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Business Commentary Struggle for control at CannTrust drew conflict in to the open, hastening crisis

A pedestrian passes a CannTrust Holdings facility in Fenwick, Ont., on July 24, 2019. The cannabis company's stock has declined precipitously amid a slew of revelations that the producer was not complying with Health Canada regulations.

Tara Walton/The Globe and Mail

Every day brings a new revelation from the corporate horror show that is CannTrust Holdings Inc.

The latest: CannTrust said on Monday that Health Canada has determined a second operation run by the cannabis company, this time a manufacturing facility, was not compliant with regulations. That triggered another dip in the stock’s roller-coaster ride.

On Friday, the company said its auditor, KPMG LLP, had withdrawn its certification of the company’s 2018 financials and declared the audited results can’t be relied upon as accurate.

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And so it has gone since July 8, when CannTrust – once considered as close to blue chip as the industry could offer – disclosed Health Canada had cited it for growing pot plants in unlicensed rooms at its Southern Ontario greenhouse.

On the surface, the sad saga of CannTrust looks to be about a failed attempt to skirt regulations in an effort to meet promises to investors. What the reporting has shown, though, was a struggle for control at the executive and board levels, which led employees to divide themselves into warring camps.

CannTrust shares plunge as pot producer runs afoul of Health Canada for second time

Ultimately, the internal battle pushed conflict out in the open, and that was a factor in a crisis that has prompted the ejection of CannTrust’s two top executives, set off an investigation by securities regulators, led to an effort to sell the company and brought skepticism about the legal cannabis industry’s ability to operate like any other.

Company founder Eric Paul stepped aside as chief executive officer in early October, 2018, to make way for Peter Aceto, the former CEO of Tangerine Bank. Mr. Paul said that, with Mr. Aceto’s “successful track record of strong leadership, deep operational knowledge and focus on delivering shareholder value, he will be the perfect compliment to our leadership team.”

By all accounts, it was not a smooth transition of power. Weeks after Mr. Aceto was hired, president Brad Rogers and Michael Ravensdale, vice-president of quality and production management, left the company in quick succession, according to CannTrust’s management circular. The reasons for their departures have not been made public.

Then, as an internal e-mail showed, within a month and a half of his arrival, Mr. Aceto was told by staff of cannabis being grown in unlicensed rooms at the company’s Niagara-region greenhouse, and that the company had “dodged some bullets” when Health Canada inspectors did not raise onerous questions, The Globe and Mail reported. It was brought to the attention of Mr. Paul, the chairman. The e-mail chain shows he told staff how to respond to any questions from the regulator.

An internal document shows plants had been moved into two unlicensed rooms on Oct. 3, two days after CannTrust announced Mr. Aceto had signed on as CEO. The move was made after lengthy delays by Health Canada processing the company’s applications, according to the document, seen by The Globe. The rooms did not receive certification until last April.

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By the end of 2018, tension between Mr. Aceto and Mr. Paul over who was running the company began to surface, according to another internal e-mail, the contents of which were reported by The Globe last week. “Management often receives conflicting instructions from board members. It is often unclear when and which board members need to be involved in decision-making, and when decisions are made, they are often second-guessed," Mr. Aceto wrote on Dec. 31.

According to current and former employees, some of CannTrusts’s workers took sides as tension increased, some with Mr. Paul and his long-time allies on the board, and some with Mr. Aceto. Those in the former camp complained that the new CEO lacked the industry background necessary to deal with the nuances of delivering cannabis on time while juggling the demands of customers, investors and regulators.

Those siding with the latter lamented that Mr. Aceto was never really handed the reins at CannTrust, and that he was given conflicting information on industry and company standards and practices by the long-time executives and directors – the same ones who had initially sought a CEO who could add credibility to the management team as recreational cannabis legalization approached.

With no clear leadership and the company in crisis, loyalists felt obliged to lay the blame at the other guy’s feet in hopes of a revival.

In the end, neither has escaped scorn. As the walls closed in on CannTrust amid investigations and recriminations, Mr. Aceto was terminated “with cause” by the board’s special committee looking into the imbroglio. It also persuaded Mr. Paul to step down.

Now, as the fate of CannTrust hangs in the balance, it’s clear internal strife only served to help tear the company apart from the inside.

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