CannTrust is a licensed producer of medical cannabis in Canada. A scandal surfaced a few weeks ago and lead to the resignation of the CEO, the CEO and the CFO. The charges are pretty serious and involve fraud, forgery and possession of stolen property.

The former CEO of Canada’s largest medical cannabis producer and two of his former directors have been charged with fraud in an Ontario court, and will appear in court for a bail hearing later this week.

The former CEO of CannTrust Holdings Inc. Peter Aceto and two former directors have been charged with fraud. All of them could face up to five years in prison if convicted in the massive quasi-criminal case being heard by the Ontario Securities Commission.

The company’s co-founder and former chief executive, Eric Paul, and former chief executive, Mark Litwin, are also charged with insider trading following a months-long investigation by Canada’s leading capital markets regulator. The OSC stepped in after it was revealed in the summer of 2019 that a Health Canada inspection of a publicly traded company had uncovered unauthorized cannabis cultivation at its facility in Pelham, Ontario.

The three men face more than a dozen charges in total, including charges of providing misleading information to investors in a case that, because of its quasi-criminal nature, will be heard in the Ontario Court of Justice rather than in OSC court as a civil suit. This is the first time the Commission has taken a listed company to court for disclosure using its quasi-criminal powers.

Quasi-criminal offenses such as fraud and insider trading carry penalties of up to five years minus one day in jail and fines of up to $5 million per conviction.

In a statement released Tuesday detailing the allegations, the OSC said the charges are related to attempts to hide illegal cannabis cultivation at CannTrust for 10 months in 2018 and 2019.

During that period, the regulator said, the three defendants failed to disclose to investors that approximately 50% of the total area of CannTrust’s facility in Pelham, Ontario, was not licensed by Health Canada.

In addition, the regulator alleges that in press releases, company statements, conversations with analysts and prospectuses, the trio claimed that CannTrust complied with regulatory requirements, and included all cannabis production in the company’s financial statements without disclosing that half was grown without a license.

In addition, Litwin and Aceto have signed prospectuses used to raise capital in the United States, indicating that CannTrust is fully licensed and in compliance with regulatory requirements, the OSC said.

Litwin and Paul also traded CannTrust shares with undisclosed material information about the unlicensed crop, the statement said.

None of the charges were proven in court, and the first appearance is scheduled for July 26 at 11 a.m. at the Ontario Court of Justice, Old City Hall Courthouse in Toronto.

CannTrust, which was one of Canada’s largest cannabis companies at the time of the discovery of the unlicensed cultivation – its market value at its peak exceeded $1 billion – has sought protection from its creditors during the investigation.

The sharp decline is a major setback for the industry that has been booming since the legalization of recreational marijuana in October 2018.

Aceto joined CannTrust as CEO in 2018 after serving as CEO of ING DIRECT Canada, a financial services company now owned by Bank of Nova Scotia and renamed Tangerine Bank. He was fired from CannTrust in July 2019 after disclosing an unlicensed crop. Paul, the company’s president, was asked to resign at the same time. Litvin, a former director, stepped down from the council earlier this year.

On Tuesday, Aceto’s attorney, Frank Addario, issued a statement saying he was disappointed that the former director had been indicted.

Like Peter and his family, I look forward to the public hearing where evidence will be presented that he has always acted with integrity, Addario said.

He said CannTrust hired Aceto because of his financial acumen and leadership background, noting that the other members of CannTrust’s executive team have been working in the regulated cannabis industry for more than five years.

CannTrust has undergone numerous regulatory and financial audits in its short existence, which have not revealed any significant problems, Addario said. He cooperated with CannTrust’s internal audit (a Select Committee investigation) and the CSO’s investigation.

Litwin’s lawyer, Scott Fenton, said his client had fully complied with his legal obligations, including those under the securities laws, and that he planned to vigorously contest the allegations.

Eric Paul’s lawyer, Paul Le Way, said his client is confident that the evidence will show that he did nothing wrong, adding that he hopes to be able to defend him vigorously against the allegations and respond to them.

CannTrust’s lengthy investigation involved the RCMP and presumably at some point considered whether the conduct – growing large quantities of cannabis without a licence – involved a drug-related offence, such as illegal distribution or sale, or, given the unlicensed nature of the cultivation, the production of cannabis outside the bounds of personal cultivation. These charges, which have not yet been filed, could result in prison sentences of up to 14 years, far more than the CVP’s quasi-criminal charges, which are limited to five years minus one day.

The insider trading charges against Paul and Litwin stem from the allegation that they traded CannTrust shares for millions of dollars while knowing about an unlicensed cannabis cultivation on the company’s premises, which could have had a significant impact on the stock price. More information on the charges is expected after the defendants appear in court.

Aceto is charged with fraud, making false or misleading statements to the market and OSC, preparing a false prospectus and pre-prospectus, and authorizing, permitting or participating in the commission of a crime.

Paul is charged with fraud, insider trading, making false or misleading statements to the market and OSC, and authorizing, permitting or participating in the commission of a crime.

Litwin is charged with fraud, insider trading, preparing a false prospectus and a false preliminary prospectus, making false or misleading statements to the market and OSC, and authorizing, permitting or participating in the commission of a crime.

In 2013, the CSO, which has recorded few convictions outside its court over the years, created a special quasi-criminal enforcement unit, the Joint Serious Crimes Unit. At the OSC headquarters in Toronto, the RCMP’s Financial Crimes Program, the OPP’s Racketeering Enforcement Unit and the OSC’s Enforcement Team work together. The RCMP’s Integrated Market Enforcement Team (IMET) was also involved in the CannTrust investigation.

This case demonstrates how the OSC’s quasi-criminal justice team, working closely with its law enforcement partners, has evolved to focus on more complex cases involving not only fraudsters and repeat offenders, but also high-profile market participants, said Jeff Kehoe, OSC’s law enforcement director.

He added that the regulator should be able to impose strict penalties, including imprisonment for serious market conduct.

Inspector Vance Morgan, head of the RCMP’s IMET division in Toronto, said this case is a good example of how the RCMP’s IMET division works with its regulatory partners to investigate serious capital markets crimes that are of regional or national significance and threaten investor confidence or economic stability in Canada.

In 2005, the OSC secured a high-profile quasi-criminal conviction by the Ontario Court of Justice of former RBC Dominion Securities board member Andrew Rankin for 10 counts of soliciting. That conviction was overturned by another judge the following year, however, and the CSO eventually settled the charges against Rankin in her civil suit.

In 2007, the OSC lost another high-profile quasi-criminal insider trading case against John Felderhof, the only person prosecuted for Bre-X gold fraud. Felderhof relied in part on the so-called due diligence defense, under which a defendant may seek to show that it has made reasonable efforts to comply with the laws and regulations, even if those efforts have proved inadequate for one reason or another.

Prosecuting white-collar crime has also proven difficult in Canada: in 2009, the founders of Livent Inc. were criminally convicted of fraud and forgery.

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