Genius provocateur

The Smartest Guy on Bay Street doesn't work on the actual street itself any more. He and his business partner buy and sell tens of millions of dollars worth of stocks and bonds out of an unremarkable office building three blocks east of downtown Toronto's clump of bank towers. His window looks right across the street at the small, antique-stuffed 19th-century post office building that Conrad Black, still Canada's most relentlessly visible Establishment man, uses as his base in the city.

The Smartest Guy on Bay Street isn't an Establishment type. He lines up for coffee at the Starbucks around the corner. He still buys clothes at Moores. He doesn't have a reserved parking space at work. The 43-year-old son of a German-born bricklayer and building contractor, he didn't go to Upper Canada College, much less get expelled from it (as Black was). He also shuns publicity and declined to be interviewed for this story.

Yet people who know him say that he craves attention and respect within his milieu. A whiz at financial analysis, he led a small team of aggressive young proprietary traders-specialists who trade part of a brokerage firm's own capital, not money from clients-at RBC Dominion Securities Inc. (now RBC Capital Markets) in the 1990s. According to court filings, the team generated returns that averaged 78.5% a year between 1993 and February, 1999, and received a cut of the profits in lieu of salaries. The Smartest Guy on Bay Street was paid $37.4 million during that period. In many of those years, he earned more than legendary RBC Dominion chairman Tony Fell.

But The Smartest Guy on Bay Street proved to be too smart and too aggressive to handle. In combing relentlessly through financial statements to spot signs of hidden value or weakness, he took runs at some of the country's highest-profile companies, often infuriating the big egos who ran them. Among his many talents, admirers laud his ability as a short seller-profiting as he helps drive down the share prices of target companies. "It's a beautiful thing," says one.

As the 1990s wore on, however, that practice got more and more embarrassing for RBC Dominion, particularly when its proprietary traders targeted companies that were long-time or potential corporate finance clients, or ones the firm's analysts had recommended in research reports.

The Smartest Guy on Bay Street and his partner were fired in 1999, and that could easily have been the end of the story. Other hotshots were reined in at bank-owned dealers or had their operations shut down, and they left without publicity, some to start their own hedge funds.

But The Smartest Guy on Bay Street didn't just give up. In July, 2002, he and his business partner filed a wrongful dismissal suit against RBC Dominion for $43.6 million, plus other damages and costs. RBC responded with a statement of defence, and that's as far as the matter has gone, with neither side willing to discuss the matter publicly. However, the court documents speak volumes, exposing both the workings and tensions within Canada's most powerful investment dealer. If the case goes to trial, the Street will be transfixed. In the meantime, The Smartest Guy on Bay Street is still an undeniable force.

Perhaps even stronger.

Roland Keiper grew up in the Toronto suburb of Don Mills. In 1978, he went off to London, Ont., to study at what is now the Ivey School of Business at the University of Western Ontario, where he dominated discussions in finance and investment classes. After a month in one course, the professor started asking at the end of lectures, "Roland, is that okay? Or have I left anything out?"

After graduating in 1982, Keiper worked for a year as a treasury analyst at Gardiner Watson, a boutique brokerage. Then, at age 22, he joined Pitfield Mackay Ross (bought by Dominion Securities Inc. a year later) as an analyst in the institutional equity department. A straight arrow who lived with his parents until his mid-20s, his first big purchases after he started making serious money were a new Honda and a modest house in Don Mills.

In many ways, the brokerage business was still very old-fashioned at that time. DS, like other investment dealers on the Street, was owned by its partners. Much of its business, like that of other firms, was based on corporate finance and underwritings, and personal ties with the men who ran client companies.

The landscape soon shifted dramatically, however, as the Street geared up for financial services deregulation in 1987. The biggest investment dealers were swallowed by banks. The Royal Bank of Canada bought a 67% interest in DS in 1988, and the remainder of the firm in 1996. Bank ownership meant access to more capital, but it also meant that dealers were grafted onto much bigger, much more bureaucratic institutions.

