Dragons’ Den’s Wekerle battles to keep his star from falling

The first thing Michael Wekerle does when I meet him is he hands me an autographed promotional photo.

I haven’t even introduced myself, but I notice that he has misspelled my name. It says “Neil.” When I point that out to him, he starts riffing on what he should call me, and as he goes off on a string of tangents, 20 minutes go by before I can get a word in edgewise. I realize it’s pointless to try and rein him in.

The question I haven’t been able to ask is why he has been selling millions of dollars in debt securities in Difference Capital Financial Inc., the merchant bank he co-founded in 2012 and in whose Toronto offices we are sitting, at a steep loss. For months, Difference’s share price has been tanking, and there have been an alarming number of staff defections.

The chattering classes of Bay Street who built Mr. Wekerle into a folk hero, the legendary trader and party animal turned merchant bank CEO, are now whispering that he’s lost it, that he’s spread himself and his investments too thin, that the company is tanking, that he’s more interested in being on TV as one of the stars of CBC’s Dragons’ Den than he is in the multimillion-dollar company he runs, or in the shareholders who have lately taken an epic bath.

At last, his assistant interrupts us to tell him Conrad Black has arrived. It turns out that Mr. Wekerle has scheduled a meeting with Mr. Black at the same time as our interview. Since I showed up first, he has to wait. Sorry, Conrad.

The interruption, however, has broken Mr. Wekerle’s train of thought. “Why are you selling down your debt holdings in Difference Capital?” I ask.

Mr. Wekerle quiets down a bit and says, “Harris Fricker. I’ve been in a battle with him forever.”

A few months back, Mr. Wekerle says, his broker Richardson GMP – a firm whose part-owner, GMP Capital Inc., Mr. Wekerle helped found – informed him that they were changing the terms of the margin account where he held $10.7-million in Difference Capital’s debt.

“You have 30 days to come up with $5-million,” Richardson GMP’s letter said, according to Mr. Wekerle, and if he didn’t come up with the cash, the brokerage said it would start selling his debentures. He didn’t, and they began liquidating $2.5-million of Mr. Wekerle’s holdings at a steep discount to their face value.

Mr. Wekerle has known Mr. Fricker, GMP Capital Inc.’s CEO and Mr. Wekerle’s former co-worker, for many years, and blames Mr. Fricker personally for the margin call.

The Fricker putdowns start coming fast and furious. “Phony.” “Peon.” “Bully.” “Four-foot-five poet.”

Mr. Wekerle believes there’s only one way to settle this thing.

“Oh my God!,” Mr. Fricker responds when I put the proposal to him by phone a few weeks later, gasping and laughing at the same time.

““I have no intention of fighting him with a Subway sandwich,” he says. “And I’m just not sure how one could biomechanically do the socks, the sandwich, the trampoline and the pugilistic endeavours.

“What can you do?” he says, shrugging at the long list of insults. “I just hope my mother doesn’t read this.”

A TRAGEDY STRIKES

Michael Wekerle was widely considered to be the best Bay Street stock trader of his generation. His epic trading career ran from 1982 until 2011. In 1995, he co-founded the independent brokerage Griffiths McBurney & Partners, or GMP. As its star trader, he generated millions of dollars in profits during a 16-year run. He became known as the go-to trader for the powerful money management firms on Bay Street. He helped bring Research in Motion Ltd., now BlackBerry Ltd., public in the late 1990s.

He was also known for his extravagant, flamboyant lifestyle. Rarely the type to head home after work and have a quiet night in, Wek was more likely to be out on the town, rabble-rousing and spending mad cash all over the place.

In 2010, a tragedy in his life knocked the wind out of Mr. Wekerle. In March of that year, his second wife, Lea-Anne, with whom he had four children, died suddenly.

“When Lea-Anne died ... for two or three years I lived a very careless life. … I dropped $100,000 in a strip club. It didn’t matter.”

His heart was no longer in his job. He took a back seat at GMP, and eventually left the firm in 2011.

By 2012, Mr. Wekerle was ready to get back to work. When word started spreading that he and Paul Sparkes, a former senior executive with CTVglobemedia (now Bell Media), were teaming up to start a technology-focused merchant bank, investors wanted in.

