Northern Exposure

 This is a sidebar to "The Paper World of Brookfield Asset Management." For more coverage, click here.

Beginning at about 9 a.m. on Jan. 24, 1996, in the offices of Toronto law firm of Tory Tory DesLauriers & Binnington, a combative former Ontario Securities Commission regulator named Joseph Groia made a small piece of Canadian legal history by deposing a native South African named Jack Lorne Cockwell. Though not a shy man, the 55-year-old Cockwell had thus far achieved astounding career success, due in some measure, to avoiding people like Joe Groia.

Though Cockwell invariably bore impressively nondescript titles like vice chairman and took pains to keep out of the limelight, he had been chief strategist of the Edper Group and the architect of its constellation of nearly 360 separate subsidiaries. He had not been alone; he built a small band of intensely loyal colleagues who shared his singular view of business. Though Edper became many things over the years of its operation from the late 1960s to the mid-1990s, it began as a sleepy holding company for the shareholdings of its two original owners, Edward and Peter Bronfman, the scions of the Seagram’s liquor fortune.

The combination of the Bronfmans’ capital and the ruthless intelligence and vision of Cockwell’s team proved unstoppable and Canada’s business firmament bent before it. By the late 1980s, Edper controlled an empire that included everything from Labatt brewing company, Brazil’s largest utility, huge real estate holdings, the Toronto Blue Jays and mining giant Noranda.

Edper was no ordinary company by any measurement, in any era: At points in the late 1980s, nearly 15 percent of the Toronto Stock Exchange’s daily trading volume involved the shares of its various subsidiaries and more than 110,000 people drew their paycheck from one of its companies.

It had not ended as planned, however. After the debt crisis of 1989, Edper's spiderweb structure, in which every unit seemingly owned the debt or the preferred shares of another, underwent a sudden rapid shift away from the diversified conglomerate model. By February 1993 its stakes in Labatt and pulp and paper giant MacMillan Bloedel were sold off in a single night in what Canadian business reporters took to calling “the great Edper lawn sale.”

(Yet despite losing 90 percent of its market capitalization from 1989 to 1993, Edper survived. Emerging unscathed, Cockwell folded many of the company’s assets into Brascan, an already asset-rich Brazilian subsidiary. After a series of asset transfers, a newer, more streamlined company surfaced in 2005. The company, based in Toronto’s tony Brookfield Plaza, was renamed Brookfield Asset Management.)

Groia’s deposition of Cockwell concerned the matter of Lionel Conacher's case against Hees International Bancorp, which was one of the central components of Edper’s empire. Like all such cases, sharply divergent viewpoints came into play: Lionel Conacher, a Dartmouth College-educated former Citicorp banker, had been hired by Hees International Bancorp as assistant treasurer.

Conacher argued that Hees had failed to honor a key compensation clause and left him with worthless options, and Hees (represented by Cockwell) defended the company’s actions as proper and just. The merits of Conacher’s claim soon became secondary to what was uncovered during discovery: how Edper really worked.

Behind the corporate facade and the track record of success lay Edper’s universe of related-party deals and a nonstop continuum of managerial investments into or out of subsidiaries. Publicly, Cockwell and his colleagues proclaimed the benefits of having managers with a personal stake in their businesses; privately, the reality was often different.

The complexity of the effort is astounding. According to Conacher’s sworn affidavit, he and his Edper colleagues set up private investment companies that issued preferred shares to investment vehicles controlled by senior Edper managers like Cockwell’s brother Ian. Such managers then used the proceeds to buy shares in a subsidiary of a private holding company of Edper, which in turn held a mix of public and private shares in other Edper entities. Depending on the cash needs of management, the publicly held Hees could act as a financial intermediary, buying back shares or providing loans.

At the center of this whirlwind of loans and secret deals was Jack Cockwell and a small group of senior Edper executives. They held shares in Partners Holdings Inc., which Conacher described as a “financial partner with Peter Bronfman in the control of the Edper group.” And there was another layer: Quadco, a company that appeared to hold a controlling interest in Partners Holdings Inc., which was a partnership between the two Cockwell brothers and two other long-serving Edper executives, Tim Price and David Kerr.

The filings also disclosed an August 1993 deal involving Hees subsidiary Great Lakes Holdings and designed to help relieve some of the financial pressure on Hees executives as a result of loans they had assumed to buy stock in Hees or its subsidiaries. That August Hees allowed executives like Conacher to buy shares at .50 Canadian dollars and bought them back six months later in February 1994 at 7.04 Canadian dollars. The loan to buy the shares came from Cockwell’s private management company and the more than 563,000 Canadian dollars in proceeds from the Great Lakes trade were used to pay off a bank that wanted back the money it had loaned Conacher.

Roughly 10 million Canadian dollars in shareholder cash were transferred to Hees executives to pay off loans they had taken to participate in various equity investments.

Lurking within the Hees-Great Lakes Holdings deal was the real threat—one posed by the massive web of undisclosed private guarantees to a series of otherwise healthy operating companies, with Hees using public capital to stave off private risk.

After some additional legal wrangling, Conacher reached an out-of-court settlement with his former business associates within the year; the terms were never disclosed. Conacher, reached at his new employer, Roth Capital Markets, declined comment.

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