Canntrust Holdings Class Action Suit Highlights Intentional Use of Black Market Seed

CannTrust Holdings Inc (NYSE:CTST) (TSX:TRST) (FRA:C9S) became the defendant in a class action lawsuit filed with the Ontario Court of Justice by a consortium of law firms on behalf of shareholders and investors who bought shares on the Toronto Stock Exchange from October 2018 to September 2019, or through the company’s prospectus offering in May 2019.

The suit is sweeping in scope as it includes the company’s auditors, KPMG, as well as the investment banks who were instrumental in bringing investors into the company’s prospectus offering. Those include Merrill Lynch, Citigroup Global Markets, Credit Suisse, RBC Dominion Securities, Jefferies LLC, and Canaccord Genuity among others.

The class action lawsuit, now being conducted by law firms Henein Hutchison LLP, Kalloghlian Professional Corporation, A. Dimitri Lascaris Law Professional Corporation and Strosberg Sasso Sutts, LLP, is filed under Ontario Court of Justice File #CV-19-00629743-00CP.

The statement of claim seeks as yet unspecified damages, but the prospectus offering alone raised $230 million.

The full scope and scale of the subterfuge and illegal activity at CannTrust’s operations¬† dating from June 1st 2018 sound more akin to the operations of a black market grow-op, rather than a licensed producer. The company hid cannabis grown in unlicensed rooms behind false walls built for that purpose, and sourced cannabis seeds from the black market. The team overseeing the growth of plants from the black market seeds changed the tags on the plants to names of strains that the company did acquire through the legal system.

Midas Letter Films shot this video at CannTrust’s Niagara grow facility in Pelham, ON in 2018.

According to the complaint, “Unbeknownst to investors, on or around June 1, 2018, CannTrust began storing cannabis in rooms in its Vaughan Facility without the required approval from Health Canada. Then, starting on or around October 1, 2018, CannTrust, with the knowledge and approval of executive management, began producing and selling cannabis made in rooms that did not have the required licenses. CannTrust employees intentionally deceived Health Canada inspectors, including by installing fake walls to hide the cannabis being grown in the unlicensed rooms.”

The claim further alleges that a designated team led by former VP of cultivation Brady Green were tasked with not just growing the plants from black market seeds to maturity, but with ensuring at every step of the way inspectors from Health Canada were prevented from finding out that the plants were from black market seeds.

Most damningly, the suit quotes an article from Bloomberg that says, (quoting from minutes recorded at a meeting of the Board of Directors, that CEO Peter Aceto okayed the establishment of cultivation in the unlicensed rooms despite being fully aware that the rooms were not licensed.

Between October 2018 and March 2019, CannTrust was growing and distributing cannabis that was grown in five rooms in the Niagara Facility that were not licensed and/or compliant with regulations.

As far as what this means for the future of CannTrust’s licensed facilities in Vaughn and Pelham, Ontario, it seems dubious that either of those facilities will be producing cannabis anytime soon.

The long and arduous path of a class action lawsuit can take years, and non-operating agricultural assets depreciate significantly when not properly maintained.

It is unlikely the sale of assets will yield even a fraction of damages sought if the plaintiffs are successful, and it is the directors, current and former, as well as the underwriters of the financing, who will be the likely targets of any collection efforts.

Former CannTrust employee Nick Lalonde was the whistleblower who brought all of these allegations to light.

Stay tuned for more Tales of Woe from the cannabis industry in 2020. Stories like Canntrust’s and Green Relief’s are just the tip of the iceberg.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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