The business plan of Difference Capital from the outset was to take significant minority stakes in late-stage, privately held companies, help them grow, and see them through to a sale, or an initial public offering. To ensure that Difference had revenue coming in while they waited for their investments to pay off, the firm also set up an advisory business.

Mr. Wekerle had helped make a lot of people rich during his GMP days; it wasn’t difficult to find heavy hitters on Bay Street and beyond to write cheques. In a matter of months, Difference had raised $85-million.

“I’ve known Mike Wekerle for a long time, and he’s been a guy who was making money. So we assumed that he would do it again,”said Ned Goodman, whose Dundee Corp. put $9.5-million into Difference in the summer of 2012.

CI Financial’s Bill Holland, philanthropist Seymour Schulich, mining magnate Frank Giustra, and retired hockey star Mats Sundin also invested in the firm.

Mr. Wekerle himself is heavily exposed to Difference. He is the firm’s biggest stock and bond holder. Mr. Wekerle said the family’s investment is in the $65-million range (his mother is the second-biggest shareholder).

The executive team was stacked with industry veterans. Henry Kneis, a hedge fund manager and an old buddy of Mr. Wekerle’s, was named chief financial officer. Ivan Fecan, former CEO of CTVGlobemedia, became a director. Jim Shaw of Shaw Communications and John Albright, one of Canada’s best-known venture capitalists, also took board seats. Former Canaccord Genuity Corp. investment banker Neil Johnson was named CEO. Mr. Wekerle himself assumed the role of executive chairman.

The company went public through a reverse takeover in June, 2012, and over the summer announced a flurry of investments. Most of the company’s bets were in the $2-million-to-$5-million range.

A few were much bigger. Mr. Johnson was bullish on junior alternative energy company Lignol Energy Corp. It had an ambitious plan to generate revenue by purchasing and revamping distressed biodiesel assets. Difference took a big swing and invested $18-million into Lignol. Mr. Wekerle was a believer in fledgling Internet company WG Ltd., or World Gaming, which organizes communities of console video game players online, allowing them to play and compete against each other as well as ranking them. Difference funnelled in $20-million.

Difference did very nicely during its first year or so of operation. The company generated gains on its investments. Its advisory business was humming along. And its stock was up about 50 per cent. In the summer of 2013, the company raised an additional $100-million from institutional investors such as Picton Mahoney Asset Management and Gluskin Sheff + Associates Inc. . At that point, Difference had exposure to around 40 companies with about $185-million under management. By all indications, Wek was back.

EARLY BETS START TO GO WRONG

Difference Capital Financial Inc.

SOURCE: Thomson Reuters

In the fall of 2013, the firm had to deal with a nasty piece of unwanted publicity. Media reports surfaced that, according to court filings, Mr. Wekerle had allegedly engaged in drunken horseplay in an Arkansas hotel in October, 2010, when he was still with GMP. The allegations included throwing around cash from a fanny pack full of money, blowing an air horn in the lobby and exposing himself to onlookers. He allegedly picked up a woman, carried her off, removed her shoe and licked her foot.

“While I dispute certain parts of the allegations, I acknowledge that on that night three years ago I behaved in a way that I’m not particularly proud of,” Mr. Wekerle told the Toronto Star when the news surfaced. Legal proceedings against Mr. Wekerle are still ongoing.

According to sources within Difference, there was also deep concern about Mr. Wekerle’s behaviour outside the office since he had become CEO, including heavy drinking and general mischief he was getting himself into while out on the town.

“Have I done anything untoward in the past 12 months? Absolutely not,” he insists. “Prior to that there have been occasions … where frankly, I’m blacked out – I really don’t know.”

The bad press over the Arkansas incident coincided with Difference losing its first big name. In late October, Jim Shaw stepped down as director.

As 2013 wound down, it was becoming clear within the company, if not in public, that the sizable early bets that Difference had made into World Gaming and Lignol Energy were not working out as planned.

Because Mr. Johnson was the Lignol man, he came under fire. Mr. Wekerle took over as CEO in February, 2014.

“The board asked Neil Johnson to step down,” Mr. Wekerle said. “I left him on as president. In hindsight, I should have been tougher.”

Multiple sources within Difference dispute Mr. Wekerle’s version of events, saying that the board requested that Mr. Wekerle take on the title of CEO, in order to make him more accountable to shareholders.

