Former CannTrust executives face securities charges after unlicenced cannabis growing

Mature cannabis plants are photographed at the CannTrust Niagara Greenhouse Facility during the grand opening event in Fenwick, Ont., on June 26, 2018. THE CANADIAN PRESS/Tijana Martin

The former chief executive and two past board members of CannTrust Holdings Inc. are facing charges roughly three years after the cannabis company became embroiled in unlicensed growing allegations.

The Ontario Securities Commission and Royal Canadian Mounted Police said Tuesday that former chief executive Peter Aceto, former vice-chairman Mark Litwin, and former chairman Eric Paul each face charges of fraud, making false or misleading statements to the OSC and the market and authorizing, permitting or acquiescing in the commission of an offence.

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

The charges under the Securities Act come after CannTrust's licences were suspended for growing thousands of kilograms of cannabis in unlicensed rooms in 2018 and 2019.

The OSC and RCMP allege the accused 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 and they allegedly used corporate disclosures to assert that they were compliant with regulatory approvals.

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

The allegations have yet to be proven in court.

The court can impose a jail term of up to five years, a fine of up to $5 million or both to any defendant convicted of an Ontario Securities Act violation, the OSC said in an email to The Canadian Press.

Aceto's lawyer Frank Addario said in a statement that he was “disappointed” his client has been charged.

“I look forward, as does Peter and his family, to a public hearing where the evidence will show that he acted with integrity at all times.”

Addario says CannTrust was subject to multiple regulatory inspections and a financial audit during Aceto's time with the company and they resulted in no material issues being raised.

Aceto, who served as the president and chief executive of Tangerine bank, is now the president of the Mortgage Alliance. He was terminated with cause from CannTrust in July 2019.

Litwin, who resigned from CannTrust in March, is listed as president of Forum Financial Corp. on a LinkedIn profile.

His lawyer Scott Fenton said his client intends to “vigorously dispute” the charges.

“Mr. Litwin knows that at all times he fully complied with his legal obligations, including those under the Securities Act,” Fenton said in an email.

“He did not commit any offences, nor was he aware of others who may have committed any offences.”

Paul, who resigned in July 2019 following a demand from other board members, is confident “the evidence will show he did nothing wrong,” his lawyer Gerald Chan said in an email.

The accused are all scheduled to appear in court on July 26.

CannTrust said in a statement Tuesday that no charges have been laid against the company, its subsidiaries or any of its current staff.

“CannTrust remains focused on resolving its civil litigation claims and fully restoring its operations as a leading Canadian recreational and medical cannabis producer,” the statement reads.

CannTrust faced civil litigation in the form of class-action lawsuits from plaintiffs who they lost millions of dollars after CannTrust allegedly made misrepresentations about having necessary licenses for growing.

The company promised in January to create a $50-million trust meant to settle claims from class action lawsuits and in April, received court approval for a $22.5 debtor-in-possession arrangement under the Companies' Creditors Arrangement Act.

It said it has begun discussions with the OSC about a plan and timetable for “curing” CannTrust's historical disclosure defaults and will work with the regulator to revoke the cease-trade order implemented last year.

“Those discussions remain at a preliminary stage, curing CannTrust's historical disclosure defaults will require a considerable amount of management time and expense,” the company said in its statement.

It warned that it has no assurance it will be successful in obtaining an order from the OSC or obtaining a listing for CannTrust's common shares before the end of the year “or at all.”

The charges CannTrust's former leaders face come after the company started staging a comeback in December 2020 with the reintroduction of its two recreational brands, Liiv and Synr.g, to the Canadian market.

As part of the comeback, CannTrust's new chief executive Greg Guyatt said at the time the company would focus first on Ontario, Alberta and British Columbia. Once CannTrust establishes a consistent supply of cannabis in those provinces, he said the company will expand to other markets and introduce new products in 2021.

He also promised CannTrust's full line of medical products will return in the near future and that it will enter the market that has focused on edibles, vapes and topicals.

He said that troubles stemming from the unlicensed growing scandal were behind CannTrust and that the company had spent 18 months on a comprehensive remediation program focused on compliance and simplifying the business.

This report by The Canadian Press was first published June 22, 2021.