Can­nTrust al­legedly hid pot from reg­u­la­tor

The Globe and Mail (Ottawa/Quebec Edition) - - FRONT PAGE - CANNABIS IN­DUS­TRY RE­PORTER

Pro­ducer put up tem­po­rary walls to con­ceal un­li­censed grow­ing rooms when it sent pic­tures to Health Canada, for­mer worker says

Can­nTrust Hold­ings Inc. hid thou­sands of cannabis plants be­hind tem­po­rary walls in or­der to stage mis­lead­ing pho­tographs of an un­li­censed grow­ing room that were sent to Health Canada, a for­mer Can­nTrust em­ployee al­leges.

The Vaughan, Ont.-based cannabis pro­ducer is un­der in­ves­ti­ga­tion by Health Canada after fed­eral reg­u­la­tors found Can­nTrust was grow­ing cannabis in five un­li­censed rooms in its green­house in Pel­ham, Ont., be­tween Oc­to­ber, 2018, and March, the com­pany ac­knowl­edged Mon­day.

The an­nounce­ment sent Can­nTrust’s NYSE-listed stock plum­met­ing 36 per cent since Mon­day.

Ac­cord­ing to Nick Lalonde, who worked for the com­pany from June, 2017, to May, 2019, and served as head of dis­posal op­er­a­tions at the Pel­ham green­house, Can­nTrust took ex­plicit steps to hide its un­li­censed op­er­a­tions from Health Canada.

On at least one oc­ca­sion last fall, em­ploy­ees were asked to stay late to set up fake walls to hide “sev­eral thou­sand” plants from view, in or­der to take pho­tographs that had been or­dered by Health Canada as part of rou­tine li­cens­ing re­quire­ments, Mr. Lalonde told The Globe and Mail.

On Mon­day, Can­nTrust con­firmed that Health Canada is­sued a non-com­pli­ance or­der to the com­pany and put a sales freeze on 5,200 kilo­grams of prod­uct that had been grown in the five un­li­censed rooms be­tween Oc­to­ber and March; the five rooms were sub­se­quently li­censed in April.

The com­pany said it is also vol­un­tar­ily hold­ing back from sale an ad­di­tional 7,500 kg of prod­uct that was grown in the un­li­censed rooms in the same time pe­riod.

Health Canada’s con­tin­u­ing in­ves­ti­ga­tion has raised ques­tions among an­a­lysts about whether fed­eral reg­u­la­tors could take the step of sus­pend­ing Can­nTrust’s li­cence. Twice in the past year, fed­eral reg­u­la­tors have sus­pended the li­cences of cannabis com­pa­nies for il­le­gal ac­tiv­i­ties.

Can­nTrust ac­knowl­edged on Mon­day that em­ploy­ees had pro­vided “in­ac­cu­rate in­for­ma­tion” to reg­u­la­tors.

Mr. Lalonde said the or­der to stage the mis­lead­ing pho­tographs came from a green­house op­er­a­tions man­ager; he said he does not know whether or not the or­der came from higher up the man­age­ment chain. Mr. Lalonde said he di­rectly par­tic­i­pated in stag­ing one mis­lead­ing pho­to­graph last fall.

“We’re hang­ing th­ese poly walls, th­ese white poly walls … mov­ing ta­bles with hun­dreds of plants on them out of the cam­era view, just to snap a pic­ture of the room with noth­ing in it,” Mr. Lalonde said.

“Health Canada re­quested pic­tures of the ranges [green­house rooms] in or­der to give the li­cence and the per­mit; they wanted to see pic­tures of the range com­plete and func­tion­ing cor­rectly with no plants in it, be­cause it’s not a li­censed room at the time,” Mr. Lalonde said.

On June 14, shortly after quit­ting Can­nTrust for a job out­side the cannabis in­dus­try, Mr. Lalonde sent an e-mail – re­viewed this week by The Globe – to Health Canada of­fi­cials out­lin­ing the ac­tiv­ity that he al­leges took place at the com­pany.

“If you look through the cam­era footage prior to the dates the pic­tures were taken and re­quested you will clearly see us hang­ing up white poly walls to cover up thou­sands of plants,” Mr. Lalonde wrote to Health Canada.

Two days later, Health Canada vis­ited Can­nTrust’s fa­cil­ity, con­ducted in­ter­views with em­ploy­ees and re­quested doc­u­men­ta­tion from the com­pany. On July 3, Health Canada is­sued its non-com­pli­ance or­der.