The full extent of the damage from Lignol and World Gaming would become clear to investors in March, when Difference reported a $19-million loss for the fourth quarter of 2013, taking writedowns in World Gaming and Lignol, among others.

As CEO, Mr. Wekerle now had much greater responsibilities, and with Difference floundering, the pressure was on him to put all his energy into the company. Instead, his focus was about to shift dramatically away from it. In March, CBC announced that Mr. Wekerle would be replacing Kevin O’Leary on Dragons’ Den. Rather than focusing on evaluating Difference’s struggling companies’ prospects, he’d be grilling the earliest of early-stage entrepreneurs on national television.

Even before Dragons’ Den, Mr. Wekerle had projects outside the firm that competed for his attention. He partnered with CI’s Mr. Holland to invest in tens of millions of dollars of U.S. real estate in the wake of the 2008 financial crisis.

Sources within Difference said that, at one point, Mr. Wekerle started advocating for the firm to start investing money into early-stage ventures. But he faced resistance from many within the Difference, who opposed any deviation from the original focus on late-stage companies. Nonetheless, in October, 2014, he announced plans to purchase a number of buildings in Waterloo, Ont., that formerly were bases for BlackBerry’s operations, several of which now house companies in the area’s rich startup scene.

In November, he swooped in at the 11th hour to buy Toronto’s historic El Mocambo music venue, offering $3.7-million for the property. The ensuing media event was a circus, with Mr. Wekerle preening for the camera, showing off his many tattoos. A week later, he attended the opening of his latest co-investment, the first Toronto location of Wahlburgers – a burger chain (and related reality TV show) led by actors Mark and Donnie Wahlberg, whom Wek counts as personal friends.

Then there was Dragons’ Den itself, which several people at the firm initially saw as a positive thing, as it would help bring exposure to Difference. But the TV show ended up being a huge time commitment.

Ross MacLachlan, CEO of Lignol Energy, recounted flying into Toronto eager to get a meeting with Mr. Wekerle during the shooting of Dragons’ Den. Mr. MacLachlan said he had been getting signals that Difference was starting to sour on its investment. He spent three days “cooling his heels in a hotel room” before hearing back from Mr. Wekerle.

John Byrne, CEO of Enhanced Systems Technologies, who was also an investor in Lignol at the time, was with Mr. MacLachlan when they were asked to head down to the CBC.

“We found ourselves going down to have a discussion with him in between Dragons’ Den takes at the CBC,” said Mr. Byrne. “What a joke.”

After waiting around for hour or so in the green room, “in came Mr. Wekerle with an entourage of his media folks in tow,” Mr. MacLachlan said.

“He talked excitedly about Dragons’ Den. We had to try and force the discussion around the situation at Lignol. We only ended up getting about 15 minutes of quality time with him.”

“Mike comes out. He’s all pumped up,” Mr. Byrne explains. “We’re trying to say there’s a debt equity proposal on the table. The producer was there. All I can say is that it was bizarre.”

Mr. Wekerle counters that he spent about thirty days filming on location at CBC headquarters in Toronto, and that he kept up with goings on around Difference by having his staff come down to the CBC for weekly meetings. But sources within Difference say they became concerned that Mr. Wekerle was starting to devote too much time and energy on building his personal brand as a TV star, to the detriment of the firm.

DRAGONS' DEN TAKES A TOLL

In the summer of 2014, with the company’s share price sinking, Mr. Wekerle said he faced serious pushback from more than one party within Difference who claimed that he was “unfocused.” Co-founder Mr. Sparkes told him that when the CBC show started airing in the fall, promotional commitments would further distract him from his core job of running the firm. He said Mr. Sparkes pleaded with him to step aside as CEO.

Mr. Wekerle refused to resign. In mid-July, Mr. Sparkes, board members Wes Hall and Mr. Fecan stepped down en masse. A month later Mr. Johnson tendered his resignation.

After the management shakeout, Difference took no prisoners in its approach to its investments, aggressively pruning some of the non-performers. At that point, Lignol Corp. was on borrowed time. Mr. MacLachlan said he hustled madly to save the company. But it was all for nought. In late August, Difference placed Lignol into receivership. Difference has since written down its original $18-million investment in Lignol to $1-million.

Rather than ditch World Gaming, however, the company undertook a drastic restructuring.

