U.S. regulators have dinged Toronto’s Anson Advisors Inc. for violations of that country’s short-selling laws, with the company agreeing to pay a total of US$3.33-million in penalties and a return of profits.
The Securities and Exchange Commission said Thursday that Anson had an “incorrect understanding” of the rules when it engaged in short selling in American Airlines Inc. AAL-Q in 2020, reaping US$2.41-million in inappropriate profits. Anson also had the “incorrect understanding” in two other transactions in 2019 and 2021, yielding a total of US$60,207 from both.
The company neither admitted nor denied the findings – standard language in an SEC settlement – and agreed to an order pledging not to violate the law in the future. Anson CEO Moez Kassam declined to comment Friday.
Anson is one of Bay Street’s most controversial companies, owing to its willingness to conduct activist campaigns and to sell stocks short, which few Canadian investors do openly.
Short selling is a bet that shares will drop, with an investor borrowing shares, selling them and repaying the loan by returning new shares, hopefully bought at a lower price. An activist short seller will campaign against the stock, publicly laying out issues it sees with the company’s finances, business model or management.
Many consider activist short selling an improper attempt to manipulate trading – it has been labelled “short and distort” – and there has been a lengthy campaign in Canada to rein in short sellers through regulation. The Canadian Securities Administrators did consultations in 2020 and again earlier this year on the matter.
Bloomberg News reported in December, 2021, that Anson was one of numerous investment and research companies that were part of a broad criminal investigation by the U.S. Justice Department into whether short sellers were improperly colluding.
A source familiar with Anson said the Justice Department has not communicated with the company in more than a year. The Globe and Mail is not identifying the individual because they are not authorized to speak about the matter.
In the settlement, the SEC does not allege that Anson’s U.S. violations were intentional, collusive or part of an activist campaign.
The SEC has a rule against buying stock in a public offering if an investor has also shorted the stock during a restricted period. That period is based on when a company files its registration statement for the offering and when it prices its offering.
The rule, the SEC says, is intended to foster offering prices “that are determined by independent market dynamics and not by potentially manipulative activity.” However, the SEC says, the rule prohibits the activity regardless of the short seller’s intent.
There’s a “bona fide purchase” exception to the rule that Anson believed it was meeting by buying shares in the shorted companies, the SEC said, but the purchases were made at the wrong times to qualify for the exception.
The settlement requires the return of US$2,469,109.11 in profits, US$261,285.30 in interest charges and a US$600,000.00 penalty, for a total of US$3,330,394.41.
In November, 2022, the Ontario Securities Commission alleged that Cormark Securities, a Toronto mid-market investment bank, facilitated an “illegal and abusive short-selling scheme” where it misrepresented to one client, Canopy Growth Corp., the purpose of a series of transactions to allow another client to net $1.27-million. The transactions centred around a private placement of Canopy stock.
In a statement to The Globe at the time, Cormark’s chief operating officer said the company “vehemently denies the allegations against it” and that all key facts about the transactions were disclosed to Canopy.
The case is continuing, with hearings scheduled for March of next year.
David Milstead