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Cormark Securities, a Toronto mid-market investment bank, facilitated an allegedly “illegal and abusive short-selling scheme” where it misrepresented to one client, Canopy Growth Corp. WEED-T, the purpose of a series of transactions to allow another client to net $1.27-million, Ontario’s securities regulator has alleged.

In a statement, 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 Ontario Securities Commission’s enforcement proceeding against Cormark is one of the first regulatory actions, if not the first, to be brought in Canada alleging an investment dealer engaged in this kind of short selling. The Globe and Mail detailed the rise of the practice in the cannabis sector in 2019, and the issue was a key focus for an Ontario securities reform task force.

The OSC’s allegations date back to March 17, 2017, which is when a Cormark client, Marc Bistricer, sold short 2.5 million Canopy shares in the open market through his investment holding company for approximately $26.76-million. At that time, Mr. Bistricer did not possess those shares, but he anticipated acquiring them in a series of transactions, executed by Cormark, in the days ahead so that he could settle the trade, the OSC alleges.

When short sellers sell shares they don’t currently own, they do so with the intention of acquiring those shares for a lower price in the future and pocketing the difference when they settle the trade.

And indeed, on March 22, Mr. Bistricer’s company bought 2.5 million shares directly from Canopy for $24.25-million in a financing known as a private placement, the OSC alleges. However, because Mr. Bistricer bought those shares as an accredited investor, there was a hold period on them, which prevented him from using them to settle the trade five days earlier, the OSC alleges.

In order to get around that hold period, the OSC alleges, Mr. Bistricer’s company entered into a securities lending agreement with a director of Canopy, Murray Goldman, who held his own free-trading Canopy shares.

Mr. Bistricer provided his 2.5 million restricted shares to Mr. Goldman’s company, the OSC alleges, and in exchange, Mr. Bistricer received 2.5 million unrestricted Canopy shares and used them to settle his trade, the OSC alleges.

After paying Mr. Goldman’s company a $875,000 securities lending fee and Cormark’s fees, which totalled $362,500, Mr. Bistricer’s company’s profit was $1.27-million, the OSC alleges.

The OSC alleges there were a number of problems with how this unfolded. The regulator says that Cormark and Jeff Kennedy, the company’s then-managing director of equity capital markets, falsely presented these moves to Canopy as “ordinary course transactions,” in connection with the company’s addition to the S&P/TSX Composite Index, which took place on March 17. The regulator alleges Cormark failed to deal with Canopy “fairly, honestly and in good faith.”

In her statement to The Globe, Cormark COO Susan Streeter denied that the company misled Canopy. “Cormark intends to vigorously contest the allegations before the Capital Markets Tribunal.” The tribunal is the independent branch of the OSC that adjudicates enforcement cases.

Mr. Bistricer, who is also facing sanction, said in an e-mailed statement: “These allegations are puzzling and appear to be a complete mischaracterization of routine transactions that benefited all parties, including Canopy Growth, index funds and retail investors.” He said he will be defending the transactions.

Melissa MacKewn, Mr. Kennedy’s lawyer, said her client will be opposing the OSC’s allegations. “The OSC is clearly attempting to make law through enforcement action,” she said. “The commission’s case is based on revisionist history and takes aim at a form of industry-accepted transaction years after the fact. "

A spokesperson for Canopy declined to comment.

A hearing in the matter is scheduled for Nov. 23.

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