As for Keiper, it quickly became apparent that he was capable of a lot more than evaluating warrants or convertible debentures for clients. In 1988, he was moved to proprietary trading and was allocated $5 million of DS's capital to play with. Keiper spent much of his time burrowing through paper-prospectuses, regulatory filings and, occasionally, court documents.

He was later joined by other mathematically inclined young analysts and traders, including Brian Chapman, Keiper's partner both at RBC and today at Clearwater Capital Management Inc., the firm they founded in March, 1999. Chapman also graduated from Western's business school, joining DS in 1987 at age 22, where he became a preferred-share trading specialist.

Among co-workers, Keiper soon developed a reputation as a compulsive tightwad-the kind of guy who wouldn't stop griping about having to pay $3 for an unclaimed soup on a group lunch order. One former colleague recalls Keiper saying he needed to get rid of some old household items. Rather than simply throwing them out, he tried to return them in exchange for new merchandise-everything from plastic magazine holders at Grand & Toy to a mattress at Sears. After a week, he'd scored about $2,400 worth of goods. "He could have made that in five minutes trading," says a friend. "Some people are manically depressed. Roland is manically distracted."

Likewise in his home life. Before he bought his home in the wealthy Lawrence Park neighbourhood-just down the street from Royal Bank CEO Gord Nixon-Keiper took time off to search its title and every other record he could find. This, of course, is something virtually anyone else would leave to their lawyer, but Keiper thought he could find ammunition to force a better deal.

When Keiper started at DS, proprietary trading wasn't as highly evolved on Bay Street as it was on Wall Street. Keiper, Chapman and other "pro" traders at the firm were kept separate from the much larger regular trading department that executes client orders. Allowing pro traders to see those orders before they're executed, particularly those from large institutional investors, would give them an unfair advantage. Regular traders, in turn, might get an inside line on the pro traders' strategies.

At DS, though, the separation was more than physical. Former employees say the rest of the firm either didn't understand what Keiper and the others were doing or just didn't appreciate how profitable it was.

Still, both the potential rewards and the pitfalls of proprietary trading, for both Keiper and RBC Dominion, became far more apparent after he negotiated what became known as "the deal." Actually, sources say there wasn't much of a negotiation. Charles Caty, a DS vice-president and director, signed a piece of paper agreeing to the terms.

Those terms are outlined in Keiper and Chapman's statement of claim, and RBC Dominion doesn't dispute them. The agreement took effect on Feb. 1, 1988. Keiper was to receive 30% of his net trading profits, paid monthly and subject to a holdback, or reserve, of $1 million against possible trading losses. There would also be no cap on his earnings at any time. Other Bay Street and Wall Street firms shared profits with traders, but the fixed-percentage guarantee was unique-and a coup for a 27-year-old. Keiper's statement of claim against RBC says that no other financial institution in Canada had anything like it.

Keiper cranked into higher gear. The statement of claim says RBC Dominion steadily increased the capital allocated to him, from $5 million in 1988 to $15 million in 1992. Over that time, the statement says, he generated $24 million in profits for the firm and received $7.3 million in compensation. RBC Dominion's statement of defence disputes that version of events.

In 1993, Chapman and another young trader, Greg Boland, were placed under Keiper's supervision. The High Yield/Arbitrage (HYA) Group, as the trio were known, split the 30% portion of the profits among themselves-60% going to Keiper, and 20% apiece to Chapman and Boland.

According to the statement of claim, the three quickly became one of RBC Dominion's biggest profit centres. The firm increased the capital at the group's disposal to $100 million by 1996, or roughly a quarter of the shareholders' equity. From 1993 until Keiper and Chapman were fired in February, 1999, the group posted an average annual return of 78.5% and generated more than $200 million in profits for RBC Dominion, or roughly 15% of the firm's total operating profits during that period. Again, RBC Dominion's statement of defence disputes that version of events.

