OSC director says all regulators ‘struggling’ with short selling
The Ontario Securities Commission's head of enforcement is firing back at critics who say the regulator mishandled allegations against Home Capital Group, and weighing in on the debate about the role of short selling in capital markets.
“There’s always criticism of the regulators when they’re in the middle of a matter and I think the proof is in the pudding, that what we saw is a successful resolution of the matter,” Jeff Kehoe told BNN in an interview Thursday.
Home Capital was pushed to the brink in the wake of the regulator's allegations that the company and three former executives misled investors in 2015 -- prompting investors to punish Home Capital's stock amid a run on the lender's deposit base prior to a settlement being announced in June.
At that time, despite the fact Home Capital's chair said the regulator wasn't to blame for the turmoil, former enforcement director Joe Groia said there should be a "good hard look" at how the OSC handled things.
But Kehoe isn't apologizing for his team's work.
“Yes there’s uncertainty when a public issuer is subject to enforcement proceedings; but this isn’t new and I think this is something many stakeholders have seen in the past,” Kehoe said. “It’s unfortunate but it’s a reality because we’re very transparent about what we do. And we take our matters seriously in terms of keeping that transparency open.”
“We always look back and we’ll do a post-mortem in terms of, ‘Could we have done anything better?’ But at the same time we have a process and we followed that process really carefully.”
Kehoe said the regulatory body wasn't blind to the magnitude of the fallout for Home Capital but said that’s not something the OSC can take into consideration when it comes to enforcing securities laws.
Before the OSC became involved, Home Capital found itself in the crosshairs of outspoken short-seller Marc Cohodes.
Kehoe said although short reports on companies can be difficult to deal with from a regulatory standpoint, they’re an important part of the market.
“Short selling by its very nature is not an evil. Short selling is a very useful tool, particularly in the context of what’s called the efficient market thesis. It’s all about price discovery,” he said.
Kehoe said it’s the so-called short and distort reports that are problematic for regulators.
“We’re all struggling with the short-selling issues. The short and distort is a completely different animal. It uses social media, it uses some of the chat rooms to talk about these issues. There are challenges in the understandings of the new world of short sellers,” he said. “Short selling can be abusive, and where it is abusive, we will take action.”
When it comes to Home Capital, however, Kehoe maintains the company has no one but itself to blame for the turmoil that engulfed the lender.
“We had a very serious fraud that took place without public disclosure and it took a long time before the company disclosed it and at that time there was an 18-per-cent drop in stock price. We did not create the situation; we did not create the uncertainty. This, in our humble opinion, was the action of the people inside Home Capital.”