The Ontario Securities Commission has launched a major investigation into potential insider trading by brokerage firms and other industry players through a strategy known as overtrading.
“We expect there to be a number of cases in this area,” said Michael Watson, the OSC's director of enforcement. “The concern is that because of the way these things are done in some circumstances the activity may be much more akin to insider trading.”
Tuesday the OSC released a number of allegations against an Ontario brokerage firm and a former portfolio manager at RBC Global Investment Management Inc. that centred on overtrading. The OSC alleges that the case involved a 2001 private placement of $10-million worth of special warrants of Bioscrypt Inc., a Mississauga-based technology company.
An overtrade is a strategy in which an investor buys freely traded shares in a company from an existing shareholder, who then replaces those shares by purchasing stock that is about to be sold in a private placement, usually at a lower price.
In this case, Patrick McCarthy, a broker at Paradigm Capital Inc., allegedly arranged a deal with Eden Rahim, a former portfolio manager at RBC Global Investment, to acquire 1.9 million shares of Bioscrypt through the private placement and an overtrade.
The private placement was at $1.60 a warrant and the overtrade was at $1.70 a share, according to OSC allegations.
Mr. Rahim allegedly agreed to the arrangement and Mr. McCarthy then attempted to carry it out.
Overtrading is permitted in cases where all participants in the deal have access to the same insider information, Mr. Watson said.
However, in the Paradigm case, OSC staff allege that in order to carry out the transaction with Mr. Rahim, Mr. McCarthy had to arrange the sale of 56,100 Bioscrypt shares to investors who did not know about the private placement.
The overtrade “resulted in shares of Bioscrypt being sold by persons, with knowledge of a material fact which had not been generally disclosed, to persons who had no knowledge of that material fact,” OSC staff alleged.
None of the allegations have been proven.
The OSC staff has reached settlement agreements with Mr. McCarthy., Mr. Rahim and Paradigm and a hearing for an OSC panel to approve the agreements will be held on June 11.
Mr. Watson said the Paradigm case does not involve allegations of insider trading. It is more concerned with the flow of information, he said.
However, he said the commission is working on other cases that involve “substantial examples of insider trading.”
“This is the first of what we expect to be a number of cases in this area,” he said. “This one we think is largely reflective of industry practice.”
© The Globe and Mail
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