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Canada needs to toughen short selling rules to weed out abuse, market watchers say

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Canada needs to crack down on a certain type of short selling because a growing number of bad apples are abusing the system for everyone, market watchers say.

Short selling is an investment strategy that allows people to make money when they think the price of a stock is about to decline.

A conventional investor makes money by buying a stock he or she thinks is undervalued, and then waits for the price to improve before selling it for a profit. But a short seller makes money when a stock price declines. They do that by borrowing a stock owned by someone else, selling it to collect the money, and then replacing the borrowed stock by buying it off someone else once the price has dropped. 

It’s a controversial strategy with plenty of detractors. But even critics acknowledge it can provide a valuable service to everyone in the market by rooting out fraud.

In recent years, Canadian companies such as Sino-Forest, Shopify, Valeant, Home Capital and many others have found themselves targeted by short sellers, with the shorts having various degrees of impact in each of those cases.

Short sellers who expose the truth about misdeeds by companies may provide a valuable service. Short selling becomes abusive, and problematic for the market, when a small minority of investors bend the truth to make money through panic. 

“Both as a financial hedging instrument and as a tool to root out bad behaviour, short selling will always have an important role in our capital markets,” said Walied Soliman, the global chair of law firm Norton Rose Fulbright Canada. “But abusive short selling is … market participants who … use either exaggerations or misrepresentations to drive their narrative.”

Canada ‘targeted’

This type of market manipulation seems to be on the rise in Canada. Canada is “highly targeted by the U.S. [shorts] because it’s an easier target, there’s weaker rules here,” said investor John Mastromattei. 

Soliman said that the way securities laws are set up give an unfair advantage to abusive short sellers because companies and investors who buy companies on the way up have to play by a much different rule book.

Anyone buying up a large enough chunk of a company has to disclose that to regulators. Their public statements are closely scrutinized, and their future buying and selling is bound by myriad rules. Executives at companies have to choose their words carefully when talking to the media, for fear of letting news slip that investors and regulators didn’t hear about first.

That’s not true for short sellers. They can largely operate in secret until they choose to go public. “If an issuer were to put out what we see from shorts, they would be the subject of class action lawsuits and regulatory arm slapping immediately,” Soliman said. He suggests implementing disclosure rules for shorts as a reasonable first step to addressing the problem. 

European Union rules mandate that short sellers must tell regulators when their position is as small as 0.2 per cent of a company, and let the public know when they top 0.5 per cent.

Many high profile companies have found themselves the target of short sellers in recent years. (Michael Nagle/Bloomberg)

“I would like to see early warning disclosure requirements for short sellers,” Soliman said. “I would like to see statutory rights of action against market participants who knowingly either exaggerate or misrepresent.”

Soliman said he would like to see a crackdown on a type of abusive short selling that almost always originates on social media and stock message boards, by people putting out research designed to start a panic.

“Those who do that know full well that … investors jump away from these positions at the slightest notion that there could be something wrong,” he said. “The exaggerations end up resulting in a self-fulfilling prophecy.”

“In circumstances where it’s founded, go get them,” he said. “But don’t exaggerate and don’t misrepresent.”

Market manipulation

Soliman declined to name specific individuals or firms involved in the negative practice, citing confidentiality.

However, he said he worked with three companies in the past year who were targeted by abusive short sellers who made “either significant exaggerations or straight out misrepresentations.” In all three cases, it took a “monumental effort” for the companies to dispel allegations that had no merit and maintain the confidence of their investors.

The instinct for many investors, Soliman said, is to think that “where there’s smoke there’s fire.”

Mastromattei said abusive shorts take advantage of that. “Those kinds of shorts are the ones who see a little smoke and they add gasoline.”

Short sellers can provide a valuable service to investors by exposing fraud, but critics say sometimes their tactics are abusive. (Angelos Tzortzinis/Bloomberg)

He cites the ongoing saga of cannabis company Aphria Inc. as a good example. In December, the company was rocked by accusations by a short seller that the firm wasted hundreds of millions on foreign acquisitions that are essentially worthless.

The stock lost more than 50 per cent of its value in the three days that followed. While it has since recovered, a hostile takeover offer has emerged for the company, and investors are pursuing a class action lawsuit against the business over how it handled some of its dealings.

The Aphria saga is ongoing. While the truth of the matter yet emerge, Mastromattei said it’s a great example of how lax rules leave Canada open to abuse. “That’s where the regulator has to step in,” he said. “That’s market manipulation, you can’t do that.”

(In the interest’s of full disclosure, Mastromattei said he had no stake in Aphria before the original short selling story broke, but took a six-figure position in the company after the sell-off because he suspected it was overblown.) 

Boardroom ‘chaos’

The CBC reached out to the Ontario Securities Commission to ask whether the regulator is contemplating changes to their short selling rules. The agency referred us to the Canadian Securities Administrators, an umbrella organization that represents 13 provincial regulators across the country.

“The CSA is currently in the preliminary stages of a project that involves reviewing the nature and extent of abusive short-selling in Canadian capital markets,” spokesperson Ilana Kelemen said. “We are in the information-gathering phase of this initiative and cannot provide further details at this time.”