“Can­nTrust has ac­knowl­edged the find­ings of Health Canada’s re­port, which are fo­cused on two key over­ar­ch­ing is­sues that Health Canada iden­ti­fied and that we are tak­ing very se­ri­ously – the first is that we were grow­ing in un­li­censed rooms and the sec­ond group of ob­ser­vances in­volve em­ploy­ees who pro­vided in­ac­cu­rate in­for­ma­tion to Health Canada in­spec­tors,” the com­pany said in an e-mailed re­sponse to ques­tions from The Globe.

“As ex­am­ples, some of th­ese in­stances re­volved around in­for­ma­tion that was pro­vided about the un­li­censed grow­ing rooms, as well as our doc­u­men­ta­tion prac­tices. We are tak­ing th­ese ob­ser­vances very se­ri­ously, and we are work­ing closely with Health Canada and our in­ter­nal teams to im­ple­ment new pro­cesses and a com­pany-wide re­train­ing pro­gram.

“As Can­nTrust an­nounced ear­lier this week, we owe our full re­sponse to Health Canada re­gard­ing spe­cific de­tails and re­spon­si­bil­ity. That is the road back to com­pli­ance. Un­til that time we are un­able to com­ment on spe­cific de­tails or the ac­tions of cur­rent or for­mer em­ploy­ees,” the com­pany wrote.

A com­pany spokesper­son said CEO Peter Aceto was un­avail­able for an in­ter­view on Wed­nes­day. The com­pany also de­clined to re­spond to a ques­tion about whether or not Mr. Aceto and other top man­age­ment knew that plants were grow­ing in the un­li­censed rooms.

In an in­ter­view with The Globe on Mon­day, Mr. Aceto de­clined to say what, if any­thing, he or other up­per man­age­ment knew about the grow­ing ac­tiv­ity in the un­li­censed rooms, say­ing only that Can­nTrust was “do­ing a root-cause anal­y­sis to fig­ure out ex­actly who knew what when,” and that one un­named em­ployee had been ter­mi­nated.

On the com­pany’s most re­cent earn­ings call in May, Mr. Aceto, the for­mer CEO of Tan­ger­ine Bank who joined Can­nTrust in Oc­to­ber, touted the com­pany’s sig­nif­i­cant quar­terover-quar­ter in­crease in pro­duc­tion.

“Firstly, with re­spect to in­creas­ing pro­duc­tion ca­pac­ity, Can­nTrust de­liv­ered a record of over 9,400 kilo­grams of pro­duc­tion in the first quar­ter from our per­pet­ual har­vest green­house. This is a 96-per-cent in­crease over Q4 2018. This in­creased pro­duc­tion is the re­sult of our in­vest­ment into peo­ple, train­ing and fa­cil­i­ties,” Mr. Aceto said on the call.

The fall­out from Mon­day’s an­nounce­ment about the non­com­pli­ance or­der and the sales freeze has been dra­matic, par­tic­u­larly for a com­pany that was widely seen as one of the more so­phis­ti­cated op­er­a­tors in the in­dus­try.

On Wed­nes­day, the On­tario Cannabis Store (OCS), the province’s whole­saler and on­line re­tailer, de­cided to tem­po­rar­ily stop sell­ing Can­nTrust prod­ucts.

“Due to the Health Canada tem­po­rary hold on cer­tain Can­nTrust cannabis prod­ucts, OCS has vol­un­tar­ily re­moved all af­fected prod­ucts from dis­tri­bu­tion pend­ing the out­come of the in­ves­ti­ga­tion,” OCS com­mu­ni­ca­tions di­rec­tor Daffyd Roderick said in a state­ment.

The Al­berta Gam­ing, Liquor and Cannabis Com­mis­sion also an­nounced Wed­nes­day that it “is plac­ing the af­fected [Can­nTrust] lots on hold while Health Canada con­ducts its in­ves­ti­ga­tion.”

Royal Bank of Canada an­a­lyst Dou­glas Miehm slashed his Can­nTrust price tar­get to $5 from $13, while Bank of Mon­treal an­a­lyst Tamy Chen cut her tar­get to $6 from $11. Bank of Amer­ica an­a­lyst Christo­pher Carey down­graded the stock two notches from “buy” to “un­der­per­form” and dropped his price tar­get to $4.50 from $9.

While it con­ducts its in­ves­ti­ga­tion – which is ex­pected to end on July 17 – Health Canada is al­low­ing Can­nTrust to con­tinue pro­duc­tion in its two On­tario fa­cil­i­ties, in­clud­ing in the five rooms at the heart of non-com­pli­ance or­der. Can­nTrust has also been al­lowed to con­tinue sell­ing prod­ucts that fall out­side the tem­po­rary sales freeze.

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