B.C. court declines to rule on legality of “naked short selling”


The Supreme Court of British Columbia has rejected an effort by Global Securities Corp. and Union Securities Ltd., defendants in a lawsuit, to have the question of whether “naked short selling” is legal resolved before trial.

Global, Union and several individuals are being sued by GeneMax Corp., an OTC Bulletin Board firm engaged in medical research. GeneMax claimed that Global, Union, and others, agreed to enter into an “unlawful trading scheme” whereby they established, maintained, facilitated, and/or participated in the sale of “phantom shares”.

GeneMax said that Global and Union engaged in the “naked short selling” of its shares when there was no prospect of delivering the shares that had been sold because insufficient free-trading shares were available to cover the short positions. In doing so, GeneMax said Global and Union breached the B.C. and U.S. Securities Acts, IDA by-laws, and the Criminal Code.

Global and Union said that the case could be accelerated, if the following court resolved the question of whether naked short selling was legal before the trial began.

However, judge I.H. Pitfield ruled that whether this type of trading is legal or not may not determine the outcome of the trial. “The fact that something done by Global or Union may be proved to have been unlawful in the sense that it was against the requirements of a statute, regulation, or governance rule may not resolve the claim in favour of the plaintiff any more than a finding that what was done did not offend any such requirement would necessarily result in dismissal of the GeneMax action,” he said. “Moreover, whether the securities transactions will be found to have been lawful or unlawful will depend upon the evidence adduced.The trial judge will have to assess and weigh all of the evidence in order to make the necessary findings of fact.”

The court concluded that answering the question beforehand would not shorten the trial. The application for leave by Golden and Union was dismissed.