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Jeffrey Kennedy, Marc Judah Bistricer, and Saline Investments Ltd. (In accordance with 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.
Background
The aim of this lawsuit is to hold three skilled market players responsible for an illegal and abusive short selling scheme that ran counter to the public interest and violated the securities legislation in Ontario.
The market participants included: (a) Cormark Securities a registered investment dealer; (b) William Jeffrey Kennedy, Cormark Securities 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.
Under terms of the transactions, Saline, in anticipation for a private placement to be completed 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 via the private placement;
(c)exchanged the shares obtained via the private placement for shares of Canopy that are available for trading publicly in accordance with a securities lending agreement; and
(d) utilized the shares that were available for free trading to settle the short sells.
Saline did not contribute any of its own money to the venture. 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. The profit made by Saline was more than $1.27 million.
An unlawful distribution of Canopy shares occurred as a consequence of the series of transactions that took place on the secondary market. In addition,
An unlawful distribution of Canopy shares occurred as a consequence of the series of transactions that took place on the secondary market. In addition, 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.
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.
Participants’ conduct was opposite to the public interest and in violation of Ontario securities legislation. If investment dealers like Cormark and Kennedy don’t act in an ethical and responsible manner, for instance, issuers won’t have any faith in them and they won’t be able to accomplish their important job of promoting securities offerings. Moreover, this sort of abusive short selling may lead to unjustifiable price decreases around the periods of issues, reducing the offering proceeds of issuers, impeding capital creation, and lowering investor confidence in the capital markets. Cormark Securities, Kennedy, and Bistricer failed to live up to their duties as registrants by protecting the fairness of the financial markets, instead enriching themselves at the cost of investors.
Reality Of Cormark Securities
An illegal and abusive short selling strategy was devised and implemented by Cormark Securities, Kennedy, and their customer Bistricer.
Being an authorized dealer in securities, Cormark Securities was a legal business. At Cormark, Kennedy served as both a director and officer, in addition to managing the company’s equity capital markets and operational functions as its managing director. Bistricer headed a portfolio management firm as its CEO.
To leverage on what they expected to be a surge in demand for Canopy shares once the company was included to the S&P/TSX Composite Index, the three came up with a series of transactions. In order to keep up with the index, index funds were expected to raise their purchases of Canopy shares, driving up demand.
After numerous discussions over how to best capitalize on the anticipated increased demand, the three parties settled on a series of transactions including a private placement, a securities loan, and short sales. Bistricer utilized Saline, a private holding company of which he was the only director and officer, to conduct the transactions. Saline executed the trades on March 17 and finalized the settlements on March 22.
Saline executed a private placement subscription agreement with Canopy and a securities loan contract with Goldman Holdings Ltd. (GHL) on March 17, the same day Canopy became a member of the index. GHL is a private entity established by Canopy director Murray Goldman to retain his shares. Before these deals closed, Saline traded short $26.76 million worth of Canopy shares on the open market.
On March 22, 2019, Saline was required to deliver freely traded shares to satisfy the short sales, three trading days after the short sales were made. Respondents planned for the private placement and securities loan to conclude on the same day to make this possible.
Saline (a) paid $24.25 million for 2.5 million Canopy shares in a private placement. To avoid the need for a prospectus, Canopy sold these shares to Saline, an approved investor. Hence, they were subject to the holding periods required by Ontario legislation.
Saline exchanged its private placement limited shares for open market Canopy shares as part of the securities loan. Collateral in the form of private placement shares was supplied by Saline to GHL (which GHL kept at the end of the loan). Saline paid GHL a $875,000 securities loan charge and obtained 2.5 million freely traded on the exchange Canopy shares in return.
At last, Saline settled the short sells with the freely-tradable shares that had been borrowed.
Saline invested nothing of its own funds. The company utilized the money from the short sale to cover the costs of the private placement, securities loan, and Cormark Securities’s services, totaling $362,500. Saline made more than $1.27 million in profit.
The earnings made by Saline and Cormark were risk-free, 14. Salina carefully planned each deal she made. It made the short sells with the confident expectation that it could cover its losses by buying shares in the market at a cheaper price via the subsequent transactions. With demand from index funds expected, it seemed probable that short sell orders would be completed. At the market close, Saline shorted the majority of the stock. Given that the private placement price was already fixed at a discount of 9% to the closing price, Saline could be certain that it would make a profit of 9%.
Distribution that hasn’t been permitted
As a consequence of the chain of events, Canopy shares were short-sold to the general public in breach of law. The short sales happened as a component of a bigger sequence of transactions comprising a buy and sale or repurchase and resale in connection with or as part of a distribution. The private placement was a transaction involving newly issued securities.
Canopy shares shorted by Saline were later purchased by the public, including small investors, as a consequence of a chain of events described in Footnote 16. The money investors put up to buy those shares was channeled via Saline and into Canopy in the form of offering profits. Shares of Canopy were made available to the general public in this offering. The term “backdoor underwriting” is used to describe this kind of illegal distribution.
To facilitate the short sells, it participated as principle in a private placement and securities loan to acquire shares. Bistricer helped advance such deals. He organized the chain of deals, signed the private placement subscription and securities loan agreements, and issued the short sale instructions, among other things.
Distribution was aided by Cormark Securities and Kennedy. They organized the sequence of deals, contacted Canopy about the private placement and securities loan, and oversaw the deals. Moreover, Cormark took in the short sell orders and helped Saline execute them on venues including the Toronto Stock Exchange.
It was against the law to distribute both a preliminary prospectus and a prospectus were not submitted, and no exemptions from the filing of a prospectus were used.
