Aphria hit with further allegations
Local cannabis firm announces review into claims of ‘self-dealing’
A forensic analysis firm that short sells companies continued its attack on beleaguered Leamington cannabis producer Aphria on Thursday, releasing another round of bombshell allegations involving shell games and backroom deals. Aphria released a statement early Thursday, before the new allegations went public, stating it had appointed a “special committee” to review the company’s recent acquisition of its Latin American holdings. Those assets were one of the targets of the first set of allegations from Hindenburg Research, which alleged Aphria is a “black hole” that enriched insiders at the expense of shareholders and wasted hundreds of millions of dollars on worthless acquisitions.
The research firm sent out a second volley Thursday afternoon. “Our examination of Aphria led to another Aphria-backed company, Liberty Health Sciences, where we uncovered multiple irregularities that raise more questions around believed undisclosed insider self-dealing,” Hindenburg alleged Thursday.
Aphria CEO Vic Neufeld and other company executives have been unavailable for comment. Hindenburg claims Liberty acquired a Florida property this year. But rather than just buying the assets, Hindenburg said, they were acquired through a newly-formed entity, netting the shell holders an estimated C$5 million gain in 6 days.”
Hindenburg also claims that holders of that shell included key Aphria, Scythian, and Liberty deal partner/insider Andy DeFrancesco, along with three other people alleged by the Securities and Exchange Commission to have run “multiple pump & dump schemes.” “Yet again, this transaction took place under the oversight of Vic Neufeld as Chairman of Liberty,” Hindenburg writes in its report. The forensic analysis firm alleges that “unnamed individuals bought 242 million shares of Liberty in a highly dilutive $0.001 private placement,” just days after Aphria announced its plan to buy its shares at 208 times the price. “Based on Canadian Securities Exchange records we believe Aphria/Liberty Chairman Vic Neufeld participated in this discount round, along with Andy DeFrancesco,” Hindenburg alleges.
In its statement Thursday morning, Aphria called the first round of allegations from Monday “inaccurate and misleading.” The company did not address any of the specific accusations in its statement. “We are committed to protecting our shareholders and restoring market confidence by confirming all the facts through an independent process to rebut innuendo and deception,” said Vic Neufeld, Aphria’s chief executive officer. “Until then, it is business as usual at Aphria, as we continue taking significant steps to solidify our position as a premier global cannabis company.”
Aphria shares recouped some of their losses Thursday after its board of directors appointed the special committee to review the company’s acquisitions in Colombia, Argentina and Jamaica. Shares rose 51 per cent to close at $7.55 on the Toronto Stock Exchange on Thursday, ending a three-day losing streak. But the company’s stock remains 28 per cent below its $10.51 close from Friday before short-sellers made the accusations. Meanwhile, a Pennsylvania law firm has also launched a class-action lawsuit against Aphria in light of the allegations. Kaskela Law said it filed the suit on behalf of people who bought Aphria’s securities between July 17, 2018 and December 4, 2018. The law firm is looking for investors who suffered losses of more than $250,000.
The class action alleges that the defendants made “materially false and misleading statements during the Class Period.”
The lawsuit also alleges that Aphria failed to tell investors that the Latin American assets it acquired “lacked adequate licenses to operate and were overvalued,” and that acquiring the Latin American assets would “enrich the Company ’s CEO and other insiders at the expense of shareholders.” Kaskela also alleges that “investors purchased Aphria’s securities at artificially inflated prices during the Class Period and suffered investment losses as a result of defendants’ conduct.”
The turmoil follows an initial Monday attack by Gabriel Grego, founder of Quintessential Capital Management. He told delegates at a conference in New York that Aphria had diverted funds into inflated investments held by insiders. In a report in conjunction with Hindenburg, Grego said Aphria, which had a US$2-billion market capitalization last week, is essentially worthless. Both Quintessential and Hindenburg were reportedly short-selling Aphria stock. A short-seller can profit if a security’s price declines. Aphria’s statement Thursday morning announced its board of directors has appointed a “special committee” of independent directors to review the company’s recent acquisition of LATAM Holdings Inc., which closed on Sept. 27, 2018. The committee’s job will also be to “confirm the Company ’s belief that it conformed with all Company policies and generally accepted corporate governance practices,” Aphria said.
“The Company’s Board reiterated its confidence in the process leading to the Acquisition, as well as in its Latin American operations and strategy,” Aphria said. “However, in the face of inaccurate and misleading accusations by certain short-sellers, whose sole interest is in profiting from a decline in the Company’s shares, it is undertaking a comprehensive review, led by a Special Committee of independent directors of these, and any other, allegations in the interest of protecting Aphria shareholders.” The Special Committee is composed of John M. Herhalt, Shlomo Bibas and Tom Looney. Aphria said Herhalt, the lead independent director and chair of the company’s audit committee, will serve as chair of the special committee. “Each of these members is independent and joined the Board following the closing of the Acquisition,” Aphria said. “The Special Committee is authorized to, and expects to, retain independent advisers to assist in its review.” Hindenburg released a blockbuster report earlier this week claiming, among other accusations, that Aprhia’s recent Latin American transactions are worthless.
“We are of the strong opinion that Aphria is part of a scheme orchestrated by a network of insiders to divert funds away from shareholders into their own pockets,” Hindenburg stated this week in its online report. Hindenburg said Aphria’s recent $280-million acquisitions in Latin American “raise major red flags” and are “largely worthless.” Hindenburg claims the official registered office of Aphria’s $145-million Jamaican acquisition “is an abandoned building that was sold off by the bank earlier this year.”
The forensic research firm also alleges that Aphria’s $50-million Argentine acquisition “publicly boasted sales of US $11M in 2017. A worker at the company, however, affirmed that 2017 revenue was only US $430K.” “Documents show that Aphria insiders were likely undisclosed beneficiaries of these deals,” Hindenburg alleges. “We noticed what appear to be systematic attempts to hide the true nature of these transactions.”
None of the allegations have been addressed in the courts.