UPDATE: CannTrust Executives Knew About Unlicensed Rooms

New information shows CannTrust Holdings (NYSE:CTST,TSX:TRST) CEO Peter Aceto told company executives in November 2018 to “continue as planned” with regards to growing cannabis in unlicensed rooms at the company’s facility in Pelham, Ontario.

Documents obtained by BNN Bloomberg show that during weekly production meetings held mid-month via conference call, CannTrust employees — including three high-level executives and Director of Quality and Compliance Graham Lee — were updated on RG9, one of the unlicensed rooms.

The minutes for a meeting later in November show that RG9 was still unlicensed, but after notifying Aceto of the room’s status Lee was told to “continue as planned.”

Adding to the rapidly growing scandal surrounding the Vaughan-based cannabis producer, on Wednesday (July 24), the Financial Post published an article in which former CannTrust employees claim a promotional video for the company featuring Aceto was filmed in front of one of the unlicensed rooms.

The video was originally posted to the company’s YouTube account — where it is no longer listed — and shows Aceto talking with a production manager in front of a room called RG8. The video shows the pair speaking in front of a room filled with cannabis plants seen through plastic walls. The former employees have said that the room was used for cultivating unlicensed cannabis, and that the video was filmed early this year.

This news comes after The Globe and Mail reported on Tuesday (July 23) that executives, including Aceto, knew the company was growing cannabis in unlicensed rooms at Pelham.

Internal company emails show that Aceto and Chairman Eric Paul were notified of the illegal growing operations in November 2018. Paul also advised staff on how to respond to Health Canada after an inspection.

The correspondence shows that Health Canada had completed an inspection, revealing a number of compliance breaches, but had missed the unlicensed growing rooms.

“We dodged some bullets,” Lee wrote, adding that Health Canada “did not ask about RG8E/W, which are unlicensed rooms currently full of plants.”

Paul was forwarded the email and responded, “We need to clearly point out that we have been diligent in submitting the applications for each new area and they have been slow in responding. We are supporting the legislation and we need their cooperation. Politely as always.”

CannTrust has been accused of growing cannabis in five unlicensed rooms between October 2018 and March of this year. The news broke after a former employee contacted Health Canada and told the government agency about the rooms and about being instructed to hang false walls to hide the illegal growing operations.

The ensuing investigation led to a hold on thousands of kilograms of CannTrust cannabis. Ontario and Alberta have also pulled the company’s products from the shelves, and CannTrust’s Danish partner has quarantined all CannTrust stock until the matter has been resolved.

The company announced on Monday (July 22) that it submitted a report to Health Canada about the non-compliance claims on July 17 and is awaiting a response from the regulator. The announcement also indicates that CannTrust has selected a special committee to investigate the company’s non-compliance and make recommendations to CannTrust’s board of directors. 

In an email statement to the Investing News Network, CannTrust Special Committee Chairman Robert Marcovitch wrote that the committee 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.”

CannTrust share prices reached an all-time low on Thursday, opening at C$2.58. The company’s shares have dropped almost 50 percent since July 8, when it announced that Health Canada had given its Pelham facility a non-compliant rating.

In the wake of the news, CannTrust has been downgraded by several analysts on TipRanks. Both Eight Capital analyst Graeme Kreindler and Merrill Lynch analyst Christopher Carey have marked it as a “sell.”

This is an updated version of an article originally published by the Investing News Network on July 24, 2019.

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Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.