OSC alleges three executives committed fraud in Canadian Cannabis case

The Ontario Securities Commission alleges that three men, including the former CEO of publicly traded cannabis seller Wayland Group Corp., committed fraud at a separate pot company.

In the regulator’s first fraud case in the cannabis industry, the OSC alleges that Benjamin Ward, Peter Strang and Silvio Serrano were responsible for misleading statements while raising millions of dollars from Canadian and U.S. investors for a company called Canadian Cannabis Corp. Some of that money was inappropriately diverted to Mr. Strang, Mr. Serrano and others associated with Mr. Serrano, the OSC says.

Mr. Ward was chief executive and director of Canadian Cannabis. He later served as CEO of Wayland Group. Both Mr. Strang and Mr. Serrano were vice-presidents and “either directors or de facto directors” of Canadian Cannabis, according to the OSC.

The allegations do not involve Wayland, formerly Maricann Group Inc., which Mr. Ward joined in 2016 as CEO. He left Wayland in August of this year.

The OSC declined to comment beyond its statement of allegations Friday. The Globe and Mail was unable to reach Mr. Ward, Mr. Serrano and Mr. Strang for comment.

“No one from Wayland will be commenting on this,” said Wayland CEO Matthew McLeod in an e-mail.

The OSC alleges that there were “numerous untrue statements” in an initial investor briefing prepared before Canadian Cannabis was incorporated, including that horticultural lighting company Growlite Canada was a “core business” in which Canadian Cannabis held a 45-per-cent stake. The OSC also says the briefing claimed Mr. Ward held a doctorate degree. “This was false,” the OSC says.

Mr. Ward, Mr. Strang and Mr. Serrano are responsible for the misleading statements, the OSC says.

Over more than 2 1/2 years, the men raised $3.2-million in Canada and US$8.8-million in the United States for Canadian Cannabis.

The company used $4-million of the investor money on Growlite Canada, with $1-million used to purchase a stake in Growlite Canada and $3-million for a loan, the OSC says. Mr. Serrano owned Growlite Canada, the OSC said.

The OSC alleges that approximately $2.73-million, plus US$224,000, “was directed away from the business of Growlite [Canada] and to the benefit of Serrano and Strang, their families or companies controlled by them.” The OSC alleges that $860,000 went to Mr. Strang while the remainder went to Mr. Serrano, one of his brothers, his father, his cousin and to a criminal defence lawyer who represented his father.

Mr. Serrano’s father is Diego Serrano, whose drug-related convictions include the trafficking of cocaine in the 1980s and, more recently, heading up a ring that imported and trafficked in ecstasy, the popular club drug.

The OSC says no interest payments were made on the loan from Canadian Cannabis to Growlite Canada, and the three men “made no attempt” to recover the balance, which was written off as uncollectible in April, 2016. “Ward, Strang and Serrano used the loan to defraud investors,” the OSC alleges.

Additionally, the OSC says, in 2015, about $800,000 worth of Growlite lights stored at a Canadian Cannabis facility “disappeared under suspicious circumstances.” The three men “failed to report the matter to police, nor did they file an insurance claim or take any steps to recover the value of the inventory.” This “deprived [the company] of one of its only remaining assets,” the OSC says.

The OSC investigation into Mr. Ward caused problems at Wayland in early 2018, when it emerged that he was under investigation by securities regulators, but had not disclosed this to Wayland’s investors.

At the time, Wayland was trying to raise $70-million in a bought deal underwritten by a group of investment banks. The underwriters cancelled the deal after information about the OSC investigation into Mr. Ward, alongside insider-trading allegations against two Wayland directors, emerged.

The OSC subsequently dropped its investigation into the allegations of insider trading by the Wayland directors.

The OSC is seeking to ban Mr. Ward, Mr. Strang and Mr. Serrano from trading securities or becoming officers or directors of publicly traded companies. The Commission is also asking for administrative penalties of “no more than $1-million each” and that the three men return “any amounts obtained as a result of noncompliance with Ontario securities law.”

An enforcement proceeding is scheduled for Sept. 30 in Toronto.