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OSC says no reasonable prospect of conviction in CannTrust case

Cannabis plants are photographed during the grand opening event for the CannTrust Niagara Greenhouse Facility in Fenwick, Ont., on Tuesday, June 26, 2018. Troubled cannabis company CannTrust Holdings Inc. says the Toronto Stock Exchange is reviewing the company's eligibility for continued listing on the exchange. THE CANADIAN PRESS/ Tijana Martin.

TORONTO — The Ontario Securities Commission says it no longer has a reasonable prospect of convicting three former cannabis company leaders linked to securities offences at CannTrust Holdings Inc.

The regulator’s lawyer Dihim Emami made the admission on Wednesday at Old City Hall in Toronto, where he asked for a leave to withdraw the charges against former CannTrust chief executive Peter Aceto, former chairman Eric Paul and former vice-chairman Mark Litwin.

Lawyers for the three men are instead seeking an acquittal, which would see their clients freed of charges linked to the alleged unlicensed growing of thousands of kilograms of pot at CannTrust’s Pelham, Ont. facility near Niagara in 2019.

“I can’t tell you how much anxiety there is among the defendants about the end of this matter for the reasons that you can imagine,” Frank Addario, Aceto’s lawyer, told Victor Giourgas, the judge presiding over the case.

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Aceto, Paul and Litwin pleaded not guilty in October to several offences related to a failure to disclose unlicensed growing at the facility to investors.

The OSC also claimed the men used corporate disclosures to assert that they were compliant with regulations. They alleged 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.

They were each charged with fraud and authorizing, permitting or acquiescing in the commission of an offence.

Litwin and Paul were also facing insider trading charges, and Litwin and Aceto were charged with making a false prospectus and false preliminary prospectus.

Since hearings in the matter began in the fall, the court has heard from the current chief executive of CannTrust, now called Phoena Holdings Inc., and former staff like Graham Lee, a former director of quality and compliance.

Lee shared that growing in unlicensed rooms was “very openly” discussed at the company, including in front of some of the accused executives.

He also testified that Health Canada visited the facility twice, once in November 2018 and again in February 2019, but never took immediate action on the alleged unlicensed growing.

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At least one of the times was due to odour complaints, but Lee also suspected Nick Lalonde, a former CannTrust employee who he heard was terminated for performance issues, prompted the visit.

In the summer of 2019, Lee said Lalonde messaged him on LinkedIn asking if Health Canada would be OK with some of the company’s practices, including unlicensed growing.

“You may reply if you like or I can ask Health Canada myself,” Lee said Lalonde wrote.

Read more: CannTrust CEO was warned over illicit pot growing: former compliance worker

Lee didn’t respond to the message, but Health Canada eventually showed up.

“What, if anything, did they ask you?” Emami questioned Lee.

“They asked me if plants had been put into the unlicensed rooms, and they had been told other things earlier in the day…and so I clarified for them that, yes, they had been.”

But in cross-examination last week, lawyers turned up evidence suggesting the Niagara facility had some licenses, making it difficult for the OSC to prove its central allegations of unlicensed growing.

During Fenton’s cross-examination of Lee, the lawyer presented the witness with a licence for the facility issued under the Cannabis Act and Health Canada regulations to CannTrust on Nov. 9, 2018.

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The license listed “standard cultivation and standard processing” as authorized activity at the lone building on CannTrust’s property and did not specify any rooms.

Emami said Lee was not shown the license in a pretrial interview the OSC completed with him.

Fenton also presented Lee with an April 5 email he sent others at CannTrust, reading “Please find attached, we are now licensed for all of the remaining outstanding Niagara areas.”

“But you told everybody that you’re now licensed,” said Fenton to Lee.

“Yes,” replied Lee.

“And used the wrong terminology?” said Fenton

“Yes,” Lee admitted.

“Were you confused regarding the operation of the Cannabis Act and its regulations?” Fenton said.

“At times,” said Lee.

The defendants’ lawyers and the OSC refused to comment on the matter beyond what was said in court Wednesday.

Before the case got underway, Fenton told The Canadian Press his client “maintains that he acted in compliance with all applicable laws and looks forward to establishing his innocence at trial.”

Addario 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.

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

The quasi-criminal case was due to stretch until May with dozens of witnesses, but could wrap up this week, should the judge agree to an acquittal or the charges are dropped.

Emami asked the court Wednesday to adjourn the matter until Thursday, so he could review case law Litwin’s lawyer Fenton said would support the case being wound up.

“I am respectfully against dragging this out,” Fenton said.

“The prosecution has determined they can’t prove the case. It is time to end it and it should end today.”

The defendants, along with a dozen family members and friends who consistently appeared at hearings over the last few months, were present as Fenton spoke. OSC enforcement director Jeff Kehoe was also there, along with a coterie of lawyers for the regulator.

The quasi-criminal case is key for the OSC because it is the regulator’s first court proceeding involving a publicly traded cannabis company.

Industry observers felt that if it ended with a strong ruling in favour of the financial regulator, the case could deter other pot companies from skirting the law.

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“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,” said Matt Maurer, a partner at Torkin Manes LLP and co-chair of its cannabis law group, before the case landed in court.

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