SEC Charges Cronos Group With Accounting Fraud

Chief Commercial Officers charged with aiding and abetting.

The Securities and Exchange Commission (SEC) charged Cronos Group Inc. (NASDAQ: CRON)  for improperly accounting for millions of dollars of revenue and for other accounting misconduct in multiple reporting periods. The SEC said in a statement that it also charged Cronos’s former Chief Commercial Officer, William Hilson, with fraud and aiding and abetting the company’s violations.

Cronos agreed to pay a total of C$1.34 million to fully settle the matter and acknowledged that it had not complied with certain requirements under the Securities Act (Ontario) in connection with the filing of interim financial reports in the manner set out therein.

Fraud Charges

According to the SEC’s order, in three separate quarters between 2019 and 2021, Cronos submitted financial statements with the SEC that contained material accounting errors related to, among other things, revenue recognition and goodwill impairment. The SEC statement wrote that in one of the quarters, “Hilson entered into an undisclosed oral agreement to sell cannabis raw material and to repurchase cannabis product in the following quarter. This agreement was neither known nor accounted for by Cronos, which discovered the $2.3 million accounting error during an internal investigation. After discovering the accounting errors, Cronos promptly reported the misconduct to the SEC and provided extensive cooperation that meaningfully advanced the Commission’s investigation. It also took effective remedial steps to enhance its internal accounting controls.”

The SEC determined that Cronos violated the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. The SEC’s order against Hilson finds that he violated the antifraud provisions of the federal securities laws and further aided and abetted and caused Cronos’s violations of the reporting, books and records, and internal controls provisions.

Hilson agreed to a three-year officer and director bar and agreed to be suspended from appearing and practicing before the SEC as an accountant for at least three years. The Commission determined not to impose a financial penalty on Hilson in light of his consent to pay C$70,000, or approximately $54,000, to the Ontario Securities Commission for similar conduct.

“It is critically important for issuers to have adequate controls in place before they take on the reporting obligations required of public companies,” said Mark Cave, Associate Director in the SEC’s Enforcement Division. “While today’s order finds that Cronos’s controls were not up to standards when it began filing financial statements with the SEC, Cronos avoided penalties by promptly self-reporting its accounting misconduct as it came to light within the company, cooperating with our investigation, and promptly taking effective remedial steps.”

As a result of the SEC Settlement, Cronos will be unable to rely on the private offering exemptions provided by Regulations A and D under the Securities Act for a period of five years; lose its status as a well-known seasoned issuer for a period of three years; and be unable to rely on the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 for a period of three years.

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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