Final chapter of the Tweed-Mettrum cannabis controversy

One of the first controversial events in the Canadian cannabis industry involved Tweed Marijuana, Inc. and Mettrum Ltd. that were two of the twelve licensed producers at the time. I first reported on the incident on April 11, 2014 and dubbed it Kelowna-gate because it happened out west in the resort town of Kelowna, B.C. Other reports referred to Tweed as Tweedle-dumb because of their apparent involvement. Ironically, Tweed would become Canopy Growth in 2015 and end up acquiring Mettrum in 2017 resulting from a slightly smaller scandal involving the use of unapproved pesticides.

It was a different time. Tweed was the first cannabis company to list on the Toronto Stock Exchange Venture (TSXV) as TWD and commenced trading on April 4, 2014. I know you’re wondering so I’ll tell you. Tweed now Canopy closed at $2.59 per share for a market cap of $90 million that first day.

Just a few days earlier, the Canadian cannabis industry that had been regulated under the Marihuana Medical Access Regulations (MMAR) since 2001 was replaced by the Marihuana for Medical Purposes Regulations (MMPR) on March 31, 2014. The courts would play an active role in formulating cannabis regulations in Canada and issued an injunction that prevented MMAR from ending at the end of March as planned while MMPR came into effect so for a while both sets of regulations were in force.

In the middle of all this activity and legal confusion, on March 31, 2014 to be exact, the RCMP seized a shipment of around 1,000 pounds of cannabis at the Kelowna airport. The companies claimed to have Health Canada’s blessing to make the purchase and Health Canada agreed but not immediately and Tweed said it informed the RCMP of the shipment. The RCMP stated that what they seized was not what was identified on the shipping documents and would refer to it as a “drug bust.”

Here were some of the problems:

1. Tweed and Mettrum were licensed producers under MMPR and were allowed to purchase from other MMPR producers. But the cannabis material was coming from MMAR producers.

2. But not everything was authorized. For example, MMAR companies could sell left over starting materials when the new regulations effectively put them out of business. MMPR companies could not buy dried cannabis or cannabis plants for resale. So what was being shipped was an important aspect of the transaction.

3. MMAR producers were supposed to be growing to supply specific medical marijuana patients. As a result, there should not be any cannabis available to ship. It should have all gone to medical users. Of course, it was widely known that MMAR growers were harvesting excess amounts and selling it illegally to dispensaries that were buying and selling cannabis against the law.

4. If the shipment documents were incorrect, it begged the question – why? Was it an attempt to hide what was really being shipped? But if the companies had permission from Health Canada, why was it necessary to hide anything?

5. Tweed shares were about to start trading when the seizure was made. If there was legal confusion and Canada’s first public company was caught breaking the law, it might scare investors away. This could result in companies being unable to finance their growth plans and thwart the entire medical cannabis industry.

6. At the time, there was a clear sense that Health Canada did not understand securities regulation requirements such as disclosure. It seemed evident that Health Canada was prepared to do anything to avoid a Kelowna-gate scandal. The way it ended at the time was completely unsatisfying.

Clearly the National Post was not happy about it either and just recently secured over 900 pages of internal records from the RCMP after five years of working the access-to-information. Much of what follows is from the National Post’s reporting:

1. There were lengthy deliberations within the RCMP in B.C. and Ottawa to decide what would be reported to the public.

2. Among the “strategic considerations” were the price of Tweed’s stock and embarrassment to Health Canada and bring to light deficiencies in the new regulations. The National Post reports several instances of the RCMP expressing concern regarding the impact of their disclosures on Tweed’s stock price. It remains a controversial question as to whether the potential impact on a public company’s stock price should be a consideration in releasing information.

3. The RCMP notes suggest Tweed and Mettrum told Health Canada they were importing 2,017 and 730 plants, respectively. What the RCMP found was marijuana buds packaged for resale.

4. Tweed issued a statement the day before it started trading on the TSXV that they had acquired seeds and plants from a number of licensed growers. Canopy Growth said recently it believed then and it believes now that they acted legally.

5. The amount of material seized was over 50% more than the 1,000 pounds first reported. It was in 55 hockey bags and 40 boxes. “Several local growers” pooled products to make up the shipment.

6. The RCMP notes indicate what the companies were reporting was “…a long way from what transpired,” it was “factually incorrect,” Tweed’s press release was really intended to disclose a significant event affecting a public company and suggested there had been a Criminal Code section 400 violation related to making a false prospectus. They wondering if the Ontario Securities Commission should be informed. The RCMP added they were never told by the companies regarding the shipment. They acknowledged several calls from the airline asking if the shipment was legitimate. They decided not to release this information because there were no charges being laid.

7. I think these are some very important statements to come out:

• “With some luck the media may dig up the facts and print them without the RCMP having to go public with any details and face the complications that would create,” Sgt. Duncan Pound wrote to a colleague.

• The same officer wrote, “The heart of the problem is that Health Canada has gone on record as saying they authorized the shipment, which has and will continue to cause us grief trying to set the record straight,”

• “Ideally,” Pound continued, “Health Canada should issue a statement saying the shipments contravened regulations and were not what they had authorized. If Health Canada says nothing it looks like two Ministries working against each other, which is a lose/lose for both of us.”

• Jolene Bradley, the RCMP’s director of strategic communications, presented a briefing document to the deputy commissioner for federal policing advising the RCMP should continue to decline comment because releasing the information “…would likely bring criticism on Health Canada’s part as it would highlight the deficiencies in the transition to the new regulations.”

• Finally on April 11, 2014, the RCMP issued a much reduced information release of their own.

Conclusion: all of this is damning information but it totally ignores one party that I believe is at the root of the problem – the securities industry regulators. If, at this early stage, these securities industries regulatory bodies had stepped forward and dealt with it, the problem would have nipped it in the bud. As the industry continued to develop since 2014, there have been several instances when the securities regulators have been asleep at the switch and allowed people who had certainly contravened regulations and, in some cases, broken the law, who have gotten off scot free. In fact, many were allowed to go unpunished while keeping their tainted profits. Over the past five years I have had conversations with some old junior mining stock buddies and concluded that if people in the resource exploration business did what people in the cannabis industry have been doing, they would have ended up in jail.

In my last comment on Kelowna-gate five years ago, I concluded we haven’t heard the last of this incident. Now, I think we have heard the last of it but I still hope some good will result from the experience.