3 former executives of cannabis producer CannTrust charged with fraud

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CannTrust executives criminal charges, 3 former executives of cannabis producer CannTrust charged with fraud

(This story was updated at 2:30 p.m. ET with more details and comments from CannTrust and attorneys.)

Three former directors of embattled Canadian cannabis producer CannTrust, including its former chief executive officer, have been charged with offenses such as fraud and making false or misleading statements.

The charges are the culmination of a nearly two-year joint investigation by the Ontario Securities Commission (OSC) and Royal Canadian Mounted Police (RCMP) after a whistleblower alerted Canada’s cannabis regulator in July 2019 to five unlicensed cultivation rooms the company had been operating since late 2018.

Peter Aceto, the company’s CEO at the time of the alleged incidents, is charged with:

  • Fraud.
  • Making false or misleading statements to the OSC and to the market.
  • Making a false prospectus and false preliminary prospectus.
  • Authorizing, permitting or acquiescing in the commission of an offense.

Mark Litwin, a director of the company until recently, is charged with:

  • Fraud.
  • Insider trading.
  • Making a false prospectus and false preliminary prospectus.
  • Making false or misleading statements to the OSC and to the market.
  • Authorizing, permitting or acquiescing in the commission of an offense.

Eric Paul, a former CannTrust chair, is charged with:

  • Fraud.
  • Insider trading.
  • Making false or misleading statements to the OSC and to the market.
  • Authorizing, permitting or acquiescing in the commission of an offense.

The charges are “quasi-criminal,” meaning that jail is possible if a defendant is convicted of a violation of the Ontario Securities Act, Kristen Rose, manager of public affairs at the OSC, told MJBizDaily in a statement.

Upon conviction, the court can impose a jail term of not more than five years less a day, a fine of not more than 5 million Canadian dollars ($4 million) for each conviction, or both.

“These allegations relate to efforts to conceal the illegal growing of cannabis at CannTrust over a 10-month period in 2018 and 2019,” the OSC said in a statement announcing the charges.

The OSC said the three men failed to disclose to investors that approximately half the total growing space at CannTrust’s facility in Pelham, Ontario, 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 noted.

In addition, the OSC said Litwin and Aceto “signed off on prospectuses used to raise capital in the United States, which stated that CannTrust was fully licensed and compliant with regulatory requirements.”

Litwin and Paul also traded shares of CannTrust while in possession of the material, undisclosed information regarding the unlicensed growing, the OSC said.

The three accused are scheduled to appear at the Ontario Court of Justice in Toronto on July 26.

CannTrust’s response

In a statement responding to the charges, CannTrust said that “no charges have been laid against CannTrust, any of its subsidiaries or any of the current directors, officers or employees of CannTrust.”

CannTrust said Paul resigned all offices with the company on July 25, 2019, in response to a demand made by the other members of CannTrust’s board of directors.

Aceto was fired “with cause” in July 2019 amid the ongoing scandal. Greg Guyatt was appointed CEO in early 2020.

Litwin resigned from the board earlier this year for undisclosed reasons.

“CannTrust remains focused on resolving its civil litigation claims and fully restoring its operations as a leading Canadian recreational and medical cannabis producer,” the company said in its statement.

The company wants to see the OSC’s cease-trade order revoked and has initiated discussions with the OSC about proposing a plan and timetable for resolving CannTrust’s historical disclosure defaults.

Those talks remain at “a preliminary stage,” the company said.

Lawyers respond

Frank Addario of the Toronto-based Addario Law Group, hired to represent Aceto, said he was “disappointed” his client had been charged.

“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,” Addario wrote in a statement.

“During his short tenure, CannTrust was subject to multiple regulatory inspections and a financial audit without any material issues being raised.

“He cooperated with CannTrust’s internal audit – the special committee investigation – and the OSC investigation.”

Scott Fenton, representing Litwin on behalf of Toronto-based Fenton, Smith Barristers, told MJBizDaily via email that his client “knows that at all times he fully complied with his legal obligations, including those under the Securities Act.”

“He did not commit any offences, nor was he aware of others who may have committed any offences. Mr. Litwin intends to vigorously dispute the charges that have been made against him.”

Gerald Chan, who, along with Paul Le Vay, is representing Paul, said the former chair “is confident that the evidence will show he did nothing wrong.”

“We look forward to vigorously defending him against the charges and answering the allegation,” Chan told MJBizDaily in an emailed statement.

CannTrust dodges fine

Canada’s top cannabis regulator chose not to fine CannTrust despite significant violations of the rules governing the country’s marijuana industry, MJBizDaily previously reported.

Potential penalties for violating the Cannabis Act and its regulations include an administrative monetary penalty of up to CA$1 million.

Instead, CannTrust’s federal licenses were suspended for about nine months starting in September 2019.

No other punishment was handed down by Health Canada.

“Health Canada has reviewed all information submitted by CannTrust Inc. related to its Pelham site since its licenses were suspended, and is satisfied with the actions the company has taken in response to the suspension,” the federal health department told MJBizDaily via email.

Matt Lamers is Marijuana Business Daily’s international editor, based near Toronto. He can be reached at matt.lamers@mjbizdaily.com.