Until any changes happen, companies will remain fearful about finding themselves on the wrong side of a short campaign because of the damage that unfair ones can create. “The chaos that a short campaign causes inside a boardroom far outweighs the chaos that a proxy battle or hostile takeover causes,” Soliman said. 

“Because we don’t have a good enough defence for it.”

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Hong Kong protests create potential problems for Ottawa, says academic

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There are four or five flights a day from Vancouver to Hong Kong during the summer season. When they land this weekend, passengers will be met by a sea of protesters staging a three-day occupation of the Hong Kong airport’s arrivals hall.

The protesters are seeking international attention as the city enters its tenth straight weekend of political demonstrations that have, at times, been chaotic and violent.

Airport authorities are taking extra security measures and the Canadian government has raised its travel advisory.

Aside from monitoring local media and avoiding areas where large protests are unfolding, there are several issues for Canadians and Ottawa to consider.

“It’s a perfect storm of domestic tensions playing into international views on Beijing’s intentions and policies,” said Paul Evans, a global affairs professor at the University of B.C. “The dissatisfaction fuelling the protests is, in part, about feelings about freedom, democracy and Hong Kong’s autonomy. But it is also about material concerns related to housing, social services and career prospects.”

The oft-quoted number of Canadian passport holders in Hong Kong is about 300,000. This is an estimate made in 2011 by the Asia Pacific Foundation, which, at the time, said it was based on “conservative assumptions” and that a higher estimate would be over half a million.

There are concerns that, should the situation spiral out of control, there would be protection issues for the federal government to manage. After the Tiananmen Square massacre in Beijing in June 1989, several thousand Canadians were airlifted out of China. But the large number of Canadians in Hong Kong would make evacuation and consular protection much more challenging.

A more immediate issue is Ottawa’s response to the prospect of protesters fleeing arrest by Hong Kong authorities and seeking refuge in Canada.

“Vancouver is already in the global spotlight as a result of the (Huawei executive) Meng Wanzhou arrest and hearings,” said Evans. “Considering the huge number of connections between the two cities, managing requests for political asylum has the potential to put Vancouver in the spotlight in an even bigger way.”

Despite the advisory, many in Hong Kong report a sense of order now that they have adjusted and life is continuing around the protests.

“Local social media is providing good updates regarding the locations and times of the protests,” said Eric Li, a professor of marketing at the University of B.C. Okanagan who is visiting family in Hong Kong and doing some research.

He added that some visitors might be getting limited information if they are only relying on official announcements from government channels.

Li said he feels safe, but “there has been more tension and conflict between the government and police and citizens as well as businesses. The pro-(Beijing) camp and protesters are criticizing each other and there are also (arguments) within families and between friends and colleagues.”

Li has been trying to be “neutral” as a “personal choice. As a person who calls Canada ‘home,’ and Hong Kong ‘my hometown,’ I should say the young protesters are very well-organized and disciplined. The government should actively engage youth in their planning rather than excluding them in the process or putting them in an opposition position.”

“It’s crucial for the Hong Kong government to take a few steps to resolve conflicts through providing open conversation with key stakeholders and young leaders. And protesters should remind themselves the purpose of the (protests) as well as the consequences of their (actions).

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PROREIT buying office, industrial buildings in Ottawa, Halifax

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(PROREIT) will use some of the proceeds from its latest, and largest, share offering to help it purchase two office and industrial properties in Ottawa, and five industrial properties in Halifax for $97.8 million.

(PROREIT) will use some of the proceeds from its latest, and largest, share offering to help it purchase two office and industrial properties in Ottawa, and five industrial properties in Halifax for $97.8 million.

“These acquisitions provide meaningful increases in our industrial sectors and expand our presence in Ontario and the strengthening Halifax market,” president and chief executive officer James Beckerleg told RENX.

PROREIT (PRV-UN-T) is acquiring a fully occupied boutique office building in Ottawa’s central business district. It’s surrounded by tourist sites, multiple restaurants and retail offerings.

PROREIT is also purchasing a class-A mixed-use, multi-tenant flex industrial property in the west-end Ottawa suburb of Kanata. It includes an office and a research and lab facility with what the trust calls exceptional power, air handling and cooling specifications.

The building is fully leased and its tenants are in the material sciences, defence, communications and medical technology fields.

The two Ottawa properties have a combined gross leasable area of 338,000 square feet and a weighted average lease term of 6.6 years. Many of the leases include contracted rent steps.

While the property addresses and additional details are confidential until the deals close, which is expected this quarter, Beckerleg said they’re both institutionally owned and have been maintained to high standards.

The addition of the Ottawa properties will increase PROREIT’s portfolio exposure to the Ontario market to 29.1 per cent by gross leasable area and 29.3 per cent by base rent, making it the REIT’s largest provincial market. It increases the Ottawa portfolio to approximately 620,000 square feet.

“We entered the Ottawa market with our $52-million portfolio acquisition of five office properties last year,” said Beckerleg. “This fits our strategy of investing in strong markets where we can increase our exposure to both of these industry sectors.

