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Former CannTrust CEO Peter Aceto, centre, leaves Old City Hall with his lawyer, Frank Addario, left, in Toronto, on Dec. 14, 2022.Eduardo Lima/The Globe and Mail

The prosecution of three former high-ranking officials of CannTrust Holdings Inc. has collapsed after a key government witness conceded that the fundamental allegation against the trio – that they permitted unlicensed growing at their company’s cannabis facility – is incorrect.

In court on Wednesday, a lawyer for the Ontario Securities Commission announced that the regulator was withdrawing its case against former CannTrust chief executive officer Peter Aceto, former chairman Eric Paul and Mark Litwin, a former director.

The lawyer, Dihim Emami, said the OSC had reassessed the case and was now “of the view there’s no reasonable prospect of conviction.”

Lawyers for the three men opposed the commission’s move, asking Justice Victor Giourgas, instead, for a verdict and a complete acquittal. But Mr. Emami asked the court for a one-day adjournment so he could review the case law, which the judge granted.

The OSC was prosecuting the case in provincial court, rather than as a regulatory hearing. Cases held before a court allow for larger penalties under the Ontario Securities Act, including possible jail time. The trial, which launched on Oct. 17, followed a joint investigation by the OSC and the RCMP.

Related: Three former CannTrust leaders plead not guilty to securities offences

The trio were charged with fraud and other securities offences, accusations that flowed from the central allegation that, over several months from late 2018 to April, 2019, CannTrust grew cannabis in eight unlicensed rooms at the company’s Niagara-area production facility. Mr. Litwin and Mr. Paul were also accused of insider trading for selling company stock while having alleged knowledge of this unlawful growing. Mr. Litwin and Mr. Aceto were charged with issuing a false prospectus that failed to mention the unlawful growing.

When the scandal erupted after a 2019 Health Canada inspection, it had wide-ranging implications, including a special committee of CannTrust’s board launching an investigation, class action lawsuits, terminations and the company seeking bankruptcy protection.

Wednesday’s abrupt U-turn came after testimony from a former CannTrust manager, who had been in charge of ensuring the company abided by federal regulations.

Graham Lee, a former quality compliance manager at CannTrust, was supposed to be a key witness for the OSC. Under his initial examination by the OSC’s lawyers last week, he testified that it was well known within the company there was “unlicensed” growing taking place in multiple rooms, and that he had relayed his concerns about this to Mr. Aceto.

But when pressed by the lawyers for the defendants, Mr. Lee walked back from some of his previous statements, court transcripts show.

Under questioning by Scott Fenton, a lawyer for Mr. Litwin, Mr. Lee conceded that, although he frequently used the word “unlicensed” to describe the plants in those rooms, that was incorrect. Mr. Lee acknowledged that the whole facility, which is 450,000 square feet, had a proper licence in place, and that the only regulatory piece missing was a ministerial approval for eight rooms the company had started using for production in late 2018 – something he said Health Canada might consider non-compliant, but not illegal.

After reading a 2019 e-mail in which Mr. Lee referred to the company getting a licence for the rooms, Mr. Fenton asked him if he “used the wrong terminology.”

“Yes,” Mr. Lee replied.

“Were you confused regarding the operation of the Cannabis Act and its regulations?” Mr. Fenton asked.

“At times,” Mr. Lee said.

The court also heard evidence that Health Canada twice inspected the Niagara facility during the period when the alleged unlicensed growing was taking place: once on Nov. 15, 2018, and again on Feb. 26, 2019, in response to an odour complaint. In neither instance did Health Canada say anything about the growing that was taking place in those rooms, even though inspectors toured and had access to the entire facility.

Mr. Lee also altered his evidence when pressed by Frank Addario, a lawyer for Mr. Aceto. Mr. Addario zeroed in on previous testimony in which Mr. Lee referred to the CannTrust officials knowing “there was unlicensed growing going on.” Mr. Addario asked him: “But we know now that that was incorrect terminology?”

Mr. Lee replied: “Yes.”

Mr. Addario then asked: “And the facility was in fact licensed?”

“Yes,” replied Mr. Lee.

Mr. Lee used that same imprecise language in several internal CannTrust e-mails, which The Globe and Mail reported on when the scandal erupted in 2019. In a Nov. 16, 2018 e-mail to Mr. Aceto, Mr. Lee made a reference to an inspection by Health Canada the day before, explaining CannTrust “dodged some bullets” and that the inspectors didn’t ask about “unlicensed rooms currently full of plants.”

The outcome of the trial raises a number of questions for Health Canada, which sparked the scandal at CannTrust on June 17, 2019, with a surprise inspection.

Although the regulator previously granted CannTrust approval to grow in those rooms on April 5 of that year, inspectors discovered, during their June visit, that the growing had started before the approvals were granted.

In a Sept. 17 letter, the government informed CannTrust it was suspending its licence, alleging it had engaged in “deceitful practices over the use of the rooms, with knowledge that approval was required.”

About a dozen supporters of the three defendants attended Toronto’s Old City Hall for Wednesday’s hearing. Several of them muffled groans when Justice Giourgas agreed to give the OSC one more day to consider its response to the men’s request for a verdict.

Jeff Kehoe, the OSC’s enforcement director, also appeared at the hearing.

In an e-mailed statement, the OSC declined to comment because, a spokesperson said, the case was still before the court.

The case resumes Thursday morning.

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