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Enforcement staff at the Ontario Securities Commission failed to prove allegations that a trio of sophisticated market participants including investment dealer Cormark Securities Inc. were involved in an “illegal and abusive” short selling scheme, an OSC tribunal ruled Thursday.
The case was launched in 2022 and revolved around a complex series of transactions in 2017 including a private placement, a securities lending agreement, and short sales.
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Enforcement staff at the regulator had contended that the players set up the scheme so they would profit — ‘virtually risk-free’ — from an anticipated spike in demand for Canopy Growth Corp. shares. The transactions occurred shortly before Canopy’s shares were included in the S&P/TSX composite index and there were no allegations of wrongdoing brought against the cannabis company itself.
Hearings were held between March and June before a three-member panel of adjudicators, who concluded that lawyers for the regulator’s enforcement staff “failed to prove any of its allegations against any of the respondents.”
While the regulator’s enforcement staff had argued that the transactions amounted to an illegal distribution of shares and that Cormark and William Jeffrey Kennedy, who was the investment dealer’s head of equity capital markets, had failed to deal honestly, fairly and in good faith with Canopy. But the panel concluded that there wasn’t sufficient evidence to prove any of the allegations.
Rather, the adjudicators found that Cormark and Kennedy did not mislead Canopy about the nature of the share transactions or short sales conducted by a company of one of the brokerage’s clients.
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Moreover, they agreed with the accused that staff at the regulator made incorrect assertions about the client relationships at the heart of the transactions and the nature of the trades.
The transactions involved Marc Bistricer, a Cormark client, and his company Saline, neither of which were found to have done anything wrong.
According to the events laid out by OSC enforcement staff, Saline had sold short shares of the cannabis company in the open market, bought an equal number of Canopy shares in the private placement, swapped the private placement shares for free-trading Canopy shares under a securities lending agreement, and used the free-trading shares to settle the short sales.
However, the panel ruled that enforcement staff had relied on a definition of distribution that did not apply to the transactions.
“Fundamentally, that is because 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,” the panel wrote. “That premise is ill-conceived because it is inconsistent with the facts and contrary to the working of the closed system of Ontario’s securities law.”
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