K2 & Associates Investment Management Inc., a well-known Toronto hedge fund, and two of its top employees have been fined a total of $1-million by the Ontario Securities Commission for “manipulative trading."
Under the settlement terms, K2′s founder, Shawn Kimel, will pay $550,000; the fund itself will pay $430,000; and president Dan Gosselin will pay $20,000.
Notably, Mr. Kimel is prohibited from trading any securities or derivatives for nine months, and after that, all of his trades must be preapproved by K2′s chief compliance officer for 18 months. Mr. Gosselin faces the same restrictions, but for shorter periods.
Last week, the OSC alleged that K2, its founder and its president engaged “in manipulative trading activities that deceive counterparties and benefit themselves financially to the detriment of others in the marketplace.”
According to the OSC, K2 used a technique known as “spoofing” when trading equity options on the Montreal Exchange – a market mostly used by institutional investors. Spoofing involves placing bids or offers – orders to buy or sell – on an exchange, then quickly removing them. It has been known to help move the price of a security shortly before a separate trade takes place.
The OSC alleged 60 incidents of spoofing by K2 in the three-month period between October and December, 2016, and also alleged that K2 benefited by approximately $250,000.
Citing one example to illustrate the behaviour, the OSC alleged that Mr. Kimel would place an electronic order to buy or sell options for an unnamed security and that, soon after, Mr. Gosselin would call traders at a financial institution to negotiate a trade for options of the same security. "Very soon after a desk trade had been confirmed by a financial institution (often within seconds) the opposite [electronic] order previously entered would be cancelled,” the OSC’s statement said.
K2 was founded in 1998 by Mr. Kimel and has long operated out of Toronto’s Yorkville neighbourhood. The firm operates two funds – the K2 Principal Fund and the K2 Principal Trust – and has made a splash of late by becoming one of Canada’s leading institutional investors in the cannabis market. K2 could not be reached for comment.