CannTrust Holdings Inc. has fired chief executive officer Peter Aceto “with cause” and forced the resignation of chairman Eric Paul amid a deepening scandal over cannabis plants being grown in unlicensed rooms.
The special committee of the board investigating the breaches at the Canadian cannabis grower said the high-profile departures stem from new information, but did not give details.
“The investigation into the company’s non-compliance with Health Canada regulations and ancillary matters uncovered new information that has resulted in a determination by the board to terminate with cause CannTrust CEO Peter Aceto,” the company said in a statement on Thursday.
The move to relieve the top executives of their duties followed a report by The Globe and Mail this week detailing internal e-mails that showed that the pair and other CannTrust officials were made aware of breaches of Health Canada regulations at a Southern Ontario growing facility in November, 2018, seven months before the regulator uncovered the illegal practice.
The price of CannTrust shares has declined 60 per cent since July 8, when the company acknowledged it had received a non-compliance order from Health Canada.
In an interview with The Globe shortly after his resignation was announced, Mr. Paul said he voluntarily complied with the special committee’s demand that he step down.
“I feel terrible about what has happened, and I’m sure the committee will find out exactly the root cause, and I’m sure that will eventually get into the public press, and I don’t want to stand in the way of anything they need to get done,” Mr. Paul said.
When asked whether he knew about unlicensed growing activity at CannTrust, Mr. Paul responded: “That’s not a question I can answer. The investigation is ongoing."
Mr. Aceto could not be reached for comment. The company declined to elaborate on the executive changes.
CannTrust said it has made a voluntary disclosure to Health Canada based on the new information, and will “fully co-operate with the regulator in an open and transparent manner to resolve these matters fully and expeditiously.”
Director Robert Marcovitch will become interim CEO, while board member Mark Dawber replaces him as head of the board committee probing the situation, which has prompted a massive drop in the company’s market value.
Mr. Paul is a founder and major shareholder of CannTrust, one of Canada’s largest marijuana producers. He stepped aside as CEO in October, 2018, to make room for Mr. Aceto, who had been head of Tangerine Bank. Neither has publicly acknowledged knowing about plants being cultivated in unlicensed rooms.
In an interview with The Globe on June 8, Mr. Aceto said: “We constructed these rooms in accordance with all the rules and regulations; the mistake that was made by CannTrust was putting plants in these rooms before we’d actually received the approval to do so.”
Internal CannTrust correspondence seen by The Globe shows that Mr. Aceto, Mr. Paul and several other top executives were informed in November that the company was growing cannabis in unlicensed rooms, storing product in unlicensed parts of the facility and breaching several other Health Canada regulations.
Graham Lee, CannTrust’s director of quality and compliance, sent an e-mail to executives on Nov. 16, 2018, shortly after a Health Canada visit to the company’s greenhouse in Pelham, Ont. The investigation 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.”
Mr. Lee also outlined a number of other “current risks."
“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,” Mr. Lee wrote.
Federal regulators began investigating CannTrust in June, after a tip from a former employee who alleged that he had helped stage photographs in CannTrust’s greenhouse in Pelham, Ont., to hide the fact that plants were growing in unlicensed rooms.
On July 11, CannTrust halted all cannabis sales, pending the outcome of Health Canada’s investigation.
It’s still unclear how federal regulators will respond. Health Canada has the power to suspend and revoke cannabis licences, and to issue fines. It has suspended cannabis licenses at other producers twice before, both of which involved buying from or selling into the black market.
Several financial analysts who cover CannTrust say the company will likely be forced to destroy the 12,700 kilograms of product grown in the unlicensed rooms between October, 2018, and March.
Ryan Tomkins, an analyst with investment bank Jefferies International Ltd., said in a research note on Wednesday that the company could also face significant action by regulators on both sides of the border.
In May, CannTrust raised US$195.5-million an offering underwritten by a large financial institutions including Bank of America, Citigroup, Jefferies LLC, and Credit Suisse. 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.
Several law firms have said they are recruiting plaintiffs for class-action lawsuits.
“The issue of [Health Canada] suspending or revoking their licence aside, we see strong likelihood of a fine by Health Canada … the possibility of a delisting from the NYSE, (through breach of terms or simply [if the] market cap falls below minimum value), action from the SEC given a substantial [capital] raise took place while management knew of these activities, and the possibility of international sanctions on the Canadian government for the export of unlicensed product,” Mr. Tomkins wrote.
The company said it had yet to determine what the impact of the situation will be on financial results.