An Ontario court has rejected an energy company’s claim against a defunct hedge fund firm, Traynor Ridge Capital Inc. — which was cease traded back in 2023, after the firm’s head suddenly died — ruling that shareholders don’t owe any duty to the issuers of the stocks they trade.
In October 2023, Traynor Ridge and its funds were cease traded by the Ontario Securities Commission (OSC) after the operator and sole officer of Traynor Ridge, Chris Callahan, passed away, leaving no one in charge of the firm — which was then also placed into receivership under Ernst & Young Inc. (E&Y).
Last month, the Ontario Superior Court Justice heard a motion from E&Y seeking to finalize the claims made under the receivership, among other things.
In particular, the receiver asked the court to approve claims from several brokerage firms (Jones Trading Canada Inc., National Bank Financial Inc., Ventum Financial Corp. and Virtu Canada Corp.) against Traynor and its funds. When the funds were cease traded their brokers were left with millions of dollars worth of unsettled trades, and suffered large losses when they sold those securities.
“The stockbrokers’ claims for the losses they suffered on liquidating unsettled trades are allowed,” the court said. “Among other claims, they have clear contractual indemnity rights against [the firm and its funds].”
E&Y also sought approval for its decision to deny claims brought by an issuer, Trillion Energy International, Inc., which alleged that it was harmed by the Traynor funds’ trading.
According to the court’s decision, Trillion made a claim for $25 million in damages — alleging that trading by the firm and its funds before they ceased operating caused it to suffer $6 million in shareholder dilution, and prevented it from raising $19 million in a planned public offering.
The receiver denied the company’s claim, concluding that the funds didn’t owe any duty of care to the company, and that its claim wasn’t valid.
Now, the court has upheld that decision.
“The law generally does not recognize any duty on shareholders regarding when or how they buy or sell shares. They do so in their own selfish best interest. Shareholders are free to deal with their shares contrary to the best interests of the company and even contrary to their own best interests,” the court noted in its decision.
“In my view, Trillion has not identified a legal right or cognizable interest protected or advanced by its proposed new category of liability,” the court added.
The court also rejected a claim that the hedge funds may have engaged in market manipulation designed to depress Trillion’s share price, saying that there is no evidence to support this allegation.
And, it also rejected the argument that the company was harmed by the funds failing to file insider reports, which would have disclosed their large stake in the company’s shares.
“While the [funds] may have been in violation of the regulatory requirement to disclose their positions and the trading moratorium that is in effect until they do so, that does not translate into private rights for the issuer,” the court said — adding that securities regulation is focused on defending the public interest.
“When the securities laws provide a private right of action, they say so. The remedy for not making disclosure, however, is simply the regulator making an order requiring disclosure,” it noted.
The court gave the receiver the go-ahead to distribute the funds that it has recovered to creditors, which includes the brokers, but excludes Trillion, and certain unitholders of the funds — unitholders that had submitted redemption requests before the funds were cease traded, but whose redemptions weren’t processed before the receivership took effect.
The latest report from E&Y estimated that $27.2 million will be available for distribution to creditors — including the cash and securities holdings of the funds. Total claims against those assets were estimated to be $114.1 million, largely from the brokers.