“Ottawa is seeing significant growth in office and industrial properties.”


PROREIT’s new Halifax acquisitions

PROREIT has a contract to acquire five light industrial buildings with clear heights of between 18 and 24 feet in Halifax’s Burnside Industrial Park. The portfolio represents 358,000 square feet of gross leasable area.

The buildings are 93 per cent occupied with a weighted average lease term of 4.1 years. Many of the leases include contractual rent steps.

While more details won’t be made available until the deals close, which is expected this quarter, Beckerleg said the condition of the buildings is similar to its Ottawa office purchases. The five buildings have been institutionally owned and maintained at a high level.

“The Halifax industrial market has enjoyed declining vacancies in line with the expanding Halifax economy,” said Beckerleg. “There has been a marked increase in institutional interest in the Halifax industrial sector.

“We like this market. Again, it fits our strategy of focusing on mid-size cities with strong investment metrics.”

PROREIT’s $50-million offering

As part of its funding for the purchases, PROREIT will issue 7.15 million shares on a bought-deal basis at a price of seven dollars per unit, for gross proceeds of approximately $50 million, to a syndicate of underwriters.

PROREIT has also granted the underwriters an over-allotment option to purchase up to an additional 1,072,500 units on the same terms and conditions, exercisable at any time, in whole or in part, up to 30 days after the closing of the offering. It’s expected to close on or about Aug. 16.

“This capital raise, our first since graduating to the TSX, is the largest in PROREIT’s six-year history,” said Beckerleg. “We believe listing on the TSX and consolidating our units to trade in the seven-dollar range has substantially broadened our potential investor base. We believe the success of this capital raise confirms that.”

The Ottawa and Halifax acquisitions will be funded with approximately $30.8 million in cash from the offering and approximately $67 million in new mortgage financing at a weighted average interest rate of 3.4 per cent.

PROREIT intends to use $13 million from the offering to repay debt.

Impact of acquisitions on PROREIT’s portfolio

Upon completion of the acquisitions, PROREIT will own 91 income-producing commercial properties representing approximately 4.4 million square feet of gross leasable area and $625 million of gross book value, with a weighted average lease term of 5.7 years.

The acquisitions will also increase PROREIT’s industrial and mixed-use exposure by another 636,726 square feet to more than 2.8 million square feet. That represents 64 per cent of its total gross leasable area and 46 per cent of its total base rent.

While PROREIT has no other immediate acquisition plans, Beckerleg said opportunities are always being reviewed.

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Moncton Airport Receives $8.34-Million From Ottawa To Boost Cargo Export Capacity

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MONCTON – The federal government is investing $8.34-million and creating 140 temporary construction jobs to expand the cargo operational infrastructure at the Greater Moncton Roméo LeBlanc International Airport.

The airport’s cargo business has been quickly expanding in recent years, mostly because of the demand for live and fresh seafood products in China. In 2018, it posted a record for the shipment of cargo abroad, with 16 flights carrying over 1,000 tonnes of live seafood to Asia and Europe. It was the first time the airport saw a steady flow of local products being exported to international markets on large, dedicated cargo flights.

Airport CEO Bernard LeBlanc says the rapid growth makes new investments necessary. Passenger and cargo planes share runway space, he says, which restricted flights in and out of the airport for both types of traffic. The new investments will “eliminate bottlenecks” for cargo and passenger travel.

“We’ll be able handle cargo traffic 24 hours a day, seven days a week,” said LeBlanc in a phone interview with Huddle. “It opens up possibilities for more growth.”

The federally funded project includes the following upgrades:

  • Expanding Apron 8 to accommodate more cargo flights without affecting passenger aircraft traffic.
  • Expanding the de-icing pad to allow for de-icing of cargo aircraft and passenger aircraft.
  • A new de-icing fluid management system to comply with environmental regulations.
  • Overhauling and reconstructing the road connecting the airport apron to cold storage and cargo staging facilities.

The new investments will help grow the live and fresh seafood exports with more regularly scheduled flights to places like China. But LeBlanc says it will also open up opportunities for other products too. For example, the airport recently received a call from Malley Industries about shipping an ambulance to Israel.

Accommodating these kinds of requests is harder when the airport has mostly chartered flights that have to work around passenger travel services, he says.

“Once you get more regularly scheduled cargo flight services, it makes it easier to ship other products as well,” said Leblanc.

LeBlanc says work could begin next spring and be completed by October of the next year.

The federal government is making these types of investments in airports that are seeing increased economic activity from cargo exports. Last November, the Halifax Stanfield International Airport received $23-million in government funding to expand its cargo facilities to reduce congestion, among other things. As in Moncton, the investment was driven by strong demand for fresh seafood in China and Europe.

Ginette Petitpas Taylor, Minister of Health and Member of Parliament for Moncton-Riverview-Dieppe, sayS the airport drives export growth by opening up new opportunities for local businesses.

“The Greater Moncton Roméo LeBlanc International Airport is a key factor in the growth of the Moncton economy,” said Petitpas Taylor in a release. “The improvements will create more options for cargo aircraft and help businesses get more products to market.”

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