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



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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Russia’s Gazprombank freezes accounts of Venezuela’s PDVSA: source




FILE PHOTO: Cutouts depicting images of oil operations are seen outside a building of Venezuela’s state oil company PDVSA in Caracas, Venezuela January 28, 2019. REUTERS/Carlos Garcia Rawlins/File Photo

MOSCOW (Reuters) – Russian lender Gazprombank has decided to freeze the accounts of Venezuelan state oil company PDVSA and halted transactions with the firm to reduce the risk of the bank falling under U.S. sanctions, a Gazprombank source told Reuters on Sunday.

While many foreign firms have been cutting their exposure to PDVSA since the sanctions were imposed, the fact that a lender closely aligned with the Russian state is following suit is significant because the Kremlin has been among Venezuelan President Nicolas Maduro’s staunchest supporters.

“PDVSA’s accounts are currently frozen. As you’ll understand, operations cannot be carried out,” the source said. Gazprombank did not reply to a Reuters request for a comment.

Reuters reported this month that PDVSA was telling customers of its joint ventures to deposit oil sales proceeds in its Gazprombank accounts, according to sources and an internal document, in a move to try to sideline fresh U.S. sanctions on PDVSA.

Washington says the sanctions, imposed on Jan. 28, are aimed at blocking Maduro’s access to the country’s oil revenue after opposition leader Juan Guaido proclaimed himself interim president and received widespread Western support.

Gazprombank is Russia’s third biggest lender by assets and includes among its shareholders Russian state gas company Gazprom.

The bank has held PDVSA accounts for several years. In 2013, PDVSA said it signed a deal with Gazprombank for $1 billion in financing for the Petrozamora company. The source said that Petrozamora accounts were frozen, too.

Russian officials have said they stand by Maduro and have condemned opposition actions as a U.S.-inspired ploy to usurp power in Caracas.

But Russian firms find themselves in a quandary, caught between a desire to endorse the Kremlin line and back Maduro, and the fear that by doing so they could expose themselves to secondary U.S. sanctions which would harm their businesses.

Reporting by Tatiana Voronova; Writing by Katya Golubkova; Editing by Christian Lowe and Mark Potter

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Airbus warns of no-deal Brexit, says has spent tens of millions preparing




A logo of Airbus is seen on a flag at Airbus headquarters in Blagnac, near Toulouse, France, February 14, 2019. REUTERS/Regis Duvignau

LONDON (Reuters) – Airbus said on Sunday it would have to make “difficult decisions” about future investment if Britain crashes out of the European Union without a deal, adding it had already spent tens of millions of euros in preparations.

“There is no such thing as a managed ‘no deal’, it’s absolutely catastrophic for us,” senior vice president Katherine Bennett told the BBC’s Andrew Marr.

“Some difficult decisions will have to made if there’s no-deal (…) we will have to look at future investments.”

She said Airbus had already spent “tens of million of euros” on preparing for Brexit, for example on stockpiling parts and securing IT systems.

Reporting by Paul Sandle; Editing by Mark Potter

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Public agencies paid millions to national translation firm that stiffs its workers




Government agencies have given millions of dollars in business to one of Canada’s biggest translation firms in recent years in the face of mounting evidence the company was shortchanging its contract workers — and, in some cases, despite warnings from their own staff.

From 2014 to 2017, federal, provincial and municipal governments and agencies spent at least $4.7 million on language services from Able Translations, public records show — everything from interpretation at legal proceedings to translation of medical records. 

Over the same period, the Mississauga, Ont.-based company weathered multiple news stories about its non-payment of freelancers, coupled with a mounting toll of lawsuits, largely from those very workers.

The cautionary signs came as early as 2013 that Able Translations was starting to stonewall the freelance translators and interpreters to whom it parcels out work.

But a number of those agencies only cut ties with the company last year, while some continue to use its services even as it’s on the brink, according to a CBC investigation into the firm’s financial delinquency.

They can see by their own eye that [Able] hurt workers, but they don’t care– Sunny Zhang , Mandarin interpreter

“That’s the ridiculous part of it,” said Sunny Zhang, a Mandarin interpreter and translator from Calgary who won a court judgment and is owed $8,300.

Most of Zhang’s unpaid invoices to Able Translations are for work she did for public-sector clients such as Ontario’s Workplace Safety and Insurance Board (WSIB), the Alberta Workers’ Compensation Board (WCB) and Alberta Health Services.   

Government agencies “can see by their own eye that [Able] hurt workers, but they don’t care.”

‘Keeps coming up’

As CBC revealed earlier this week, Able Translations owes more than $1 million to dozens of translators and other suppliers from as far afield as Korea and Egypt, as well as to the taxman. It has been sued 245 times in the last five years by translators and other creditors — among them, the Canada Revenue Agency, which obtained seizure orders for the company’s assets and put liens on the president’s home and luxury cars.

Able’s office, in a business park in Mississauga, Ont., is closed to visitors except ‘By appointment only,’ according to a sign posted in the window. (Martin Trainor/CBC)

While most of those developments arose out of the public eye, a number of the biggest public agencies using Able had their own indications all was not well, judging from more than a thousand pages of records CBC obtained under access-to-information laws.

