Quick Facts
Overview
Stifel Nicolaus Canada Inc. entered into a settlement agreement with the Canadian Investment Regulatory Organization (CIRO), resulting in a $475,000 fine and $25,000 in costs. The enforcement action stemmed from Stifel's failure to enforce its supervisory system regarding the handling of potentially confidential information by two employees during expressions of interest for two proposed bought deal block trades in April and May 2020, which led to hedge fund clients entering short sale transactions without Stifel's knowledge.
Details of the Case
In April and May 2020, while operating remotely due to COVID-19 lockdown guidelines, Stifel Nicolaus Canada Inc. was involved in seeking expressions of interest for two separate bought deal block trade transactions involving publicly listed issuers.
Two Stifel employees communicated information to hedge fund clients that should have been identified as potentially confidential and evaluated for permissible disclosures. Following these communications, certain hedge funds entered short sale orders at other dealer members, potentially profiting from the information, without Stifel's awareness.
Stifel had policies and procedures in place requiring the exercise of judgment on confidential information and mandating reports of potential violations to compliance for review, but the communications were not escalated, leading to the supervisory failure. The case was resolved via a mediated settlement, with Stifel admitting the contravention of Dealer Member Rule 38.1.
WORKED EXAMPLES
Issuer 1 Short Sales on May 6, 2020
After an internal Stifel meeting discussing a potential Issuer 1 transaction, Employee A contacted a portfolio manager at Hedge Fund 1 at 12:23 p.m. They spoke for approximately 3 minutes.
- Within 20 minutes, the portfolio manager entered short sale orders for 200,000 shares of Issuer 1 at two different dealer members.
- 162,700 shares were filled at an average price of $6.687.
- This occurred without Stifel's knowledge and resulted in a potential profit of part of the total $118,945 for Hedge Fund 1 based on the later offering price of $6.35 per unit.
Issuer 1 Short Sales on May 7, 2020
Following further Bloomberg messages between Employee A and the Hedge Fund 1 portfolio manager, including phrases like "Fish on the line" and "next call at 130 pm," Employee A messaged "Tonight" at 2:57 p.m. after learning of the transaction terms.
- At 3:01 p.m., the portfolio manager entered a short sale order for 100,000 shares of Issuer 1 at a different dealer member.
- The order was fully filled at an average price of $6.99.
- Combined with prior sales, this contributed to total short sales of 262,700 shares at an average $6.80, yielding a potential profit of $118,945 without Stifel's knowledge.
Issuer 2 Short Sales on April 9, 2020 (Hedge Fund 1)
Employee A messaged Hedge Fund 1 representatives at 11:20 a.m. about trying to place 12 million shares of Issuer 2 from Shareholder 2 at $9.50 to $10.
- Less than 4 minutes later, Hedge Fund 1 entered a short sale order for 100,000 shares at a different dealer member, with 91,000 filled at $10.663.
- Additional orders at 11:43 a.m. and 12:34 p.m. totaled 200,000 shares, with 175,751 filled at $10.682.
- Later, after a message at 3:36 p.m. about "7.5 mm units at $10," a further 100,000 shares were shorted and filled at $10.789, contributing to a total potential profit of $258,561 based on the $10.00 offering price.
Issuer 2 Short Sales on April 9, 2020 (Hedge Fund 2)
Employee B responded to a query from Hedge Fund 2 at 11:38 a.m. confirming work on a block for Issuer 2, followed by a call.
- Less than 20 minutes later, Hedge Fund 2 entered four short sale orders totaling 160,000 shares on Canadian and U.S. markets at another dealer member.
- 152,600 shares were filled at an average price of $10.637.
- This resulted in a potential profit of $97,218 based on the $10.00 offering price, without Stifel's knowledge.
Issuer 2 Communications by Employee B
On April 8 and 9, 2020, Employee B contacted multiple clients, mentioning "Issuer 2," a "gold deal," and specifics like participation for $5m at "9.50 w 2yr full warrant."
- These included suggestions of telephone discussions for further details.
- No evidence of trades by these other clients, but the communications highlighted the lack of containment of potentially confidential information.
Fines and Penalties
The total penalty amounted to $500,000, broken down as follows:
- Fine: $475,000
- Costs: $25,000
Key Quotes
"The integrity of the capital markets requires Regulated Persons to adhere to the highest standards when dealing with potentially confidential information." (From the Settlement Agreement)
"The failure to enforce the supervisory system for the containment of confidential information is a serious matter which has the potential to undermine the integrity of the capital markets." (From the Hearing Panel's Reasons for Decision)
"Stifel had policies and procedures ('P&Ps') in place at the time regarding information barriers... Stifel’s employees are required to report any potential violation of its regulatory policies and procedures as soon as they become aware of it." (From the Settlement Agreement)
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