When Health Canada informed CEN Biotech recently that its application to build the world's largest medical marijuana facility was being formally rejected, one would expect the bad news to send the stock plummeting – and it did. However, some lucky investors were fortunate enough to avoid the drop in price, selling millions of shares shortly before the information was made public.
At around 4:30 p.m. on March 11, after the stock markets closed, Health Canada issued a statement saying that the company had been informed that day that the rejection of the licence bid was final.
But less than an hour before the statement came out, more than 7.9 million shares were unloaded in the span of 15 minutes, in a flurry of late-day trading between 3:30 p.m. and 3:44 p.m.
When the markets reopened Thursday morning, and retail shareholders were able to react to the news for the first time, a mass selloff resulted. More than 20 million shares were traded in the first 11 minutes of trading, pushing the penny stock down nearly 30 per cent from the previous day’s close of 1 cent (U.S.). It closed the day down 14 per cent. CEN’s shares are traded in the loosely-regulated U.S. over-the-counter market.
It’s not clear who did the trading, but the unusual good fortune of the investors who sold shortly before Health Canada’s statement is noteworthy.
CEN Biotech, the subsidiary of Michigan-based Creative Edge Nutrition, sought to become Canada’s biggest producer of medical marijuana under a new federal program launched by Health Canada last year. At its height, the company rose to be worth more than $350-million in 2014 on speculation and false claims by the company that it had been licensed, or was about to be licensed.
However, Health Canada’s licence rejection this month came after concerns emerged over the conduct of CEN and its executives – including multiple different signatures attributed to its chief executive, Bill Chaaban, on documents filed with regulators; revelations that a CEN employee was claiming close ties to Health Minister Rona Ambrose, which the minister then denied; and evidence the company fabricated the identity of an employee on a press release.
It’s possible the large share sales prior to Health Canada’s rejection announcement were coincidental. However, the 7.9 million shares that traded late in the day on March 11 represented 41 per cent of that day’s volume in a matter of minutes, and the spike in activity was noticeable – even considering the upticks in volume that stocks typically see toward the end of a trading day.
Some investors were left wondering what happened. CEN Biotech did not issue a press release until 5:29 p.m. on Thursday, a full day after the rejection was announced by the government. In that press release, CEN Biotech said it has “never-ending affinity for its loyal shareholders.”
Asked why the company waited a full trading day to communicate with shareholders on such a material event, Mr. Chaaban said the company was acting within the rules laid out by the OTC market, which “encourages companies” to make material information available within four business days. The rules state persons with knowledge of such events may not buy or sell the securities before the information is made public.
In an e-mail to The Globe this week, Mr. Chaaban said he did not trade any shares prior to the Health Canada announcement. He said the late-day rise in trading volume was not significant, because trading activity tends to pick up at the end of the day.
“Many trading days exhibit volume that is much heavier in the last half hour before the market close,” Mr. Chaaban said.
Though companies often issue press releases if they see unusual movement in their stock, particularly around a significant event, Mr. Chaaban said trading volumes on March 11 were much lower than the daily average for the preceding month, so there was no need to issue a statement. “Why would the company take action when the volume that day was 40 per cent less than its daily average?” Mr. Chaaban said. “No well-meaning, logical company would see the need to take any action.”Trading volumes on March 11 were about 19.3 million shares, compared to a daily average of 31.6 million for the preceding 30 days.
The company said in its press release following the Health Canada decision that it has sought a judicial review of the licence rejection, and asked shareholders to “trust in our quest for transparency.”
However, the company’s transparency is being called into question surrounding its proposed facility in Lakeshore, Ont. In conversations with The Globe, investors have wondered why – unlike other companies – CEN refuses to show the inside of the building it has constructed, wondering if investors are being misled about bold claims of a “state-of-the-art” operation designed to make CEN the world’s largest producer. Such claims helped push the stock price up significantly last year.
In a statement issued last week, CEN told investors that allowing shareholders to see the inside the building would be a “violation of security” under Health Canada’s rules. However, several publicly traded companies – including Tweed, Aphria, and Organigram – have displayed their facilities through photos or analyst tours in recent months, without running afoul of Health Canada regulations.
The questions some shareholders have about the buildings in Lakeshore are only part of the murkiness surrounding CEN Biotech. In November, its parent company Creative Edge Nutrition announced to shareholders that CEN Biotech was being spun off into a separately traded entity. However, the company provided no information to shareholders as to how they would be compensated for their stock, or when the spinoff would take place – basic information that is usually necessary for investors.
The company told shareholders it could not answer their questions on the spinoff, saying it was in a quiet period mandated by the Securities and Exchange Commission. However, there was no SEC quiet period in place. Though the company has emerged to issue public statements, it has not yet addressed any key questions for shareholders surrounding the spinoff. The company says it is waiting on an audit of its operations, but has given no indication why this audit – announced last year – is taking so long to complete.
In a statement released to shareholders last week, the company also attempted to address one of the most puzzling situations clouding the stock – attempting to explain why CEN was caught inventing a fake persona to speak on behalf of the company following the publication of a Globe investigation in December, which raised concerns about the company’s conduct in the capital markets. The company put out a press release quoting a man named Isak Weber who was said to be “head of internal public relations.” However, after several attempts by The Globe to contact Mr. Weber failed, it was revealed he wasn’t real. Mr. Chaaban later explained Mr. Weber was “a nom de plume” for CEN employee Roger Glasel.
The company said Mr. Glasel adopted the “nom de plume” because CEN executives were receiving threats from angry shareholders upset over the loss of their money. However, even though Mr. Glasel did not want to use his name in a press release, CEN did not say at the time why it was necessary to invent an identity, and why Mr. Chaaban, as CEO, was not the one to address the concerns.
In his e-mail to The Globe this week, Mr. Chaaban said it is “not the norm” for a CEO to speak on behalf of a company, and that CEOs are rarely heard from. “In fact, even business professors and business reporters would have difficulty naming more than five CEOs. They are not prominent and do not speak regularly on behalf of their companies.”