VANCOUVER–The Investment Dealers Association of Canada has fined Canaccord Capital $85,000 for failing to adequately supervise an account and not restricting an unfair strategy called "naked short selling."

The industry regulator said yesterday Canaccord failed to "establish procedures which would enable it to detect whether the trading in the account was fair to other market participants or contrary to the public interest."

According to a negotiated settlement reviewed by a hearing panel June 29, the activity took place from November 2001 to November 2002 and involved two Toronto-based employees who dealt with options. They were responsible for managing the assets of Stonestreet LP, a hedge fund with an account at Canaccord, and, according to a statement of facts, were involved in "naked short selling," which involves short selling without first having borrowed the shares.

The seller then may be unable to deliver the shares to the buyer when due.

Stonestreet's trading strategy involved securing private placement deals in which it bought shares at a discount, then "sold short the issuer's underlying common stock by initiating `naked' short sales in the Stonestreet account," the agreement said.

"Stonestreet LP continued to short the underlying stock until the accumulated short position was approximately equal to the number of shares that Stonestreet LP would receive through the private placement. Eventually, the shares purchased in the private placement were used, either directly or indirectly, to close out the accumulated short positions. This trading strategy generated profits for Stonestreet LP on the difference between the short sale price and the discount price of the private placement."

The panel ruled the strategy was unfair since Stonestreet began the short sales with advance knowledge of the private placement.

The panel ruled Canaccord supervisors were aware of the unfair strategy but failed to restrict it