The CannTrust Holdings, Inc. (NYSE: CTST) (TSX: TRST) scandal just took a sinister turn for worst. According to Canada’s Globe and Mail, internal emails at CannTrust show that chairman Eric Paul and CEO Peter Aceto were made aware of cannabis cultivation taking place in unlicensed rooms at its facility in Southern Ontario. To make matters even worse, the emails allegedly show Mr. Paul counseling staff on how to respond.
The Globe and Mail notes that in an email dated November 16, 2018, CannTrust’s director of quality and compliance, Graham Lee, informed Peter Aceto and additional top executives about a completed Health Canada inspection. The inspection had showed numerous compliance issues, but regulators did not inspect the unlicensed rooms, which were growing cannabis.
“We dodged some bullets,” Mr. Lee wrote. “[Health Canada] did not ask about RG8E/W, which are unlicensed rooms currently full of plants.”
“Although serious, on their own, each of these can be talked through with [Health Canada]. The concern is that together they will paint a picture with the regulator of a company not in control. We have dodged observations for items 1 and 6 despite having HC in the building,” Mr. Lee wrote.
Globe and Mail says Mr. Paul responded by email later that day: “We need to clearly point out that we have been diligent in submitting the applications for each new area and they have been slow in responding. We are supporting the legislation and we need their cooperation. Politely as always.”
Among the other damning email evidence presented: “Mr. Lee outlined a number of risks, referring to room numbers in the facility: “1) RG8 is not licensed but has plants in it; 2) RG9 is not licensed but we are intending to put plants in it on Monday; 3) PA2A-E are not licensed but we have moved the encapsulation equipment into them and will begin running it next week.”
Major Revelation Comes As Health Canada Launches Investigation After Whistleblower Tip
CannTrust’s “house of cards” effectively began to crumble after former employee-turned-whistleblower, Nick Lalonde, sent information to Health Canada on June 14, 2019. The email alleged of the unlicensed cannabis cultivation at the Pelham, Ontario facility between October 2018 and March 2019. Lalonde says he was directly involved with efforts to conceal the unlicensed grow activity through staged photographs, moving plants, and even hanging temporary walls.
By July 8th, CannTrust publicly acknowledged receiving a non-compliance order from Health Canada, which noted the potential of destroying thousands of kilograms worth of cannabis involved in the unlicensed grow and even losing their license. By July 11th, CannTrust halted sales until the Health Canada investigation concluded. The cannabis company also acknowledged that it had made international shipments of the unlicensed cannabis into Denmark and Australia.
Looking Ahead: The Potential End of CannTrust, Damage to Industry Image
Not long ago, CannTrust was considered to be among the top licensed producers operating in Canada. The cannabis company had just completed a U.S. listing on the New York Stock Exchange in May 2019, which was underwritten by Bank of America Corporation (NYSE: BAC), Citigroup, Inc. (NYSE: C), and Jefferies, LLC. The U.S. listing was priced at $5.50 per share and raised $195.5 million.
Unfortunately, those days are long gone and will likely never return for CannTrust. After the surface of these internal emails, there is a very strong likelihood that Health Canada will revoke CannTrust’s licenses. The likelihood of a NYSE delisting also certainly comes into play as well. While CannTrust sinks, the damage is not confined to just shareholders and individuals involved with the cannabis company.
The entire industry will no doubt feel the reverberations from this scandal. Financing has been very strong for cannabis companies over the past few years, but scandals, poor financial results, etc. could help slow the pace of fund allocation into new cannabis startups. With legalization efforts still fragile in other countries around the world, CannTrust’s scandal does not give legalized cannabis markets a good review.
In the end, CEO Peter Aceto and chairman Eric Paul, along with other executives involved, betrayed investors, patients, and the industry. With the email revelations and international shipments of unlicensed cannabis, CannTrust executives could be facing a much worse scenario that could include a criminal probe. However, it is likely the special committee assigned to investigating the scandal could move to remove offending executives in a matter of days.
“The Independent Special Committee of the Board of Directors of CannTrust is in the final stages of a thorough investigation of these matters as part of our due diligence requirements. We expect to conclude this investigation within days and will take all appropriate actions immediately thereafter,” said Robert Marcovitch, CannTrust board member and appointed leader of the special committee.
The CannTrust disaster continues to highlight pitfalls in the high-growth cannabis industry. Bad actors disguising themselves as trustworthy, open, and honest continues to be an issue. This scandal proves that this issue is alive and well. CannTrust shareholders have seen massive losses of -64% over the past quarter and with the NYSE share price currently at $2.62, the losses could continue in the coming days in light of this new bombshell information.
Disclaimer: The author and Spotlight Growth have no positions in any of the stocks mentioned in this article. Nor does either party currently have any relationship, or any other conflicts of interest, with any of the companies mentioned in this article. This content is meant for informational and entertainment purposes only and should not be meant as a recommendation to buy or sell any securities. Please visit a licensed financial representative to determine what investments are right for you.