STATEMENT OF ALLEGATIONS (subsection 127(1) and section 127.1 of the Securities Act, RSO 1990, chapter S.5) IN THE MATTER OF CORMARK SECURITIES INC., WILLIAM JEFFREY KENNEDY, MARC JUDAH BISTRICER, AND SALINE INVESTMENTS LTD.
Overview – Cormark Securities Inc.
This case is being brought to hold three sophisticated market participants accountable for an illegal and abusive short selling scheme that violated Ontario securities law and was against the public interest. The case is being brought in order to hold these market participants accountable for their actions.
The market participants included: (a) Cormark Securities Inc. (Cormark), a registered investment dealer; (b) William Jeffrey Kennedy, Cormark Securities Inc’s Head of Equity Capital Markets; and (c) their client Marc Bistricer, a registrant who engaged in the transactions through a private holding company called Saline Investments Ltd. (Saline). (a) Cormark Securities Inc. (Cormark) is a registered investment dealer. (b) William Jeffrey Kennedy is commonly known as Jeff Kennedy.
As part of the transactions, Saline, in preparation for a private placement that will be carried out by Canopy Growth Corporation (Canopy):
(a) traded short shares of Canopy in open market transactions;
(b) invested the same amount of money in Canopy shares through the private placement;
(c) exchanged the shares obtained through the private placement for shares of Canopy that are available for trading publicly in accordance with a securities lending agreement; and
(d) used the shares that were available for free trading to settle the short sells.
Saline did not provide any of its own funds. It then used the money from the sale of the Canopy shares it did not hold to pay for the private placement shares, the securities loan, and the services of Cormark Securities Inc. The profit made by Saline was greater than $1.27 million.
A violation of the law occurred as a result of the string of transactions that took place on the secondary market regarding the distribution of Canopy shares. In addition, Cormark Securities Inc and Kennedy lied to Canopy, their customer, and told them there was no illicit short selling going on. They failed to deal with Canopy in a manner that was fair, honest, and in good faith.
In addition to breaking the law of securities in Ontario, the respondents engaged in conduct that was against the public interest. For instance, issuers will not be able to trust and rely on investment dealers like Cormark Securities Inc and Kennedy if they do not conduct themselves in an honest and responsible manner. As a result, these dealers will not be able to fulfill the crucial role of advancing securities offerings, which is one of their primary responsibilities.
In addition, this type of abusive short selling may result in unreasonable price decreases close to the times of offerings, which can reduce the proceeds that issuers receive from their offerings, restrict the development of new capital, and lower investors’ confidence in the capital markets. Cormark Securities Inc, Kennedy, and Bistricer chose to enrich themselves at the expense of the capital markets rather than perform their duty as registrants to maintain the integrity of the capital markets.
Short selling scheme
Cormark Securities Inc., Kennedy, and Bistricer, who was their client, set up and ran a short-selling scheme that was illegal and unfair.
They knew what they were doing in the market. Cormark Securities Inc. was licensed to sell investments. Kennedy was a director and officer of Cormark Securities Inc. as well as its Managing Director of Equity Capital Markets and Operations. Bistricer was the CEO of a company that took care of portfolios.
The three of them came up with the series of trades to make money off of the expected increase in demand for Canopy shares after the company joined the S&P/TSX Composite Index. Index funds would want to buy Canopy shares so they could track the index, which was thought to raise demand.
After thinking about different ways to make money off of the expected higher demand, the three decided to do a series of deals that included a private placement, a securities loan, and short sales. Bistricer used Saline, a private holding company he ran and was the only director and officer of, to do the deals. Saline did the deals on March 17, 2017, and they were finalized on March 22, 2017.
On March 17, the day Canopy joined the index, Saline signed a private placement subscription agreement with Canopy and a securities lending agreement with Goldman Holdings Ltd. (GHL), a private company that Murray Goldman, a Canopy director, used to hold his shares. In order to get ready for these deals, Saline sold short about $26.76 million worth of Canopy shares on the open market.
Three trading days later, on March 22, Saline had to settle the short sales by giving free-trading shares. So that it could do this, the respondents set up for the private placement and securities loan to close on the same day.
a. In the private placement, Saline paid $24.25 million for 2.5 million Canopy shares. Canopy sold these shares to Saline without having to give her a prospectus because she was a “accredited investor.” So, Ontario securities law’s hold periods applied to them.
b) As part of the securities loan, Saline traded these private placement shares with restrictions for Canopy shares that could be traded freely. The private placement shares that Saline gave to GHL were used as “collateral” (which GHL kept at the end of the loan). In exchange, GHL gave Saline 2.5 million Canopy shares that were free to trade, and Saline paid GHL a securities lending fee of $875,000.
