Company says broker-dealer units of RBC, CIBC failed to stop price manipulation
A Toronto-based biopharmaceutical company is taking legal action against CIBC World Markets Inc. and RBC Dominion Securities Inc., alleging that the broker-dealer units of two of Canada’s biggest banks allowed an illegal trading tactic known as spoofing to manipulate its share price.
Quantum BioPharma Ltd., which trades on the Nasdaq and the Canadian Securities Exchange, filed the lawsuit on Sunday in the United States District Court for the Southern District of New York. The company was formerly known as FSD Pharma Inc. until a name change in August.
The suit also names 10 “John Does,” entities that could include market makers, subsidiaries, affiliates and sister companies, as well as customers of the defendants, whose identities are currently unknown. Quantum BioPharma alleges that the defendants either engaged in spoofing for their own proprietary accounts, or failed to fulfill their duties as gatekeepers by not implementing proper controls to prevent the market manipulation from occurring.
The alleged spoofing, which utilized high-speed algorithmic computer systems, occurred between Jan. 1, 2020, and Aug. 15, 2024, according to the company, whichclaimsithassufferedsignificant damages and is seeking US$700-million in damages.
Spoofing involves artificially creating or suppressing demand for a stock by flooding the market with orders to buy or sell the stock that are ultimately cancelled before they go through.
In the case of Quantum BioPharma, for instance, the company alleges that the defendants placed thousands of spoofing orders to sell the company’s shares, creating the illusion that the share price was declining in order to bait other investors into selling their shares, which would drive the price down even further.
Afterhavingcausedthepriceof the company’s shares to decrease, the defendants would allegedly swoop in and buy shares at the artificially low prices, before cancelling all of their sell orders.
These steps, which are referred to as a “spoofing episode” or “spoofing cycle,” would be completed within seconds or milliseconds and repeated multiple times a day, according to Quantum BioPharma.
None of the allegations have been proven in court. CIBC spokesperson Kathryn Lawler declinedtocomment,“giventhisisa matter before the courts.” RBC also declined to comment.
Sunday’s lawsuit follows an opinion and order issued by a U.S. Federal District Court Judge last year in a spoofing case filed by a Bermuda-based hedge fund against a consortium of U.S. and Canadian broker-dealers, including CIBC World Markets Inc., TD Securities Inc. and BOFA Securities Inc.
In that case, which is continuing, Federal District Court Judge Lorna Schofield of the Southern District of New York denied the defendants’ motion to dismiss the hedge fund’s spoofing claims, noting that broker-dealers have a responsibility to detect and prevent manipulative or fraudulent trading.
“This decision is a clear and unambiguous warning to brokerdealers that unless they fulfill their gate-keeper responsibilities of monitoring their customers’ trading they can be held primarily liable for their client’s manipulative conduct,” Alan Pollack, a partner at Warshaw Burstein LLP and one of the lawyers representing Bermuda-based Harrington Global Opportunity Fund Ltd., said in a statement at the time.
Last month, the U.S. brokerdealer unit of Toronto-Dominion Bank agreed to pay more than US$20-million as part of a deal with U.S. authorities to settle charges that it spoofed the U.S. Treasuries market.
Quantum BioPharma was founded in 1994 and went public in 2018. It was targeted in January, 2019, by short seller White Diamond Research, which called it a “roll up with scattered, uneconomical cannabis investments” and said they thought it had 50-percentto70-per-cent downside from its price at the time of about $0.30.
The company announced in July ,2020, that it was shuttering its medical cannabis subsidiary, FV Pharma Inc., and selling off its cannabis production facility in Cobourg, Ont., to focus on drug development.
In 2021, Quantum BioPharma had a contested board election, with founder and director Anthony Durkacz taking control of the company and replacing the chief executive officer.
The company’s current projects include developing a multiple sclerosis drug called Lucid-MS and a product called “Unbuzzd” that it bills as a “rapid alcohol detoxification drink.” One of its directors is Dr. Eric Hoskins, who served as Ontario’s health minister from 2014 to 2018.
Quantum BioPharma recorded $26,000 of revenue in 2017, but otherwise has had no sales from 2016 to the present. Its cumulative net loss has been $225-million in the past 8½ years, according to S&P Global Market Intelligence.
As the company’s stock tumbled, it has performed two large reverse share splits. Today, a share of Quantum–which closed Monday at $6.81 on the Canadian Securities Exchange–is equal to 13,000 shares from the time it was known as FSD Pharma.
The stock is down more than 99 per cent from its all-time high set in September, 2018.
Terry Lynch, the founder of Save Canadian Mining, an advocacy group focused on com batting predatory short selling in Canada’s junior markets, said the ruling in the Harrington Global case in New York “means quite clearly that the banks are responsible for the trading actions of their clients. If their clients are spoofing they are responsible to stop it and deal with it.”