When will a court order a regulator to share information in aid of litigation: Lessons from the Harrington short seller case

In a recent decision, the Ontario Superior Court refused to order the Investment Industry Regulatory Organization of Canada (“IIROC”), Canada’s national self-regulatory organization policing secondary trading, to provide an investor information to identify short-sellers who allegedly colluded to cause the investor to sustain losses.

Background

In Harrington,[1] the Ontario Superior Court refused to order IIROC to produce trading information to Harrington Global Opportunities Fund (“Harrington”). Harrington believed the information sought would help it identify short-sellers that had allegedly manipulated the shares of Concordia International Corp. (“Concordia”) between 2016 and 2018. Harrington’s investment in Concordia declined by $160 million in value during that period. 

In September 2015, industry commentators, including Mark Cohodes, published articles equating Concordia with other pharmaceutical companies that were under regulatory and investor scrutiny. As a result of these publications, Concordia’s share price declined significantly. In the spring of 2016, further publications, including from Mr. Cohodes, resulted in another substantial decrease in Concordia’s share price. 

Harrington believed that Concordia was the victim of a “short and distort” scheme in which unidentified conspirators agreed to orchestrate a decline in Concordia’s share price through a strategy of (a) using social and mainstream media to disseminate misleading negative information about Concordia; and (b) short selling Concordia stock.

To identify these conspirators, Harrington sought trading information from IIROC. IIROC provided Harrington with trading information that excluded the identification of the client seller and the client buyer. IIROC also concluded that no market manipulation had occurred. Harrington took issue with IIROC’s conclusion because, among other things, it focused on Canadian trading only even though 80% of the declared short positions in Concordia were held in the U.S. Harrington commissioned an independent report that identified irregularities in Concordia trading and requested additional information from IIROC, including trading information IIROC had received from its American counterpart, the Financial Industry Regulatory Authority (“FINRA”).

When its request was denied by IIROC, Harrington sought a Norwich order from the Ontario Superior Court to compel IIROC to disclose the trading information. A Norwich order compels a third party to provide evidence in its possession to a potential plaintiff for use in potential litigation.

The Court denied Harrington’s application, finding that the test for a Norwich order was not satisfied because IIROC did not have a direct connection to the alleged market manipulators, securities regulators and self-regulatory bodies like IIROC are not obliged to share information with private litigants and granting the Norwich order would compromise IIROC’s relationship with other regulators such as FINRA which is facilitated by its ability to maintain confidences and protect privacy interests.  

Key Takeaways

  • The Court’s decision was likely influenced by IIROC’s decision to share certain trading information with Harrington and by IIROC’s conclusion that there was no market manipulation. The result may well have been different if IIROC had refused to provide any information and/or had not investigated Harrington’s concerns.
  • Harrington appears to limit a private litigant’s ability to compel information from a securities regulators or self-regulatory body in order to potentially identify and prosecute abusive short sellers or other market manipulators. Without market-wide trading information from the relevant period, it may be difficult for a private litigant to comprehensively analyze the extent or origin of an abusive short-selling conspiracy.
  • The Court confirmed that a private litigant may have a valid cause of action for civil conspiracy against an abusive short-seller. IIROC had argued that Harrington did not have a bona fide action for civil conspiracy.
  • Private litigants who are harmed by abusive short selling will, without trading information or other specific evidence, need to rely on regulators to identify and prosecute market manipulators. Regulators do not have a successful track record of prosecuting abusive short sellers. In Re Cohodes,[2] the Alberta Securities Commission refused to grant Staff an interim cease trade order that would have prohibited Mark Cohodes, who was also involved in short selling Concordia, from trading in the securities of another issuer and refused to prohibit him from directly or indirectly disseminating untrue or misleading statements about that issuer. Similarly, in Re Carnes,[3] the British Columbia Securities Commission determined that the respondent short seller had not committed fraud or engaged in conduct contrary to the public interest despite making negative statements about an issuer that did not “fairly present the full results of the diligence underlying those statements”.
  • The Court in Harrington acknowledged the “perception that the regulation of shorting selling is permissive and lax in Canada compared to other capital markets.” Without legislative reform, it is unclear whether this perception can be reversed.

 

[1] Harrington Global Opportunities Fund S.A.R.L. v Investment Industry Regulatory Organization of Canada, 2018 ONSC 7739.

[2] Re Cohodes, 2018 ABASC 161.

[3] Re Carnes, 2015 BCSECCOM 187. 

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