Stockwatch Daily

SEC fines Cormark $800,000 (U.S.) over short sales

The SEC has fined Toronto’s Cormark Securities Inc. $800,000 (U.S.) for violations of rules designed to prevent naked short selling. The firm allowed a hedge fund client to repeatedly sell shares while failing to deliver the underlying stock on time.

- By Mike Caswell

THE U.S. Securities and Exchange Commission has fined Toronto brokerage Cormark Securities Inc. $800,000 for repeatedly violating rules designed to prevent naked short selling. (All figures are in U.S. dollars.) The SEC says that, for a period of over one year, Cormark allowed an unidentifi­ed hedge fund client to place sell orders when it was not clear that the hedge fund could actually produce the underlying stock. The hedge fund, which the SEC has not named, sold $660-million worth of shares through Cormark in this manner, according to the SEC.

The penalty for Cormark is contained in an administra­tive order that the SEC released on Monday, Dec. 21. In addition to the fine, the SEC has ordered that Cormark not commit any future violations. The penalties are the result of a negotiated settlement, in which Cormark did not admit to any wrongdoing.

The case centres around violations of Regulation SHO, the rule that the SEC introduced in 2005 to discourage naked short selling. The rule requires those placing a short sale to come up with the underlying shares by the end of a three-day settlement period. The idea is to prevent manipulati­ve short selling, or that designed to push down the price of a stock. (There are also provisions that stop all short sales if a stock has declined by more than 10 per cent in one day.)

The trades at issue, as set out in the SEC’s order, began in August, 2016, when Cormark entered the first of what would be 200 short sales for the hedge fund customer. The problem, according to the SEC, was that with at least 80 of the orders (worth $660-million), the hedge fund said that it had the underlying shares, but failed to deliver that stock prior to the settlement date. The trades were in three companies listed in the U.S. (which the SEC has not identified).

Despite the hedge fund’s poor record of delivering shares on time, Cormark continued to enter the short sales, the SEC says. This went on for over a year, with the hedge fund each time promising it would do better, until October, 2017. Given the repeated failures to deliver shares on time, it was not reasonable for Cormark to rely on the hedge fund’s representa­tions, the order states.

In addition to the $800,000 fine for Cormark, the SEC has imposed a $200,000 fine on ITG Canada Corp., the executing broker through which Cormark routed its U.S. trades. In a separate order also entered on Dec. 21, the SEC says that ITG should also have noticed something was amiss, as it too was aware that the hedge fund had failed to deliver shares on time for a large number of trades. ITG, as with Cormark, did not admit any wrongdoing in accepting the fine.

The penalties represent the first sanctions for Cormark and ITG. Since the violations, ITG has undergone an ownership change and is now known as Virtu ITG Canada Corp.

(*SEC)

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