Canadian hedge funds confused by crackdown on trading around private placements and special warrant

Date: Monday, August 23, 2004

The Financial Post reports in its Monday edition that Canadian hedge fund players are confused by the recent crackdown by the Ontario Securities Commission on trading around private placements and special warrant financing. The Post's Scott Adams writes that the OSC has said it is investigating trades around 300 such deals, with two cases having already emerged. The cases have brought up more questions than answers, said Jim McGovern, chairman of the Alternative Investment Management Association. Shorting ahead of a special warrants financing is simple. You hear that ABC company is doing a financing. You short ABC and then you cover after the financing is announced because the stock will fall to a price in line with the financing's discount. It is common in the industry for brokerages to contact institutional investors seeking interest in a deal. What is difficult to determine is whether this is just a feeler or if a deal is already in the works. "Even the fact that they are considering doing a deal and they've told you that, are you now an insider?" Mr. McGovern wonders, adding that the dealer may want to start the call by saying the listener has the option of hearing it.