CannTrust Fires CEO Amid Breach at Cannabis Company; Stocks Jump

(Bloomberg) — CannTrust Holdings Inc. shares climbed after the board of the Canadian cannabis company fired its chief executive officer and forced out its chairman amid a scandal over a regulatory breach. CEO Peter Aceto was fired “with cause” and chairman Eric Paul resigned at the request of the board, Vaughan, Ontario-based CannTrust said in a statement Thursday.

CannTrust jumped 16% to $2.27 at 9:32 a.m. in New York on Friday. But the future of the company remains uncertain with sales on hold amid a government investigation and lawsuits piling up. The shares are down 54% this year. “This stock has been absolutely pummeled,” Brian Madden, senior portfolio manager at Goodried Investment Counsel, said on BNN Bloomberg TV. “As to the existential question, can the company continue to operate? Frankly I don’t know. You are granted the public trust of growing a regulated product, then you violate it, not accidentally but flagrantly; I don’t know if Health Canada lets them keep their growing license.”

Aceto, who was previously CEO of Tangerine Bank, and Paul, couldn’t immediately be reached for comment. The shakeup comes after a Globe and Mail report cited internal correspondence showing that the executives were aware pot was being grown in unlicensed rooms about seven months before Health Canada, the federal regulator, unearthed the breach.

A special committee appointed to investigate the claims had “uncovered new information“ that led to the termination of Aceto, who had joined CannTrust after a career in the banking world in October. Robert Marcovitch, who chaired that committee and previously headed ski and snowboard maker K2 Sports, was appointed interim CEO.

Non-Compliant Rating

CannTrust said it has voluntarily disclosed its findings to Health Canada and will “fully cooperate” with the regulator in order to resolve the matter expeditiously. The impact on its financial results is unknown at this time, according to the statement.

On July 8 the company said that the federal regulator gave a non-compliant rating to its greenhouse in Pelham, Ontario, forcing it to halt sales of nearly 30,000 pounds of pot. The company was found to have grown the crop in five unlicensed rooms between October and March, and employees were found to have provided inaccurate information to the regulator.

Several law firms have either filed or are investigating lawsuits against the company.

Derek Dley, an analyst at Canaccord Genuity Inc., said it’s likely the company’s license will be suspended and it’s unlikely the company will be taken over by a competitor. He cut his price target on the stock to C$2.50 from C$5.00 while maintaining a hold rating.

“While we believe CannTrust’s physical assets may still be of value to other Canadian licensed producers, we do not anticipate the company being acquired in the near term given the uncertainty surrounding the penalty expected to be levied by Health Canada,” he said in a note dated Thursday.

–With assistance from Michael Bellusci.

To contact the reporters on this story: Natalie Obiko Pearson in Vancouver at npearson7@bloomberg.net;Jacqueline Thorpe in Toronto at jthorpe23@bloomberg.net