Former CannTrust CEO and two former directors accused of fraud

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All could face jail time if convicted in a quasi-criminal case led by the Ontario Securities Commission

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Fraud charges have been brought against the former managing director of CannTrust Holdings Inc., Peter Aceto, and two former directors, all of whom face jail terms of up to five years if convicted in one. large quasi-criminal case conducted by the Ontario Securities Commission. .

Company co-founder and former chairman of the board Eric Paul and former director Mark Litwin are also charged with insider trading following a months-long investigation by the largest market regulator financial institutions of Canada. The OSC responded to a blockbuster revelation in the summer of 2019 that a Health Canada inspection of the publicly traded company discovered an unauthorized cannabis crop in Pelham, Ontario. establishment.

The three men face a total of more than a dozen charges that include allegations of misleading disclosure to investors in a case that will be prosecuted in the Ontario Court of Justice due to its quasi-criminal nature, rather that in OSC court as a civil case. This is the first time that the commission has attacked a public company using its quasi-criminal powers.

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In a statement released on Tuesday outlining the charges, the OSC said the allegations “relate to efforts to cover up the illegal cultivation of cannabis at CannTrust over a 10-month period in 2018 and 2019”.

Meanwhile, the regulator said, the three defendants “failed to disclose to investors that approximately 50% of the total grow space at CannTrust’s facilities in Pelham, Ont., Was unauthorized. by Health Canada ”.

It is further alleged that in press releases, corporate disclosures, analyst calls and prospectuses, the trio “claimed that CannTrust complied with regulatory requirements, and they included all cannabis production in the company’s financial statements, without indicating that half was cultivated without a license. . “

Additionally, Litwin and Aceto signed prospectuses used to raise capital in the United States, which indicated that CannTrust was fully licensed and complied with regulatory requirements, the OSC said.

“Litwin and Paul also traded shares of CannTrust while in possession of the material, undisclosed information regarding unlicensed cultivation,” the statement read.

None of the allegations have been proven.

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CannTrust, which at the time of the blockbuster unlicensed cultivation revelations was one of Canada’s largest cannabis companies, had a market cap of over $ 1 billion at its peak. But as the investigation grew, she put herself under protection from creditors.

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The rapid drop has been a major obstacle in the way of a booming industry following the legalization of recreational marijuana in October 2018.

Aceto, who joined CannTrust as CEO in 2018 after serving as CEO of ING DIRECT Canada – a financial services company now owned by the Bank of Nova Scotia and renamed Tangerine Bank – was fired by CannTrust for cause in July 2019 after the revelations of the unauthorized crops were made public. Paul, the president of the company, was asked to resign at the same time. Litwin, a former director, resigned from the board earlier this year.

The lengthy CannTrust investigation included the RCMP and would have weighed in at one point whether driving – growing a large amount of cannabis without a license – constituted criminal drug offenses such as illegal distribution or sale or, given the unauthorized nature of cultivation, producing cannabis beyond the limits of personal cultivation. These charges, which have not been prosecuted, have reportedly resulted in jail terms of up to 14 years, much longer than the quasi-criminal charges brought by the OSC which are capped at five years less a day.

The insider trading charges against Paul and Litwin are believed to be linked to allegations that they traded millions of dollars in CannTrust shares at a time when they knew there was unlicensed growth in the markets. company premises, information that could materially affect the price of the Stock. Further information on the changes is expected once the accused appears in court, with a first appearance scheduled for July 26 at 11 a.m. in the Ontario Court of Justice.

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Aceto is charged with fraud, making false or misleading representations to the marketplace and the OSC, making a false prospectus and preliminary prospectus, and authorizing, permitting or consenting to the commission of an offense .

Paul is charged with fraud, insider trading, false or misleading reporting to the marketplace and the OSC, authorizing, permitting or acquiescing in the commission of an offense.

Litwin is charged with fraud, insider trading, fabricating false prospectuses and preliminary prospectuses, making false or misleading representations to the marketplace and to the OSC, and authorizing, permitting or acquiescing in the commission of an offense.

The OSC, which has an uneven record of convictions outside of its courtroom, formed a special quasi-criminal enforcement division in 2013 called the Joint Serious Offenses Team. Operating out of OSC headquarters in Toronto, it is made up of members of the RCMP Financial Crime Program, the OPP Anti-Racketeering Branch and the Law Enforcement Team of the OSC. CannTrust’s investigation also involved the RCMP Integrated Market Law Enforcement Team, or IMET.

“This is a good example of how the RCMP IMET and regulatory partners work together to investigate serious breaches in financial markets of regional or national importance that threaten investor confidence or stability.” economic in Canada, ”said Inspector Vance Morgan, RCMP IMET Section Constable in Toronto.

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In 2005, the OSC secured a high-profile quasi-criminal conviction against former RBC Dominion Securities CEO Andrew Rankin in the Ontario Court of Justice on 10 counts of tips. However, that conviction was overturned by another judge the following year, and the OSC ultimately settled the allegations against Rankin in its civil court. The OSC lost another high-profile quasi-criminal insider trading case in 2007 against John Felderhof, the only person to be prosecuted for the Bre-X gold fraud.

Going beyond the regulatory court to prosecute white-collar crimes has proven difficult in Canada, with Crown attorneys securing convictions in a criminal fraud and forgery case against the founders of the Livent theater company. Inc. in 2009, but failed to prove the fraud allegations against the former executives of telecom giant Nortel Networks, resulting in their acquittal in 2013.

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