InHouseCFO's Small Business Blog

Season's Greetings from a Guest Blogger

Posted by Donald Cameron on Thu, Jan 10, 2013

The Toxic Trade

The 1998 Honda Civic shuddered as it leaned left into the corner of West King Edward heading east after coming up Arbutus, driving hard in the darkness of a rainy Wednesday night in December.

“Come onnnn, Dad,” pleaded Alexandra in the back seat, “We’re going to be late picking up Tanya again. It’s soooo embarrassing.”

Behind the wheel, Fred Richards glanced down at the clock on the dash – 6:39 pm. Just more than 20 minutes to make a stop at Osler to pick up his daughter’s newfound Russian friend and then hustle both of them out to the PNE grounds in Vancouver for their gymnastics class. It’s going to be tight.

“I know sweetheart, but we’ll make it,” he offered, only half convincingly, as he glanced into the rear view mirror at his 13-year old daughter.

In the past few months, it seemed, this little girl, his only child, had grown up so quickly, a young teenager now in the full blossom of youth, who’d realized that her Mom and Dad were only human after all, fallible, prone to mistakes, and at many times, hopeless.

Yeah, hopeless, alright, thought Fred. Everything looks hopeless now – the markets are crashing, his clients are leaving him in droves, the banks called in his loans, his savings are gone, and he had to give up the lease on the Mercedes and borrow money to buy a used Honda Civic.

Fred swung hard left onto Osler. He and his wife and Alexandra used to live not far from here, before they had to sell their house and rent a two-bedroom apartment in Dunbar.

As a top producing Investment Advisor in the brokerage firm Vancouver First Securities, Fred had been on a roll for a number of years, making large and successful speculative trades with his clients’ money. He had leveraged his client accounts to the hilt, went long oil, short the dollar, and long most commodities and gold. Clients flocked to him, commissions soared through the roof, his production numbers shot him to the top of the office. He got warm calls and congratulatory emails from the national director of retail sales nearly every other day.

Fred’s boss, Steve Schnicklehoff, promoted him to Senior Vice President, and he was given a corner office with a gorgeous view of English Bay and the North Shore Mountains. He became a member of the Vancouver First’s prestigious “Chairman’s Club” and went on a luxury ten-day awards trip to Brazil with his fellow top producers from across the country. Life was great – until the summer of 2008.

Starting earlier in the year, Fred had moved a significant chunk of his client assets into a series of complex U.S. packaged mortgage investments that the Vancouver First structured product desk was promoting heavily to their sales force. Fred was attracted by the fact that these investments offered high yields, diversification over a number of housing markets in the US, and were apparently backed up by guarantees issued by the largest US banks and brokerage houses.

However, the clincher for Fred was the high 8-10% commission rates paid out on these products. If he was able to move enough of these mortgage products into his client accounts, his gross commission numbers would push him into the highest payout rate in the firm and qualify him for a bonus in the form of Vancouver First equity, which had historically enjoyed annual returns in excess of 100%.

So, Fred got on the phone and pitched his clients to leverage up even more by using the maximum of allowable margin in their accounts to buy these package mortgage products. And they did, counting on his past track record to bankroll them to untold riches.

In July, it all began unraveling. Things began to go horribly wrong. A series of US bank failures was followed by similar failures in Europe. The US mortgage investment vehicles at Vancouver First were frozen, clients had no access to their funds, and Fred’s clients received “margin calls” from his company’s compliance officer, demanding them to pay up for loans they’d made to buy the worthless mortgage investments. Fred’s production numbers dropped, and clients transferred their accounts out the door in droves. Schnicklehoff moved Fred out of his office into the open area bullpen, he lost his three assistants, had to answer his own phone, and saw his client base nearly decimated. His income dried up to virtually zero.

All that was bad enough, but there was something even worse that Fred had to live with. He glanced back again at Alexandra as they drove through the iron gates of the Shaughnessy mansion where Tanya Lezansky lived, he shook his head and let out a ragged breath. If only he hadn’t invested the $3.5 million of savings of his daughter’s Mountain City Gymnastics School into these toxic mortgages, he could live with everything else.

But now, after five years of fund-raising, applying for government grants, and having parents pay higher fees, the Gymnastics School was ready to make a payment to the developer that would allow him to go ahead and build a brand new addition to the school. Only Fred, the club treasurer, knew the ugly truth. Not only were the funds not available, by next week there would be no money available to pay the staff and keep the existing facility open.

Fred’s stomach boiled and perspiration formed on his forehead despite the chill fall air. He pulled up to the front door of the $7 million Osler Street mansion. The door opened, and from behind it emerged 13-year-old Tanya Lezansky.

In a darkened office deep inside the Kremlin, Pavel Lezansky stared intently at the flickering computer screens in front of him. The 48-year-old Russian’s face was expressionless, his hands on his temples as he watched the red numbers flash on the screen in front of him.

