Yahoo Finance OSC moves to withdraw all charges in CannTrust case, saying no prospect of conviction
The quasi-criminal trial of former CannTrust Holdings Inc. CEO Peter Aceto and two former directors took a dramatic twist Wednesday when the Ontario Securities Commission abruptly sought leave to withdraw all charges against the men after reaching the conclusion that there was no reasonable prospect of conviction.
Lawyers for the defence opposed the motion, arguing for a verdict with no further evidence called, which they say would mean acquittal for the three men.
The about-face came a week after a key witness testified on cross-examination that he was mistaken about using the term “unlicensed” to describe non-compliant cannabis growing in parts of one of the company’s main facilities.
In a Toronto courtroom on Dec. 6 and 7, Graham Lee, CannTrust’s former director of quality and compliance and the second witness called by the OSC, was cross-examined by Scott Fenton, a lawyer for former company director Mark Litwin, who had been charged with fraud and insider trading. Under cross examination, Lee acknowledged that CannTrust, which had operated in the medical marijuana market before recreational cannabis was legalized in October of 2018, was, through a series of iterations, in possession of a Cannabis Act licence as of Nov. 9 that year that covered the entire Pelham facility, according to court transcripts.
He also agreed with Fenton that he had been mistaken or used the words “licensed” and “unlicensed” incorrectly on occasion to describe oversight of the company’s cannabis-growing operations, some of which were in five rooms at the Pelham facility that were found by Health Canada to be “non-compliant” with certain regulations.
The words unlicensed, unauthorized and non-compliant were sometimes used interchangeably after the scandal broke in the summer of 2019 — including by CannTrust itself in a July 8 news release that year that referred to “unlicensed rooms” — but legal experts say the difference between them was crucial to the OSC’s prospect of obtaining convictions on any of the charges based on the case it brought. Every charge related specifically to unlicensed growing, which would not apply to a company that was licensed but had non-compliant growing rooms requiring ministerial approval before the product could be sold.
Fenton rose in court Wednesday morning to say case law dictates that the three men “are entitled to a verdict,” which would be not guilty if no further evidence is to be called, rather than simply having the charges withdrawn as the OSC is seeking.
“It’s time to end it for all these gentlemen, and it should end today,” he told Justice Victor Giourgas.
However, counsel for OSC staff asked for time to study the cases and court was adjourned until 11 a.m. Thursday.
During his cross-examination of Lee last week, Fenton suggested to Lee that the “mistaken terminology” within CannTrust about the company’s license to grow and sell cannabis and cannabis products at some point “took on kind of a life of its own.”
It was not clear why OSC staff, who sought a break in the trial after Lee’s testimony last Wednesday, seemed unprepared for a document presented to Lee related to the Cannabis Act licence and Lee’s responses to Fenton. OSC investigators worked alongside the RCMP during a months-long investigation leading up to charges being laid against Aceto, Litwin and former CannTrust director Eric Paul in June 2021.
When the trial got underway in October, all three men pleaded not guilty to the charges, which included fraud and authorizing, permitting or acquiescing in the commission of an offence. Litwin and Paul were also charged with insider trading counts, while Litwin and Aceto faced charges of making a false prospectus and preliminary prospectus.
Wednesday’s turn in the quasi-criminal case is significant for the OSC, which has struggled to secure convictions or findings of wrongdoing in cases that are adjudicated outside its own civil administrative proceedings. In an earlier blow, in 2007, the OSC failed to secure a conviction on quasi-criminal insider trading charges against John Felderhof, the only person prosecuted in the Bre-X Minerals Ltd. gold fraud that rocked markets.
The investigation into CannTrust was done by the OSC’s Joint Serious Offences Team, a partnership created in 2013 to bolster enforcement in complex cases. JSOT is a partnership between the OSC, the RCMP’s financial crime program and the Ontario Provincial Police’s anti-rackets branch and the unit has access to special constables, litigators, investigators and forensic accountants, as well as investigative powers and methods expected to stand up in court.
Quasi-criminal charges carry harsher penalties, if convictions are obtained, than are available under the OSC’s administrative proceedings, with up to five years less a day in prison and up to $5 million for each conviction. In an interview last year, former OSC chair Maureen Jensen said more severe penalties lead to stronger deterrence for market players beyond those on trial because the penalties are not seen simply as “a cost of doing business.”
The OSC’s move to withdraw the charges in the case against the former CannTrust trio comes nearly three-and-a-half years after the grow-room scandal knocked the high-flying company into creditor protection under the Companies Creditors Arrangement Act and sent ripples across the fledgling recreational cannabis industry.
With quasi-criminal CannTrust charges, OSC flexes enforcement muscles long seen as weak spot
Trial begins for former CannTrust trio accused over unlicensed cannabis growing
In July 2019, CannTrust issued a news release disclosing that it had received a non-compliant rating from Health Canada, based on observations of growing cannabis in what the company referred to as five unlicensed rooms between the previous October 2018 and March of 2019.
Reports soon emerged that walls had been erected in the Pelham greenhouse, along with other attempts to hide the cultivation taking place in the five rooms.
In the aftermath of the Health Canada findings, and as the probes into CannTrust’s operations grew, Aceto, who had been recruited from the financial services sector where he served as CEO of ING Direct Canada and Tangerine Bank, was terminated with cause, and Paul was asked to step down from the board of directors.
In September 2019, CannTrust said it had received a notice of licence suspension from Health Canada, which indicated the licensing would be reinstated if the company could demonstrate that the suspension was unfounded or if the reasons for the suspension no longer existed.
In October, the cannabis company announced plans to destroy $77 million worth of cannabis in an effort to comply with the health regulator.
CannTrust set aside $50 million and subsequently settled multi-million class-action lawsuits in Canada and the United States. The lawsuits were filed on behalf of investors including those who took part in a prospectus offering in May 2019, before the Health Canada inspection and CannTrust’s destruction of crops grown in the five non-compliant rooms.
The company emerged from court-supervised CCAA proceedings in March of this year and was renamed Phoena Holdings Inc.
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