CannTrust execs linked to unlicensed growing caused 'incredible' damage, court hears

A man holds holds a handful of cannabis bud at the CannTrust Niagara Greenhouse Facility, during the grand opening event in Fenwick, Ont., on Tuesday, June 26, 2018. THE CANADIAN PRESS/ Tijana Martin

TORONTO — A lawyer representing Ontario's securities regulator says three former executives whose cannabis company was caught growing pot in unlicensed rooms were in positions to disclose the improper growing but didn't.

Dihim Emami, a lawyer for the Ontario Securities Commission, said in a Toronto court Monday that by not disclosing the unlicensed growing at CannTrust Holdings Inc., Peter Aceto, Eric Paul and Mark Litwin caused “incredible” damage.

The impact on investors alone was “significant, to put it mildly.”

“Ultimately, investors rely on the representations that CannTrust made and unfortunately it was to their detriment,” said Emami, in his opening statements made at the Ontario court of justice's Old City Hall court.

The argument was levelled against Aceto, Paul and Litwin, who have pleaded not guilty to a series of securities offences linked to the unlicensed growing at a Niagara, Ont. region facility, including fraud and authorizing, permitting or acquiescing in the commission of an offence.

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

The charges against Aceto, Paul and Litwin were laid in June 2021, after a months-long investigation conducted by the OSC and the Royal Canadian Mounted Police. The regulator and RCMP found the men allegedly did not disclose to investors that about 50 per cent of the growing space at the facility was not licensed by Health Canada.

They allege the men used corporate disclosures to assert Vaughan, Ont.-based CannTrust was 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 aware of the unlicensed growing.

The three men no longer work for CannTrust, which is now called Phoena Holdings Inc.

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.

Frank Addario, Aceto's lawyer, disagreed with much of Emami's opening statement Monday.

“Mr. Aceto didn't hold anything back that he needed to tell the market,” he argued.

Addario described how his client joined CannTrust as its chief executive officer in 2018, just as cannabis was about to be legalized.

Upon starting in the role, he learned that unlike many “fly by night” cannabis companies, CannTrust had a good relationship with regulators and any compliance issues were routinely resolved and “not fatal.”

“State of the art” security systems ensured the history of every batch of cannabis could be tracked “from seed to product.” Health Canada was given access to facilities, conducting inspections that ended with “favourable compliance reports” on several occasions, Addario added.

He suggested any claims linked to misleading inspectors with photographs and statements are the fault of “low-level” employees, who were in and out of five rooms where unlicensed cannabis was allegedly grown.

He also argued Aceto and his wife's purchase of CannTrust shares just after he became CEO is a “counter indicator” because someone who thought the company was misleading people likely wouldn't invest in the company.

This report by The Canadian Press was first published Nov. 28, 2022.