Andrea Mandel-Campbell is senior vice-present, Capital Markets, NATIONAL Public Relations, and author of Why Mexicans Don’t Drink Molson
At first glance, CannTrust’s transgressions didn’t seem that egregious, at least compared with some of the other transgressions committed by the nascent cannabis sector. There were a couple of fake walls put up in anticipation of soon-to-be licensed growing rooms. It wasn’t illegal pesticides, illicit product or allegations of pumped up multimillion-dollar acquisitions to benefit insiders.
Clearly, the company didn’t think the issue was that serious either. In one of the more boneheaded reactions to a crisis I have seen, former chairman and co-founder Eric Paul decided to blame the regulator for freezing sales on CannTrust inventory and launching an investigation. As Mr. Paul said on July 9: "I think Health Canada has to look at themselves in the mirror and say, ‘Okay, did these guys do it out of desperation or just sheer stupidity.’ ”
The company, I would wager, is ruing that remark. Health Canada appears to have taken a long, hard look and concluded that stupid or desperate people should, in fact, not have a licence to produce and sell cannabis.
To no one’s surprise, CannTrust’s license was suspended Tuesday. But things could still get a whole lot worse for the company that was once considered “the closest thing to blue chip” among cannabis LPs, with a coveted NYSE listing, institutional investors and a market cap at its peak of $2.2-billion.
In addition to a joint probe of the company by the Ontario Securities Commission, the RCMP and the OPP, and multiple class-action lawsuits, Health Canada may still opt to revoke CannTrust’s licence altogether.
We are in the middle of a federal election after all, and whoever wins – Liberal or Conservative – may very well feel the need to knuckle down on an industry that is increasingly being seen as playing fast and loose with the rules.
They certainly have plenty of ammunition.
Over the summer, a series of bombshells revealed that not only did Mr. Paul and his CEO know about the unlicensed inventory for at least eight months, but they allegedly used the pumped-up illegal inventory to raise $200-million in a public offering led by top-tier banks including Bank of America Merrill Lynch and RBC Capital Markets. Then, earlier this month, reports surfaced that CannTrust had been using illicit seeds to bulk up its production.
If CannTrust has any chance of salvaging any value – either by selling what’s left of the business, or attempting to restart it – it needs to get its licence reinstated. Otherwise, it might as well head straight for creditor protection.
It needs to demonstrate to politicians and regulators in very short order why it is worthy of a reprieve. Filing a remediation plan with Health Canada and acknowledging that “mistakes were made” simply won’t cut it. Rather, a dramatic change of approach is required that demonstrates a real commitment to compliance and best-in-class governance, and a willingness to clean house.
It needs a chief compliance officer and board members with compliance bona fides. And based on the performance of its interim CEO and former board director, Robert Marcovitch, CannTrust needs a new CEO as well – one that doesn’t need to “go online” to check out how to set up a special committee of the board, as he told BNN Bloomberg in a July 30 interview.
The company may want to think about some more radical moves, such as voluntarily de-listing from the NYSE to reduce the additional reporting costs and the reputational risk of being de-listed. But most importantly, it needs to go beyond the sterile, legally approved key messages acknowledging its mistakes, and genuinely apologize to the 72,000 medical patients whose trust CannTrust has betrayed.
It’s not often that an entirely new industry is created virtually overnight. Mistakes will be made, but how we manage them is critical to the longevity and success of this industry – and Canada’s reputation as an emerging growth area – over the long term. The challenges of managing the inevitable friction between government regulation and profitability are real, but at the end of the day, there simply are no shortcuts.