Anson Funds agreed to a $2.25 million settlement with the Securities and Exchange Commission (SEC) over a secret relationship with a short seller affecting two cannabis companies. The SEC found that while Anson Funds disclosed its short position strategy to investors, it did not reveal its collaboration with an activist short publisher, which remains undisclosed.
The Scheme
The SEC detailed that Anson Funds would establish a short position before the release of negative reports by the short seller, reported Bloomberg. These reports often led to a decrease in the target companies' stock prices, allowing Anson Funds to profit from the drop. The events happened in 2018, and the involved cannabis companies included Namaste Technologies Inc. (now Lifeist Wellness Inc.) (OTC:LFSWD) and India Globalization Capital (now IGC Pharma Inc.) (NYSE:IGC).
The scheme involved coordinated efforts where Anson Funds paid the short seller a share of its profits through third-party invoices for non-existent research services, thus masking the true nature of the transactions.
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Legal Repercussions
The SEC accused Anson Funds of failing to inform investors about this arrangement, rendering its statements about its short-selling strategy misleading. The SEC also noted discrepancies in the firm's record-keeping related to these transactions. Consequently, Anson Funds agreed to pay a civil penalty of $1.25 million, and Anson Advisors Inc. in Toronto agreed to a $1 million penalty.
Anson Funds defended its actions by stating that its involvement benefited investors and the broader market by highlighting overvalued stocks. However, the SEC criticized the fund for omitting crucial details in its communications with prospective investors and for inaccurately recording payments, thus violating the Advisers Act compliance rules.
Gains for Anson Funds
Bloomberg reported that Anson Funds generated over $4 million in gains from this move. The payment to the short seller, made through a third party, amounted to $1.1 million. This investigation is part of a wider effort by U.S. authorities to examine relationships between hedge funds and bearish researchers, which began three years ago and involves more than 50 stocks. Thus, the sentence inaugurates what can be the first of many scrutinies by the SEC and the Department of Justice (DOJ) into illegal short-selling involving hedge funds and research firms.
