OSC charges CannTrust directors, ex-CEO

Three former executives and directors of troubled cannabis company CannTrust Holdings Inc. are facing fraud and other charges in connection with undisclosed illegal growing activity at the company.

The Ontario Securities Commission (OSC) announced that Mark Litwin, Eric Paul and CannTrust’s former CEO Peter Aceto have all been charged with fraud, making false statements to the OSC and authorizing, permitting or acquiescing in the the commission of an offence.

Litwin and Paul have also been charged with insider trading, and Litwin and Aceto have both been accused of filing a false prospectus.

None of the allegations has been proven. Lawyers for the accused indicated they intend to defend themselves against the charges. The first court appearance in the case is scheduled for July 26 in Toronto.

The OSC, which investigated the case along with the RCMP’s Integrated Market Enforcement Team, said that the charges stem from “efforts to conceal the illegal growing of cannabis at CannTrust over a 10-month period in 2018 and 2019.”

During that time, approximately 50% of the company’s growing space at a facility in Pelham, Ont., was not licensed by Health Canada.

The regulators are now alleging that the executives and directors violated securities rules by claiming in communications to investors — including press releases, corporate disclosures, analyst calls and prospectuses — that CannTrust was compliant with regulatory requirements.

They also allege that Litwin and Aceto signed off on prospectuses that falsely claimed CannTrust was fully compliant with regulatory requirements, and that Litwin and Paul traded CannTrust shares based on knowledge of the unlicensed growing, which amounted to inside information.

In a statement, Litwin’s lawyer Scott Fenton said that his client “intends to vigorously dispute the charges that have been made against him.” 

“Mr. Litwin knows that at all times he fully complied with his legal obligations, including those under the Securities Act. He did not commit any offences, nor was he aware of others who may have committed any offences,” Fenton said.

One of Paul’s lawyers, Gerald Chan, said that “Mr. Paul is confident that the evidence will show he did nothing wrong. We look forward to vigorously defending him against the charges and answering the allegations.”

Aceto’s lawyer, Frank Addario, said in a statement: “During [Aceto’s] short tenure, CannTrust was subject to multiple regulatory inspections and a financial audit without any material issues being raised.”

Addario said Aceto cooperated with CannTrust’s internal audit investigation and the OSC’s investigation.

“I am disappointed he has been charged,” Addario said. “I look forward, as does Peter and his family, to a public hearing where the evidence will show that he acted with integrity at all times.”

After the Health Canada violations came to light in July 2019, Aceto, a long-time financial industry executive who was CEO of Tangerine Bank before moving to CannTrust, was fired for cause by the company. Late last year, he was named president of mortgage broker Mortgage Alliance.

Paul stepped down as CannTrust’s chairman in July 2019. Litwin resigned from the company’s board in March of this year.

CannTrust remains under creditor protection amid ongoing shareholder litigation.

The OSC first imposed a management cease trade order on CannTrust in 2019, and cease-traded the company after it entered creditor protection in March 2020.

“This matter demonstrates how the OSC’s quasi-criminal team, working closely with policing partners, is evolving to focus on more complex cases involving senior level market participants, in addition to fraudsters and repeat offenders,” said Jeff Kehoe, director of enforcement at the OSC, in a release.

“In cases involving serious market misconduct, prosecution in provincial court allows us to seek a range of strong sanctions, including jail time,” Kehoe added.