Last, Saline used the borrowed shares that were free to trade to pay off the short sales.
Saline didn’t put up any of its own money. It paid for the private placement, the securities loan, and Cormark Securities Inc’s work, which cost $362,500, with the money from the short sale. Saline made more than $1.27 million.
Profits for Saline and Cormark Securities Inc. were almost risk-free. Saline thought about each deal she made in light of the others. It sold short when it was sure it would be able to pay for the short sales with shares bought in a series of transactions for less money. Because of the demand for index funds, it was likely that the short sale orders would be filled. Last, Saline sold most of the shares short at the end of the day. Saline knew it would make a 9% profit because the private placement price was set to be 9% less than the closing price.
Through the short sales, the Canopy shares were given to the public in a way that was against the law. The short sales were part of a series of buy-and-sell or re-buy-and-sell transactions that happened during or as part of a distribution. That was the private placement, which was a trade in securities that had never been issued before.
In the end, the Canopy shares that Saline had sold short to the public, including to small investors, were bought by the public. As Canopy’s offering proceeds, the money that people paid for those shares went through Saline to Canopy. Canopy shares were sold to the public. “Backdoor underwriting” is a term that is sometimes used to describe this kind of illegal distribution.
Saline was an underwriter. As the main investor, it agreed to buy shares through the private placement and securities loan so that they could be sold through short sales. Bistricer made these trades better. He set up the series of transactions, signed the private placement subscription agreement and the securities lending agreement, and put in the short sale orders, among other things.
Cormark Securities Inc.and Kennedy also helped with the spread. In order to do this, they planned the series of transactions, talked to Canopy about the private placement and securities loan, and made sure that all of these things went smoothly. Cormark Securities Inc.also got the orders for short sales and helped Saline get the orders carried out through exchanges like the Toronto Stock Exchange.
It was against the law to do this. No preliminary prospectus or prospectus was filed, and none of the exceptions to the requirement that a prospectus be filed were valid.
Failure to deal fairly, honestly and in good faith
Cormark Securities Inc.and Kennedy did not deal with their client, Canopy, in a fair, honest, and good faith way when they set up the private placement and securities loan. Because of this, Canopy couldn’t decide whether or not to get involved in the transactions in a smart way.
Cormark Securities Inc. and Kennedy pitched the private placement and securities loan to Canopy as “ordinary-course transactions” related to Canopy’s addition to the index, which would lead to new demand for Canopy’s shares from index funds and give Canopy a chance to raise money. Cormark and Kennedy say that the final buyers of the private placement were the index funds, that Saline acted as a middle buyer in the private placement to make it easier for the index funds to buy, and that Saline needed the securities loan so it could give the index funds free-trading shares.
Their story was not true. Saline needed the securities loan to pay off the short sales. Cormark Securities Inc. and Saline sold those shares short on the open market, where anyone could buy them, not just index funds. In reality, some of the buyers were small investors who needed a prospectus.
Cormark and Kennedy also didn’t tell Canopy how the deals helped Saline. They hid the short selling that let Saline make money with almost no risk. They also lied about how much money they made. When they talked to Canopy about the securities loan, they lied about how the 9% discount and the lending fee related to each other. They said that Goldman could be paid 6.5% per year, which would leave “enough room” for Saline to get a “small” discount and Cormark Securities Inc. to get 1% to 1.5% in commissions. In fact, Saline made most of the money.
Cormark Securities Inc. and Kennedy also said things that were not true about Canopy’s cost of capital and, by implication, its net proceeds. They told Canopy that the costs of this deal were better than the costs of the last deal Canopy made. Their comparison left out important details.
It was important that, unlike the last deal, the underwriter (Saline) sold all of the offering on the day it was priced. These short sales might have stopped the closing price from going up or made it go down, which would have changed the offering price and lowered Canopy’s net proceeds. Because Cormark Securities Inc. and Kennedy kept the short selling secret, Canopy could not assess or even find this risk to itself and its shareholders.
Cormark Securities Inc. and Kennedy’s business with Canopy was against what was best for the public. They lied about what the private placement and securities loan were really about. These were not normal, low-cost deals to meet new demand for Canopy’s shares from index funds. Instead, these were important parts of an illegal and unfair short-selling scheme that Saline and Cormark came up with to make money with almost no risk.
