TSX-V firms Global, Union fail on shorting application
2004-02-10 21:22 ET - Street Wire
Also Street Wire (U-GMXX) GeneMax Corp
TSX Venture Exchange member firms Union Securities Ltd. and Global Securities Corp. have lost their bid to have a judge determine the legality of a practice known as "naked" short selling. The application was part of Union and Global's defence to a Sept. 4, 2002, suit filed by biotechnology promotion GeneMax Corp., traded on the U.S. OTC Bulletin Board. Mr. Justice Ian H. Pitfield, in a brief six-page decision, has determined that the matter would best be settled in the pending trial.
GeneMax's claim seeks damages from an alleged "unlawful trading scheme" carried out by defendants Union and Global. GeneMax claims that the defendants were short selling when they could not deliver the shares, because there was an insufficient number of free-trading shares to cover the short positions. This practice is referred to by the plaintiffs as "naked" short selling.
Union and Global, in their defence, claim that there is no law prohibiting "naked" short selling. Consequently, they say GeneMax's claim of damage from "unlawful" short selling was not valid, because the claim was based on the alleged illegality of naked short selling. They had requested that Mr. Justice Pitfield decide, ahead of the trial, if they were legally required to determine the deliverability of shares prior to executing a short sale.
Mr. Justice Pitfield greatly simplified the matter, stating that he only needs to determine if defining this point of law ahead of the trial would save time and costs, and if a decision would be better left to the trial judge. His decision favours leaving the matter for decision at trial. He places the onus on the trial judge, saying it will hinge on the evidence presented at trial. "In my opinion it is not appropriate to submit the question as framed by Global and Union to the court for determination in advance of trial."
He chastises the defendants for channeling too much effort into trying to determine the legality of short selling, and says the real issue to be determined at trial is whether damages were caused to GeneMax by the "naked" short sales. The fact that so-called "naked" short selling could be illegal may not the resolve the claim in favour of the brokerage houses, according to Mr. Justice Pitfield. Mr. Justice Pitfield asserts that the defendants could be held liable for harm caused by their naked short selling activities, legal or not. He said the substance of the claim is that the defendants did not determine whether shares they or clients were selling were available for delivery. They knew or ought to have known such shares were not available for delivery, and in proceeding as they did they knew or ought to have known that loss and damage would be caused to GeneMax.
Genemax now trades at 95 U.S. cents. When the company filed its statement of claim on Sept. 4, 2002, the stock traded at $4.82 (U.S.).