“What’s happening at GazProm”, he shouted across the mammoth trading desk to this assistant on the far side. “I can’t get a quote. Who can tell me what the hell is happening at GazProm?!”

Pavel Lezanky was Russian President Igor Stravich’s chief investment officer. Pavel’s job was to take the massive amounts of rubles that flowed into Russia from that country’s gas exports and re-invest them in securities in the Russian and the Western European stock markets. Making money in Russian stocks was easy, since Stravich essentially controlled the major players on the market, and Lezansky knew ahead of time, through the henchmen and informers that Stravich had on payroll, what was happening with these companies, and could easily buy and sell according to this inside information.

“GazProm’s halted, Pavel” shouted his assistant, Sarah Sorovitch. “Too many sell orders to process. Looks like the whole Moscow exchange is about to shut down again – they just can’t handle all the sell orders on Gazprom. ”

Lezansky took a deep breath, and then a small smile turned up at the corner of his mouth. He winked across the trading room floor at Sarah, a tall and statuesque blonde who he had lured from Goldman’s fixed income desk in London, where she had specialized in emerging market debt. She now handled Lezansky’s equity order flow on the Russian exchange, which the Kremlin manipulated virtually at will.

Perfect, he thought. Couldn’t be better. He had learned during the night before that terrorists had blown up a large section of a GazProm pipeline that shipped Russian natural gas into France, one of GazProm’s largest customers. It would take months to repair, and the damage to GazProm’s finances would be significant.

Stravich’s secret service had kept the news quiet from the media for the first thirty minutes of the trading day, allowing Lezansky the time he needed to execute three large block trades that got him almost entirely off of his long position in GazProm.

Even better, the GazProm trade that Lezansky just put on was causing a major financial crisis with one of the Russian oligarchs who was a pain in the side of President Stravich. Oleg Federov, known as “Cachou”, was an aggressive and ambitious young man who had benefited from his connections with Stravich to put his hands on much of the oil & gas sector in Russia. He had badly wanted to take control of GazProm, but couldn’t find enough shares for sale in the market to increase his stake as high as he wanted.

Cachou Federov has his eyes on President Stravich’s job, and everyone inside the Kremlin knew it. He financed his ambitions with the cash flow from his extended investments in oil & gas as well as in potash, copper and nickel mines. He now badly wanted to take a larger stake in Gazprom, which would give him the political capital he’d need to line up allies inside the Kremlin to help him eventually push Stravich out of his job.

The problem for Federov, however, was that he had borrowed heavily to finance his mining interests, and as commodity prices plunged over the summer of 2008 he was getting significant pressure from his bankers in Monaco, Zurich and Dubai to repay his loans. Before news of the GazProm explosion was out, though, one of Lezansky’s moles inside Federov’s organization convinced Federov to draw down his final $20 million line of credit to buy the large GazProm stake that had just come onto the market. Only minutes after Federov had bought his GazProm stake, the stock was halted as word of the terrorist attack came out. When the market re-opened, his investment would be significantly under water.

Serves Federov right, chuckled Lezansky. Maybe he’ll have to sell his NHL hockey team in Vancouver to pay the bills.

Ah, yes. Vancouver. He had recently sent his daughter Tanya there for one year to improve her English, and as a rising gymnast in Russia, Tanya was welcomed with open arms at the newest gymnastics club in Vancouver. He missed his only child terribly.

He glanced beside his screen, touched the picture of Tanya he kept on his desk, and picked up his BlackBerry to email a message to her in Vancouver: “Hi Baby, how r u?”

Fred pulled up in front of the Mountain City Gymnastics School at ten past seven. Late, again. The two girls piled out of the back seat and ran through the front doors and into the main gym. Fred parked the car, and walked quietly into the school, trying to keep a low profile while he watched his girls, knowing the financial catastrophe that was about to hit the gymnastics club.

He watched Alexandra and Tanya step onto the floor and begin their warm-ups. Tanya was the picture of grace, elegance and strength, as she rolled through a series of stretching exercises. Her gymnastics suit was a silky black, with bright red legwarmers decorated with the red star of Russia.

Fred shook his head a little as he saw his daughter Alexandra go through her routine. She had grown so much over the summer that she needed a new gymnastics outfit, but Fred simply couldn’t afford to buy her the top of the line clothing any longer. Instead, they went to Thrift City Sports and bought a grey outfit made in China with legwarmers that were a little loose, but comfortable. The legwarmers fit surprisingly well considering the shoddy workmanship and questionable yarn.

A hand came from behind him and clasped his shoulder.

“Hey, Freddie, how you doing?” It was the booming voice of Stephan Anton, a well known real estate developer in the city and Chair of the gymnastics school board.

