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More reporting from Cannabis Professional

CannTrust Holdings Inc. hid thousands of cannabis plants behind temporary walls in order to stage misleading photographs of an unlicensed growing room that were sent to Health Canada, a former CannTrust employee alleges.

The Vaughan, Ont.-based cannabis producer is under investigation by Health Canada after federal regulators found CannTrust was growing cannabis in five unlicensed rooms in its greenhouse in Pelham, Ont., between October, 2018, and March, the company acknowledged Monday. The announcement sent CannTrust’s NYSE-listed stock plummeting 36 per cent since Monday.

According to Nick Lalonde, who worked for the company from June, 2017, to May, 2019, and served as head of disposal operations at the Pelham greenhouse, CannTrust took explicit steps to hide its unlicensed operations from Health Canada.

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On at least one occasion last fall, employees were asked to stay late to set up fake walls to hide “several thousand” plants from view, in order to take photographs that had been ordered by Health Canada as part of routine licensing requirements, Mr. Lalonde told The Globe and Mail.

On Monday, CannTrust confirmed that Health Canada issued a non-compliance order to the company and put a sales freeze on 5,200 kilograms of product that had been grown in the five unlicensed rooms between October and March; the five rooms were subsequently licensed in April.

The company said it is also voluntarily holding back from sale an additional 7,500 kg of product that was grown in the unlicensed rooms in the same time period.

Health Canada’s continuing investigation has raised questions among analysts about whether federal regulators could take the step of suspending CannTrust’s licence. Twice in the last year, federal regulators have suspended the licences of cannabis companies for illegal activities.

CannTrust acknowledged on Monday that employees had provided “inaccurate information” to regulators.

Mr. Lalonde said the order to stage the misleading photographs came from a greenhouse operations manager; he said he does not know whether or not the order came from higher up the management chain. Mr. Lalonde said he directly participated in staging one misleading photograph last fall.

“We’re hanging these poly walls, these white poly walls ... moving tables with hundreds of plants on them out of the camera view, just to snap a picture of the room with nothing in it,” Mr. Lalonde said.

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“Health Canada requested pictures of the ranges [greenhouse rooms] in order to give the licence and the permit; they wanted to see pictures of the range complete and functioning correctly with no plants in it, because it’s not a licensed room at the time,” Mr. Lalonde said.

On June 14, shortly after quitting CannTrust for a job outside the cannabis industry, Mr. Lalonde sent an e-mail – reviewed this week by The Globe – to Health Canada officials outlining the activity that he alleges took place at the company.

“If you look through the camera footage prior to the dates the pictures were taken and requested you will clearly see us hanging up white poly walls to cover up thousands of plants,” Mr. Lalonde wrote to Health Canada.

Two days later, Health Canada visited CannTrust’s facility, conducted interviews with employees and requested documentation from the company. On July 3, Health Canada issued its non-compliance order.

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“CannTrust has acknowledged the findings of Health Canada’s report, which are focused on two key overarching issues that Health Canada identified and that we are taking very seriously – the first is that we were growing in unlicensed rooms and the second group of observances involve employees who provided inaccurate information to Health Canada inspectors,” the company said in an e-mailed response to questions from The Globe.

"As examples, some of these instances revolved around information that was provided about the unlicensed growing rooms, as well as our documentation practices. We are taking these observances very seriously, and we are working closely with Health Canada and our internal teams to implement new processes and a company-wide retraining program.

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"As CannTrust announced earlier this week, we owe our full response to Health Canada regarding specific details and responsibility. That is the road back to compliance. Until that time we are unable to comment on specific details or the actions of current or former employees,“ the company wrote.

A company spokesperson said CEO Peter Aceto was unavailable for an interview on Wednesday. The company also declined to respond to a question about whether or not Mr. Aceto and other top management knew that plants were growing in the unlicensed rooms.

In an interview with The Globe on Monday, Mr. Aceto declined to say what, if anything, he or other upper management knew about the growing activity in the unlicensed rooms, saying only that CannTrust was “doing a root-cause analysis to figure out exactly who knew what when,” and that one unnamed employee had been terminated.

On the company’s most recent earnings call in May, Mr. Aceto, the former CEO of Tangerine Bank who joined CannTrust in October, touted the company’s significant quarter-over-quarter increase in production.

“Firstly, with respect to increasing production capacity, CannTrust delivered a record of over 9,400 kilograms of production in the first quarter from our perpetual harvest greenhouse. This is a 96-per-cent increase over Q4 2018. This increased production is the result of our investment into people, training and facilities,” Mr. Aceto said on the call.

The fallout from Monday’s announcement about the non-compliance order and the sales freeze has been dramatic, particularly for a company that was widely seen as one of the more sophisticated operators in the industry.

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On Wednesday, the Ontario Cannabis Store (OCS), the province’s wholesaler and online retailer, decided to temporarily stop selling CannTrust products.

“Due to the Health Canada temporary hold on certain CannTrust cannabis products, OCS has voluntarily removed all affected products from distribution pending the outcome of the investigation,” OCS communications director Daffyd Roderick said in a statement.

The Alberta Gaming, Liquor and Cannabis Commission also announced Wednesday that it “is placing the affected [CannTrust] lots on hold while Health Canada conducts its investigation.”

Royal Bank of Canada analyst Douglas Miehm slashed his CannTrust price target from $13 to $5, while Bank of Montreal analyst Tamy Chen cut her target from $11 to $6. Bank of America analyst Christopher Carey downgraded the stock two notches from “buy” to “underperform” and dropped his price target from $9 to $4.50.

While it conducts its investigation – which is expected to end on July 17 – Health Canada is allowing CannTrust to continue production in its two Ontario facilities, including in the five rooms at the heart of non-compliance order. CannTrust has also been allowed to continue selling products that fall outside the temporary sales freeze.

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