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OSC launches investigation into unlicensed pot growing at CannTrust

VAUGHAN, Ont. – The Ontario Securities Commission and RCMP have opened an investigation into issues around unlicensed growing at CannTrust Inc.’s Ontario greenhouse.

“We can confirm that we have an active Joint Serious Offences Team (JSOT) investigation,” Kristen Rose, the commission’s manager of public affairs said Thursday.

“In order to protect the integrity of our investigation, we will not be providing any further details or comment.”

The JSOT is an enforcement partnership between the OSC, the RCMP Financial Crime program and the Ontario Provincial Police Anti-Rackets Branch.

JSOT combines law enforcement policing skills with the OSC’s expertise in forensic accounting and capital markets to investigate and prosecute serious violations of the law using provisions of the Securities Act (Ontario) and Criminal Code.

The beleaguered cannabis producer said in a late-day release that the investigation has been assigned to the commission’s enforcement branch.

The company disclosed on July 8 that it was facing a probe by Health Canada after the agency found the company had grown cannabis in several rooms at its Pelham, Ont. facility without government approval, and that employees had provided inaccurate information to regulators.

CannTrust’s shares have since fallen more than 50 per cent on the Toronto Stock Exchange and the scandal has led to the ousting of the company’s CEO and the chairman of its board of directors.

The company warned Thursday that it would likely miss its filing deadline for an interim financial report because of the significant uncertainty on the impact of the pending Health Canada decisions.

“Management is of the view that there is significant uncertainty with respect to the potential impact of pending Health Canada decisions on the valuation of the company’s inventory and biological assets and revenue recognition,” the company said in a release.

Health Canada’s probe could result in the suspension or termination of CannTrust’s cannabis licences and fines up to $1 million.

Illegal cultivation is also a criminal activity under the Cannabis Act, for which individuals could face up to 14 years in jail.

The Vaughan, Ont.-based company, which has halted all sales and shipments as Health Canada continues its probe, said Wednesday it had hired a financial adviser to help it explore a potential sale and other strategic alternatives.

Tamy Chen, an analyst with BMO Capital Markets, said it is unclear whether CannTrust’s review of strategic options will result in a sale of the company given the ongoing potential legal liabilities, which also includes several class action lawsuits.

“We believe the Niagara greenhouse would provide value to LPs that are relatively behind on their production ramps,” she said Wednesday in a note to clients.

“The Vaughan facility would provide processing capacity that includes extraction and packaging. However, if Health Canada ultimately revokes the licences at these facilities, the sale of these assets would likely be expedited at a deep discount.”

CannTrust has disclosed that the production in five unlicensed rooms took place between October 2018 and March 2019, before it received licences for those rooms in April 2019.

This is not the company’s first run-in with the securities regulator. A Nov. 23 OSC letter to CannTrust’s then-CFO cited “deficiencies” in its continuous disclosure record, and noted that the cannabis company had agreed to take “remedial steps” to address them. A copy of the letter was viewed by the Canadian Press.

CannTrust was among 21 licensed producers, out of a total 70 cannabis issuers, that were examined by securities regulators as part of an industry-wide review of disclosure issues in the pot sector.

Interim CEO Robert Marcovitch told The Canadian Press he would not comment on what those disclosure deficiencies were or the nature of the remedial steps, but said all matters have been addressed since the review.