Pubdate: Mon, 23 Dec 2019
Source: Wall Street Journal (US)
Copyright: 2019 Dow Jones & Company, Inc.
Author: Vipal Monga, Jacquie McNish and Corrie Driebusch


Graham Saunders is a man in high demand.

When U.S. cannabis companies need financing they can't find elsewhere,
they turn to this Toronto banker who operates far from Wall Street.
Since the spring of 2016, Mr. Saunders's team at Canadian boutique
firm Canaccord Genuity Group Inc. has helped finance more than half of
all pot deals in the global equity markets, raising more than $5
billion from investors, according to Dealogic.

The king of pot financing presents himself in business meetings as a
banker from another era, sporting pinstripe suits, monogrammed cuff
links and slicked-back hair. He drives a Bentley, has a collection of
expensive watches, and answers to his high-school nickname, "Sudsy."
Mr. Saunders, 51, has become so identified with cannabis that he has a
jacket with marijuana leaves printed on it.

He openly invests his own money in some of the cannabis pacts he helps
broker. Before Canaccord sold shares in many of these startups to
investors, Mr. Saunders personally took early stakes in dozens of the
companies, according to regulatory filings and people familiar with
the matter. He reaped profits when the companies hired Canaccord to
sell shares to the bank's retail clients and other investors at higher
prices, according to regulatory filings.

In the U.S. and Canada, it is legal for bankers to take stakes in
companies that their banks later take public. A Canaccord spokesperson
said the firm has "stringent policies and protocols" to ensure Mr.
Saunders's private investments don't put his interests at odds with
those of the companies it is advising or its investor clients. The
bank said it preapproves his investments and keeps track of his trading.

"We are confident that our activities are in full compliance with
relevant securities laws and companion policies," the spokesperson

Mr. Saunders joined Canaccord in 1996, developing an investor
following in speculative mining and oil and gas stocks. He emerged as
a central figure in the cannabis market by acting as a matchmaker for
investors and the companies in the nascent sector. As the
Toronto-based head of originations in Canaccord's equity capital
markets group, he is responsible for identifying and cultivating
startups that might become fee-paying clients for the bank.

The practice of acting as investor and adviser to companies tests an
ethical line that most major banks in the U.S. and Canada aren't
willing to cross. Most U.S. financial institutions don't allow bankers
to make such investments because they could be more motivated to
benefit from their own investments than offer a fair price to clients
who later buy the shares, said Brad Bennett, former head of
enforcement at the Financial Industry Regulatory Authority.

"Bankers are supposed to be professional skeptics about the securities
their firms sell. They should not have a blatant self interest in the
stock," he said.

In Canada, bankers's investments at most major banks are restricted
"because of the potential for conflicts of interest," said Laurence
Booth, a professor at the University of Toronto's Rotman School of

"Our decision to allow employees to participate in early-stage
financings is in alignment with our longstanding heritage of
supporting emerging industries and entrepreneurs in Canada," Canaccord
said in a statement. "Many of the investors in these emerging
companies expect and appreciate that professional investors are
willing to have 'skin in the game' and share the risk."

Though many U.S. states have legalized marijuana, it is still
federally illegal and the New York Stock Exchange and Nasdaq don't
allow listings by cannabis companies More broadly, banks that engage
in business with the cannabis industry could risk their federal
banking charters. So few will bank with marijuana businesses.

That has left companies such as Wakefield, Mass.-based Curaleaf
Holdings Inc., Chicago-based Green Thumb Industries Inc., and Culver
City, Calif-based MedMen Enterprises Inc. with few fundraising
alternatives to Canada, the only major economy where cannabis is
federally legal.

Mr. Saunders made his first big cannabis deal in 2016. He bought
50,000 Canadian dollars ($37,720) worth of Aurora Cannabis Inc.
convertible securities in May that year, according to filings with the
Canadian Securities Exchange.

Three months later, Aurora said it had hired Canaccord as its
exclusive agent for a C$23 million financing. As part of the deal, Mr.
Saunders invested another C$750,000 in the company to buy stock and
warrants. He was joined by several friends and colleagues including
Patrick Burke, Canaccord's president of capital markets, and Dan
Daviau, its CEO, according to Aurora regulatory filings. A Canaccord
spokesperson said its employees were invited to acquire the Aurora
shares after they were unable to find enough clients to invest in the
offering. Mr. Burke couldn't be reached for comment.

Aurora CEO Terry Booth said he welcomed Mr. Saunders's early
investments at a time the company was struggling to attract investors.
"When you can't get money that's why a lot of this fringe banking goes
on," he said.

Mr. Saunders's enthusiastic sales pitches and frequent promise to
investors of a "grand slam" return on Aurora's stock "helped us to be
what we are today," he said.

It isn't clear whether Mr. Saunders held on to his Aurora investment
or for how long. If he held on to it through a series of public
offerings, private placements and mergers for which Canaccord acted as
the company's adviser, his C$800,000 investment in the two financings
that year would have been worth almost C$45 million when Aurora's
stock price hit its high of C$15.07 a share in 2018. Even at current
valuations, Mr. Saunders's stake would be worth roughly C$9 million.
That potential return doesn't include fees he earned as a banker for
his work with the company.

"Canaccord made a lot of money banking on Aurora," said Mr.

