• Ted Ohashi

Regulatory agencies involved with CannTrust should be alarmed

The media would label CannTrust (TSX: TRST) (NYSE: CTST) as a story with legs. It has staying power. It’s like the Energizer Bunny that “keeps going and going and going.” If a company dominates the news for several weeks, what is happening must be relevant by definition and there has to be a regular flow of new information that impacts people, in this case, shareholders and cannabis investors in general.

First, I have to start at the end. Last Friday, with 15 minutes to go in the trading session, shares of TRST soared to close with a gain of 41% on the day. TRST shares started lower in the morning session as the company had just announced that auditor KPMG is withdrawing its report on the financial statements for 2018 and the March quarter, saying they can no longer be relied on. KPMG was reported to have said they were “…not aware of the information recently shared by the Company when it issued the KPMG Reports and had relied upon representations made by individuals who are no longer at the Company," That would be, I assume, former Board Chair Eric Paul and former CEO Peter Aceto. So a selloff on this news is normal and expected.

What is particularly odd is TRST did not put out a statement to explain what they knew about what was happening in the market. Even weirder is the fact that the Investment Industry Regulatory Organization of Canada (IIROC) did not request that TRST put out a press release to explain the market action of their stock. This was not just any old company that jumped over 40% in the final 15 minutes of the final trading session of the week. To my way of thinking, the following information evidences a deceptive and rules don’t matter to us corporate culture at TRST. Also, in my opinion, removing the top two executives will not clear the air. Here are some of the points I think should be setting off alarms at all the regulatory agencies involved with CannTrust Holdings.

  • Was found growing cannabis in unlicensed rooms.

  • Alleged CRTC hid the rooms from Health Canada inspectors and lied to them.

  • Emails released by the press indicate several people including the Board Chair and CEO knew of the illegal growing by November 16, 2018.

  • Those emails infer that the knowledge of illegal growing was known before this date.

  • Subsequent information suggests management knew of the illegal growing and participated in the activity and the cover up.

  • Subsequent information suggests management participated actively in the illegal activity including giving instructions to employees to perform illegal actions.

  • Health Canada only found out about the illegal activity when contacted by a whistleblower. Health Canada was completely in the dark and only the whistleblower stepped forward from TRST to cast light on the situation.

  • Illegally grown cannabis was apparently harvested, processed, packaged and delivered to provincial dispensaries and some was exported to an overseas buyer.

  • Health Canada suspended 5,200 kilograms of dried cannabis harvested from the illegal rooms.

  • Subsequently, TRST put a hold on another 7,500 kilograms of dried cannabis that was also grown in illegal rooms and halted all sales of all products.

  • It appears Chair Eric Paul and others sold tens of millions of dollars in TRST stock with the insider knowledge that illegal growing was taking place.

  • CEO Peter Aceto’s statement “21 years a trusted banker of the people & 9 years the CEO. Then 9 months later a thief/fraud? Ah, doesn’t make sense. Let the dust settle” was misleading at best and outright lying at worst.

  • Several law suits are underway that could lead to hundreds of millions of dollars in settlements or reimbursements required of TRST.

I could go on but while all this was happening and even before, TRST’s stock was going from a high of $15.50 to a low of $2.45 per share creating hundreds of millions in investment losses for shareholders. After a decline of some 85% in the price of a stock that suddenly rises some 40% in the last 15 minutes of trading on a Friday afternoon prompts no comment or explanation from TRST? IIROC saw no reason to ask for an explanation from TRST? I smell a rat!

Generally speaking in cases like this, a company will issue a boilerplate press release that says management is not aware of any reason to account for the price change/high volume of trading in their shares. Of the many reasons a company may not want to issue such a statement, one is there is a reason for the price change/high volume of trading that the company does not wish to disclose. I am sure we will hear more of this in the days ahead.

Meanwhile, last week Aphria (TSX: APHA) (NYSE: APHA) interim CEO Irwin Simon told Bloomberg, “I think they have some great medical clients and they have some real interesting assets. As somebody that looks for opportunities all the time, it’s something absolutely we would be looking at.” A couple of takeaways. Simon specified “assets.” As we said in an earlier report, TRST is not a company anyone would likely takeover at this point. The reason is there are many potential and, at this time, unknown liabilities that cannot be calculated at this time and if you acquire the company, you acquire the related liabilities. There are also asset risks. Health Canada could force the company to destroy its crops and inventories. This could mean the loss of many tens of millions of dollars. Also Health Canada could ultimately revoke TRST’s licenses. If that happens, the assets become specialized buildings and, perhaps, some land. I know most legal and other experts keep saying they don’t think it will happen but I remind you it happened to Ascent Industries and there are many parallels between the two cases.

Last week I commented on the possible lack of independence of the so-called independent special committee. In their report, BNN Bloomberg called the internal relationships ‘awkward dynamics.’ Awkward dynamics, my foot! In plain language there are serious conflicts of interest that have the potential to bias the upcoming report. For example, Mark Dawber is the chair of TRST’s independent committee. Dawber is a director of Gencan Capital listed on the CSE. Mark Litwin is TRST’s vice-chairman and president of Gencan. Litwin’s father is the chair of Gencan. Litwin’s wife is the niece of Robert Marcovitch, the interim CEO of TRST. I was skeptical of their independence in the first place since a director is a director first and independent second. For this reason I indicated such a committee lacked credibility. This prompted readers to ask if I had an example of a lack of independence. Of course, I don’t. But I have a question. Why was CEO Peter Aceto “fired for cause” and Board Chair Eric Paul allowed to resign even though the independent committee tried to paint a totally different picture by saying they demanded his resignation. As far as I can see, Paul would have jumped at the opportunity to not be fired. Again I do not have access to all the details but from my viewpoint, I don’t see any difference in the seriousness of the transgressions of Aceto compared with Paul.

This is not good news for shareholders as I tried to point out in previous reports. A company trading on the stock market in an exciting and growing industry often trades at a multiple of the value of its assets. I mean at one point, the stock market valued TRST at over CAN $1 billion. So if you’re left with simply realizing on the sale of assets, it is going to be a disappointing result.

Then we had the rumoured offer of an all-stock takeover of TRST by Aleafia (TSX: ALEF) at an exchange rate that would value TRST shares at $4.00 when it was trading well below that level. This reminded me of the all-stock offer made by Green Growth Brands (CSE: GGB) for Aphria (TSX: APHA) (NYSE: APHA) in January 2019 of which I said at the time: “…the market’s assessment of the GGB offer for APHA closing is close to non-existent.” Given all the circumstances, my sense is the chances of Aleafia being successful with TRST are even worse.

The damage being done by CannTrust Holdings is being exacerbated by the inactions of Health Canada and IIROC past and present. Hopefully, all institutions involved in the regulation of this company will step forward and more fully perform their duties in the future.

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