Illegal and abusive short-selling scheme – Cormark Securities
Ontario’s securities regulator has accused Cormark Securities, a Toronto mid-market investment bank, of facilitating a “illegal and abusive short-selling scheme” by misrepresenting to one client, Canopy Growth Corp. WEED-T -3.40%decrease, the goal of a series of transactions that ultimately netted another client $1.27 million.
Cormark Securities’s COO released a statement in which the business “vehemently disputes the charges against it” and claims that Canopy was provided with all material information regarding the transactions.
The enforcement process initiated against Cormark Securities by the Ontario Securities Commission is among the first regulatory actions, if not the first, to be brought in Canada alleging an investment dealer engaged in this type of short selling. The issue was a primary topic of an Ontario securities reform task force, and The Globe and Mail reported on its rise in the cannabis industry in 2019.
The Ontario Securities Commission (OSC) claims that Cormark Securities customer Marc Bistricer committed market fraud on March 17, 2017, when he sold short 2.5 million Canopy shares through his investment holding company for roughly $26.76 million. The OSC claims that Mr. Bistricer did not physically possess the shares at the time of the alleged trade but expected to do so through a series of transactions completed through Cormark Securities in the days ahead.
Short sellers are investors who borrow shares from the market in the hope of buying them back at a cheaper price and pocketing the difference when the trade is settled.
Specifically, the OSC claims that on March 22, Mr. Bistricer’s business engaged in a “private placement” financing transaction with Canopy in which it purchased 2.5 million shares for $24.25 million. The OSC claims that Mr. Bistricer should have settled the trade five days earlier, but he was unable to do so because the shares he purchased were subject to a hold period since he was an accredited investor.
Mr. Bistricer’s securities loan agreement with Murray Goldman breached the hold period
According to the OSC’s allegations, Mr. Bistricer’s firm violated the hold period by entering into a securities lending deal with Murray Goldman, a director of Canopy who was in possession of freely tradable Canopy shares.
The OSC claims that Mr. Bistricer settled a trade he had by giving Mr. Goldman’s business 2.5 million restricted Canopy shares in return for 2.5 million unrestricted Canopy shares.
According to the OSC, Mr. Bistricer’s company made $1.27 million after paying fees of $875,000 to Mr. Goldman’s company for securities lending and fees of $362,500 to Cormark Securities.
According to the OSC, there were several issues with the execution of this plan. The regulator claims that Cormark and Jeff Kennedy, the company’s then-managing director of equity capital markets, misrepresented these acts to Canopy as “ordinary course transactions” in conjunction with the March 17 inclusion of the company to the S&P/TSX Composite Index. The authority claims that Cormark Securities did not treat Canopy “fairly, honestly, and in good faith.”
Susan Streeter, COO of Cormark, refuted allegations that the company misled Canopy in a statement to The Globe. At the Capital Markets Tribunal, “Cormark wants to fiercely defend the claims.” The OSC’s tribunal is an autonomous body responsible for deciding on judicial review of enforcement complaints.
Mr. Bistricer, who is also being sanctioned, sent out an email statement in which he stated, “These charges are confusing and appear to be a complete mischaracterization of regular transactions that benefited all stakeholders, including Canopy Growth, index funds, and retail investors.” He promised to stand by the deals.
Mr. Kennedy, according to his attorney Melissa MacKewn, will be disputing the OSC’s claims. The OSC is “obviously attempting to make law through enforcement action,” she said. According to the commission’s attorney, “the complaint is based on revisionist history and takes aim at a form of industry-accepted transaction years after the event.”
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