K2 & Associates Investment Management Inc., a well-known Toronto hedge fund, has been accused of “manipulative trading” by the Ontario Securities Commission.
In a statement of allegations released on Wednesday, the OSC alleged that K2, founder Shawn Kimel and president Dan Gosselin 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.
This behaviour “resulted in or contributed to a false or misleading impression, as to the supply of, or demand for derivatives listed on the [Montreal Exchange] and allowed K2 through Mr. Kimel and Mr. Gosselin to trade in derivatives on the MX at artificial prices," the statement continued. “By injecting false information into our markets, spoofers gain an unfair advantage over law-abiding market participants, impeding competition and undermining the integrity of Ontario’s capital markets.”
By engaging in this activity, the OSC believes K2 acted contrary to the public interest. A hearing has been set for Friday to potentially approve a negotiated settlement.
K2 declined to comment until a settlement has been approved.
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.