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CannTrust Holdings Plunges on Report That Senior Leadership Knew About Cannabis Violations

Joe Tenebruso, The Motley Fool

The situation at CannTrust Holdings (NYSE: CTST) is going from bad to worse.

The Globe and Mail reported Tuesday that senior CannTrust executives -- including Chairman Eric Paul and CEO Peter Aceto -- were aware that the company was growing cannabis in unlicensed rooms for months before regulators discovered it earlier in July.

Other CannTrust executives also appear to have had knowledge of the violations. Graham Lee, CannTrust's director of quality and compliance, reportedly sent an email in November informing Aceto and other members of CannTrust's leadership team about a Health Canada inspection that revealed multiple compliance issues -- but failed to notice the plants growing in unlicensed rooms. "We dodged some bullets," Lee allegedly wrote.

Lee reportedly went on to write that these and other compliance issues -- such as lost bottles of cannabis that the company failed to report -- would "paint a picture with the regulator of a company not in control."

Lee's email has proved prescient. At this point, it's difficult to see CannTrust as anything other than an out-of-control company.

A downwardly sloping line chart

Image source: Getty Images.

Investors responded by once again hammering CannTrust's stock. Shares fell more than 22% on Wednesday.

The decline furthers a brutal stretch that has seen CannTrust's stock shed nearly 60% of its value since the company announced that it had received a noncompliance report from Health Canada on July 8. 

It's possible that more pain could lie ahead for shareholders. Health Canada is likely to issue fines and could force CannTrust to destroy thousands of kilograms of cannabis that it produced in the unlicensed rooms. Health Canada could even decide to revoke CannTrust's cannabis license.

Moreover, it's unlikely that the current management team will remain in place. Investors appear to have lost confidence in the company's leadership, and regulators are unlikely to hold Paul or Aceto in high regard after these incidents.

The best option may be for CannTrust Holdings to be acquired by a larger and better-run cannabis company. However, even if a deal is reached, it could occur at a price lower than the level at which CannTrust's stock currently trades, particularly if more compliance issues come to light.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool recommends CannTrust Holdings. The Motley Fool has a disclosure policy.