On June 30, in a packed conference room in Denver, Bill Chaaban – a man known to his legions of followers as “Wild Bill” – took the stage to a rousing ovation. The room was filled with investors hungry for the stock market’s next big thing. And Mr. Chaaban knew how to play to a crowd.

According to the emcee who introduced him, Mr. Chaaban was “probably the most talked-about CEO in the space,” which in this case was the new medical marijuana industry rapidly coming into being across North America.

It is a multibillion-dollar business being created from scratch – the product of historic government reforms happening in a number of jurisdictions, particularly in Canada. In fact, the subject of Mr. Chaaban’s talk was his plan to dominate the new Canadian market for medical marijuana, which Ottawa had opened in April.

To those attending the first annual “Weedstock” – a conference that had sold itself as a conduit for investors to connect with “the titans that drive this fast-paced industry” – Mr. Chaaban seemed to be letting them in on something remarkable.

“There’s some things that I’m going to reveal that haven’t been made public yet,” he said, tempting the audience with the prospect of inside information. “We’ll let you speculate from there.”

Far from the scrutiny of the Canadian government – the kingmaker deciding which companies receive a highly coveted licence to grow and sell medical marijuana – Mr. Chaaban proceeded to talk up his plan.

His Michigan-based company, Creative Edge Nutrition, had a Canadian subsidiary called CEN Biotech that was constructing a facility in Southern Ontario big enough to produce 600,000 kilograms of medical marijuana a year. Not only would it be the largest legal grow operation in Canada, but this plant in the town of Lakeshore, just east of Windsor across the border from Detroit, would be the biggest of its kind in the world – bigger than all the other Canadian companies combined. CEN Biotech was going to rule this new industry.

Mr. Chaaban, a lawyer from the Detroit area, said he’d spoken with Health Canada only a few weeks earlier and was going to “partner with them.” He also told the room of investors that his company had “essentially” been approved by Ottawa.

It was a tantalizing story. Because, as Mr. Chaaban said, this wasn’t just about medical marijuana. The way he saw it, Ottawa’s medical marijuana legislation was basically the end of prohibition on the drug.

“Effectively it’s de facto legalization. All you need is a script from a doctor. You don’t have to prove why you need it – all you need is a prescription to get it,” he said. “I see the market being 500,000 patients in two years, and being billions of dollars.”

Energized by his story, investors gave Mr. Chaaban a standing ovation. In the weeks that followed, shares of the parent company, Creative Edge – a penny stock traded on the loosely regulated over-the-counter (OTC) market in the United States – rose quickly.

But what the investors in Denver didn’t know was that Mr. Chaaban had made several claims that weren’t true. Health Canada does not form “partnerships” with private-sector companies. Nor had CEN Biotech “essentially” been approved by Ottawa to begin selling medical marijuana in Canada.

What they also didn’t know was that while Mr. Chaaban was touting his company to them, he was simultaneously selling off his own shares in huge numbers and pocketing millions of dollars in the process.

Video: In a booming industry, medical marijuana company makes problematic claims

When Health Canada set out to design a market – under orders from the Supreme Court – that would allow medical marijuana to be prescribed to patients who need it, the impact on the capital markets was not on its mind, according to thousands of pages of federal documents detailing the process, which were reviewed by The Globe and Mail.

But in forming this lucrative new industry, Ottawa has unwittingly left the door open for stock promoters to spin tales of vast opportunity, and enrich themselves on the backs of unsuspecting investors. And Ottawa appears to have no answer for how to stop it.

A Globe and Mail investigation has found that while Health Canada performs background checks on those who want to operate medical marijuana companies, the department has not looked into how these same companies conduct themselves in the capital markets, or what they are telling investors.

When asked about CEN Biotech’s conduct, Health Canada refused questions, saying it could not comment.

But Mr. Chaaban has continued unabated. As he concluded his remarks in Denver, he couldn’t help but entice investors further. “Stay tuned,” he said. “We just started.”