Capital formation depends on investment dealers and the people who work for them. Issuers must be able to trust and depend on them if they are to help with securities offerings. When people lie, like Cormark Securities Inc. and Kennedy did, it hurts the trust that is needed. It threatens the fairness, efficiency, and competitiveness of Ontario’s capital markets, as well as people’s trust in them, which is the opposite of what the Securities Act was meant to do (the Act).
Further conduct contrary to the public interest
The actions of the respondents were rude and went against the main ideas of Ontario securities law. It:
(a) make it harder for information to be shared in a timely, accurate, and efficient way;
b) hurt the protection that hold periods give to investors;
(c) made Ontario’s capital markets less efficient and less trustworthy;
(d) didn’t meet the high standards for health and business behavior that registrants have to meet.
The respondents tried to make it harder for information to be shared quickly, correctly, and effectively.
First, they made sure that the private placement was less than 2% of Canopy’s total shares, so they didn’t think it was important. Because of this, neither the rule against trading on inside information nor, as Cormark Securities Inc. and Kennedy stressed to Canopy, the rule about reporting material changes, applied.
Still, Canopy chose to put out a news release about the closing. The first draft was written by Cormark Securities Inc. and Kennedy. It didn’t say what the transactions were about, mention that they were short sales, or even name the broker, Cormark Securities Inc.
The risk that regulators would take action was lessened by the secret. Because the whole series of transactions was hidden, market participants couldn’t check them out and regulators couldn’t keep an eye on them in a timely manner.
Civil lawsuits were also less likely to happen because of the promise not to tell. For example, Saline had to give a prospectus to the small investors who bought short-sold shares from them. Because they didn’t get one, they had the right under common law to get the money back as an unjust enrichment to Saline. But the retail investors never knew they had this right because the fact of the distribution was kept secret. They were not given what was due to them.
Undermining investor protection
The series of transactions took away the protections that the hold periods in Ontario securities law gave to investors. With the securities lending agreement, it got around those hold periods.
Under the agreement, Saline and GHL swapped the restricted shares from the private placement for shares that could be traded freely. The length of the agreement was the same as the length of the hold periods. At the end of the term, the agreement said that (a) Saline had to give GHL shares to pay back the loan, and (b) GHL had to give Saline shares since “collateral” was no longer needed. Cormark Securities Inc. and Kennedy thought that, for “better optics,” the agreement should call for this exchange of shares.
In fact, this did not happen. Once the hold periods were over, GHL just kept the shares it had held as “collateral.” There was no need to take any more steps. The agreement had done what it was supposed to do. In reality, the securities loan was just a swap of shares to get around the hold periods.
Hold periods are very important for protecting investors. They make sure that privately placed securities are bought by people who want to invest in the issuer. This keeps “backdoor underwriting” like the series of transactions from happening.
Hold periods also make sure that before the shares are sold to the public again, there is a new set of financial statements and management’s discussion and analysis for investors to look at. Instead, the public traded in the shares based on the financial statements and management’s discussion and analysis for the period ending December 31, 2016. This went on for more than three months, until the end of June 2017.
Threatening capital market efficiency and confidence
The series of transactions put Ontario’s capital markets and people’s trust in them as a good way to set prices at risk.
It was unlikely that Saline’s short sales would help make a good trading price. Not Saline’s opinion of Canopy’s worth but the chance to make money with almost no risk was what drove them. The fact that these profits come with no risk is a big reason why people do these kinds of short sales, which may stop a stock price from going up as much as it would have without the short sales or even cause it to go down.
If investors don’t know why the market is moving, they might think that the issuer’s quality is being judged and decide to sell as well. This could cause prices to drop more than they should around the time of offerings. Such drops in price could lower the amount of money shareholders get from the secondary market. They may also lower the amount that issuers get from their offerings, which slows down the process of raising money. Because of these short sales, the capital markets are less fair, efficient, and competitive, and people have less faith in them.
Failing to meet high standards of fitness and business conduct
Cormark Securities Inc., Kennedy, and Bistricer did not act in a way that met the high standards for registrants and was honest or responsible.
Cormark Securities Inc., Kennedy, and Bistricer were all signed up:
(a) Cormark Securities Inc. was set up as an investment dealer in Ontario;
b) Kennedy was registered in Ontario as a Cormark Securities Inc. sales agent; and
(c) Bistricer was registered in Ontario as the ultimate designated person for Murchinson Ltd., an Ontario portfolio manager.
