Diane Francis: CannTrust is the fruit of a reckless, rushed Liberal cannabis policy – Financial Post

The legalization of marijuana was cynically rushed into law by the Trudeau government without sufficient medical testing on long-term health effects or adequate controls over the players involved, presumably to court the youth vote.

For a country where governments bear the cost of medical care, it is the height of recklessness to legitimize the sale of weed without the same rigorous testing requirements that pharmaceutical or food companies must endure.

In addition, Ottawa has delivered the worst of all possible outcomes in what amounts to an inept rollout: Black market dope continues to sell for nearly half the price of the legal stuff because bootleggers are obviously able to produce and import with impunity.

This is Cheech and Chong policy

This negates the Liberal notion that legalization will put the drug dealers out of business, make sure the products are not diluted or dangerous, and collect big taxes on an illicit product that people were going to buy anyway.

This is Cheech and Chong policy: Eliminating the black market will be impossible because while unlicensed cannabis cultivation is illegal in Canada, possession and consumption is entirely legal. So, criminals and importers have more customers than ever.

As if that’s not bad enough, the legal cannabis industry has had its first stock market scandal, as CannTrust Holdings Inc. shares collapsed on the news that it ran afoul of Health Canada regulations by growing pot plants in unlicensed rooms.

A whistleblower reported the illicit growing, and soon attention turned to how much chairman Eric Paul, chief executive officer Peter Aceto and other officers knew about the problems. According to newspaper reports, they had been informed about the breach last November, seven months before the government uncovered it.

A Health Canada inspection was reported to have been completed last fall, but missed the unlicensed grow operations as well as a large number of lost bottles of cannabis. The company decided to not report these breaches to the regulator.

The multi-million-dollar question is where did the lost bottles go and does Health Canada know what it’s doing or does it rely on the honour system to enforce regulations?

CannTrust is now under investigation for growing 12,700 kilograms of cannabis in unlicensed rooms between October 2018 and March. This revelation caused CannTrust stock to plummet 55 per cent, amid concerns the company could lose its licence, be levied big fines, and/or be forced to destroy tens of millions of dollars’ worth of cannabis grown in unlicensed rooms. Sales have been halted pending Health Canada’s probe.

Like many cannabis companies, CannTrust was the darling of Bay and Wall Streets and stock prices had soared. Now, the company faces multiple class-action lawsuits and shareholders have every right to be furious.

Obviously, the company has been totally mismanaged: Its independent special committee of the Board of Directors said it is conducting a thorough investigation “as part of our due diligence requirements,” according to Robert Marcovitch, its interim CEO.

But due diligence is not just crisis management: It is supposed to be in the DNA of both the board and management to audit operations and obey laws. It’s appropriate that Paul and Aceto have been ousted, but frankly all management and directors deserve pink slips.

Greg McLeish, director of equity research at Mackie Research Capital Corp., has terminated coverage of CannTrust and said he wants Health Canada to “come down hard” on the company in order to maintain any credibility.

The legalization of cannabis for adult recreational use was an opportunistic, ill-considered, policy by the Liberals. Corporations went public in haste, and this first scandal should make investors cautious.

Prospects are not rosy. As long as the market remains dysfunctional, with black market grass undercutting legalized pot, the profits and multiples of legitimate operators will continue to sink.

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