Selling a story

Before he set his sights on dominating Canada’s nascent marijuana sector, Mr. Chaaban’s primary business was Creative Edge Nutrition, a company on the outskirts of Detroit that made nutritional supplements and energy drinks.

Mr. Chaaban told investors in the U.S. that Creative Edge Nutrition ships around the world and is a major player north of the border, “supplying every major nutrition store in Canada.” The Globe and Mail has been unable to verify this claim. Staff at three of the country’s largest retail chains – GNC, Popeye’s Supplements, and Nutrition House – said they had never heard of the brand. When asked for a list of Canadian stores that sell Creative Edge products, Mr. Chaaban and his spokesman did not respond.

The focus shifted to medical marijuana on Sept. 5, 2013, when Mr. Chaaban announced the creation of a subsidiary, CEN Biotech.

However, the company did not seek a listing in the Canadian markets, which would have required it to file audited financials and other key documents with regulators. Instead, Creative Edge Nutrition and its new subsidiary continued to trade as a single penny stock in the lax U.S. over-the-counter market – sort of a back alley of the capital markets.

These shares, sometimes known as the “pink sheets,” carry few disclosure requirements, leaving investors in the dark on companies’ finances. And because penny stocks are so volatile, even the smallest rumour can send a stock soaring. Thinly traded, the market is notorious for stock manipulation.

Interest in Creative Edge’s move into marijuana was muted at first, primarily because CEN was an unknown stock trading at a fraction of a cent, with more than three billion shares outstanding. Then, on Dec. 30, 2013, in an article titled, “Big Marijuana: Is it the Future?,” Mr. Chaaban made a huge splash. A writer for financial website Forbes.com stated that CEN Biotech “has been approved to grow, distribute, import and export medicinal marijuana” by Health Canada.

In the article, Mr. Chaaban predicted the operation would be running in seven months, or by late July. “By the end of year five, we’ll be doing $100-million in sales, with a margin of 80 per cent,” Mr. Chaaban said.

The article was posted at 1:09 p.m. that day. At 4:23 p.m., Creative Edge issued a press release trumpeting the story. The company said it was “proud to announce that it has received its regulatory approval from Health Canada to become one of Canada’s commercial medicinal marijuana growers. This was announced today in Forbes Magazine.”

It was great news, and the stock price began to soar as investors piled in. Based on what other entrants had experienced, a licence from Health Canada was worth more than $40-million to a company’s value in the stock market, because it meant revenue would soon be flowing. “That’s a conservative estimate,” said Andrea Hill, a securities lawyer in Toronto with Wildeboer Dellelce. She pegs the value as high as $70-million.

As fever over marijuana stocks gripped the markets in the first few months of this year, Creative Edge’s shares climbed from 0.37 cents last Dec. 30 to 10.68 cents on Feb. 10 – a staggering 2,800-per-cent increase. Creative Edge was suddenly worth more than $360-million.

But CEN Biotech had not been approved for a licence.

Mr. Chaaban’s company had only been issued a preliminary nod from Health Canada, based on its paperwork. It was not an approval. That couldn’t come until it passed a formal inspection, and there was no telling when that would happen.

Forbes eventually issued a correction to this effect, but the company itself was conspicuously silent. Health Canada sent Mr. Chaaban a reprimand letter on Jan. 26, informing him that “you cannot in any way suggest that a licence has been obtained or that the issuing of a licence is imminent.”

The Globe and Mail obtained the details of the letter. When asked about this reprimand, CEN Biotech spokesman and head of investor relations William Swalm said he was not aware of any such letter.

However, what Creative Edge wasn’t highlighting – for Health Canada or its investors – was that, as Mr. Chaaban was boldly touting the company in the market, he was also selling off his own shares by the millions.

