Ontario’s Capital Markets Tribunal dismissed all of the allegations against Toronto-based investment dealer, Cormark Securities Inc., which was accused of illegally distributing securities, and misleading an issuer client, by the Ontario Securities Commission (OSC).
The tribunal dismissed all of the regulator’s allegations against Cormark, its head of equity capital markets, Jeff Kennedy, and a client, Marc Judah Bistricer (along with his company, Saline Investments Ltd.). The matter stemmed from a series of transactions involving shares in cannabis company, Canopy Growth Corp.
According to the decision, when Canopy was being added to the TSX composite index in 2017, the investment dealer proposed a series of transactions that were designed to allow the company to raise fresh capital by taking advantage of the anticipated increase in the demand for its shares due to its inclusion in the index.
The OSC alleged that the transactions involved abusive short selling, and amounted to an illegal distribution. In its allegations, the regulator said that the scheme involved Saline selling Canopy 2.5 million shares short on the market, buying an equal number of shares in a private placement, swapping those restricted private placement shares for freely-trading shares in a securities lending agreement, and then using the free-trading shares to cover its short.
“Saline put up no money of its own. It simply sold Canopy shares it did not own and used the proceeds to pay for the private placement shares, the securities loan and Cormark’s services. Saline’s profit was over $1.27 million,” the OSC said in its allegations — which alleged that the dealer (and the investment banker) that structured the transactions violated securities rules.
“The series of transactions resulted in an illegal distribution of Canopy shares in the secondary market. In addition, Cormark and Kennedy concealed the illegal short selling from their client, Canopy. They failed to deal fairly, honestly and in good faith with Canopy,” the OSC alleged.
The regulator also alleged that the firm violated the public interest.
“This type of abusive short selling may cause unwarranted price declines around the times of offerings that reduce issuers’ offering proceeds, inhibit capital formation and diminish confidence in the capital markets,” it charged.
However, the tribunal disagreed with the regulator.
It concluded that the transactions didn’t amount to an illegal distribution, as “distributions” involve securities being sold to the public for the first time — whereas the shares traded by Saline, both the initial short sale and covering the short, involved shares that were freely trading.
“… we do not accept the premise, at the heart of the commission’s submissions, that the transactions effectively converted the restricted shares issued under the private placement into the free-trading shares borrowed under the securities loan agreement,” the tribunal said.
“We agree that the restricted shares remained within the closed system until the end of the four-month hold period. Saline used the free-trading shares to settle its short sales. The two were distinct sets of securities. The fact that the parties may have understood that the transactions were designed to work together does not change the reality that the transactions involved two separate sets of securities,” it noted.
The tribunal also rejected the allegation that Cormark and Kennedy misled Canopy about the transactions. It found that Canopy was not its client in the transactions.
“Canopy, with its experienced management, board and counsel, was not akin to a vulnerable individual investor. The relationship between Canopy and Cormark was not akin to an agency or underwriting relationship. There is evidence that Cormark frequently referred to Saline as its client in communications with Canopy. There is no evidence of Cormark indicating to Canopy that it was its client, nor of Canopy referring to itself as Cormark’s client,” it found.
And, it rejected the allegation that the transactions violated the public interest. The tribunal concluded that there was no misconduct in the case, and that, as a result, there was no violation of the public interest.
“We also agree with the respondents that Cormark, Kennedy and Bistricer using their knowledge and skills, and benefitting from their efforts, is what is expected of market participants and registrants. We conclude that their conduct in this case was not improper, and we also conclude that there is no evidence that the investing public in this instance suffered from the transactions,” the tribunal said.
Ultimately, it found that the allegations amounted to regulatory overreach.
“The unfortunate consequence is that the respondents have incurred significant costs due to this proceeding, both financial and reputational, which they cannot recover,” it said.