The Ontario Securities Commission's enforcement arm has accused a former Bay Street hedge fund manager of illegal insider trading in a case that raises deeper questions about whether details of secret financing deals are leaking out.
Jeff Banfield, founder and former head of Banfield Capital Management Inc. has been accused of making quick profits for a fund he managed by trading in the shares of two companies with information that was not public.
In both instances, the OSC alleged he was aware the companies planned to raise equity through special warrant financings before the information was publicly disclosed.
The events date back more than four years ago to February, 2001. Mr. Banfield left the firm in December, 2001, and it has since been wound down. Neither he nor his lawyer could be reached for comment yesterday.
Mr. Banfield found out the companies were raising equity from the brokerage firms that led the financings. His firm was among a select group of institutional investors invited to road shows, where the brokerage firms premarketed the financings in a bid to drum up buyers, according to the OSC's statement of allegations. As a result, Mr. Banfield and many other large investors knew about the financings several days before the companies issued news releases.
Michael Watson, head of enforcement at the OSC, said the matter has prompted his staff to review every special warrant financing over the past four years to determine whether others illegally traded on inside information.
“When we found out this was going on, it was our perception that this has got potential to be a fairly significant problem,” Mr. Watson said in an interview. “A lot of these deals go on, and if the potential is there for people to lock in substantial profits prior to the announcement, there are [other] people who are disadvantaged by not having access to that information.”
Commission staff have pulled files for 387 special warrant financings dating to January, 2000, he said. Staff are now determining who attended road shows for the financings, and then traded on that information. This is no easy task — in many cases the brokerage firms have no written records of who they contacted to premarket a financing, he said.
Nevertheless, he said, “we've already found evidence of activity that requires further investigation.”
In the case of Mr. Banfield, OSC staff detected his questionable trading as part of its investigation into former Yorkton Securities Inc. chief trader Piergiorgio Donnini. In September, 2002, an OSC panel found in a 2 to 1 ruling that Mr. Donnini engaged in illegal insider trading when he ordered Yorkton to sell short shares in a fledgling technology company, Kasten Chase Applied Research Inc. in February, 2000. Yorkton had helped the company raise $5-million that month by selling four million special warrants at $1.25 each.
Mr. Banfield is also accused of illegally trading the company's shares. According to the OSC's statement of allegations, sales staff from Yorkton solicited orders for the financing from Banfield Capital on Feb. 11, 2000, just hours before Kasten Chase issued a news release announcing the financing.
Banfield agreed to buy 134,000 special warrants for the arbitrage fund it managed, the OSC alleges. That same day, Mr. Banfield sold short 110,000 Kasten Chase shares at $2 each and $2.26 through two brokerage firms on behalf of the arbitrage fund. A few days later, Mr. Banfield also traded in Burntsand Inc. before it announced that it was raising $45-million in a special warrant financing, the OSC alleges. On Feb. 17, 2000, brokerage firm Goepel McDermid premarketed the financing to selected institutional investors, the OSC alleges.
Mr. Banfield locked in profits of $137,000 for the arbitrage fund by selling short a total of 150,000 Burntsand shares on Feb. 18 and Feb. 21, the OSC alleges. On Feb. 21, Mr. Banfield acquired 193,500 special warrants at $10.50 each. Each special warrant entitled the holder to acquire one common share of the company. Burntsand announced Feb. 22 that it was issuing 4.3 million warrants at $10.50 each.
Mr. Banfield has entered into a settlement agreement with OSC staff. A panel of OSC commissioners will be asked to approve the settlement at a hearing on Aug. 19.
© The Globe and Mail
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