According to documents filed with the U.S. Securities and Exchange Commission, he sold 12.1 million shares after that initial price surge, for approximately $1.11-million (all figures U.S.) Almost all of that was profit since, as an insider, he had been issued a vast number of shares at fraction of a cent apiece.

Despite the reprimand letter from Health Canada – which was at most a slap on the wrist – the company continued touting its prospects, becoming a serial issuer of misleading press releases and statements.

On Feb. 21, CEN Biotech held an open house for investors and Mr. Chaaban said the company would list on NASDAQ – one of the largest U.S. exchanges – as early as May, a move that would bring it more credibility in the capital markets.

To date, there is no NASDAQ listing for the company. However, the claim helped to buoy the stock in otherwise falling markets, and between Feb. 24 and April 29, Mr. Chaaban sold another 12.7 million shares for about $1.03-million.

On April 30, with the stock in decline, he issued a press release announcing that the Lakeshore facility was ready for a “pre-licence inspection.” The announcement pushed the shares up 5 per cent, even though it was not a significant event in any way. That day, Mr. Chaaban unloaded another 3.1 million shares for more than $261,000.

Then, on May 6, an article appeared in The New York Post with a bold headline: “World’s Largest Legal Pot Facility to Open.” The story said Creative Edge was on the verge of launching a “legal marijuana production facility … that could produce $5-billion in sales per year, when it starts producing in a few weeks after it passes government inspections.” Mr. Chaaban was quoted saying that “the facility is done, it’s ready” and that it would be run by a “dream team” of top executives. The stock rose 6 per cent.

The suggestion that the facility would start producing “in a few weeks” was, again, inaccurate and misleading. Rather than object to the article, Creative Edge spokesman Mr. Swalm pointed The Globe and Mail to the article as a credible piece of research on the company.

In the six weeks after the claims were published, Mr. Chaaban sold another 18 million shares, for $1.4-million.

Then came the Colorado investor conference on June 30. Apart from inventing a “partnership” with Health Canada, Mr. Chaaban told investors that Creative Edge had retained auditor Deloitte, suggesting the company was going to subject itself to greater scrutiny and transparency and likely file more detailed financial statements. The stock finished the week up 8 per cent, but more than five months later there is no evidence that Creative Edge or CEN is audited by Deloitte. When asked why by The Globe and Mail, Creative Edge refused to say.

However, in mid-July, Mr. Chaaban sold a further 1.8 million shares for more than $94,000.

In an Aug. 5 interview in Canada, Mr. Chaaban said he was certain the company would have its licence and be operating by the end of that month. Again, there was no licence. But the stock rose 18 per cent by the end of August, and Mr. Chaaban sold another 5 million shares in that span, for $317,000.

Starting on Oct. 1, as the boom in medical marijuana stocks was fading, a series of events helped to push up the company’s shares. It began with a peculiar bit of information regarding CEN Biotech that made its way onto several investor websites.

The blurb was titled “A Pat On The Back – Health Canada Associate Deputy Minister Paul Glover to Highlight Creative Edge … Facility As a Positive Example For Other Applicants.” That is, the federal government was about to give CEN Biotech an unprecedented endorsement.

But just as Health Canada doesn’t “partner” with companies in the medical marijuana industry, it doesn’t endorse them. As the blurb made its way around the Internet – to the dismay of Health Canada, sources in the department say – CEN Biotech did nothing to clarify the situation. As the markets slumped, the misinformation helped to give its stock a 3-per-cent lift.

Another strange virtual tout came on Oct. 22, as a document relating to Health Canada’s pre-licence inspection of the Lakeshore facility was leaked on the Internet.

Such documents are not usually public information. The 12-page report identified a few deficiencies with the proposed facility, such as concerns over security cameras. But over all, the inspector seemed satisfied, concluding “the applicant will be ready and able to meet the requirements” of obtaining a licence, provided the reported deficiencies were dealt with.

