Company officials reportedly sold stock after being informed of illegal activities at Fenwick facility
BY VOICE STAFF
Eric Paul, chairman of CannTrust’s board of directors until last week, when he was forced to resign, along with board member Mark Litwin, sold some $6 million dollars in CannTrust stock shortly after being informed that the company was engaged in illegal growing operations at its Fenwick facility—this according to a Globe and Mail story published late Monday.
The newspaper reports that on the same day that Paul was informed of the illegal activities in Fenwick—November 16, 2018—he and Litwin sold nearly $1 million dollars worth of shares.
Over the next 30 days, a further $5 million dollars worth of shares were sold, according to the report, through a holding company controlled by the two men.
Stock trading by company insiders may be considered illegal if it is based on information unknown to the public.
The beleaguered cannabis producer fired CEO Peter Aceto last Thursday, and forced Paul—a company co-founder— to resign.
The moves were made by a “special committee” of the company’s board of directors, formed in the aftermath of the Health Canada compliance meltdown triggered by whistleblower Nick Lalonde, a former employee at CannTrust’s Fenwick facility.
“Implementing the necessary changes is essential to the interests of our medical patients, customers, shareholders and employees,” committee chair Robert Marcovitch said in a media release.
One of the final straws for Aceto appeared to be a video the company placed on YouTube in February, in which the CEO was seen standing in front of an unlicensed growing room at the Balfour Street site. Lalonde, and four other former employees who were not identified, told the Financial Post that the room was “Range 8,” the area that sparked the Health Canada compliance violations in June.
Furthermore, internal emails from last November obtained by the Globe and Mail indicated Aceto was fully aware of the illegal growing.
“We dodged some bullets,” CannTrust director of quality and compliance Graham Lee wrote in an email to Aceto after an earlier Health Canada inspection. “[Health Canada] did not ask about [Range 8], which are unlicensed rooms currently full of plants.”
Another email obtained by BNN Bloomberg cited Aceto telling subordinates to “continue [planting] as planned” in the unlicensed areas, evidently appearing to flaunt federal regulations.
Nick Lalonde told the Voice earlier this month that he was previously ordered to hang temporary walls in Range 8 so CannTrust could mask plants in photographs sent to Health Canada as part of a compliance check. He separately alleged that CannTrust also cut corners in disposal of waste cannabis.
Reached for comment over the weekend, Lalonde said that he was pleased that the company’s CEO and board chair had been given the boot.
“I believe there are still many great employees there for the new company that buys that facility,” said Lalonde. “But they should also get rid of whoever directed the Health Canada submissions process.”
Lalonde named a number of managers he asserted would have “known what was going on.”
“I also find it very interesting how, if a small cigarette shop or beer store would’ve got caught breaking major regulations like these, they would have been fined immediately, licence taken, or thrown in jail... never mind been given the opportunity to hire a special committee [to report on themselves].”
CannTrust’s virtual collapse has fast become the biggest scandal in the Canadian cannabis industry since the government fully legalized the product less than a year ago. The regulatory change spawned numerous licensed grow operations across the country, and it appears early demand outstripping supply may have created a wild west approach among some in the industry.
CannTrust had been in the medical marijuana business prior to legalization, and Aceto took the reins of the company last October —when the unlicensed Fenwick rooms were reportedly activated. Beyond that, Health Canada earlier cited CannTrust 15 times for “major or critical observations” between 2015-18.
Aceto, former CEO of Tangerine Bank before taking over at CannTrust, told the Voice in January that the Fenwick facility was “globally revered,” and at the time promised to address community concerns such as light and odor emissions.
“There’s no doubt there are things we can do to be a better member of [the Pelham] community, and be more involved in the community, and we certainly have plans to do so,” he said.
Pelham Mayor Marvin Junkin was among those watching from the sidelines as the carnage unfolded.
“I find it hard to believe that management would ignore the rules that they did, with so much at stake,” said Junkin. “I realize that you have to keep the shareholders happy, but staying within the rules should have been the number one concern.”
Tim Nohara, Chair of Pelham's newly formed Cannabis Control Committee, says that the developing situation is disturbing.
"The justified national press coverage casts a negative shadow on our Town and by extension its residents," says Nohara, "and tarnishes the good reputation and integrity of local business leaders and workers."
Nohara adds that the situation also highlights the importance of the work of the committee.
"We are developing as quickly as possible new bylaws and regulations to help Council mitigate the adverse impacts we are experiencing from this new industry, which showed up unannounced to residents and imposed itself on our beautiful community."
Pelham Town Councillor and committee member Mike Ciolfi was equally blunt.
“Everyone involved with the decision making of growing cannabis in five additional rooms without a licence should be held accountable,” said Ciolfi. “Health Canada should cancel their licence. This is a new industry and everyone should play by the rules.”
Ciolfi also noted that CannTrust’s financial contribution to Pelham is negligible, contrary to an inaccurate assertion made recently in a Welland Tribune story, in which Cann Trust was cited as an “important source of tax revenue to the Town.”
In fact, the sprawling operation in Fenwick is classified as agricultural, and pays property tax at rates far lower than those of the average business.
“CannTrust is not a major source of revenue for the Town at this time,” confirmed Town Treasurer Teresa Quinlin.
“As for jobs,” said Ciolfi, “approximately 5% of the workers are from Pelham...and for donations to the community, there has been zero dollars donated to groups or organizations in Pelham.”
Where the scandal leaves the future of the Fenwick facility remains anyone’s guess. While some analysts have predicted CannTrust could lose its licence, the company’s special committee appears determined to salvage the operation. Marcovitch — who previously headed U.S. ski and snowboard maker K2 Sports —has been appointed interim CEO after last week’s executive purge. Calls grew among some industry analysts last week for a “white knight”—another cannabis company—to come in and acquire CannTrust’s assets in Pelham, Vaughan, and B.C., presumably including its workforce.
CannTrust stock rebounded slightly on news of Aceto’s dismissal after weeks of precipitous decline, spiking 16 percent in Friday morning trading before closing the week at $3.01 a share—though still down some 80% in value since its high point of $14.87 per share, last October. At least a dozen class action lawsuits are underway, according to financial media reports, seeking shareholder restitution.
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