Hedge fund founder gets nine-month trading ban over ‘spoofing’
Toronto-based K2 pays $550,000 penalty to settle claims of manipulative practices
TORONTO Shawn Kimel, the founder of Toronto-based hedge fund K2 & Associates Investment Management Inc., has paid the Ontario Securities Commission a $550,000 penalty and agreed to a nine-month prohibition on trading in both a personal and professional capacity to settle allegations of manipulative trading.
The settlement, approved Friday by a three-member panel of commissioners chaired by OSC vicechair Grant Vingoe, also stipulates that K2 will submit to a review of its trading practices and procedures by a third party acceptable to the regulator.
Kimel, who participated by phone, also agreed to a 10-year prohibition on being a chief compliance officer or ultimate designated person (UDP) at an investment firm. He was previously chief compliance officer at K2, the commissioners were told.
Daniel Gosselin, K2’s president, settled for sanctions including a $20,000 penalty, a six-month prohibition on trading, and a five-year prohibition on becoming or acting as a chief compliance officer or ultimate designated person at an investment firm.
Separately, K2 paid a penalty of $400,000, as well as costs of $30,000.
Raphael Eghan, counsel for staff of the OSC, said the agreed sanctions were acceptable to address the “serious conduct” because they would “send a powerful deterrence message” to K2 and its principals, as well as anyone else considering engaging in manipulative trading.
Between October and December 2016, Kimel and Gosselin engaged in trading on behalf of their funds that contributed to a “false or misleading” impression about the supply or demand for derivatives listed on the Montreal Exchange, which allowed them to trade at “artificial prices,” according to an agreed statement of facts.
“Through their misconduct, the Respondents wrongly benefitted by approximately $250,000,” said the document, which was made public following the OSC’s acceptance of the settlement agreement.
There were about 60 incidents of the “impugned trading,” also known as spoofing.
In some cases, as described in the document, Kimel would place direct electronic access (DEA) orders to buy or sell small quantities of certain options, which would increase or decrease the national best bid and offer “to the advantage of K2.”
Gosselin would then initiate a chat session with one or more Canadian financial institutions and negotiate a larger desk trade on the opposite side of the order entered by Kimel. Very soon after the desk trade was confirmed, “often within seconds,” the DEA order previously entered would be cancelled, the settlement agreement says.
According to the document, “Kimel and Gosselin coordinated their conduct regarding the Spoofing Events. In certain circumstances, Gosselin would notify Kimel when the desk trade had been successfully negotiated so that Kimel could quickly cancel his DEA order.”
The settlement agreement noted that K2 and its two principals had no prior record of securities regulatory misconduct and that they had co-operated with OSC staff at all times during the investigation. It was also noted that there was no harm to retail investors, since the counterparties to the trades were “sophisticated institutional derivatives traders.”
The document says K2 offered to compensate a counterparty to the trading, but that offer was declined.
Kimel and Gosselin were subject to “internal sanctions” including a three-month ban on options trading for Kimel, and a three-month ban on all trading for Gosselin, according to the settlement agreement. They were also required to complete a trader training course program.
As part of their settlement with the OSC, Kimel and Gosselin will have to have all trades preapproved by K2’s chief compliance officer for a period of 18 and 12 months, respectively, after their prohibition on trading ends.