“We are hearing more and more interpreter concerns regarding not being paid for their services. This issue keeps coming up,” wrote Fahreen Rayani, an Alberta WCB employee, to Able’s vice-president and co-owner, Annabelle Teixeira, on Feb. 17, 2016.

The previous autumn, CBC News and the Toronto Star had published stories about workers’ troubles in getting paid by Able. The stories were cited in complaint emails a number of interpreters sent to the WCB.

“They are notorious for late payments,” one wrote. “I have sent numerous letters of complaint regarding pay … I have never received a response to my emails.”

Able provided the WCB with a variety of explanations for why interpreters weren’t getting their money. Vice-president Teixeira wrote that sometimes, Able would mail out a cheque, but an interpreter just wouldn’t cash it. Other times, “either Canada Post does not deliver it or the interpreter moves and does not inform us.” In yet other cases, interpreters hadn’t invoiced yet, Teixeira said.

She attributed at least one non-payment to “irregularities” with a cheque, and said that generally, mail is slow getting to Alberta from Ontario.

In total, there were at least 10 complaints to the Alberta WCB about Able’s payment practices by fall 2016, when the WCB decided to extend Able’s contract to provide language services by six months.

‘Cheques have bounced’

Still more complaints arrived through the end of 2016 and into the new year, including one in February 2017 from a group of interpreters who stated, among several grievances, that “the company cheques have bounced.”

Teixeira responded at length to the Alberta WCB, concluding, “Finally, we have never had a cheque returned NSF” (non-sufficient funds).

In fact, that was not true. Court records from a lawsuit against Able in Ontario show that nine months earlier, it had bounced a cheque to a Mandarin interpreter from Toronto.

Despite all the complaints, at the end of March 2017, the WCB again extended Able’s contract  — along with those of its five other translation suppliers — this time by two years.

The organization said in a statement to CBC News that it has “significant demand” for translators for its clients, who often develop “long-standing, trusting relationships” with their interpreters, all of which weighed on the decision about whether to keep using Able’s services.

The WCB added that Able was “responsive” when presented with translators’ complaints about not getting paid, “so we chose to work on resolving complaints while allowing their contractors to continue working with our clients.”

The public agency said its global budget for language services is about $1.4 million a year, and of that, Able Translations’ slice ranged from as high as 65 per cent in 2016 to a more typical 20 per cent since then.

That is, until it prematurely terminated its agreement with Able Translations last May. “We determined they could not consistently deliver on their commitment to ensure their contractors were paid promptly,” the WCB statement said.

Ontario board had warnings, too

Ontario’s workers compensation agency, meanwhile, was aware of potential payment issues at Able as early as October 2013, when a translator wrote in. “Able Translations have not been paying for my services since May,” they said. “I have been sending emails asking for payments and they have ignored and not respond[ed] to my emails. I am not the only service provider that they are not paying.”

The WSIB’s manager of language services then emailed a colleague: “I spoke to the owner and president of Able Translations and he will investigate. I don’t believe there is anything more for us to do … It is an internal issue for them, not us.”

A handful more complaints trickled in in 2014 and 2015. About five months later, in April 2016, the WSIB extended its contract with Able Translations for two more years.

Then, in early 2017, another news report came out about Able’s workers struggling to get paid. It prompted a senior WSIB manager to suggest “we should be cancelling the contract,” internal emails show.

But that didn’t happen, at least not right away. The WSIB finally terminated its agreement last April. All told, from 2014 through the end of 2017, it gave $448,892 in business to Able Translations.

“We expect all of our vendors to conduct business in an ethical manner, which includes fair treatment of employees and proper payment practices,” the WSIB said in a statement.

Hospital looking elsewhere

CBC emailed Able Translations a list of questions about its business relationships and practices in November. Teixeira replied that “your research is incorrect in many details. I will provide further details for your review later this week.”

Despite weekly reminder emails and calls, she never did.

Over the years, the company has had contracts with numerous public bodies, including the Public Prosecution Service of Canada, Employment and Social Development Canada,  Alberta Employment and Immigration and Ontario’s Finance and Natural Resources ministries, but no longer.

It still does business with the University Health Network (UHN) in Toronto, one of the country’s largest hospital and health research organizations.

‘We should not be doing business with companies that don’t pay their workers,’ said Gillian Howard of the University Health Network in Toronto. But she also said, ‘there aren’t lots of companies that provide the breadth and depth of translation that Able does.’ (CBC)

Access-to-information records show UHN paid $2.4 million to Able between 2014 and 2017 for interpretation services, largely at its network of workplace injury clinics.

UHN spokesperson Gillian Howard said the health organization recognizes “we should not be doing business with companies that don’t pay their workers,” and is diverting as much business as it can to other firms. 

But she said UHN needs access to interpreters in more than 100 languages, and “there aren’t lots of companies that provide the breadth and depth of translation that Able does.”

Have a tip on this or any other story? Email or call 416-205-7553.

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