Keiper, who is far from modest among confidants, has boasted that he would have made half a billion dollars more for the Royal Bank had he stayed on, and that he would have performed better than all of the bank's recent U.S. acquisitions combined.

The obvious question: How did-and how does-he do it?

Keiper doesn't employ any revolutionary new methods or tricks-well, not many. He holds long and short positions in companies, and he's been involved in distressed securities and trading during so-called event-driven situations such as corporate takeovers and restructurings. His memory is prodigious. Admirers say he can reel off the exact terms of 15-year-old bond issues or the job history of any leading Canadian executive. "He talks in 10-minute bursts," says one source, "then he has to pause to let his brain reload."

One of his fortes is short selling-borrowing shares in companies and selling them. Short sellers keep the proceeds from sales and profit if a company's share price goes down, as they can then purchase replacement shares on the open market for less than they borrowed them for. One element of the short seller's tool kit, well used by Keiper, is talking off the record to the press about weaknesses at specific companies, which can add to uncertainties about their share values. Although shorting is perfectly legal, it still has taint to it-"the last taboo," as one trader puts it. It's certainly no way to make friends with investment banking and corporate finance specialists in large dealers. Yet it was hard to argue with the money proprietary traders were making in the mid-'90s. "Banks treated pro dealers like they were something dirty, but the banks loved the profits," says a former proprietary trader.

At RBC, Keiper's personality sometimes didn't help, either. "He's lacking a few of the social niceties," says one source, meaning that Keiper is incapable of making small talk. But in his trading element, he's absolutely sure of himself. Once he's convinced of an investment opportunity, he isn't afraid to move fast or take big positions.

Keiper's cockiness and his paycheque alarmed some DS veterans. "You know how," says another source, "you have some stuffy old guys and you didn't go to the same school as they did and you're making more money than they are "Those personal differences aggravated the firm's dilemmas. On one hand, even RBC Dominion chairman and CEO Tony Fell jocularly told new recruits that if they worked hard, they too could make more than the boss. On the other hand, Keiper would scoff at the firm's own research reports, both inside the firm and to outsiders.

Fell, still chairman, is the ultimate company man. He joined Dominion Securities right out of school in 1959. An investment banker to the core, he's one of the most well-connected executives in the country, and one of the most successful charity fundraisers. At a B'nai Brith Canada dinner in 1999 where Fell received an award of merit, Conrad Black, speaking from London via video, praised him for transforming a "torpid, rather conventional firm" into a Bay Street powerhouse.

At the office, Fell is known for driving staff hard, and nothing escapes his notice. He steadily moved up the time of the firm's morning meeting over the years to 7:15. After Toronto passed a no-smoking bylaw, Fell had a ventilation system installed in his office at his own expense so he could continue to oversee the firm's trading floor while puffing on Cuban cigars. Not surprisingly, he would occasionally get an earful about Keiper through his social and benevolent pursuits.

The Hees-Edper group, controlled by Peter and Edward Bronfman, was one of Keiper's fixations in the early 1990s. The conglomerate had been assembled in the '70s and '80s by Jack Cockwell, the brilliant and secretive accountant whose legend was a match for Fell's. At its peak, the group's holdings included Brascan Ltd., Noranda Inc., John Labatt Ltd., Royal Trustco Ltd., developers Bramalea Ltd. and Trizec Corp. Ltd., among other corporate brand names.

But its Byzantine structure, designed to minimize taxes, had long bewildered analysts and investors. Keiper joked to colleagues that if you were drawing an organizational chart of Hees, it was best to start at the middle of the page because there were always companies above or below the ones you thought were the final owners of securities.

