The Ontario Securities Commission’s case was one of few regulatory actions in Canada in recent years targeting the practice of short-selling, a trading strategy used to bet that a company’s share price will drop.Melissa Tait
Ontario’s Capital Markets Tribunal has dismissed a case by the province’s securities regulator alleging that Cormark Securities Inc. helped facilitate an “abusive” short-selling scheme involving Canopy Growth Corp., calling the securities watchdog’s allegations “an overreach.”
The Ontario Securities Commission’s case was one of few regulatory actions in Canada in recent years targeting the practice of short-selling, a trading strategy used to bet that a company’s share price will drop.
Many companies and law firms urged regulators to crack down on the practice, including what they called “short and distort” activist campaigns where the seller publicly criticized the stock. The issue was a key focus for an Ontario securities reform task force.
Short-selling has been rampant in the cannabis sector, sometimes facilitated by company insiders lending their own shares to be sold short. (The Globe and Mail documented the practice in 2019.)
The Cormark case dates back to Canopy’s addition to the Toronto Stock Exchange’s composite index March 17, 2017. Prior to that, Cormark Securities, a Toronto midmarket investment bank, had approached Canopy, a cannabis company based in Smiths Falls, Ont., about participating in a series of transactions intended to allow the company to raise funds by taking advantage of an anticipated increase in demand for its shares.
Jeff Kennedy, Cormark’s then-managing director of equity capital markets, and Cormark client Marc Judah Bistricer and his company Saline Investments Ltd. were also defendants in the dismissed case. Mr. Kennedy developed the structure of the transactions.
Mr. Bistricer’s Saline sold short 2.5 million Canopy shares. Several days later, Saline bought 2.5 million shares from Canopy in a private placement. However, because Mr. Bistricer bought those as an accredited investor, they were subject to a four-month holding period. That prevented him from using those shares to settle his earlier short trade.
Instead, Saline borrowed 2.5 million freely trading shares from Goldman Holdings, the holding company belonging to Canopy director Murray Goldman. Saline used the restricted shares as collateral for the loan. Saline then used the borrowed Goldman shares to close out its short position.
Saline’s profit, after paying various fees, was $1.27-million, according to the OSC, a provincial agency tasked with regulating Ontario’s capital markets.
The OSC had contended that the series of transactions amounted to an illegal distribution of Canopy’s shares and that Cormark and Mr. Kennedy had failed to deal with Canopy, which the OSC alleges was their client, “fairly, honestly and in good faith,” among other allegations.
However, the tribunal determined that the respondents did not engage in an illegal distribution and that Canopy was not Cormark’s client.
“Having found that the Commission has not proven any of its numerous allegations of misleading, dishonest or other wrongful conduct, we conclude that these allegations against the respondents were an overreach,” wrote the three adjudicators in a Nov. 6 decision.
The tribunal is a division of the OSC that is responsible for the commission’s adjudicative function and comprises at least nine adjudicators.
Melissa MacKewn, a lawyer representing Mr. Kennedy, said she and her client are “exceedingly pleased” that the tribunal has confirmed that the transaction was “entirely proper.”
“The OSC’s myopic focus on the alleged short sale component of the transaction missed the point. It is unfortunate that the OSC chose to exhume a transaction executed in 2017 to try to make its misguided point and needlessly tarnish the reputation of experienced professionals in the process,” Ms. MacKewn wrote in an e-mailed statement.
David Di Paolo, who represented Cormark, said the investment dealer “is pleased this matter has come to an end with a dismissal of all of the charges against it and respects the outcome of the Capital Markets Tribunal process.”
Derek Ricci, counsel for Saline, called the dismissal “fair and just, and a complete vindication of our client’s conduct.”
“The Tribunal agreed with what we said from the very beginning – our client and Mr. Bistricer did nothing wrong. It has always been evident to us that simply earning profit is not a violation of the public interest and it should be comforting to all market participants that the Tribunal agrees,” Mr. Ricci said in an e-mail.
Andy McNair-West, a spokesperson for the OSC, said in a statement that “the Tribunal’s decision contains findings of fact and law for the Commission to review and consider as it fulfills its mandate to protect the integrity of Ontario’s capital markets and confidence in them.”
With reports from David Milstead