The Ontario Securities Commission has called a hearing to determine whether investment dealer Pollitt & Co. acted contrary to the public interest by giving a “heads up” on a “bought deal” to certain clients in advance of a news release.

The OSC today brought allegations against Robert Cassels, a portfolio manager with Cassels Investment Management Inc., securities dealer Pollitt & Co., and Murray Pollitt, chief compliance officer and vp at Pollitt.

On Nov. 11, 2002, Pollitt & Co. was formally invited to be part of a syndicate, co-led by Scotia Capital Inc. and National Bank Financial Inc. involving a $100 million offering of five-year convertible unsecured subordinate debentures from Agricore United. Of this, $55 million would be sold to the public, and Pollitt was allocated 3% of the deal.

According to the OSC, Pollitt was concerned that the terms of the transaction were highly dilutive to existing shareholders of Agricore, including its clients.

“As a result, Pollitt decided to provide certain clients with a ‘heads up’ about the bought deal prior to the transaction being generally disclosed by means of a press release,” the OSC alleges that the firm contacted at least five different institutional clients after it was invited to participate in the bought deal syndicate and prior to the issuance of a press release announcing the deal.

The OSC says that Scotia learned that Pollitt had leaked word of the deal, and decided to cut it out of the offering.

Cassels sought to sell its 69,750 Agricore shares upon learning of the deal from Pollitt. According to the OSC, there was some debate between Cassels and his broker at TD Waterhouse about whether he could sell the shares with this information in hand.

A sell ticket was issued, but after talking with a superior, the Waterhouse broker advised that he did not think he could sell the stock without further clarification of the information Cassels had. While this message was being left, trading in Agricore was halted for the issue of the press release announcing the deal. The sale of the 3,700 shares which were sold prior to the halt was subsequently reversed.

The OSC alleges:

  • Cassels acted contrary to the public interest by selling shares of Agricore with knowledge of a material fact which had not been generally disclosed;
  • Pollitt acted contrary to the public interest by alerting clients to the bought deal; and
  • Pollitt & Co. acted contrary to the public interest by failing to implement procedures to ensure that when participating in a bought deal syndicate, no inappropriate pre-marketing activities were engaged in.

“The conduct at issue in this matter concerns the responsibilities of investment dealers and its senior officers in the context of marketing a ‘bought deal’ financing prior to the issuance of any press release generally disclosing the deal,” said the OSC in a news release.

The OSC has pursued similar cases involving portfolio managers with advance knowledge of private placements and warrant offerings.

The commission is seeking trading and registration suspensions against Cassels and Pollitt, as well as costs and a reprimand. Against Pollitt & Co, it’s seeking a review of its practices, a reprimand, and costs.

The hearing is scheduled for September 28. None of the OSC’s allegations have been proven.