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Cannabis Two CannTrust officials sold $6-million of stock after the chair was informed of unlicensed cannabis growing

More cannabis reporting from The Globe and Mail

The former chair of CannTrust Holdings Inc. – along with a company director – sold $6-million of the company’s stock in the weeks after he was informed in writing that the cannabis producer was illegally growing marijuana plants in unlicensed rooms.

Trading records show that a holding company controlled by Eric Paul and director Mark Litwin sold nearly $1-million worth of shares on Nov. 16 last year. That was the same day a CannTrust executive sent, and Mr. Paul replied to, an e-mail that outlined the company’s illicit growing operations.

The holding company, called Cannamed Financial Corp., sold a further $5-million in CannTrust shares over the next 30 days, according to records filed with the Canadian System for Electronic Disclosure for Insiders (SEDI).

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Trading by company executives and board members is not illegal as long as they do not possess confidential information about the corporation that would affect the stock price. SEDI is the means by which Canadian insiders disclose their trades to the public.

CannTrust’s board forced Mr. Paul to resign his chairmanship last week in a growing scandal at the cannabis company. CannTrust has acknowledged that it grew cannabis in large sections of its greenhouse in Pelham, Ont., that had not yet been licensed by federal regulator Health Canada. The unlicensed cultivation took place between October, 2018, and March of this year.

The Globe and Mail reported last week that Mr. Paul, chief executive Peter Aceto and other CannTrust officials were made aware of regulatory breaches at the Southern Ontario facility in an e-mail sent on Nov. 16, 2018, seven months before the regulator uncovered evidence of unlicensed growing. In a reply with a timestamp of 10:38 a.m. that day, Mr. Paul advised staff on how to deal with the regulators. Mr. Litwin was not listed as a recipient of the e-mail seen by The Globe.

According to SEDI records, Cannamed sold 110,000 shares that day for $8.77 apiece for gross proceeds of $964,854. SEDI records show that from Nov. 20 through Dec. 12, Cannamed sold another 620,000 shares for prices $7 to $8.50, grossing $5.06-million.

CannTrust shares traded as high as $15.50 in the pot-stock excitement before Canada legalized cannabis in October, 2018, but were part of the industry’s share-price slump that followed. They’ve fallen from $6.46 the trading day before CannTrust revealed the Health Canada problem on July 8 to close at $2.86 on Monday.

As of May, according to CannTrust securities filings, Cannamed was 57 per cent owned by the Paul Family Trust, which benefits the two children of Mr. Paul. The remainder is held by corporations that CannTrust board member Mark Litwin; his sister Risa; and Litwin’s father, Fred Litwin, own.

Messages left Monday afternoon on the cellphone voicemails of Mr. Paul, Mark Litwin and Fred Litwin were not returned before publication.

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The Litwins and Mr. Paul’s family, who were early backers of CannTrust, have grossed millions on the sale of company stock.

Forum Financial Corp., which is owned by Fred Litwin, held more than 2.8 million shares of CannTrust when it debuted on the Canadian Securities Exchange in August, 2017, but has gradually sold off nearly all of them, grossing just less than $25-million, according to SEDI records. Forum’s most recent trade happened in September, 2018.

In late 2017 and early 2018, the Paul Family Trust sold 500,000 shares worth $4.5-million. SEDI records indicate it still owns 6.3 million shares of CannTrust. Mr. Paul was the company’s CEO from 2014 until October, 2018, when he stepped aside for Mr. Aceto.

SEDI records show three companies owned by Mark and Risa Litwin sold $11.8-million worth of shares from December, 2017, to September, 2018.

A family trust for Norman Paul, Eric’s brother and CannTrust co-founder, sold $7-million worth of stock from October, 2017, to April, 2018.

And Cannamed sold US$34.5-million worth of CannTrust shares in a May, 2019, offering of its recently listed New York Stock Exchange shares. The sale was part of a larger offering led by U.S. and Canadian investment banks in May to raise US$195-million, before fees, for CannTrust.

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In the prospectus that accompanied the May financing, CannTrust referred to a 9,400-kilogram increase in production in the preceding quarter, an increase of 96 per cent. That increase happened at the same time the company was growing thousands of kilograms of cannabis in unlicensed rooms. Several financial analysts say the company will likely be forced to destroy all of the product that was grown illegally.

For the past several years, much of CannTrust’s financial management has been handled by Forum Financial, which has a service agreement with the cannabis grower to provide it with “various managerial, operational and administrative services, including services related to the corporation’s continuous disclosure and reporting requirements,” according to CannTrust filings. In fiscal 2018, CannTrust paid Forum $320,000 in management fees.

Forum also exercised considerable control over CannTrust’s board. According to filings from 2017, Forum had the right to appoint a majority of directors to Cannamed’s board. Cannamed, in turn, had a monopoly on CannTrust board appointments for a year after CannTrust went public in the summer of 2017 through a voting trust with key shareholders.

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