“They were extremely supportive. I believe they are still very much committed to the success of World Gaming,” Rob Segal, CEO of World Gaming, said in an interview.

In August, 2014, another legendary money manager, Rohit Sehgal – a former close friend of Mr. Wekerle’s – sued him for non-payment of a $1.4-million (U.S.) debt, stemming from the sale of a Manhattan condo in which they had co-invested. Mr. Sehgal subsequently attempted to have Mr. Wekerle legally declared bankrupt. Mr. Wekerle admits he owes his old pal $1.1-million, but isn’t willing to pay him the extra $300,000 Mr. Sehgal claims he is owed, and is challenging him in court.

And as if that weren’t enough for one man to handle, in September, video footage appeared online showing an accident where Mr. Wekerle’s $845,000 (U.S.) Porsche 918 Spyder caught fire at a gas station in Caledon, Ont., and was incinerated.

Of all the controversy surrounding Mr. Wekerle, it’s the notion that he’s going broke that incenses him.

“A lot of people like to talk about me. And it’s malicious. If I was bankrupt, I wouldn’t have just flown to Europe in my own jet, which [cost] about $100,000,” he said. Mr. Wekerle claims that his money is tied up in illiquid assets such as the 27 real estate assets he says he owns.

“I’m asset rich and cash poor,” he added.

Whatever state Mr. Wekerle’s accounts really are in, Difference Capital’s financial condition – and Mr. Wekerle’s investment in it – have continued to deteriorate. Since going public, the shares have lost about 70 per cent of their value. The company posted a loss of $13-million in the second quarter of 2014 and a $12-million loss in the third quarter. Its portfolio of 40 companies has nearly been cut in half. The advisory business is being wound down. Difference’s team is down to 10 employees from its peak of 16. In mid-January, managing partner Jamie Brown tendered his resignation (he said it was amicable). The firm’s big talk about expanding internationally and setting up satellite offices is gone.

“We’re not saying we will be tomorrow’s hero,” Mr. Wekerle said. “We’re keeping our powder dry from both a capital point of view and from an operational point of view.”

“The nature of the sector is if it had worked out, they’re heroes,” said Mark McQueen, CEO of Wellington Financial, a veteran of the technology industry. “And if not, they lose their money – of course.”

““Technology investing is a very specialized, tough thing to do. You need to look at a thousand opportunities in technology to have a chance at finding those potential billion-dollar opportunities, because they are so rare,” Mr. McQueen added.

But if Difference’s fate is inextricably linked to the fortunes of the mercurial Mr. Wekerle, can it recover?

Even his critics aren’t sure.

“You only need one or two winning investments and he’s a winner. His strategy of working his way out of this may well be dead right.” said Enhanced Systems’ Mr. Byrne. Difference boasts stakes in three of Canada’s hottest prospects for tech IPOs: BuildDirect, Vision Critical and HootSuite.

“Wekerle is one of those freak fundraisers and he’s a trader. But he needs safe hands around him,” Mr. Byrne added.

And while he’s burned his fair share of bridges on Bay Street, Mr. Wekerle’s worst enemy may well be the man in the mirror.

“I have been criticized [based] on hearsay, and [on my] lifestyle. … I did have scenarios which I regret.” He said he has taken “a lot of steps” to control his issues, which he characterizes as “dependency and addiction.”

Despite the criticism of his performance at Difference, his antics, the friendships that have been torn asunder and the internal demons he appears to be fighting, there are still plenty of people on Bay Street that are sticking by Michael Wekerle.

“He is as much a friend today as he was when he was a trader at GMP,” Ned Goodman said. “I think he’s trying hard. He’s doing the best he can.”

Jim Shaw said he and Mr. Wekerle are still buddies, and if a bunch of rich big shots lost their shirts on Difference, too bad.

“Listen, they’re all big boys, too,” he said.

As all of the craziness swirls around him, Mr. Wekerle said one of his biggest priorities is moving from his Forest Hill home back to Bayview and Steeles, to be close to his mother. Hermine Wekerle is 83 and has early-stage dementia. “I saw my dad go through [dementia].” He passed away a year and a half ago, Mr. Wekerle said.

“Whether it’s a week or a year, or two years, I get with my mum, I’ll be next door to her. And that’s what’s more important than anything else.”