Part of cannabis laws and regulations
The Ontario Securities Commission initiated an investigation into CannTrust Holdings Inc., after disclosure the company was growing cannabis without a license.
OSC spokesman Kristen Rose said the joint serious crime team, a partnership between the OSC, the RCMP financial crime program and the anti-racket branch of the provincial police Ontario, is conducting the investigation. "In order to protect the integrity of our investigation, we will not provide further details or comments," he said.
CannTrust is already under investigation by Health Canada for the cultivation of thousands of kilograms of cannabis in unlicensed rooms in its greenhouse in Pelham, Ontario, between the end of 2018 and the beginning of 2019. The company has suspended all sales awaiting the outcome of the investigation.
CannTrust stated that the OSC contacted the legal advisor of the special committee of the company's board of directors on Thursday and informed that "an investigation has been opened on issues and parties related to CannTrust". He offered no further comments on the matter.
CannTrust also stated that it may have to reformulate its historical financial statements and that it "will probably miss" on the August 14 deadline for the second quarter budgets.
The company stated that its management "is of the opinion that there is significant uncertainty regarding the potential impact of pending Health Canada decisions" on the evaluation of the company's inventory, on growing cannabis plants and on revenue who is recording in his financial statements. This, said CannTrust, is because "Health Canada has a wide discretion to exercise a wide range of regulatory powers".
The decisions of outstanding Health Canada "could also require the re-evaluation of some of the Company's historical financial statements and the discussion and analysis of relative management for 2018 and the first quarter of 2019," the company said.
CannTrust stated that on Thursday it established a trading blackout by directors, officers and other insiders of the company that will last until the second quarter reports and any possible financial repercussions have been filed.
A week ago, CannTrust fired its CEO Peter Aceto "for just cause" and forced Eric Paul, president and major shareholder, to resign. Departures came after a story by Globe and Mail showing Mr. Aceto, Mr. Paul and other company executives in a November 2018 e-mail describing regulatory violations, including unlicensed growth, seven months before the federal inspectors discovered the violations.
CannTrust shares fell 55.6 percent from July 8, when the company revealed that it had received a non-compliance order from Health Canada.
The CannTrust board of directors took over the law firm of Bay Street McCarthy Tétrault LLP and appointed a special committee of its board to investigate how the company has grown cannabis in unauthorized facilities and who knew. The committee of the three independent directors of the company is chaired by the retired accountant Mark Dawber.
The company could be subject to sanctions by the securities regulators on both sides of the border after CannTrust and several insiders sold $ 195.5 million in May using a prospectus that included production numbers from illegal and unlicensed areas. CannTrust is listed on the New York Stock Exchange and the Toronto Stock Exchange.
Mr. Paul and Mark Litwin, a board member, sold US $ 34.5 million as part of the US equity offer through Cannamed, an investment vehicle. Cannamed also sold $ 6 million of CannTrust shares starting November 16 last year, the day Mr. Paul responded to an internal e-mail explaining illegal growth, until mid-December .
A spokesman for the US Securities and Exchange Commission declined to comment on Thursday if he was examining CannTrust.
In an interview on Tuesday, interim CEO Robert Marcovitch said: "We have not been in direct contact with the SEC because we are cooperating with the OSC as the principal regulator of the Toronto Stock Exchange."
Marcovitch stated that CannTrust is in "regular contact" with OSC. "We've been very transparent with everything we've done, what we're doing and how we're doing it," he said.
The joint serious crime team is a permanent collaborative group between the OSC and law enforcement officers that allows "collaborative investigations into serious violations of the law using the provisions of the Securities Act or the Penal Code" and the possibility "of criminal charges that will be placed by JSOT members," according to a statement from the June OSC on another matter. At that time, the OSC stated that JSOT pursued 44 issues that involving 62 accused since its foundation in 2013.
Cheryl Reicin, a partner of Torys LLP who works in New York and Toronto, said she believes "the OSC and the SEC will probably have to understand how they are going to work together on this". The Globe interviewed prior to the disclosure of the RCMP-OSC survey company.
"I would say that the OSC probably wants to take a leading role because it is a Canadian company … they were primarily responsible for revising the disclosure," he said. "Once again, the SEC is still a novelty for cannabis, so I suppose they will be very interested because they want to know what happened here and how they make sure it won't happen in the future?"
Law firms in the United States and Canada are seeking plaintiffs for attempts to sue CannTrust on behalf of shareholders. The Pomerantz and Robbins Geller law firm – the two companies with the highest number of class bond transactions in 2018, according to institutional shareholder services – have both announced their interest in CannTrust. In Canada, Strosberg Sasso Sutts LLP stated that it is proposing a class action for non-US holders of shares listed on the CannTrust Toronto Stock Exchange.
CannTrust has hired the Canadian arm of the US investment bank Greenhill & Co. to conduct a "review of strategic alternatives", which could include a potential sale of the company.
"The nature, timing and results of the strategic review process will be influenced, among others, by the resolution of the regulatory compliance issues of the company with Health Canada," CannTrust said in a statement Wednesday.