The Ontario Securities Commission has received court approval to appoint a receiver to take control of Traynor Ridge Capital Inc. and its funds after arguing there is an “urgent” need to minimize risks to investors and multiple investment firms.
The move follows the OSC’s decision Monday to place Traynor Ridge, which has $95-million in assets under management, under a cease trade order after the sudden death of its founder, owner and chief executive, Christopher Callahan.
Three investment dealers executed trades for Traynor Ridge, then could not collect payment for the securities. The OSC estimated that the dealers have potential losses totalling approximately $85-million to $95-million.
Two have now emerged publicly: Virtu Canada Corp. sued Traynor Ridge, estimating it has losses of at least $5-million. And Echelon Wealth Partners Inc. placed a $30-million lien on the assets of Traynor Ridge, its funds and Mr. Callahan. Echelon CEO David Cusson told The Globe and Mail the lien covers the original value of the trades, not the losses incurred.
In its receivership application, the OSC said Mr. Callahan was Traynor’s sole director, officer and shareholder and was the ultimate designated person and chief compliance officer, two positions an investment firm must have under the Ontario Securities Act.
“There are no persons or entities able to exercise control over Traynor following Callahan’s death,” the OSC said in its application. “Callahan was the mind and management of Traynor and was the only person or entity legally empowered to make decisions on behalf of Traynor.”
Ernst & Young LLP will serve as the receiver.
The OSC said it learned Oct. 27 from the Canadian Investment Regulatory Organization (CIRO), which supervises brokerage firms, that the three firms had settled trades for Traynor but could not get the money for them from CIBC World Markets Inc., which was acting as CIBC’s prime broker for stock trades. (The OSC also says CIBC terminated its prime broker relationship with Traynor Ridge “because of Traynor’s failure to fulfill its contractual obligations in relation to the reporting of trades.”)
CIRO also advised the OSC “that a preliminary review of Traynor’s trading activity shows some trading without any change in beneficial or economic ownership.” The OSC offered no further details about the trading, but the comment is the only point the OSC makes in its application under a heading labelled “Concerns Regarding Traynor’s Trading Activity.”
Immediately after receiving the information from CIRO, the OSC said it tried to contact Traynor Ridge, leaving messages for Mr. Callahan and William Chyz, the only other employee who was registered to sell securities. “Chyz returned the call, advising that Callahan had gone ‘AWOL’ and Chyz was not sure what to do next,” the OSC said.
On Saturday, Oct. 28, Mr. Callahan’s lawyer told the OSC that Mr. Callahan, who would have turned 31 on Nov. 20, was dead.
On Monday, the OSC met with Mr. Chyz and lawyers from McMillan LLP who represented Traynor Ridge. Mr. Chyz, whom the OSC described as “visibly grieving the recent loss of his friend and colleague,” told the regulator his role at the firm was limited to sales and marketing – he had no trading experience or investment role.
The McMillan lawyers, who are unnamed in the OSC application, told the commission there was no longer anyone who could make decisions for the firm. The OSC says their understanding is that Jeff Callahan, Mr. Callahan’s brother, is the executor of Mr. Callahan’s estate and will eventually receive his shares in Traynor Ridge.
Ria Sharma, a forensic accountant with the OSC’s enforcement branch, says in an affidavit filed with the application that the OSC “has not yet been able to confirm the total number of investors in, and total assets under management by, the funds.” A team in the enforcement branch has started an investigation into the matter.
Mr. Callahan founded Traynor Ridge in 2020. He previously worked as an associate portfolio manager at HGC Investment Management Inc. and as an analyst at Echelon, the broker that filed the lien against Traynor Ridge. He graduated from Queen’s University in 2014.
The OSC’s application reveals that Traynor Ridge had a structure where its TR1 and TR1-I funds take the money from the purchase of their units and buy redeemable participating shares of the Cayman Islands-based TR1 International Fund. That fund, in turn, invests in a class of redeemable participating shares of another Cayman-based vehicle, the TR1 Master Fund.
The OSC says it met Thursday with the two other directors of the Cayman funds and their lawyers. They told the commission that Mr. Callahan, who had been a director of the Cayman funds, made all investment decisions for the funds and interacted with the prime brokers who were used for trading.
A prospectus for the TR1 Fund that investors placed their money in says Traynor Ridge would charge a 2-per-cent management fee and take 20 per cent of all profits, a common compensation structure in the hedge fund industry. The minimum investment was $100,000. (The TR1-I Fund, marketed to high-net-worth and institutional investors, had a $5-million minimum investment.)
The TR1 Fund’s core investment strategies included merger arbitrage; arbitrage in convertible-debt securities and warrants; buying shares in companies spun out from other companies; IPOs; and short-selling.
The prospectus also warned that the TR1 Fund may use leverage – borrowing – with the goal of optimizing returns. The investment guidelines – which the prospectus warned could change without notice – said leverage could go to 200 per cent of the fund’s net asset value.
It also said TR1 would limit its ownership in private-company securities – which are harder to trade than stocks on an exchange – to 10 per cent of the fund.
The prospectus warns that illiquidity can be “particularly damaging to leveraged strategies” because of investment dealers’ ability to raise margin requirements, which would force the fund to sell positions at highly distressed prices.
“These market conditions have in the past resulted in major losses to a substantial number of private investment funds,” the prospectus says. “Such conditions, although unpredictable, can be expected to recur.”
“Unitholders will be solely reliant upon the ability and experience of the investment manager to limit losses to the Fund.”
With a report from Stephanie Chambers