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Cannabis CannTrust shares plummet after Globe report that executives were told of unlicensed growing

Shares of CannTrust Holdings Inc. dropped 22 per cent on Wednesday, a day after The Globe and Mail reported both CannTrust’s chairman and chief executive officer were informed about cannabis being grown in parts of a facility that had not been licensed seven months before Health Canada uncovered the regulatory breach.

A quality-control official at the company sent an e-mail to chairman Eric Paul, CEO Peter Aceto and other senior officials on Nov. 16, 2018, outlining various regulatory breaches at CannTrust’s two Ontario facilities, including unlicensed cultivation at its greenhouse in Pelham, Ont.

Six million CannTrust shares changed hands on the Toronto Stock Exchange on Wednesday, with the stock falling 75 cents to $2.68. The value of CannTrust shares has declined 58.5 per cent since July 8, when the Vaughan, Ont.-based cannabis grower acknowledged it had received a non-compliance order from Health Canada for the regulatory breach. Health Canada began investigating in mid-June after receiving a whistle-blower tip from a former employee.

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The company halted all sales of cannabis on July 11 and appointed a special committee made up of independent board members, which is conducting an internal investigation.

CannTrust chairman, CEO were informed in November of unlicensed cannabis growing, e-mails show

“The Independent Special Committee of the board of directors of CannTrust is in the final stages of a thorough investigation of these matters as part of our due diligence requirements. We expect to conclude this investigation within days and will take all appropriate actions immediately thereafter," said Robert Marcovitch, the chair of the special committee, in a statement sent to The Globe on Tuesday.

The revelations that Mr. Aceto and Mr. Paul were informed about the unlicensed growing in November increases the chance of significant action by regulators on both sides of the border, wrote Ryan Tomkins, an analyst with investment bank Jefferies International Ltd., in a research note Wednesday morning.

CannTrust raised US$195.5-million in May in an offering underwritten by a number of large financial institutions, including Bank of America, Citigroup, Jefferies LLC, RBC Capital Markets, Credit Suisse and Canaccord Genuity Corp. Mr. Paul and members of the Litwin family, long-time backers of the company, sold US$30-million of CannTrust stock as part of that offering.

Several law firms have said they are recruiting plaintiffs for class-action lawsuits.

“The issue of [Health Canada] suspending or revoking their licence aside, we see strong likelihood of a fine by Health Canada … the possibility of a delisting from the NYSE, (through breach of terms or simply [if the] market cap falls below minimum value), action from the SEC given a substantial [capital] raise took place while management knew of these activities, and the possibility of international sanctions on the Canadian government for the export of unlicensed product,” Mr. Tomkins wrote.

Health Canada has not indicated how it intends to respond to the regulatory breaches at CannTrust. It has the power to suspend or revoke licences, issue fines and force a company to destroy product that was grown in contravention of federal rules.

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CannTrust produced 12,700 kilograms of cannabis products in its unlicensed rooms, between October, 2018, and March of this year.

“We estimate that over 70 per cent of TRST’s inventory balance is on hold, including substantially all of its finished goods," wrote Eight Capital analyst Graeme Kreindler in a research note published after CannTrust halted sales earlier in July, referring to the company by its stock symbol.

“We believe that Health Canada will likely disallow the sale of any product grown in an unlicensed room, which will effectively reset TRST’s product available for sale."

Matt Maurer, the vice-chairman of Toronto-based Torkin Manes LLP’s Cannabis Law Group, said he’s received a large number of calls from U.S. financial institutions over the past several days inquiring about the situation at CannTrust.

“It seems like these calls are more like, ‘should we be selling and should we be shorting?’ versus, ‘where should we be looking to buy at the low end?’ ” Mr. Maurer said, referring to the practice of short-selling, where investors bet on share price declines.

He said his U.S. clients are primarily trying to understand the range of possible actions Health Canada could take.

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“Best-case scenario is [CannTrust] gets a warning and that’s the end of it. A worst-case scenario is they lose their licence,” Mr. Maurer said. “It’s one thing to jump the gun [and start growing in unlicensed rooms], so to speak. It’s something else, and I’m not saying this is the case, if there was a large-scale attempt to mislead the regulator.”

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