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Canadian fund execs acquitted of insider trading

Date: Thursday, September 29, 2005
Author: Jonathan Stempel- Reuters.com

By Jonathan Stempel

NEW YORK (Reuters) - A Canadian regulator on Thursday said it dismissed insider stock trading charges filed against two hedge fund managers as part of a broad investigation into alleged short-selling abuses.

A panel of the Investment Dealers Association of Canada dismissed charges that Michael Finkelstein and Elizabeth Leonard, then of Toronto's Canaccord Capital Corp., engaged in insider trading.

Finkelstein also controlled and managed Stonestreet, a hedge fund with an account at Canaccord, and Leonard was a Stonestreet portfolio manager.

"While we are unable to say that, from a Canadian perspective, the conduct of the respondents was commendable, we are left in a state of real uncertainty about whether that conduct constituted a violation of (law)," the panel said.

The panel also found Finkelstein was not in violation of supervisory rules aimed at deterring insider trading. The panel also said he did not commit "conduct unbecoming" because of short-selling that took place despite an agreement he had signed prohibiting it. Short-selling involves a bet that the price of a security will fall.

The charges were announced in early 2005, less than a year after two U.S. regulators, the Securities and Exchange Commission and the NASD, pursued allegations that hedge funds profited from inside knowledge of private investments in public equity, or PIPEs.

PIPEs help cash-strapped companies raise money quickly by selling discounted shares to investors. Shares of companies conducting PIPEs usually fall because the transactions flood the market with additional shares. Regulators were examining whether people who helped finance PIPEs profited from selling company shares short before the transactions closed.

Finkelstein and Leonard faced charges over PIPEs related to Novatel Wireless Inc. (NVTL.O: Quote), a wireless broadband access equipment provider, in 2001, and Trikon Technologies Inc. (TRKN.O: Quote), a semiconductor processing equipment company, in 2002.

The Canadian regulator said four transactions were at issue. Three involved PIPEs and the fourth involved a shelf registration sale.

It said there was a "general pattern" in which Stonestreet, upon learning of an impending private financing, sold short the issuer's shares, subscribed to buy discounted shares in a pending offering, and profited on the difference between the discounted private placement price and the short sell price.