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Both the chairman and the chief executive officer of CannTrust Holdings Inc. were informed that the company was growing cannabis in unlicensed rooms about seven months before Health Canada uncovered the regulatory breach, internal e-mails show.

The company communications, seen by The Globe and Mail, show chairman Eric Paul and CEO Peter Aceto were made aware that cannabis was being cultivated in rooms at a growing facility in Southern Ontario that had yet to be licensed by the federal regulator, and that Mr. Paul counselled staff on how to respond.

In an e-mail dated Nov. 16, 2018, Graham Lee, CannTrust’s director of quality and compliance, informed Mr. Aceto and other top executives about a Health Canada inspection that had just been completed. It had revealed several compliance breaches but missed the plants growing in unlicensed rooms.

“We dodged some bullets,” Mr. Lee wrote. “[Health Canada] did not ask about RG8E/W, which are unlicensed rooms currently full of plants.”

The e-mail outlines a number of “current risks," including plants growing in unlicensed rooms, the storage of cannabis in unlicensed rooms and the “large number of lost bottles [of cannabis] we have not reported.”

“Although serious, on their own, each of these can be talked through with [Health Canada]. The concern is that together they will paint a picture with the regulator of a company not in control. We have dodged observations for items 1 and 6 despite having HC in the building,” Mr. Lee wrote.

Along with Mr. Aceto, the e-mail was sent to Ian Abramowitz, a CannTrust executive who was chief financial officer at the time, and Ilana Platt, the company’s vice-president of innovation and regulatory affairs.

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The e-mail was forwarded to Mr. Paul later the same day, who responded, “We need to clearly point out that we have been diligent in submitting the applications for each new area and they have been slow in responding. We are supporting the legislation and we need their cooperation. Politely as always.”

When asked about the e-mails, CannTrust responded with a statement from Robert Marcovitch, a CannTrust board member who is leading a special committee appointed to conduct an international investigation.

“The Independent Special Committee of the Board of Directors of CannTrust is in the final stages of a thorough investigation of these matters as part of our due diligence requirements. We expect to conclude this investigation within days and will take all appropriate actions immediately thereafter," Mr. Marcovitch said.

CannTrust is under investigation by Health Canada, after federal regulators found the Vaughan, Ont.-based cannabis producer grew 12,700 kilograms of cannabis in unlicensed rooms between October, 2018, and March of this year.

The value of CannTrust shares has fallen 47 per cent since July 8, when the company acknowledged that it had received a non-compliance order from Health Canada, raising concerns that CannTrust could lose its licence or be forced to destroy thousands of kilograms of cannabis worth tens of millions of dollars. CannTrust halted all sales on July 11, pending the outcome of the Health Canada investigation.

The special committee responded to Health Canada’s queries on July 17, and is waiting to hear back from federal regulators. Health Canada has not indicated how it intends to respond to the regulatory breaches at CannTrust. It has the power to suspend and revoke cannabis licences, and to issue fines.

Prior to revelations of unlicensed growing, CannTrust was widely regarded as one of the best operators in the cannabis space. Mr. Aceto is the former CEO of Tangerine Bank, and the company has partnerships with major non-cannabis firms, including drug manufacturer Apotex Inc. and alcohol distributor Breakthru Beverage Group. Mr. Aceto became CEO in October, 2018, replacing Mr. Paul, who retained the chairman post.

On Monday, CannTrust said it was ending its exclusive brokerage partnership with Breakthru.

The scandal has cast the cannabis industry in an unfavourable light as it seeks to attract capital and expand operations in the United States, where federal legalization has yet to move forward. U.S. financial-services giants Bank of America, Citigroup and Jefferies LLC were among the underwriters of a US$195.5-million CannTrust share offering in May to international investors, with the stock priced at US$5.50 a share. Mr. Paul and members of the Litwin family, long-time backers of the company, sold US$30-million of CannTrust stock as part of that offering.

Numerous law firms have said they are recruiting plaintiffs for class-action lawsuits.

The November e-mail was sent shortly after a targeted inspection of CannTrust’s Pelham facility by Health Canada, which turned up several regulatory breaches, including poor paperwork, missing personnel and an incorrect protocol for releasing batches of cannabis, according to Mr. Lee’s e-mail.

“The fallout from this inspection will be major observations, and possibly a ‘critical’ one. I am not ruling out a censure letter of some sort. That said, in the past I have had success explaining away these types of observations to HC, and they have dialed down the rhetoric. Practically, this may lead to increased inspections and more scrutiny, but hopefully will have no other immediate material affect,” Mr. Lee wrote.

“That said, if that’s all that happens, we got very lucky here. There are several points of exposure in our business we need to consider. I would not be surprised if HC visits Vaughan in the near future and that could compound HC’s concerns,” he added.

Mr. Lee outlined a number of risks, referring to room numbers in the facility: “1) RG8 is not licenced but has plants in it; 2) RG9 is not licenced but we are intending to put plants in it on Monday; 3) PA2A-E are not licenced but we have moved the encapsulation equipment into them and will begin running it next week.”

Mr. Lee said CannTrust was storing product in unlicensed rooms at both its Pelham and Vaughan facilities.

“We have a large number of lost bottles we have not reported. I suspect due to bad counting rather than diversion [into the black market],” Mr. Lee added. “I will continue working to eliminate our exposure on all these items, but they remain a liability. Please advise of any actions you would like me to take."

Health Canada appears to have begun its investigation into CannTrust’s unlicensed cultivation in mid-June, after receiving a whistle-blower tip from former CannTrust employee Nick Lalonde.

In an e-mail sent to Health Canada on June 14, Mr. Lalonde alleged that last fall he took part in efforts to stage photographs of an unlicensed room in the Pelham greenhouse by hanging temporary walls and moving plants. Health Canada can request photographs of facilities as part of the routine licensing process.

Federal inspectors had conducted three inspections on CannTrust’s Pelham greenhouse since the Cannabis Act came into effect in October, Health Canada spokesperson Tammy Jarbeau wrote in a statement to The Globe on July 12.

You’re invited: Conference call with Greg Taylor on what CannTrust’s regulatory breach means for the cannabis industry

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