As people who had signed up to do business, Cormark Securities Inc, Kennedy, and Bistricer had to keep the capital markets honest. Representatives like Kennedy and investment dealers like Cormark Securities Inc. are important gatekeepers when it comes to giving securities to the public. People like Bistricer are in charge of making sure that securities laws are followed as a matter of course. Instead of doing these jobs, the three used their knowledge and skills to help themselves, hurting investors and the capital markets in the process.
INFRACTIONS OF ONTARIO SECURITIES LAW AND BEHAVIOR AGAINST THE PUBLIC INTEREST
It is said that the following broke Ontario securities law and acted against the public interest:
(a) the respondents sold securities without filing a preliminary prospectus, a prospectus, or an exemption from the requirement to file a prospectus, which is against section 53(1) of the Act;
b) Cormark and Kennedy did not deal with their client, Canopy, in a fair, honest, and good-faith way, which is against section 2.1 of OSC Rule 31-505 Conditions of Registration;
(c) Kennedy authorized, allowed, or looked the other way when Cormark Securities Inc. didn’t follow Ontario securities law, and under section 129.2 of the Act, Kennedy is considered to have broken Ontario securities law;
(d) Bistricer gave Saline permission or looked the other way when Saline didn’t follow Ontario securities law, and under section 129.2 of the Act, Bistricer is considered to have broken Ontario securities law;
(e) Cormark Securities Inc. and Kennedy did things that deserved a public interest order under section 127(1) of the Act, as described in paragraphs 20–41; and
(f) As described in paragraphs 28–30 and 32–41, Bistricer and Saline did things that, according to section 127(1) of the Act, called for an order in the public interest.
The Capital Markets Tribunal (the Tribunal) may allow these allegations to be changed or new allegations to be made.
It is asked that the following orders be made by the Tribunal:
(a) that any registration or recognition given to the respondents under Ontario securities law be canceled, suspended, or limited for a time period set by the Tribunal, or that the registration or recognition be subject to terms and conditions under paragraph 1 of subsection 127(1) of the Act;
(b) according to paragraph 2 of subsection 127(1) of the Act, that the respondents stop trading in any securities or derivatives for good or for a certain amount of time set by the Tribunal;
(c) that the respondents can’t buy any more securities forever or for as long as the Tribunal says they can’t, according to paragraph 2.1 of subsection 127(1) of the Act;
(d) that any exemptions in Ontario securities law don’t apply to the respondents forever or for as long as the Tribunal says they don’t, according to paragraph 3 of subsection 127(1) of the Act;
(e) In accordance with paragraph 4 of subsection 127(1) of the Act, Cormark Securities Inc. must let the Tribunal review its practices and procedures and make any changes that it may order;
(f) According to paragraph 6 of subsection 127(1) of the Act, that the respondents be reprimanded;
(g) that Kennedy and Bistricer resign from any positions they may hold as directors or officers of an issuer, according to paragraph 7 of subsection 127(1) of the Act;
(h) that Kennedy and Bistricer can’t be a director or officer of an issuer for as long as the Tribunal says, or for as long as the Tribunal says, based on paragraph 8 of subsection 127(1) of the Act;
I that Kennedy and Bistricer quit any positions they may hold as a director or officer of a registrant, according to paragraph 8.1 of subsection 127(1) of the Act;
(j) that Kennedy and Bistricer can’t be a director or officer of a registrant for life or for as long as the Tribunal says they can’t; this is because of paragraph 8.2 of subsection 127(1) of the Act.
(k) that Kennedy and Bistricer quit any jobs they might have as directors or officers of investment fund managers, according to paragraph 8.3 of subsection 127(1) of the Act;
(l) Kennedy and Bistricer can’t be a director or officer of an investment fund manager for the rest of their lives or for as long as the Tribunal says. This is because of paragraph 8.4 of subsection 127(1) of the Act.
(m) that the respondents aren’t allowed to become or act as registrants, investment fund managers, or promoters in the future or for as long as the Tribunal decides, according to paragraph 8.5 of subsection 127(1) of the Act;
n) According to paragraph 9 of subsection 127(1) of the Act, the respondents must pay an administrative fine of up to $1 million for each time they didn’t follow Ontario securities law;
(o) according to paragraph 10 of subsection 127(1) of the Act, that the respondents give back to the Ontario Securities Commission any money they got from not following Ontario securities law;
p) According to Section 127.1 of the Act, the respondents must pay for the costs of the investigation and the hearing; and
(q) Any other order that the Tribunal thinks is best for the public.
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