Fidelity-Hirsch AffairIt is late at night and Veronika Hirsch is back home in Toronto's west end. This is not where Hirsch was supposed to be. She was scheduled to jet to 27 cities, popping champagne corks for the True North fund, the one that Boston-based Fidelity Investments created just for her. This was to be Veronika Hirsch's finest hour. Instead, it has been Veronika Hirsch's very bad month. Last week, Fidelity iced Hirsch from True North and issued a statement saying her future was "under discussion." The company went so far as to offer refunds to True North investors who did not want to stay in now that Hirsch was out. Says Hirsch of Fidelity: "I honestly don't know what their intentions are. We're communicating through our lawyers." Last Friday, Hirsch met with securities lawyer Tom Lockwood, whom she retained early last week. Lockwood would only say that "discussions [with Fidelity in-house counsel] are ongoing." To describe those discussions as severance talks would not, says someone close to the story, be "an untruth."
The Gabor sisters had marriages last longer than the one between Hirsch and the mega-money manager. How could her love affair with Fidelity - and her career, for that matter - crater just two months after it began?
Go west. To Vancouver. To Stockwatch, a daily newsletter created by John Woods. Woods employs reporters who love nothing more than pawing through B.C. Securities Commission filings. Earlier this fall, reporter Brent Mudry was preparing a story on Oliver Gold Corp., an exploration company on the hunt for gold in Mali and Zimbabwe. In a list of private placements, cheap-stock issues that are churned out month after month to keep junior operations going, he happened upon Veronika Hirsch's name. At any other time, that may not have meant much. Except that Hirsch had just jumped to Fidelity from AGF Management Ltd., which had spent millions turning Hirsch, a stellar fund manager, into a TV star. AGF felt burned. Hirsch's bolting was big news.
Mudry phoned AGF chairman Warren Goldring. Was he aware of this investment, asked Mudry. Goldring said he was not. Hirsch, who is believed to have made roughly $250,000 on her Oliver Gold investment, had not followed the internal reporting procedures required by AGF's code of ethics. The fact that the purchase was made by way of a private placement, said Goldring in the Oct. 4 issue of Stockwatch, "smacks of some sort of information not used for the client." Mudry posed a hypothetical question: what would Goldring have done had Hirsch still been in the employ of AGF? Said Goldring: "It would be the dismissal of Veronika."
And, apparently, it was. But why?
What is known is that in February, Hirsch, then at AGF, subscribed to 65,000 special warrants in Oliver Gold. A decade ago, junior mining companies such as Oliver Gold rarely drew attention in the corridors of the "serious" brokerages and fund houses on Bay Street. Only when they hit the big mine find did the East take notice. But steroidal stock markets and the discovery of diamonds in the Northwest Territories (Dia Met), NICKEL in Labrador (Diamond Fields Resources) and gold in Indonesia (Bre-X) have scored huge wins for "small-cap" investors. Suddenly, heavyweight MUTUAL FUNDS became small-cap investors, too.
And that was Hirsch's strength. She had a deft touch for the explosive potential of these high-risk plays, and that made her a hit with investors. But when she invested in Oliver Gold, she did not invest on behalf of her fund but rather for herself. Nor did she tell AGF. The company's code of ethics states that all personal trading must be reported to the company's chief auditor within 10 days of the end of each month. Hirsch told Mudry that she was too swamped to notice the oversight. The purchase was not entirely secret: Hirsch's name appears as a purchaser on a March 29 Vancouver Stock Exchange notice.
Had Hirsch simply bought shares, the story might have ended there. But a private placement of special warrants is far trickier. Placements in junior mining companies get talked up among the small circle of brokers who sell them, and the small circle of institutional investors who buy them. Deep-pocketed private investors buy in, too. But when the private investor and the institutional investor are one and the same, the spectre of conflict of interest arises. Bob Farquharson, vice-chairman of AGF, says there are in-house rules for investing in initial public stock offerings and private placements. IPOs, he says, are prohibited. Private placements are not off-limits, but any personal purchase requires prior clearance.
AGF's code, however, does not spell that out. Rather it outlines the broad "principle," as Farquharson calls it, that portfolio managers must follow. That in no way, he argues, indicates lax internal controls. "I take issue with the impression that we don't have rigid standards," says Farquharson. "I pay a hell of a lot of attention to professional standards." Clive Coombs, who manages roughly $2 billion in fund money for AGF, says he always felt the company's rules were understood. "We all know what the rules are on what you do and what you don't do with the public's money," he says. Hirsch will not say whether her understanding of private placement investing jibes with Farquharson's.
The core principle of ethical investing is that the manager not use his or her position for personal benefit. For example, securities law prohibits "front running," the practice of a broker personally loading up on a stock before executing a large client trade. On April 3, the private placement that Hirsch invested in "closed," having been fully subscribed at $1.53. A month earlier, Oliver Gold announced another private placement that actually "closed" before the first one, priced at $2.10, so any element of risk for the $1.53 investors had virtually disappeared. At the end of March, before the $1.53 private placement closed, Hirsch bought Oliver Gold shares on the open market for the fund at an average price of $2.62. That raises the question of whether Hirsch was giving herself the benefit of the better deal.
In April, Hirsch bought into a third private placement, this time on behalf of the fund. Again the placement was special warrants. In this round, the price was $3.60. And she continued buying on the open market for the fund, too, paying a high of $5 in May.
It is not known when Hirsch sold her own shares or at what price. She told Mudry that she sold in the interim period as she hopped from AGF to Fidelity, and that she sold at $4, which is where the $250,000 profit figure comes from. But Oliver Gold did not trade at $4 when Hirsch was between jobs.
On Oct. 7, Fidelity spokesman Chethan Lakshman offered sweeping defences of the company's new hire. In an internal memo, Lakshman said it was clear that Hirsch "acted in a legal, ethical and proper fashion with regard to these transactions." Lakshman is saying far less these days. He has, he says, "never seen" AGF's code of ethics. "That's a good question," he says, when asked how he could make the assertion about Hirsch's ethics in such a vacuum. Lakshman says Fidelity's own code of ethics states that managers can invest in private placements only after special review. Lakshman earlier said that Fidelity was confident that it had all the "facts" from Hirsch. One fact Fidelity did not have was that, in making her purchase, Hirsch used the address of a Vancouver broker in order to skirt securities restrictions on the warrants, which were to be sold only to B.C. and offshore investors. And Lakshman now will not reaffirm an earlier assurance by Fidelity: that Hirsch sold her Oliver Gold shares before she got there. Even if she did, the optics still look bad. "All we have is our integrity," says AGF's Coombs. If investors question that, "then people aren't going to leave money with you and there goes the business."
It is now up to securities regulators to determine exactly when Hirsch did what and to whose benefit. At Fidelity, Lakshman hopes that being "one of the largest private investment firms on the planet" will help investors forget the Hirsch affair. At AGF, the company's corporate governance committee is preparing to meet later this month to review their corporate code of ethics. Farquharson says he disagrees with the idea of a full ban on personal trading, a move that Altamira Management Ltd. made last September. "Is that appropriate? Is that right? Is that just?" he asks. Still, it's not a long bet that the code revisions will clearly state prohibitions on IPOs and tight restrictions on private placements. As for Hirsch, her lawyer's gag order is chaffing. "I wish I could talk to you, but I can't," she says. So far the tale of the meteoric fall of Veronika Hirsch has been missing only one thing: the star herself.
Maclean's November 18, 1996