A hearing panel of the Investment Dealers Association of Canada has dismissed all charges involving allegations of unbecoming conduct against two brokers with Canaccord Capital Corp.

By written decision dated September 16, the panel dismissed two charges against Michael Finkelstein and one against Elizabeth Leonard. The panel dismissed a third charge against Finkelstein, with one panel member dissenting.

IDA staff alleged that between December 2001 and November 2002, both respondents engaged in conduct unbecoming in that, through a hedge fund over which they exercised control, they traded in securities of U.S. issuers while in possession of material non-public information.

In addition, staff alleged that Finkelstein failed in his gatekeeper duties by permitting certain clients to trade in securities of U.S. issuers while in possession of material non-public information.

Staff also alleged that Finkelstein, on behalf of Stonestreet Limited Partnership, engaged in short selling and hedging transactions in breach of certain covenants contained in two separate subscription agreements to not short sell securities of the issuer.

At times relevant to the case, Finkelstein was registered with the IDA as a registered representative options and controlled and managed Stonestreet, through Stonestreet Corp,. Stonestreet operated as a hedge fund and maintained a non-client account at Canaccord.

Leonard was registered with the IDA as a registered representative options and as a portfolio manager options. She was employed at Canaccord and was the portfolio manager of Stonestreet. Together, Finkelstein and Leonard ran Stonestreet.

As part of its business operations, Stonestreet participated in private financing by issuers of securities which traded on the NASDAQ Stock Market Inc. or on the Over-the-Counter Bulletin Board. Four financings were specified in the particulars of the charges, three of which were private investment in public equity sales. The fourth transaction was a shelf registration sale. In private financing of these types, restricted-trading shares of the issuers are offered to investors at a discount to the market price.

On Count 1, the panel concluded that “while we are unable to say that, from a Canadian perspective, the conduct of the respondents was commendable, we are left in a state of real uncertainty about whether that conduct constituted a violation of Section 10(b) of the Act. Canadian law requires that the uncertainty be resolved in the respondents’ favour. Count 1 is, therefore, dismissed.” Count 2 against Finkelstein alleging failure to perform his gate keeping role was dismissed because conviction required a finding of violation on Count 1.

With respect to the third charge, Finkelstein executed the signature page of a subscription agreement which contained a covenant precluding the short sale of the issuer’s securities. He claimed he signed the agreement without reading it. Despite the covenant, Stonestreet engaged in short selling activity. A majority of the panel found that in these circumstances, an isolated breach of a contractual provision which may well have been inadvertent did not amount to conduct unbecoming.

For a complete summary of facts, please see IDA Bulletin 3465.