Aphria chair’s former firm settles with SEC
‘Material weaknesses in its internal controls’
An organic and natural products company founded by Irwin D. Simon, the new independent chair of the board of directors of cannabis producer settled SEC charges related to its internal controls just weeks before Simon started his job with the Canadian company.
On Dec. 11, the U.S. Securities and Exchange Commission issued a statement saying it had charged The Hain Celestial Group Inc. with “internal controls failures,” and reached a settlement. The SEC’s allegations against the firm, whose brands include Terra chips, Yves Veggie Cuisine, Live Clean, and Earth’s Best baby food, covered a period between 2014 and 2016, according to the U.S. regulator.
The SEC ordered Hain to cease and desist from further violations, and Hain consented to the SEC’s order without admitting or denying the regulator’s findings.
The commission’s statement in December did not name anyone besides the firm, and noted that there was no monetary penalty imposed on the firm due to “extensive co-operation with the SEC’s investigation, which included self-reporting (the issues) and remediation efforts.”
Simon, Aphria’s newly appointed board chair, was chief executive of Hain Celestial, the company he founded, until he stepped down in November, a planned departure that had been announced in June. He remains a shareholder.
In an interview with Financial Post on Thursday, Simon said the SEC settlement was not raised in his talks with Aphria before he was appointed chairman on Dec. 27 because it was already a matter of public record and he felt it had been resolved in the best way possible with no financial restatements or penalties.
Not only was the SEC statement available online, Simon said, but he had discussed reaching an understanding with SEC staff to resolve the issue with no financial penalty during a company conference call with Hain Celestial analysts in August.
“It was publicly disclosed. The SEC closed the case,” he told Financial Post. “It was not raised as an issue (with Aphria).”
According to the SEC’s order against Hain Celestial Group, sales personnel for Hain had offered the company’s two largest distributors sales incentives at the end of fiscal quarters, between 2014 and 2016, to encourage the purchase of sufficient inventory to meet quarterly internal sales targets.
“The incentives offered by Hain included rights of return for products that spoiled or expired before they were sold to retailers, as well as cash incentives of up to $500,000, substantial discounts, and extended payment terms,” the SEC said, noting that some of these incentives were agreed to orally and not documented, or documented only in email exchanges with the distributors.
The SEC’s order found that the firm’s finance department was not aware of the incentive practices until May of 2016, after which the company conducted an internal investigation and self-reported the issue to the SEC.
The regulator also noted that no financial restatements were required, and that the company had acknowledged “material weaknesses in its internal controls of financial reporting,” retained compliance staff, and voluntarily made “significant changes” to its organization and to its revenue recognition practices.
Simon said his company’s brush with regulators actually strengthens his skill set to help the Canadian cannabis company, Aphria, move from fast-growing startup to a growth company with strong independent oversight.
“If anything, it’s a positive, because I managed it, I knew how to manage the employees, the people, the process, the governance, where changes had to come into place, where there were any weaknesses …. I knew how to get it to a good conclusion,” Simon told Financial Post, speaking as Aphria’s chair.
He said building Hain over 25 years, and sitting on a number of other corporate boards including MDC Partners Inc., and Barnes & Noble, has ensured that corporate governance and corporate finance processes are “very important” to him.
“I plan to bring in my expertise, other people that I’ve worked with, and ensure that there is the strongest, strongest level of governance throughout Aphria,” Simon said.
Aphria shares cratered in early December after shortsellers Quintessential Capital Management and Hindenburg Research called the company a “black hole” and alleged that recent international acquisitions valued at around $280 million had been orchestrated to benefit insiders and were essentially “worthless.”
Aphria defended the acquisitions and called the short-seller report a “malicious and self-serving attempt to profit by manipulating Aphria’s stock price at the expense of Aphria’s shareholders”
The cannabis company also formed a special committee of directors and has promised a comprehensive response refuting all the short sellers’ claims, and has taken steps to increase independent oversight. Six of its 10 board members are now independent.
Aphria shares closed at $8.03 Thursday on the Toronto Stock Exchange, 65-per-cent below their 52-week high.