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Aurora Cannabis to settle shareholder lawsuit over alleged ‘sham’ pot sales

Axel Gille, President of Aurora Europe, inspects cannabis plants in a flowering room of the production facility at the Leuna Chemical Park. (Photo by Hendrik Schmidt/picture alliance via Getty Images)
Axel Gille, President of Aurora Europe, inspects cannabis plants in a flowering room of the production facility at the Leuna Chemical Park. (Photo by Hendrik Schmidt/picture alliance via Getty Images) (picture alliance via Getty Images)

Lawyers for Aurora Cannabis (ACB.TO)(ACB) and a group of shareholders have agreed to settle a class-action lawsuit where the Canadian pot company is alleged to have booked a “sham” transaction to boost its sales figures.

The suit, filed in a U.S. District Court in New Jersey, alleged former executives falsely inflated Aurora’s 2019 fourth-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by selling $21.7 million worth of dried cannabis to Radient Technologies in June 2019.

Radient, a small cannabis extraction company based in Edmonton, Alta. was at the time 12 per cent owned by Aurora. An Aurora executive sat on its board of directors. The plaintiffs claimed in the suit that there was no legitimate business reason for Radient to buy the cannabis, which they say was later resold to Aurora.

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In 2019, Aurora and its peers in Canada’s cannabis sector were under immense pressure to reassure investors as stocks crashed from dizzying highs. In the suit, plaintiffs allege Aurora misled investors on numerous fronts, including the company’s ability to turn a profit, and consumer demand for legal cannabis.

“Aurora’s sales of cannabis in Canada were severely constrained by at least two factors that were known, or recklessly disregarded, by defendants: Immense over-production of cannabis by Aurora and other Canadian licensed producers; and woefully limited numbers of retail stores in Ontario and Quebec, where nearly two-thirds of Canadian citizens reside,” the plaintiffs stated in an amended complaint filed in November 2022.

“This did not hinder [the] defendants from boldly making projections of positive adjusted EBITDA because they devised a scheme they thought would ensure that Aurora met their projections—a sham, round-trip wholesale cannabis transaction with a related party.”

None of these claims were proven in court.

Both sides reached a settlement via mediation on March 4, according to a letter from a law firm representing the defendants addressed to District of New Jersey Judge Brian Martinotti.

“The amount is not public yet, but it will be in the near future,” Alan Ellman, a partner at Robbins Geller Rudman & Dowd told Yahoo Finance Canada. “We’re working on filing the preliminary papers.”

Ellman’s firm is among those representing the lead plaintiffs. He says a judge needs to approve the preliminary settlement reached in mediation. Then, a final approval hearing can be held involving members of the class action.

The class action is limited to investors who purchased Aurora stock on the New York Stock Exchange between Jan. 8, 2019 and Nov. 14, 2019.

Aurora declined to comment on the settlement, citing a company policy not to comment on legal matters.

In addition to Aurora itself, Terry Booth, who co-founded the company in 2006, and former chief operating officer Allan Cleiren, are listed as individual defendants. Cleiren was a member of Radient’s board between February 2019 and December 2020.

Cam Battley, former chief operating officer, and the public face of Aurora at its peak, was previously named in the lawsuit, along with former executives Stephen Dobler, Glen Ibbott, Michael Singer, and board member Jason Dyck. They were not listed as defendants in the third amended complaint submitted to the court by the lead plaintiffs on Nov. 7, 2022, as the focus narrowed to Booth and Cleiren.

In October 2019, Yahoo Finance Canada reported on ties between Aurora and Radient after Craig Wiggins of the industry research group TheCannalysts published research warning of a "roundtrip sale" between the companies.

“Essentially there’s potential to double dip on sales,” Wiggins told Yahoo Finance Canada in an interview at the time. “I think you have to put a big asterisk beside a material chunk of Aurora’s sales, gross margin, and EBITDA until we get answers on this.”

Aurora is now a shadow of its former self from the high-flying era for Canada's pot industry several years ago. The company has laid off scores of workers and dramatically shrunk its cultivation footprint in a bid to improve financial performance under current CEO Miguel Martin.

Aurora reported positive adjusted EBITDA for the first time in its second quarter 2023 financial results.

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

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