Mr. Saunders followed the same strategy in more than 100 other deals,
investing an average of roughly C$100,000 in each, according to people
familiar with the matter.

Roughly 40% were later banked by Canaccord, according to one of those

Employees' early stage investments are subject to preapproval by the
bank, a spokesperson said. If the bank later takes on the startup as a
client, employee investments are disclosed and the bank gives clients
priority as buyers in subsequent financings. If bankers are deemed to
be too invested in a company or if an investment committee feels there
is a conflict of interest, Canaccord may choose not to advise the company.

Steve White, CEO of Tempe, Ariz.-based cannabis company Harvest Health
& Recreation Inc., worked with Canaccord for its capital raise last
year, and is again working with the bank for a debt raise. He said he
respects Canaccord bankers like Mr. Saunders who have made millions by
betting on cannabis companies before they were widely accepted.

"There's a certain reward they should be entitled to for taking that
risk," he said.

In a statement to The Wall Street Journal, Mr. Saunders said he has
invested in early-stage companies for most of two decades working in
the capital markets. "As a passive participant in the companies I have
invested in, my personal investing activities have been fully
transparent to my employer, Canaccord Genuity, and I have strictly
followed all applicable laws and internal company policies," he said.
"These activities are perfectly aligned with my duties as Head of
Capital Markets Origination, where building relationships with early
stage companies is critical to the success of the firm, both in the
cannabis industry and elsewhere."

Canaccord declined to discuss specifics of Mr. Saunders' trading, but
a spokesperson said he made money on roughly a quarter of his
investments. He either lost money on the rest, or they remain private

Mr. Saunders's initial success financing cannabis startups has been a
boon for Canaccord. In 2016, the bank reported a loss of C$358.6
million for the fiscal year ending on March 31. In 2019, the bank
earned C$71.6 million. The bank cited "increased activity levels and
our active involvement with numerous transactions in the cannabis
sector" as driving its Canadian business, which was the largest
contributor to the bank's profits that year.

Though Mr. Saunders's efforts helped vault Canaccord to the top of the
cannabis banking league tables, in at least one instance, his early
investing led Canaccord to abandon a client. according to two people
familiar with the situation.

According to an early shareholder list reviewed by the Journal, by
early 2017, Mr. Saunders had acquired nearly 3% of two offerings by
Cannabis Wheaton Income Corp. , since renamed Auxly Cannabis Group
Inc., a company that funds other cannabis businesses. Two bankers at
Canadian broker Eight Capital also held large stakes, according to the

In May 2017, both Eight Capital and Canaccord were chosen to co-lead
an C$80 million private sale of securities. Auxly disclosed in a press
release announcing the financing that "representatives" of the banks
held shares and warrants in the company.

That deal fell apart less than two weeks later when Eight Capital
dropped out. Two people familiar with the situation said the firm's
other partners found out after the transaction was announced that
their colleagues held large stakes in Auxly and they were ousted from
the firm.

A few days later, Canaccord's investment committee also decided to
drop the assignment because of concerns that Mr. Saunders was in line
to make a multimillion-dollar profit from his investment, one of those
people said.

A Canaccord spokesperson said the bank was aware of Mr. Saunders's
stake in Auxly before it agreed to finance the company and Auxly
agreed mutually to end their engagement on the deal afterward, and
said "any potential conflict with investors was avoided." An Auxly
spokeswoman declined to comment.

Another instance where Mr. Saunders's investing practices became an
issue happened ahead of Curaleaf Holdings Inc.'s 2018 capital raise.
Executives at the U.S. cannabis retailer entered a conference room at
Canaccord's Toronto offices to meet with Mr. Saunders and discuss
listing stock on the Canadian Securities Exchange, according to a
person familiar with the matter.

The banker welcomed them warmly, this person said. But the executives
at Curaleaf, which at the time was already one of the largest pot
producers and sellers in the U.S., were wary. They had heard of Mr.
Saunders's importance in the then-booming market, this person said.

Curaleaf's management team told Mr. Saunders up front that they would
not give away warrants or allow bankers to hold stock ahead of a
public offering. The company still used Canaccord to help with its
financing because of the bank's dominance in cannabis capital raising,
this person said, but the company chose rival bank GMP Securities as
the lead on its roughly $400 million capital raise instead.

Mr. Saunders said he doesn't recall the meeting.

The banker's wealth and status were on display last year during his
50th birthday party. He threw a lavish party at his sprawling compound
on Lake Joseph, in the Muskokas region north of Toronto, according to
pictures and people familiar with the event. The area, a Canadian
version of the Hamptons, is frequented by supermodel Cindy Crawford,
actors Kurt Russell and Goldie Hawn and a colony of Toronto's superrich.

The guest list included many of the co-investors in Mr. Saunders's
deals. Some of the guests arrived to the party on a seaplane, which
was capped off by a private performance by Canadian rock band 54-40. A
spokesperson for the bank said Mr. Saunders had no comment on the party.

Now Mr. Saunders is building a mansion in an exclusive section of
Nassau in the Bahamas, according to one of his future neighbors. Homes
in the area sell for roughly $10 million, said Philip Hillier, a
Bahamas-based real-estate broker. Mr. Saunders declined to comment on
his personal assets.

The house abuts the Albany golf course near a resort that lists
golfers Tiger Woods and Ernie Els as co-founders.
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