The inspection report was great news for the company, even moreso when it mysteriously showed up online. The shares rose 5 per cent over the next two days. About a week later, on Oct. 30, the company issued a press release containing a link to the same report. The shares, trading on this recycled information, closed 12 per cent higher over the next five days.

Between Oct. 21 and Nov. 7, as these tidbits circulated in the market, Mr. Chaaban unloaded more than 18.9 million shares, pocketing another $397,000.

At the height of its valuation, more than $360-million, the fledgling company was worth more than the combined market capitalizations of the four licenced Canadian producers that were publicly traded at the time: Bedrocan Canada Inc., Mettrum Ltd., OrganiGram Inc., and Tweed Inc.

Without producing a thing, and without a licence, Creative Edge had somehow become the most valuable company in the Canadian sector.

In all, Mr. Chaaban executed at least 57 stock sales between Feb. 10 and Oct. 9, unloading more than 71 million shares at a significant profit.

Because he had been issued those shares for as low as a tenth of a cent, he pocketed more than $4.6-million during that eight-month span, selling the maximum shares allowable for a CEO under securities rules.

It was highly unusual behaviour. Yet an official with Health Canada – overseer of the new medical marijuana market – said the agency was unaware of these stock sales, and had not been keeping track of how the company was conducting itself in the capital markets.

More bold claims

In his bid to become the undisputed giant in the Canadian medical marijuana industry, Bill Chaaban has stated numerous times that he is building a “dream team” of executives and expertise to manage the company, which will be a “super grower” of the drug.

When the company held an open house in Lakeshore in October to assuage local concerns, some of this expertise was on hand.

James Whitfield, a project manager, fit the bill as an executive with an impressive resume. According to his LinkedIn page, Mr. Whitfield worked for the White House Military Office from July, 2009, to December, 2012. But he doesn’t go into much detail online about his job. “Perhaps one day we’ll be able to talk about that,” his LinkedIn page says.

However, when neighbours attending the Lakeshore event asked how the company planned to contain the pungent smell of marijuana plants, Mr. Whitfield invoked his previous experience numerous times. “My job at the White House was to provide a clean breathing environment for the president,” he told told the crowd, pointing to a mechanical air filter the company plans to install. “This system is used to save lives.”

The comments fit with Creative Edge’s tendency toward bold statements. Meanwhile, neighbours’ questions about the facility were met with murky replies, such as an unwillingness to say how much water the facility would use.

But the most unusual moment came when company officials held up a large photo of the inside of a grow-operation. Residents asked if that was a rendering of the proposed facility. “No,” Mr. Whitfield said. “That’s of an operation in Japan.”

But was it? The Globe and Mail determined that the picture belongs to Caliber Biotherapeutics, a company in Texas that posts photos of its operations on its website. How CEN Biotech obtained the photo is not clear. When asked by The Globe, Mr. Chaaban did not respond.

The “dream team,” meanwhile, also includes Morgan Petitti, an Ohio lawyer who was sued by the U.S. Securities and Exchange Commission in 2011 for her alleged involvement in an oil-and-gas stock scam that targeted Canadian investors with promises of returns as high as 141 per cent. Ms. Petitti, who advises CEN on securities matters, agreed to pay a $25,000 fine without admitting or denying the allegations.

The SEC also came down on another person connected with Creative Edge when it charged Randy Hamdan last December.

Mr. Hamdan, like Mr. Chaaban a Michigan resident, runs a firm that generates online attention for companies in exchange for fees ranging between $15,000 and $30,000. He has a large stake in Creative Edge, having been issued shares in exchange for his services.

The SEC charged him with “conducting a pump and dump scheme” in the market. It alleges that he is “a penny stock promoter” who orchestrated an elaborate scheme to drive up the price of shares in a dormant tech company named CompuSonics. According to the SEC, he did this by “engaging in manipulative trading, conducting a fraudulent marketing campaign, and by pretending to be a representative of CompuSonics, causing a news service to issue a false press release on behalf of the tech company.”

