TSX-V member Golden's Shull facing market-making suit
2006-03-16 14:59 ET - Street Wire
by Stockwatch Business Reporter
Golden Capital Securities Ltd. broker Jason Shull has lost a bid to have what he calls a market-making lawsuit tossed out of B.C. Supreme Court. The case, if it makes it to trial, could hinge on the difficult-to-define differences between market-making and market manipulation.
The civil suit stems from a disputed market-making agreement between Mr. Shull and his former clients, Fred Sebastian and James Petersen.
Mr. Sebastian and Mr. Petersen, in their suit, say they paid Mr. Shull a "secret commission" of one million shares to make a market in their company, OTC Bulletin Board listing Westsphere Asset Corp., and to promote it to clients. They say they set up market-making accounts with Mr. Shull in July, 2001, and deposited their own shares, not the million they gave Mr. Shull, in those accounts.
They then say that Mr. Shull underhandedly sold the "secret commission" shares while buying with Mr. Sebastian and Mr. Petersen's market-making accounts, after he promised to hold the commission shares for at least six months.
The stock traded at 61 cents on July 23, 2001, around the time Mr. Shull received his purported "secret commission." It reached a $1.10 high in August, before falling to an 11-cent low in December.
A market manipulation agreement
Mr. Shull, in arguing to have the lawsuit thrown out, says the agreement was for market manipulation, an illegal activity and therefore unenforceable. "The plaintiffs allege [Mr. Shull] breached an agreement to assist them in manipulating the market for Westsphere," Mr. Shull says in court filings.
The idea, it seems, is that an illegal market manipulation agreement would have no weight in court, and could not be the basis for a lawsuit.
The judge, however, ruled Mr. Shull has not proven the agreement was for market manipulation and therefore illegal. "I am not persuaded that [Mr. Sebastian and Mr. Petersen] have effectively admitted to engaging in unlawful market manipulation or to paying an illegal secret commission to Jason Shull to carry out such manipulation," the judge's decision reads.
The judge, in his decision, also tries to spell out the difference between market-making and market manipulation.
Market making is generally defined as buying and selling a stock to smooth out price fluctuations. In theory, market-makers buy in falling markets and sell in rising markets. Market manipulation, on the other hand, is the unlawful practice of trading to make an appearance of market activity.
The difficulty lies in determining whether market manipulation can be passed off as market-making.
"It appears that the distinguishing feature between lawful market-making and illegal market manipulation lies in the purpose of the trading activity. If the objective is to provide market liquidity, the trading will be lawful. If the purpose is to induce action by others out of a desire to benefit, then the trading activity will be unlawful market manipulation," the judge's decision reads.
This suggests that if a market-maker is trying to make money at the expense of others, he is manipulating the market. Otherwise, the practice can be called market-making.
The suit names Mr. Shull, Golden Capital and former Golden Capital compliance officer Leo Wong as defendants.
Neither Mr. Shull nor his lawyer were available for comment Wednesday. Mr. Shull, who ran Golden Capital's satellite branch in Kelowna, now works at the brokerage's Vancouver office. Mr. Sebastian and Mr. Petersen, who live in the Prairies, filed the lawsuit in 2003 at an out-of-the-way courthouse in Nanaimo. |