Hees-Edper was hit hard by the recession of the early 1990s, and institutional investors were rattled. At Hees's request, RBC arranged an information meeting in its boardroom, and about two dozen representatives from the institutions showed up. Four top Hees executives attended, including Cockwell. Hees president Willard (Bill) L'Heureux was the front man. Many of the institutional shareholders were leery of asking questions, so Keiper took over the meeting, drilling L'Heureux in detail. Hees had called the meeting to ease the institutions' worries; thanks to Keiper, the event just reinforced them.

A few days later, Keiper, RBC Dominion vice-chairman George Dembroski and two other colleagues were ordered to go over to Cockwell's office and "do penance," as one source puts it. Cockwell lectured them non-stop from late afternoon until 11 p.m. with no break for refreshments-only some water and "time to pee," one of them said later. Alone and without notes, Cockwell reviewed the financials of all the major companies in the empire. The irony was that some people on the Street figured Keiper must have had a short position in Hees at the time. He didn't: He was just enjoying the fight.

Keiper doesn't like to be singled out as a short seller, but he's awfully good at it. One of his most widely known efforts capitalized on the crumbling of Newcourt Credit Group Inc. in late 1998 and early 1999.

Newcourt was founded by wunderkind accountant Steve Hudson, who'd worked at Toronto General Hospital in the early 1980s. There, he developed ideas for financing equipment leases. In the 1990s, Newcourt built a huge business by gathering up money from insurance companies and other institutional investors, then lending it to clients who wanted to lease trucks, computers or other equipment. Newcourt would then bundle many of the leases-and the income from them-and sell them to institutions as securitizations. Eventually, Newcourt became the second-largest non-bank finance company in the world.

But by 1998, Newcourt's capital structure and its convoluted accounting left it vulnerable to a downturn. When Long Term Capital Management Inc., a leading U.S. hedge fund, collapsed in August, 1998, financial markets were spooked, and institutions didn't want to buy Newcourt's leases any more.

A friend says Keiper toiled into the night for several weeks to create a financial blueprint of Newcourt based on the new realities of the marketplace, making it easier for him to zero in on the weaknesses in Newcourt's financial statements. As doubts swirled on the Street, the company's share price was hammered, declining from around $70 in the summer of 1998 to around $18 in June, 1999. Newcourt was absorbed by New Jersey-based CIT Group Inc. in August, 1999, after Hudson agreed to a humiliating $1.4-billion (U.S.) reduction in the purchase price.

But these heady battles could not go on forever. By 1998, both Keiper's personal life and his situation at RBC Dominion were becoming strained. His marriage had broken down the previous year. In March, 1998, Greg Boland resigned. Then came the collapse of Long Term Capital Management in August, triggered by a plunge in the Russian ruble. Even though the fund had two Nobel Prize winners in economics on staff, it buckled. Stock markets teetered, and the U.S. Federal Reserve had to arrange a $3.5-billion (U.S.) bailout by American banks.

According to Keiper and Chapman's statement of claim, the HYA Group's rate of return fell from 71% in 1997 to 11% on an annualized basis for the 14 months ended in February, 1999. Like financial institutions around the world, RBC and Bay Street's other bank-owned dealers took a harder look at their hotshot proprietary traders. That fall, the banks beefed up investment risk controls, in some cases ordering traders to sell off positions at a loss.

At RBC, it was crunch time for Keiper and Chapman. The pair's statement of claim says that in September, 1998, Bill Moriarty, the head of RBC's global equities division, told them the firm was no longer comfortable with the HYA Group's risk profile and its visibility in the marketplace. The bank also wanted to cut back the amount of capital at HYA's disposal.

The following March, the statement continues, Moriarty fired Keiper and Chapman. RBC Dominion's statement of defence is less specific, stating that by 1998, both sides recognized that the manner in which the pair was investing capital was "becoming increasingly inconsistent" with RBC's "best interests" and that there were "irreconcilable conflicts" between the two sides.

