CannTrust Holdings Inc. (TSX: “TRST”, NYSE: “CTST”, FRA: “C9S”)

Ontario Superior Court of Justice, Court File No: CV-19-001554-00CP

 

Morganti & Co., has been contacted by over 100 investors that are furious that CannTrust Holdings Inc. (“CannTrust”) has not taken legal actions against the wrongdoers that destroyed their beloved Company.

BEFORE DECEMBER 6, 2019, LONG-TERM INVESTORS CAN REGISTER THEIR PETITION TO SUPPORT LITIGATION AGAINST THE WRONGDOERS, TO DEMAND THAT THOSE WRONGDOERS TO RETURN ANY FORM OF COMPENSATION, AND TO PAY DAMAGES TO THE COMPANY. 

On September 18, 2019, Morganti & Co. served a section 246 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”), demand letter on the Company’s Board of Directors (“Board”) to provide them notice that is was our intention to seek leave to bring an action in the name and on behalf of the Company against Peter Aceto (“Aceto”), Eric Paul (“Paul”), their co-conspirators within TRST, and KPMG LLP (“KPMG”).

On July 8, 2019, CannTrust released a statement revealing that Health Canada had determined that one of its production facilities was not in compliance with regulations because the Company was growing cannabis in five unlicensed rooms between October 2018 and March 2019 and because it had provided inaccurate information to Health Canada with regards to its licensing application.  This finding resulted in Health Canada placing a hold on 5,200kg of dried cannabis grown in the unlicensed rooms. Additionally, CannTrust announced that it was voluntarily going to place an additional 7,500kg of dried cannabis on hold because it too was grown in unlicensed rooms.  On July 11, 2019, CannTrust announced that it was implementing a voluntary hold on the sale and shipment of all of its cannabis products. Additionally, it announced that a Special Committee for the board of directors was created to conduct an internal investigation. On July 24, 2019, it was reported that senior executives of CannTrust were intentionally attempting to deceive Health Canada and that CannTrust was terminating its recently appointed Chief Executive Officer and asking the chair of its board of directors to step down. CannTrust’s share price dropped by over 60% from July 5 – July 25, 2019. On September 17, 2019, CannTrust announced that it received a Notice of License Suspension revoking its authority to produce cannabis, other than cultivating and harvesting, and to sell cannabis.

During March 2019, CannTrust’s equity securities listed on the TSX traded above $10 per share.  As a direct and foreseeable result from the wrongdoers’ illegal and negligent conduct, CannTrust’s equity securities trade below $2 per share.

It is our clients’ views that the Company has acknowledged that Aceto and Paul have engaged in improper conduct resulting in the license suspension, lost revenues, lost business opportunities to competition, impairment to goodwill, and lost jobs.  It is also indisputable that since October 2018, Messrs. Aceto and Paul had received compensation worth millions and sold, indirectly, millions worth of common shares earlier this year, which has exposed the Company to primary market shareholder litigation in Canada and the United States. KPMG has also acknowledged that its report for TRST’s consolidated financial statements for the year ended December 31, 2018 (dated March 27, 2019), and its interim report for the unaudited condensed interim consolidated financial statements for the period ended March 31, 2018 (dated May 13, 2019) failed to identified Messrs. Aceto and Paul’s improper conduct and cannot, therefore, be relied upon by the Company.

Our clients also believe that there is an appearance of a conflict of interest with McCarthy’s role as counsel to the Special Committee and the Company, which has appears to have resulted in remediation efforts being stymied, i.e., asset freezes and litigation. First, McCarthy’s is counsel to KPMG in very similar type litigation that is now evolving against TRST (i.e., the shareholder litigation against North American Palladium Ltd. and KPMG LLP). Our clients believe that McCarthy’s simply cannot recommend any remediation efforts against KPMG. Second, McCarthy’s role is further complicated by the Ontario Securities Commission’s investigation which could easily intermingle the members of the Special Committee, as well as KPMG. Finally, McCarthy’s role as counsel to the Company in the pending shareholder class actions is a fait accompli on the topic of its inability to recommend remediation efforts against any further member of the Company.

Demand Letter to Board of Directors:  September 18, 2019

Board of Directors’ rejection letter to advance legal claims against the wrongdoers: October 2, 2019

Motion Record for Leave to Proceed with the Derivative Suit Claims Filed: TBA

Shareholders’ Counsel: Eli Karp and Hadi Davarinia, Morganti & Co., P.C.

CannTrust’s Canadian Counsel to the Special Committee: McCarthy Tetrault LLP

CannTrust’s Canadian Counsel defending the Class Actions: McCarthy Tetrault LLP