CannTrust's former CEO, 2 executives face possible jail time in fraud case

FILE - This March 22, 2019 file photo shows a bud on a marijuana plant at Compassionate Care Foundation's medical marijuana dispensary in Egg Harbor Township, N.J. U.S. retail sales of cannabis products jumped to $10.5 billion last year, a threefold increase from 2017, according to data from Arcview Group, a cannabis investment and market research firm. The figures do not include retail sales of hemp-derived CBD products. (AP Photo/Julio Cortez, File)
FILE - This March 22, 2019 file photo shows a bud on a marijuana plant at Compassionate Care Foundation's medical marijuana dispensary in Egg Harbor Township, N.J. (AP Photo/Julio Cortez, File)

CannTrust Holdings' former chief executive officer (CEO) and two other ex-directors at the embattled Canadian cannabis firm face a number of charges, including fraud, related to the company's infamous illegal cannabis-growing scandal.

Former CEO Peter Aceto, former board chair Eric Paul, and former director Mark Litwin could face up to five years in jail if convicted in a quasi-criminal case led by the Ontario Securities Commission (OSC).

Health Canada found CannTrust illegally grew millions of dollars worth of cannabis over a 10-month period in 2018 and 2019. During that time, the three accused allegedly did not disclose to investors that approximately half of the growing space at the company's facility in Pelham, Ont. was not licensed.

"These allegations relate to efforts to conceal the illegal growing of cannabis," the OSC said in a statement on Tuesday.

The securities regulator outlined more than a dozen charges against the three Toronto men, including fraud, insider trading, making misleading statements to the OSC and the market, and issuing false prospectus documents.

According to the OSC, the trio stated that CannTrust was fully compliant with Canada's cannabis regulations in press releases, corporate disclosures, analyst calls and prospectuses. The OSC also alleges that Litwin and Aceto signed off on prospectuses used to raise capital in the United States that included similar claims. Litwin and Paul are said to have traded CannTrust shares while aware of the unlicensed growing.

None of the allegations have been proven. The accused are scheduled to appear before a Toronto court on July 26.

The CannTrust scandal rocked Canada's legal pot sector when the unlicensed growing operation was discovered. In June 2019, a whistleblower revealed the company was growing cannabis in unlicensed rooms, and allegedly erected walls to deceive Health Canada inspectors. The federal health agency suspended the company’s licence to produce cannabis that September, and seized thousands of kilograms of dried pot.

Nick Lalonde, the whistleblower who brought the illegal cannabis scandal to light, shared cell phone video with Yahoo Finance Canada in November 2019. He claims the footage shows the room where he was allegedly instructed to put up plastic walls to hide illegal cannabis in photos sent to Health Canada.

A CannTrust spokesperson confirmed the video was shot on company property.

CannTrust’s licences were reinstated by August of last year, following a rehabilitation process to ensure the company was compliant with regulations.

In December, CannTrust announced its return to the Canadian marketplace with the launch of two recreational brands called Liiv and Synr.g. As of April, the company remained under creditor protection amid efforts to resolve civil litigation claims, and complete its review of strategic alternatives.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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