CRON accused of purposely not disclosing distribution agreements

Investing in the cannabis sector with many new companies and several stock promotions provides a learning experience. As someone with a background in securities analysis and portfolio management, I am always on the lookout for people who inadvertently and sometimes purposefully contravene securities regulations. I am the first to admit I am not an expert on the intricacies of securities law but as an associate of mine used to say, “I know just enough to be dangerous.”

For example on August 7, 2018 when Elon Musk, Chief Executive Officer of the electric car company Tesla Inc., tweeted that he was: (1) thinking of taking Tesla private by buying back all of its shares at $420 per share and (2) he already had the financing needed to undertake a $70 billion transaction, and, (3) he said shareholders could either sell at $420 per share or hold on and go private as well, the first thought that crossed my mind was “Hey, you can’t say that unless it’s true.” I suspected it wasn’t true because companies usually make announcements by Press Release widely and evenly disseminated using an acceptable news service.

Subsequently, the U.S. Securities Exchange Commission (SEC) started looking into it and private lawyers started coming forward with potential lawsuits against Musk and Tesla on behalf of investors who might have lost money because of it. The price of (NASDAQ: TSLA) jumped up $379.57 by the close for a gain of $37.58 per share. Since then the shares have slumped to under $300 recently. Using kitchen arithmetic, a 10% loss on $70 billion works out to potential claims of $7 billion.

The SEC is in a tough spot. They might like to give Musk a slap on the wrist because he heads up the most valuable American auto company and has a habit of running amok on Twitter. Sort of like another prominent American we can think of. But the SEC can’t ignore the situation. If they do, when Mr. Crooked Stock Promoter next issues a tweet saying he is thinking about taking his company, SCAM Inc., private at 12¢ per share which happens to be four times the 3¢ a share the stock had been trading at they will have an excuse. When the SEC calls, Mr. Promoter can say, “I only did what Elon Musk did and nothing happened to him.”

Of course that brings us to the case of Cronos Group (NASDAQ: CRON) that faces a possible class action suit led by Rosen Law Firm claiming the company issued materially misleading business information to the investing public. The allegation is that on August 30, 2018, Citron Research published a report stating “Cronos management appears to have been deceiving the investing public by purposely not disclosing the size of its distribution agreements with provinces – unlike every other major cannabis player . . . because the agreements are so small they could never justify the premium investors are paying for the stock.”

On August 29, 2018, CRON closed at US $12.74 and was recently at below US $10.00 per share. Again, we admit our lack of expertise in securities law but on the face of it, this seems like a much tougher case for the plaintiffs. It seems to me they have to prove that CRON was the only major cannabis player not to publish the size of their provincial contracts and CRON did not disclose this information because the agreements were so small they would not justify the price of their shares.

But then the case gets even stranger. A report that was purported to be published by GMP Securities and that appears to defend CRON’s position in general terms appeared on Facebook. It seems to say:

1. The root of the matter is the information and action is one of those “hatchet jobs” done by professional short sellers. We have commented on short sellers Grumpy Bear and Black Mamba in the past.

2. CRON was justified in not revealing the size of their contracts because they are not fixed commitments and it would be misleading to report them as such.

3. It was alleged that CRON had no sales in Germany but at this stage of business development that is not important.

4. Also Citron claimed CRON could not find a global liquor partner but CRON has had a record of attracting excellent partners.

The GMP report concluded that CRON is a strong company and the correction has been overdone.

However, what is really strange is the copy of the report we saw taken off Facebook did not include the name of the analyst who wrote the report, it did not have the date it was alleged to have been written and published, and recommends CRON as a buy at C $11.77 per share with a target price of C $10.00 per share.

Quite apart from all of that, we tend to agree with GMP’s general conclusions. From our point of view, Cronos is a sound Canadian cannabis Licensed Producer. I don’t think the legal issues raised by Citron rise to anywhere near the level facing Tesla. CRON shareholders should ignore this threat and carry on.