The scheme, which targeted an unnamed Canadian newswire service to issue false information, involved Mr. Hamdan using numerous tactics to hide his identity, the SEC said. The matter is currently before the courts and the SEC allegations have not been proved.

Such situations present a quandary for Health Canada. While the health regulator runs extensive criminal checks on key executives and employees involved in proposed medical marijuana operations, it admitted to The Globe that it does not delve into the business dealings of the companies it is licensing.

Backlash

Those who have dared to question Mr. Chaaban and Creative Edge have been met with an onslaught – from the company and its shareholders.

Matthew Finston, a graduate student and penny stock investor who writes for the financial website Seeking Alpha, faced intense criticism when he brought up the SEC’s case against Mr. Hamdan on social media.

In a testy Facebook exchange, Mr. Chaaban warned Mr. Finston that he was going to be sued for some of his remarks.

“The lawyers already have all your information. They now [sic] your sister’s name, your parents’ name. Your address in California. Your phone numbers etc.,” Mr. Chaaban told Mr. Finston.

“Did you just threaten my family?” Mr. Finston replied, wondering why his sister had been invoked.

Mr. Hamdan did file a suit, which he later dropped.

Meanwhile, Creative Edge investors have accused Mr. Finston of short-selling the stock – that is, making a bet that its price will fall.

Mr. Finston says he has never owned shares in the company, nor has he taken a short position. His interest in the company stems from its habit of issuing boosterish press releases while the CEO sells off huge numbers of shares, he said.

This was especially problematic as the shares began to fall in the second half of this year, Mr. Finston noted. “Bill’s a millionaire, and a lot of investors are under water,” he said.

Yet Mr. Chaaban says he is the victim – that there are people paid to denigrate his stock in public. “We’re legitimate,” he said in Denver. “We’ve found and confirmed there’s paid bashers on our stock and we know who they are and we know who’s paying them. And we’ll come after them. And we’re going to do it.”

When asked by The Globe to identify who is paid to discredit his stock, Mr. Chaaban would not say, but Mr. Finston seem an unlikely culprit. All he receives for what he has written about the company for Seeking Alpha is around $150 an article, depending on the number of clicks it gets.

Others who have criticized Creative Edge have experienced a similar backlash.

When Chris Parry, a columnist at investor website Stockhouse, questioned Mr. Chaaban’s claims, he was met with a barrage of insults from shareholders on social media. “It’s an orchestrated means of discrediting anybody who says anything negative about the company,” Mr. Parry said. “There were certainly points where I just stopped putting Twitter on my screen.”

David Jimenez, a Miami real-estate agent, became interested in marijuana stocks when he heard about the changes happening north of the border. He admits he was taken in by all the talk online – “I just wanted to invest in Canada.”

One company in particular caught his attention because of the grand claims it was making. He also liked how the CEO of CEN Biotech’s parent company would go online and talk to investors through Facebook. “That guy Bill Chaaban, he was on there … and I felt good being part of that group, because I’m thinking, ‘Wow, the CEO is commenting back.’ ”

Mr. Jimenez saw other investors taking huge positions and wanted in. He made a small investment to start, buying 15,000 shares for about $1,300. When the stock started to fall this summer, he began to wonder about the company’s claims.

He tried to bring up his concerns in a CEN Biotech Facebook group, but twice suddenly found his account suspended. Someone had reported him as having sent spam.

“I just wanted to be heard,” he said. “I don’t want to see others lose. If I had my life savings in there, I would be so depressed.”

Meanwhile, as investors vacated slumping marijuana stocks this fall in favour of greener pastures, and Creative Edge shares dropped further in November, someone claiming to be a shareholder posted a recording of a song on the Internet. It mocked critics and implored other shareholders not to lose faith – even as the CEO was selling millions of his shares.

