CannTrust Prepares To Sell The Company Following Illegal Growing Scandal

Following the disastrous revelation that the company began growing cannabis plants in grow rooms without licenses, CannTrust Holdings Inc. (TSX: TRST)(NYSE: CTST) said that its special committee has retained Greenhill & Co. Canada Ltd. as the Special Committee’s financial advisor, to assist in a review of strategic alternatives. Those options include a sale of the company, a merger or changes to the company’s strategy. The interim CEO has said the talks are happening at only a conversation level at this time.

Unlicensed Grow Rooms

Just a few weeks ago, a Health Canada audit found that the company was growing cannabis in five unlicensed rooms and that inaccurate information was given to the regulator by CannTrust employees. CannTrust said that it accepted Health Canada’s non-compliance finding and took actions to ensure current and future compliance.

The growing in the five unlicensed rooms took place from October 2018 to March 2019 during which time CannTrust had pending applications for these rooms. The company received the licenses for each of the five rooms in April 2019.  There are 12 rooms in total at the facility.

Health Canada placed a hold on inventory which includes approximately 5,200kg of dried cannabis that was harvested in the previously unlicensed rooms in Pelham until it deems that the company is compliant with regulations. In addition, CannTrust said it instituted a voluntary hold of approximately 7,500kg of dried cannabis equivalent at its Vaughan manufacturing facility that was produced in the previously unlicensed rooms.

At this time, the company said it has suspended all sales and shipments. A former employee Nick Lalonde told Bloomberg News that he was “instructed to put up fake walls to obscure unlicensed plants in photos submitted to Health Canada.”

Top Executives Bad Behavior

Internal emails showed that CEO Peter Aceto was aware of the illegal growing and has since resigned. It also looks like he lost approximately C$8.2 million in stock options due to his termination with cause. It also seems that another former CEO and board chair Eric Paul sold stock in the company in November 2018 and had been aware of the illegal growing as well. Mark Litman another director of the company also sold shares during November. Thus, insider trading accusations are flying around as well.

Also back in November, the company’s former CFO noted that there were “deficiencies” in the company’s disclosure record in a letter to the Ontario Securities Commission. He said the company had agreed to take “remedial steps” to address them. Board member and interim CEO Robert Marcovitch said those issues had been addressed but didn’t say what they were. He has also said that the company will “clean house.”

The numerous class-action lawsuits are lining up as securities lawyers see this as chum in the water.

Debra Borchardt

Debra Borchardt is the Co-Founder, and Executive Editor of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Master's degree in Business Journalism from New York University.


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