Dishonesty, lack of integrity, or bad faith
Cormark Securities and Kennedy misled Canopy in negotiating the private placement and securities loan. Canopy could not decide whether to participate in the trades.
Cormark Securities and Kennedy said that the index funds were the ultimate purchasers of the private placement, Saline was enabling their purchases as an intermediary buyer, and Saline required the securities loan to deliver free-trading shares to the index funds.
Cormark Securities and Saline shorted shares on the open market, where anybody might acquire them. Retail investors needed prospectuses.
Cormark Securities and Kennedy concealed Saline’s gains from Canopy. They hid Saline’s risk-free income from short trading. They also miscalculated earnings. They misrepresented the 9% discount and lending charge to Canopy while negotiating the securities loan. Goldman might get 6.5% annually, leaving “enough leeway” for a “modest” discount for Saline and 1% to 1.5% commissions for Cormark. Saline made the most money.
Cormark Securities and Kennedy misled Canopy’s capital cost and net proceeds. They told Canopy that this offer was cheaper than its prior. Their comparison ignored crucial data.
Unlike the prior trade, Saline sold short the whole offering on price day. Short sales may have lowered the closing price, reducing Canopy’s offering price and net revenues. Canopy could not analyze or detect this danger to itself and its stockholders because Cormark and Kennedy disguised the short selling.
Cormark Securities and Kennedy’s Canopy transactions violated public interest. They distorted the private placement and securities loan. They weren’t low-cost trades to accommodate fresh index fund demand for Canopy shares. These were critical elements in an unlawful and abusive short selling operation designed to make Saline and Cormark Securities almost risk-free profits.
Capital creation requires investment dealers and their agents. Issuers must trust and depend on them to develop securities offerings. Cormark Securities and Kennedy’s dishonesty destroys confidence. Contrary to the Securities Act’s essential objective, it threatens Ontario’s capital markets’ fairness, efficiency, and competitiveness and trust in them (the Act).
TRANSACTIONS AGAINST THE PUBLIC INTEREST AND VIOLATIONS OF ONTARIO SECURITIES LAW
(a) in breach of subsection 53(1) of the Act, the Respondents disseminated Securities without first submitting a preliminary prospectus, a prospectus, or an exemption from the prospectus requirement;
(b) according to clause 2.1 of OSC Rule 31-505 Conditions of Registration, Cormark and Kennedy did not engage fairly, honestly, and in good faith with their client, Canopy;
(c) Kennedy is judged to have failed to comply with Ontario securities legislation under section 129.2 of the Act because he allowed, condoned, or acquiesced in Cormark’s noncompliance with Ontario securities law;
Bistricer is judged to have failed to comply with Ontario securities legislation under section 129.2 of the Act because it allowed, permitted, or acquiesced in Saline’s noncompliance with Ontario securities law;
The Capital Markets Tribunal (the Tribunal) has the discretion to allow for the addition or deletion of accusations from this list.
REQUESTED ORDERS
The following recommendations are made to the Tribunal:
(a) that, in accordance with paragraph 1 of subsection 127(1) of the Act, any registration or recognition granted to the Respondents under Ontario securities law be terminated, suspended, or restricted for such period as is specified by the Tribunal, or that terms and conditions be imposed on the registration or recognition;
(b) that the Respondents, in accordance with paragraph 2 of subsection 127(1) of the Act, discontinue dealing in any securities or derivatives permanently or for such time as is designated by the Tribunal;
(c) that the Respondents’ ability to acquire securities be permanently or temporarily revoked under paragraph 2.1 of subsection 127(1) of the Act;
(d) according to paragraph 3 of subsection 127(1) of the Act, any exemptions included in Ontario securities legislation shall not apply to the respondents permanently or for such time as is stated by the Tribunal;
(e) Cormark comply with any adjustments to its methods and processes that the Tribunal may impose under paragraph 4 of subsection 127(1) of the Act;
(f) that respondents be censured under paragraph 6 of subsection 127(1) of the Act;
(g) in accordance with paragraph 7 of subsection 127(1) of the Act, Kennedy and Bistricer resign from any position he may have as a director or officer of an issuer;
In accordance with paragraph 8 of subsection 127(1) of the Act, the Tribunal orders that Kennedy and Bistricer be permanently or for such term as is stated by the Tribunal barred from serving as a director or officer of an issuer;
I in accordance with paragraph 8.1 of subsection 127(1) of the Act, Kennedy and Bistricer resign from any position they may have as directors or officers of a registrant;
(j) according to paragraph 8.2 of subsection 127(1) of the Act, Kennedy and Bistricer be permanently or for such term as is stated by the Tribunal barred from becoming or serving as a director or officer of a registrant;
As required by paragraph 8.3 of subsection 127(1) of the Act, Kennedy and Bistricer must resign from any positions they hold as directors or officers of investment fund managers.
(l) that Kennedy and Bistricer be permanently or for such term as is indicated by the Tribunal barred from becoming or functioning as a director or officer of an investment fund management according to paragraph 8.4 of subsection 127(1) of the Act;
(m) that the respondents be permanently or for such term as is stated by the Tribunal barred from becoming or functioning as a registrant, as an investment fund manager, or as a promoter, in accordance with paragraph 8.5 of subsection 127(1) of the Act;
In accordance with paragraph 9 of subsection 127(1) of the Act, the Respondents must pay an administrative penalty of not more than $1 million for each violation of Ontario securities legislation;
(o) that, in accordance with paragraph 10 of subsection 127(1) of the Act, the respondents disgorge to the Ontario Securities Commission any funds gained in violation of Ontario securities legislation;
(p) that, in accordance with subsection 127.1 of the Act, the respondents bear the expenses of the inquiry and the hearing; and
q) any other order the Tribunal finds to be in the public interest.
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