CEN Biotech, a company that soared to be worth hundreds of millions of dollars last year on claims that it was being licensed to build the world's largest medical marijuana facility in Canada, is under investigation by the Ontario Securities Commission.
The regulator said Wednesday it is looking into the company and its parent firm, but did not provide further details, such as how long the investigation has been going on or if regulators in the United States are involved.
"The OSC has an active investigation into this matter," Carolyn Shaw-Rimmington, spokeswoman for the OSC, said in an e-mail to The Globe and Mail.
CEN Biotech is the Canadian subsidiary of Creative Edge Nutrition, a Michigan-based nutritional supplements company that is traded on the loosely regulated over-the-counter market in the United States. CEN Biotech was seeking a licence to grow 600,000 kilograms of medical marijuana in the town of Lakeshore, Ont., under a new federal program run by the Department of Health Canada.
Beginning in late 2013, Creative Edge touted its stock to investors, including many in Canada, with inaccurate claims that it had been licensed, or was on the verge of being licensed, to build a state-of-the-art facility that would produce $5-billion in revenue. The company also claimed it was partnering with Health Canada. Such statements caused the penny stock to rise sharply, at one point soaring more than 2,000 per cent in a matter of weeks. While making these proclamations, CEN chief executive officer Bill Chaaban was selling more than 71 million shares at a significant profit. At its height, the penny stock company was worth more than $350-million (U.S.).
The company's licence application was rejected by Health Canada amid concerns over the conduct of CEN and its executives – including multiple different signatures attributed to Mr. Chaaban on documents filed with regulators; revelations that a CEN employee was claiming close ties to Health Minister Rona Ambrose, which the minister then denied; and evidence the company fabricated the identity of an employee on a press release.
Health Canada issued a statement after markets closed March 11, saying CEN Biotech was told that day its licence had been refused. The company did not issue a press release to shareholders until late the next day. However, an hour before the Health Canada announcement was made public, 7.9 million shares were unloaded in a 15-minute span. It is not known who conducted those trades, and the sell-off could be coincidental, but the shareholders who sold shortly before the government's announcement were able to sidestep a 29-per-cent drop in the shares when trading resumed the next morning.
In a statement to The Globe this week, Mr. Chaaban said he sold no shares prior to the Health Canada announcement and denied any wrongdoing by company insiders.
It is not known when the OSC investigation into the company began. Given that the matter involves an OTC-listed company operating in Canada, it is likely that the OSC is working in conjunction with U.S. regulators since that is typically how the regulator conducts such probes. Ms. Shaw-Rimmington said the OSC could provide no further details.
The conduct of OTC penny stocks in Canada has been a concern for provincial regulators. In 2013, several provinces implemented a new rule called Multilateral Instrument 51-105, which requires OTC-listed companies operating in Canada to comply with Canadian reporting standards. These include filing prospectuses, audited financials and other disclosure documents.
The intent was to improve disclosure for these loosely regulated companies and to discourage abusive "promotional activities," such as inaccurate or exaggerated claims to investors. In recent cases, the introduction of 51-105 has given regulators in B.C. and Alberta the ability to clamp down quickly on OTC stocks believed to be acting improperly.
However, Ontario opted out of implementing 51-105, believing it wasn't needed. While this has created an "Ontario loophole" in the eyes of some securities lawyers, the OSC has said before that it has other methods to police problem OTC companies. This includes working with U.S. regulators on cross-border investigations to probe suspected problems.