Three former executives of cannabis company CannTrust Holdings Inc., including former chief executive officer Peter Aceto and former chairman Eric Paul, have been charged with fraud related to illegal growing of cannabis at a CannTrust facility in 2019.
The charges follow a two-year investigation by the Ontario Securities Commission and the RCMP’s Integrated Market Enforcement Team after The Globe and Mail reported in July, 2019, that CannTrust had been cultivating cannabis in unlicensed areas of its facility with the apparent knowledge of senior executives in the company.
Mr. Paul and former CannTrust director Mark Litwin were also charged with insider trading for selling shares of CannTrust while knowing about the unlicensed growing activities. The quasi-criminal charges were laid in court under the Ontario Securities Act, which allows jail terms to be imposed.
“In cases involving serious market misconduct, prosecution in provincial court allows us to seek a range of strong sanctions, including jail time,” OSC enforcement director Jeff Kehoe said in a statement.
The revelations that CannTrust grew thousands of kilograms of cannabis illegally and raised US$170-million with a prospectus that contained incorrect information hit the nascent cannabis industry like a bombshell in 2019. CannTrust was one of the largest and best-known Canadian marijuana growers, and one of only two cannabis producers to be listed on the New York Stock Exchange at the time. CannTrust’s market valuation, which once topped $1-billion, dropped sharply and investors and investment banks retreated from the industry, making it harder for other cannabis firms to raise money.
The OSC and the RCMP allege the three did not disclose to investors that approximately 50 per cent of the total growing space at CannTrust’s facility in Pelham, Ont., was not licensed by Health Canada.
“In press releases, corporate disclosures, analyst calls and prospectuses they asserted that CannTrust was compliant with regulatory requirements, and they included all cannabis production in the company’s financial statements, without stating that half was grown without a license,” the OSC said in a statement on Tuesday.
In total, four charges were laid against Mr. Aceto and Mr. Paul, and five against Mr. Litwin.
Beyond insider trading and fraud, the additional charges include making false or misleading statements to the OSC and to the market, and using false information to raise capital in the United States by approving investor prospectuses without disclosing the unlicensed growing.
In a statement to The Globe, Mr. Aceto’s lawyer, Frank Addario, said he was “disappointed” Mr. Aceto had been charged. He said Mr. Aceto, a former CEO of Tangerine Bank who joined CannTrust in 2018, had co-operated with CannTrust’s internal audit and the OSC investigation.
“I look forward, as does Peter and his family, to a public hearing where the evidence will show that he acted with integrity at all times,” Mr. Addario said.
Scott Fenton, a lawyer for Mr. Litwin, said his client “did not commit any offences, nor was he aware of others who may have committed any offences,” and intends to “vigorously dispute” the charges.
Gerald Chan, a lawyer for Mr. Paul, said in an e-mailed statement that “evidence will show [Mr. Paul] did nothing wrong.”
In a statement on Tuesday, CannTrust said the company was committed to “regulatory compliance, risk management, and effective oversight,” and that no charges had been laid against it or any of its subsidiaries, current directors, officers or employees.
In a surprise raid in early July, 2019, Health Canada seized 5,200 kilograms of cannabis at the Pelham greenhouse in the Niagara region. The raid followed a tip from a whistle-blower who suggested CannTrust was cultivating cannabis in unlicensed rooms and hiding this from regulators – at one point allegedly using fake walls to stage misleading photographs.
Weeks later, CannTrust’s board fired Mr. Aceto and demanded the resignation of Mr. Paul. CannTrust’s stock lost more than 50 per cent of its value.
Company e-mails obtained by The Globe in 2019 showed Mr. Aceto, Mr. Paul and other top CannTrust executives were aware of the illegal growing as early as mid-November, 2018.
After an inspection by Health Canada that did not flag the unlicensed grow rooms, the company’s director of quality and compliance sent an e-mail to colleagues saying: “We dodged some bullets … [Health Canada] did not ask about RG8E/W, which are unlicensed rooms currently full of plants.”
Mr. Paul responded the same day, advising staff to point out to Health Canada that they have been diligent in submitting licensing documents for new parts of the growing facility and that Health Canada has “been slow in responding.”
Recreational cannabis was legalized in October, 2018. Cannabis companies raced to expand their production capacity to supply the new market, bolster their soaring share prices and raise additional capital. Health Canada had a large backlog of licensing applications and the approval process for new facilities and new grow rooms had slowed.
A holding company controlled by Mr. Paul and Mr. Litwin and his family sold nearly $1-million worth of shares on Nov. 16, 2018, the same day the internal company e-mail pointing out illegal growing was sent to executives. Mr. Litwin was not one of the recipients of the e-mail.
The holding company, Cannamed Financial Corp., sold a further $5-million worth of CannTrust shares over the next 30 days. As of May, 2019, according to CannTrust securities filings, Cannamed was 57-per-cent owned by the Paul Family Trust. The remainder is held by corporations owned by Mr. Litwin, his sister Risa and their father Fred Litwin – long-time backers of the company.
Cannamed also sold US$30-million of CannTrust stock as part of the company’s U.S. financing in May, 2019.
CannTrust raised US$170-million in a deal underwritten by major U.S. investment banks, including BofA Merrill Lynch, Citigroup and Credit Suisse Securities. The deal was also RBC Capital Markets’ first significant foray into cannabis financing.
The prospectus for the deal, which was signed by Mr. Aceto, pointed to a 96-per-cent increase in the amount of cannabis cultivated in the first quarter of 2019 compared with the previous quarter. This increase included the unlicensed cannabis.
CannTrust sought creditor protection in March, 2020, after the regulatory turbulence of the previous year resulted in the company barely being able to afford to keep operating. Health Canada has since reinstated all its licences, with a caveat that it would conduct more frequent inspections. It also forced CannTrust to destroy $77-million worth of cannabis inventory and plants.
A first court hearing in the case is scheduled for July 26 at Old City Hall in Toronto.
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