Former proprietary traders say getting fired was no tragedy for Keiper and Chapman. There are no economies of scale or other advantages to working for a large bank-owned dealer, says one. "There are dis-economies," he says. "You're always running into conflicts. You don't have free rein." He adds that by driving away pro traders, the banks have helped build a competing industry: hedge funds.

So what has The Smartest Guy on Bay Street been up to lately?

On the home front, Keiper's ex-wife, Lynda, now lives close by in another house in Lawrence Park. The couple, who have three children, were divorced in 2001. Terms were not disclosed.

Neither is known for leading the high life. Friends say that at the time the couple separated, they owned two vehicles-a Lexus and a Dodge minivan. Keiper doesn't own a cottage. He vacations at the Fern Resort on Lake Couchiching near Orillia, Ont. Friends say he doesn't want his children to take anything for granted-Keiper joked recently that he's already taught them how to use a Bloomberg terminal-and performs household chores himself, such as shovelling the driveway. Until a year ago, he'd "never exercised in his life," according to a friend. Keiper started working out, and within two months, he ran a 10-kilometre race.

Rebounding from RBC, Keiper and Chapman founded Clearwater in 1999. The firm manages only the pair's own money and is private, so it doesn't disclose its financial results. Given Keiper's track record, other fund managers find it hard to believe he's not making a bundle. "He's doing very well," says one. "I'm guessing he has a hundred big ones under his belt"-meaning more than $100 million.

However, sources say that Chapman and Keiper took a big hit on debt in Teleglobe Inc., BCE Inc.'s troubled international long-distance subsidiary, in 2002. Investors will often buy up the debt of troubled companies at pennies on the dollar, betting that they'll profit from an eventual restructuring. But in Teleglobe's case, BCE shocked creditors and debtholders by simply cutting the company loose in April, 2002, and paying debtholders nothing.

Yet Keiper and Chapman seem to have recovered nicely. Keiper has told those close to him that Clearwater posted a return of close to 90% last year. One of its biggest moneymakers was a long position-shares in Extendicare Inc., which climbed by 185% in 2003.

Keiper also continues to be an off-the-record source for reporters who call him for specifics on companies. Other traders and short sellers do the same thing, and many fancy themselves as truth warriors-the only people who stand up and say a company is weak and overvalued. Reporters who've dealt with Keiper say that is, indeed, what he is. But the symbiotic relationship is also self-serving: Reporters get explanations of complex subjects they know little about; in return, a company's share price can suffer because of media speculation.

Keiper has used his media contacts to turn up the heat on dubious corporate financial practices. The most dramatic recent example: so-called equity monetization-derivatives transactions that allow executives and other corporate insiders to essentially cash out of their companies without selling shares. In that way, they avoid reporting requirements. New regulations requiring disclosure take effect in February.

And Keiper seems to be just as fastidious and methodical as ever. Last November, he joined a conference call with officers of Royal Group Technologies Inc. The company had just released terrible quarterly results, and embattled founder Vic De Zen announced that he was retiring as CEO. Keiper's first question was typical: "In the first half of the year, your effective tax rate was 16%. Could I apply that tax rate to your fourth-quarter charges in determining what the after-tax effect of the $160-million charges are? And if not, what tax rate would you suggest I apply, in lieu of 16%?"

You have to figure Keiper still has a lot up his sleeve. If he and Chapman post the kind of returns they did at RBC Dominion, they'll have $1 billion within a decade.

Maybe then The Smartest Guy on Bay Street will be ready to sit down for a magazine profile.

Butting heads with the big egos

Jack Cockwell, architect of the Hees-Edper empire: Once, after Keiper grilled Hees executives, he was ordered to go to Cockwell's office and "do penance"

Former Newcourt CEO Steve Hudson: To identify Newcourt's weaknesses, Keiper toiled into the night for weeks to create his own blueprint of the company

RBC Dominion chair Tony Fell: During stints on the social circuit, Fell, a noted fundraiser, got an occasional earful about Keiper's short-selling antics