Skip to content

Court case against ex-CannTrust leaders should prompt OSC 'soul-searching': experts

TORONTO — Legal experts say the acquittal of three former cannabis executives should prompt the Ontario Securities Commission to do some "deep soul searching." The Thursday acquittal of ex-CannTrust Holdings Inc.
Former CannTrust CEO Peter Aceto, left, leaves the Old City Hall courthouse after being acquitted on all charges in Toronto on Thursday, December 15, 2022. THE CANADIAN PRESS/Nathan Denette

TORONTO — Legal experts say the acquittal of three former cannabis executives should prompt the Ontario Securities Commission to do some "deep soul searching."

The Thursday acquittal of ex-CannTrust Holdings Inc. chief executive Peter Aceto, chairman Eric Paul and vice-chair Mark Litwin came a day after the regulator revealed it no longer had a reasonable prospect of convicting the men on charges linked to alleged unlicensed cannabis growing at a Niagara area facility.

The trio, who pleaded not guilty in October, were each charged with fraud and authorizing, permitting or acquiescing in the commission of an offence.

Litwin and Paul were also facing insider trading charges, and Litwin and Aceto were charged with making a false prospectus and false preliminary prospectus.

Industry observers were eagerly anticipating the outcome of the matter — the OSC's first court case involving a publicly traded cannabis company — and Doug Sarro saw it as a way the regulator could change its perception. 

"The OSC had a reputation for a while for being weak on enforcement and this outcome doesn't help," said the lawyer and University of Toronto adjunct professor.

The regulator also lost an insider trading case against Bre-X Minerals Ltd. chief geologist John Felderhof in 2007.

In 2010, it settled a 1986 civil lawsuit filed on behalf of shareholders of real estate company Mascan Corp. after 24 years of litigation.

Sarro thinks the Thursday acquittals further entrenched the OSC’s reputation for court losses and should prompt the OSC to look more closely at how it handles cases.

"This was a really high-profile prosecution that was supposed to really change that perception, and clearly with this outcome, the OSC is going to have some soul searching to do,” he said.

The OSC declined to comment Friday, but referred The Canadian Press to a Thursday statement saying it was "considering the implications of the (court’s) decision and assessing its options.”

Rather than acquit the accused, the OSC had asked the court to withdraw its case, which would have allowed it to pursue charges against the men again.

Justice Victor Giourgas rejected the withdrawal ask, telling the OSC’s lawyers, “The law seems to be against you.”

The acquittal leaves the OSC few options to move forward on this case, though Sarro said the regulator could bring an administrative proceeding in front of the Ontario Capital Markets Tribunal, where jail time wouldn’t be possible but the accused could be banned from serving as a directors of public companies.

Like Sarro, University of Ottawa law professor Jennifer Quaid suspects the OSC’s next move is most likely a "deep soul-searching session" to address why it does not have a high rate of success, especially when compared with the more resource-laden U.S. Securities and Exchange Commission.

The outcome of the case against the ex-CannTrust leaders is “not a very flattering look for the OSC," she said.

"It won't help their reputation, that's for sure, because I'm pretty sure that the public interpretation of what happened is not going to be favourable to them,” she said.

In the years proceeding the case, CannTrust, which is now called Phoena Holdings Inc., admitted to partaking in “unlicensed” growing in at least one news release and after halting cannabis sales and shipments from the company, Health Canada suspended CannTrust’s license.

Yet the OSC's case still crumbled a few weeks into hearings, when Litwin's lawyer Scott Fenton cross-examined Graham Lee, a former CannTrust director of quality and compliance. 

Fenton presented Lee with documents showing the entire Niagara facility was licensed between 2017 and Sept 2019.

Lee testified the documents, which he was not shown by the OSC before court proceedings, did not include any restrictions on what rooms the company could grow pot in. 

Cross-examination also uncovered documents where CannTrust was seeking ministerial approval to add rooms where unlicensed growing was alleged to that licence. But in May 2020, Health Canada relieved cannabis producers of the need to get ministerial approval before using growing rooms.

Days after the cross-examination, the OSC announced it no longer had a reasonable prospect of convicting the men.

Observers felt a strong ruling in favour of the financial regulator would deter other pot companies from skirting the law and bring comfort to investors who lost money, when the unlicensed growing was revealed by the company in July 2019.

"Maybe (the OSC) felt that if they came down hard on people who didn't follow the rules, it would sort of send a message that 'hey, cannabis is not a free for all,'" said Quaid.

"It would have been powerful, if they had gone through a 50-day trial and got a conviction, but that's not what happened."

This report by The Canadian Press was first published Dec. 16, 2022.

Tara Deschamps, The Canadian Press