Tough ruling against former cannabis leaders could send message, say experts

Click to play video: 'Feds launch review of Canada’s Cannabis Act'
Feds launch review of Canada’s Cannabis Act
WATCH: Feds launch review of Canada's Cannabis Act – Sep 23, 2022

Industry observers say cannabis companies’ future regulatory compliance is at stake as a case against three former leaders of CannTrust Holdings Inc. begins.

Charges were first laid by the Ontario Securities Commission in June 2021, about three years after CannTrust was found to be growing thousands of kilograms of cannabis in unlicensed rooms.

The case–the OSC’s first court proceeding involving a publicly traded cannabis company–is scheduled to begin at the Ontario court of justice in Toronto on Monday. If it ends with a strong ruling in favour of the financial regulator, many believe the case could deter other pot companies from skirting the law.

“When this whole CannTrust thing came out, it caused a lot of people to pause and stop cutting corners that they were cutting before because they were concerned for what might happen,” said Matt Maurer, a partner at Torkin Manes LLP and co-chair of its cannabis law group.

Story continues below advertisement

“If there aren’t significant consequences (for CannTrust’s former leaders), I could see some companies … saying, ‘Wow, we just shuffle this here and do that there and we’re so much further ahead, what’s really going to happen? Just look at CannTrust.”’

The CannTrust case focuses on Peter Aceto, Eric Paul, and Mark Litwin, the company’s former chief executive, chairman and vice-chairman, who face charges of fraud and of authorizing, permitting or acquiescing in the commission of an offence.

Click to play video: 'Ministers defend delay of cannabis legislation review'
Ministers defend delay of cannabis legislation review

Litwin and Paul are also charged with insider trading and Litwin and Aceto are accused of making a false prospectus and false preliminary prospectus.

Neither the OSC nor lawyers for Paul would not comment on the matter.

Litwin’s lawyer, Scott Fenton, said only that his client “maintains that he acted in compliance with all applicable laws and looks forward to establishing his innocence at trial.”

Story continues below advertisement

Frank Addario, Aceto’s lawyer, pointed out his client was hired because of his financial acumen and track record, and said the company was subject to inspections and financial audits that uncovered no material issues.

READ MORE: Uber, Tokyo Smoke team up to allow Ontario pot purchases through Eats app

“The evidence will show Peter Aceto behaved legally and with integrity during his time at CannTrust,” Addario said in an email.

The securities commission and Royal Canadian Mounted Police say Litwin, Aceto and Paul did not disclose to investors that about 50 per cent of the growing space at CannTrust’s Pelham, Ont. facility was not licensed by Health Canada. They claim the men used corporate disclosures to assert that they were compliant with regulations.

They also allege Litwin and Aceto signed off on prospectuses used to raise money in the U.S., which stated CannTrust was fully licensed and compliant with regulatory requirements, and that Litwin and Paul traded shares of CannTrust while in possession of material, undisclosed information regarding the unlicensed growing.

Aceto was terminated with cause by CannTrust’s board in July 2019, around the same time Paul was ordered to step down. Litwin resigned in March 2021.

Click to play video: 'Health Matters: Study finds cannabis poisonings among children have spiked since edibles became legal'
Health Matters: Study finds cannabis poisonings among children have spiked since edibles became legal

Though the men moved on to other jobs, Maurer feels there’s still pressure on the OSC to prevail in the case because it would send a “strong message” to the industry.

Story continues below advertisement

“If (the allegations) are all true and if there are no consequences, what are we doing?” he said.

“What is the point of all these rules, all these requirements, if what is perhaps one of the most flagrant violations just results in no consequences?”

Aceto, Litwin and Paul already saw some of the claims against them dropped in May, when the OSC withdrew charges linked to making false or misleading statements through press releases.

CannTrust, which was renamed Phoena Holdings Inc. in May, was delisted from the Toronto Stock Exchange and filed for creditor protection after the unlicensed growing rooms were found.

It has since been working to stage a comeback and exited creditor protection in March, after receiving $17 million in financing from a subsidiary of Netherlands -based private equity investment firm Kenzoll B.V.

Jeffrey Zietlow, Phoena’s chief commercial officer, said his company “has no interest” in the matters before the court because it was not charged and the leaders involved have since departed.

While Jaclynn Pehota, an adviser with the Retail Cannabis Council of Canada, agreed with Maurer that the case could be a “litmus test” for how seriously regulations are enforced, she doesn’t expect it to weigh on consumers’ purchasing decisions.

She believes most people wouldn’t realize Phoena is the company behind the Estora, Liiv, Synr.g and Xscape brands or even realize the company was renamed.

Story continues below advertisement

“I don’t think there will be a knock-down effect.”

This report by The Canadian Press was first published Oct. 16, 2022.

Sponsored content