“Hi Steph, fine thanks,” Fred lied quietly, glancing only quickly at Stephan but pulling his eyes away from his good friend and staring back out into the gym.

“Great news from Paulson & Bernanke Construction Company this morning,” said Stephan. “As soon as we make the payment to the developer next Tuesday, they’ll start breaking ground on the new site. I’ve got the local media notified and we’d love to have you join us for the groundbreaking ceremony. What do you think – wouldn’t all your clients love to see the work you’re doing for us, Fred, when the picture hits the paper?”

Yes, he answered. Great idea. With that, he turned and quietly slipped back out into the night, and threw up in the parking lot.

“Hey sweetheart, tell me what’s wrong. Why are you crying?”

Pavel Lezansky could hear the muffled sobs of his daughter in Vancouver over his BlackBerry phone as he drove home in Moscow.

“Oh Daddy, can you please help us here,” pleaded his daughter. “Alexandra is locked in the bathroom at her place and is beside herself. She’s sending me text messages that her Mom and Dad had a big fight over some money. Something about the gymnastics school and how her Dad lost all the money. Daddy, what’s a leveraged mortgage investment? ”

Lezansky took a deep breath. The financial mayhem on the world stock markets was hurting everyone, with the exception, of course, of the Kremlin’s chief investment officer. He knew, through his network of sources, what was coming down before everyone else and was making a fortune placing massive investment bets on inside information. But, out in the real world, the savings and hopes and dreams of regular people even from places like Iceland and, it now seems, Vancouver, were getting hurt. Now it was his daughter and her new friend in Vancouver, as well.

“OK baby, everything will be alright,” Lezansky whispered into the phone. “I’ve got an idea.”

“Richards, get your ass down here right away!”

Steve Schnicklehoff’s voice rang in Fred’s ears as he picked up the phone at his desk at Vancouver First Securities, and then hustled down to his boss’ office. He sat nervously on the edge of the plush chair, looking up at the massive moose head trophy mounted on the wall. Yep, that will be me soon, dead meat, thought Fred, unless I can pull this trade off today.

“What’s this?” asked Schnicklehoff, as he threw a file in front of Fred. Inside were forms that had been filled out, opening up an investment account for a new client who had walked into the office that morning.

“It’s my new client. Is everything OK?”

Schnicklehoff paused, and looked carefully at Fred. Yes, he told him, everything’s fine, it all looks good, but why in the world would anyone open up a $10 million trading account with a bank draft and give total discretion to this loser of a broker, Fred Richards, to trade it as he sees fit?

“You’re OK. I just don’t want any monkey business with this client,” growled Schnicklehoff. “We can’t loose any more of them. One more mistake, and you’re out the door. And if that happens, I’ll make sure you won’t even be able to find a job in the mail room of the worst bucket shop on the Street.”

Two hours later, Fred stared at his screen. He’d just made the trade of his life, and he couldn’t believe his luck. A day before, Alexandra’s new friend Tanya had brought a man into his office, Vladimir Krutov, who said he was a family friend and wanted to open up an account and donate any gains he made to the Mountain City Gymnastics Club.

Krutov deposited $10 million in a secured bank draft, and instructed Fred to enter an order before the market opened next day to sell short 2 million shares of the Vancouver Miners NHL hockey club, which traded on the Toronto Stock Exchange. And, sure enough, the Miner’s stock dropped like a rock at the market open on word that the team’s owner, the Russian oligarch Cachou Federov, was nearly bankrupt after losing a fortune on a Gazprom share trade on the Russian exchange.

Cachou’s bad luck was Fred’s godsend. The gymnastics school netted a tidy profit of nearly $4 million, more than enough to cover the losses Fred had wracked up on the toxic mortgages he’d bought for the Mountain City account.

Pavel Lezansky smiled up as Sarah Sorovitch, his star trader, walked into his office to see him, as she always did before leaving for the day. He closed the door behind them so they would be alone. Sarah sat down, crossed her legs, and sat quietly with a black Hermes purse on her lap.

“That was a pretty good day, wasn’t it” said Pavel, as he leaned forward in his chair across his desk. “I’m thinking of going to Vancouver this weekend. Would you like to come with me?”

“Thanks, Pavel”, said Sarah, smiling softly, “that would be really nice. I’ve just got something here for you if you don’t mind.”

She opened her purse and pulled out a gun. Before Lezansky could react, she snapped on the silencer, pointed the weapon at his chest, and pulled the trigger three times.

As Lezansky slumped forward on his desk, the blood spurting out of his chest, Sarah calmly stood up, put the gun back in her purse, and softly whispered the last words Lezansky would ever hear.

“Merry Christmas, Pavel. That’s from Cachou Federov. His way of thanking you for the GazProm trade”.


Rick Peterson