• Ted Ohashi

CannTrust (TSX: TRST) growing cannabis in unlicensed rooms

Sometimes the only way to respond to news is “UNBELIEVABLE!” That was my response when I read the news regarding CannTrust (TSX: TRST). “UNBELIEVABLE!”

The report was that Health Canada had found that TRST was found growing cannabis in unlicensed rooms at its cannabis grow facility in Pelham, Ontario. But this is not the unbelievable part of the story. It is everything else especially the response of management.

For example, TRST described the issue as “…some of its cannabis-growing practices at its facility in Pelham, Ontario were found to be non-compliant with certain Health Canada regulations.” When you consider that it seems TRST was growing cannabis in five unapproved rooms at a twelve room facility, the statement is the equivalent of saying some of Bonnie and Clyde’s banking practices were non-compliant with certain laws. TRST was involved in the illegal growing of cannabis plain and simple.

This was also not part of some giant but understandable mix-up. The illegal activity continued between October 2018 and March 2019. This was not a mistake that was made by some low level employees that was quickly discovered by management that quickly moved to correct the error. It was discovered during a surprise inspection by Health Canada and the illegal activity only ended because a license was issued by Health Canada covering the rooms in April 2019.

Not only was there illegal growing, some or perhaps all of the cannabis was exported to customers, provincial distributors and exported to Denmark. In effect, TRST grew cannabis illegally and then sold it illegally. As if that weren’t enough, unidentified employees of TRST provided inaccurate information to Health Canada. It begs the question, did they lie to Health Canada. If they did lie, why would they unless they know they were doing something wrong.

TRST Chief Executive Officer Peter Aceto’s statement that “We made errors in judgement, but the lessons we have learned here will serve us well moving forward” was an admission of guilt in my opinion. “Errors in judgement” is a term that does not cover off certain employees making a mistake or management having no knowledge of the illegal activity. In fact, it is troublesome management has not admitted guilt and claims to have no knowledge of how this happened. If that’s true, how can they take steps to fix something they have no knowledge about?

With each passing day, there is more news and it is mostly bad. Now it is said that the illegal growing was happening behind fake wall designed to hide the illegal growing from Health Canada inspectors. Sound familiar? I seem to recall when a whistleblower said Mettrum was using unapproved pesticides and hiding it in a false ceiling in their grow facility.

Aceto also said, “We have made many changes to make this right with Health Canada.” As an investment professional, alarm bells go off when I hear something like this. It might mean there was a period of time when there was a material event at TRST that was not widely disseminated to public investors in a timely manner. Let’s say during the first week of April, TRST management was in long meetings to come up with the many changes to “…make this right with Health Canada.” If I was an investor who bought TRST stock during that time, I would angry, upset and wondering what to do next. If I was an institutional investor, I would be just as angry and upset and talking to lawyers to find out if taking legal action was part of my fiduciary responsibility.

Here’s what I think should happen because I followed Ascent Industries that lost their license over a similar transgression. I reported on them regularly and their shareholders still see their stock halted some six months after the fact. Of course, the problem with laws and regulations is there are shades of grey and humans have to pass judgement on which shade is darker and which shade is lighter. But justice is supposed to be blind. I believe the management of CannTrust should be put through the same process as Ascent. I just find it is almost inconceivable that TRST management did not know and approve of what was happening. Aceto can maintain an aura of innocence. But you really have to practice willing suspension of disbelief to believe that he and other senior managers did not know this was happening. This did not happen over six days. It happened over six months. I believe whatever shade of grey was judged appropriate for Ascent should apply to TRST. No more; no less.

But here’s what concerns me because I’ve seen it happen before. Health Canada and the securities regulators have tended to use velvet gloves with people in the cannabis industry. In cases like this, just allowing senior management or founders to walk away is a powder puff decision as far as I’m concerned. But that’s what happened with Mettrum, Namaste and Aphria to name a few higher profile companies. So the result might be, Health Canada does little and the securities regulators do nothing. Each time that happens, it just paves the way and shortens the time when we hear about the next scandal. If there are little or no consequences to doing something wrong, you can be sure it is more likely that something will happen again. If you can cheat and win and get caught and not lose, it will just keep happening over and over.

Not too long ago, CannTrust Holdings started each news release with the words, “CannTrust…one of Canada’s leading, most trusted licensed producers of cannabis and the 2018 Canadian Cannabis Awards “Top Licensed Producer of the Year….” Even the company’s stock symbol ‘TRST’ is an obvious reference to the word ‘trust.’ In effect, CannTrust has become Can’tTrust. I suspect consumers might be more forgiving than investors but in any event it will take a long time for trust to be earned back completely.

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