Well, they came and they bought.
And they sold.
Couldn’t even see that what they were holding.
It was gold.
But all the bashers, all the noise, all the puppets and the toys.
All the doubters and Debbie-downers.
Well, the naysayers, bitches, and straight-ass clowners.
They couldn’t hold little CEN that day.
Because little CEN Bio is going to be okay.

The Canadian loophole

Were it not for a convenient loophole in Canadian securities regulations, shareholders would be able to know a lot more about CEN Biotech. And Canadians could more closely examine the company that seeks to dominate the medical marijuana industry.

Last summer, securities administrators across the country discussed a new rule called Multilateral Instrument 51-105, which states that OTC market companies in the U.S. that want to operate in Canada must comply with Canadian reporting rules – which means filing prospectuses, audited financials and other disclosure documents typically expected of a public company.

The goal was to improve disclosure standards for these companies and to discourage abusive “promotional activities,” such as inaccurate or exaggerated claims made to investors.

The new rule, proposed by British Columbia, was accepted by the other provinces – except Ontario, which disagreed that it was needed.

That means a company like Creative Edge doesn’t have to answer to the Ontario Securities Commission.

In an e-mailed statement, the OSC said it investigated last year to see if such problems were an issue but “has not found sufficient evidence of abusive activity being conducted in Ontario.”

Health Canada now finds itself in the position of potentially granting a licence to a company that does not fall under the watch of any financial regulator.

The introduction of 51-105 stemmed from “a desire to step in and be the regulator of last resort, if you will, for companies that weren’t otherwise regulated,” said Rob Lando, a corporate securities lawyer at Osler. “It says, since no one else is regulating you, we will.”

But Ontario’s refusal to sign on creates a “safe haven” for OTC companies, he added. “Maybe the word is out that Ontario is open season because it’s the only province that doesn’t have 51-105. It’s possible.”

‘I see the elusiveness’

Trying to get information from Creative Edge isn’t easy. A visit to the company’s facility in Lakeshore is met with a stern stare from a security guard behind a chain-link fence and barbed wire.

Mr. Chaaban has arranged, then cancelled, five interviews with The Globe and Mail since October. One such cancellation happened as Mr. Swalm, the company spokesman, was trying to get the CEO on the line. The explanation for the last-minute change of plans was that Mr. Chaaban was unexpectedly delayed in court while representing a client. The company refused to elaborate, rescheduling the call and then later cancelling that one, too.

As well, the company has not discussed Mr. Chaaban’s numerous stock sales with its base of shareholders. In a recent conversation, Mr. Swalm acknowledged that it is less than forthcoming with information.

“To be honest with you, I would think that Bill would want to be more transparent as a CEO,” he said.

“I see the elusiveness. We do tell Bill that there should be increased transparency here. But again, he’s the company.”

He admitted that “I don’t like representing a company like this, where they are so evasive. I’m just a soldier.”

With CEN Biotech seeking to become a giant in Canada’s new marijuana sector, there are many troubling questions about the company’s conduct, raising concerns about how much Health Canada has probed beyond simply its application paperwork.

Those troubles have not abated. On Nov. 19, after markets closed, Creative Edge stunned investors by announcing that it was spinning off CEN Biotech as a separate stock.

The reasons for this move are not clear, but it was an abrupt change in strategy, one analyst noted, since it went against the strategy the company had laid out for shareholders all year, and it cast doubt on the value of Creative Edge’s shares.

For that reason, anyone who knew the press release was coming would likely also know that, after months of relentlessly boosterish announcements, this development was bound to have a negative effect on the stock – and it did.

The next day surprised investors sent the shares down 32.6 per cent to less than 2 cents, removing nearly $32-million from the value of the company, which had already eroded in recent months and now was worth just $65-million.

What investors didn’t know is that, a week earlier, Mr. Chaaban had quietly moved to sell 1.7 million more shares, thereby avoiding the steep drop the rest of the shareholders would suffer.

Health Canada, which is now evaluating the company for a federal licence, said it was not aware of the trade.