Fraud charges have been laid against CannTrust Holdings Inc.’s former chief executive Peter Aceto and two former directors, all of whom face possible jail time of up to five years if found guilty in a sweeping quasi-criminal case led by the Ontario Securities Commission.

Company co-founder and former board chair Eric Paul and former director Mark Litwin are also charged with insider trading following a months-long investigation by Canada’s largest capital markets regulator. The OSC moved in following blockbuster revelations in the summer of 2019 that a Health Canada inspection of the publicly traded company uncovered unlicensed cannabis growing at its Pelham, Ont. facility.

The three men are facing a total of more than a dozen counts that include allegations of making misleading disclosure to investors in a case that will be prosecuted in the Ontario Court of Justice due to its quasi-criminal nature, rather than before an OSC tribunal as a civil matter. This marks the first time the commission has gone after a public company over disclosure using its quasi-criminal powers.

Quasi-criminal offences such as fraud and insider trading carry penalties including jail terms of up to five years less a day and fines of up to $5 million for each conviction.

In a statement Tuesday laying out the charges, the OSC said the allegations “relate to efforts to conceal the illegal growing of cannabis at CannTrust over a 10-month period in 2018 and 2019.”

During this time, the regulator said, the three accused “did not disclose to investors that approximately 50 per cent of the total growing space at CannTrust’s facility in Pelham, Ontario, was not licensed by Health Canada.”

Furthermore, the regulator alleges, the trio asserted in press releases, corporate disclosures, analyst calls, and prospectuses that CannTrust “was compliant with regulatory requirements, and they included all cannabis production in the company’s financial statements, without stating that half was grown without a license.”

In addition, Litwin and Aceto signed off on prospectuses used to raise capital in the United States, which declared that CannTrust was fully licensed and compliant with regulatory requirements, the OSC said.

“Litwin and Paul also traded shares of CannTrust while in possession of the material, undisclosed information regarding the unlicensed growing,” the statement says.

None of the allegations have been proven in court and a first appearance is scheduled for July 26 at 11 a.m. in the Ontario Court of Justice at Old City Hall Courthouse in Toronto

CannTrust, which at the time of the revelations of unlicensed growing was one of Canada’s most prominent cannabis companies — with a market cap that exceeded $1 billion at its peak — entered creditor protection as the probe grew.

The swift downfall was a significant bump in the road for a burgeoning industry after recreational marijuana was legalized in October of 2018.

Aceto joined CannTrust as chief executive in 2018 after serving as chief executive of ING DIRECT Canada — a financial services company now owned by Bank of Nova Scotia and rebranded as Tangerine Bank. He was terminated by CannTrust for cause in July 2019 after the revelations of unlicensed growing were made public. Paul, the company’s chair, was asked to resign at the same time. Litwin, a former director, resigned from the board earlier this year.

Aceto’s lawyer Frank Addario issued a statement Tuesday saying he is “disappointed” the former executive was charged.

“I look forward, as does Peter and his family, to a public hearing where the evidence will show that he acted with integrity at all times,” Addario said.

He said CannTrust hired Aceto “because of his financial acumen and track record as a leader” and noted that the rest of CannTrust’s management team had been operating for more than five years in the regulated cannabis industry.

“During his short tenure, CannTrust was subject to multiple regulatory inspections and a financial audit without any material issues being raised,” Addario said. “He cooperated with CannTrust’s internal audit (the special committee investigation) and the OSC investigation.”

Litwin’s lawyer Scott Fenton said his client “fully complied with his legal obligations, including those under the Securities Act” and “intends to vigorously dispute the charges.”

Eric Paul’s lawyer Paul Le Vay said his client “is confident that the evidence will show he did nothing wrong,” and added that he looks forward to “vigorously defending him against the charges and answering the allegations.”

The lengthy investigation into CannTrust included the RCMP and is understood to have weighed at one time whether the conduct — growing a large amount of cannabis without a licence — constituted criminal drug offences such as illegal distribution or sale or, given the unlicensed nature of the grow, producing cannabis beyond personal cultivation limits. Those charges, which were not pursued, would have carried possible jail terms of up to 14 years, far longer than the quasi-criminal charges brought by the OSC that are capped at five years less a day.

The insider trading charges against Paul and Litwin are understood to relate to allegations that they traded millions of dollars worth of shares in CannTrust at a time when they knew there was unlicensed growing taking place on company premises, information that could materially affect the price of the stock. Further information on the charges is expected once the accused appear in court.

Aceto is charged with fraud, making false or misleading statements to the market and the OSC, making a false prospectus and preliminary prospectus, and authorizing, permitting or acquiescing in the commission of an offence.

Paul is charged with fraud, insider trading, making false or misleading statements to the market and the OSC, authorizing, permitting or acquiescing in the commission of an offence.

Litwin is charged with fraud, insider trading, making a false prospectus and preliminary prospectus, making false or misleading statements to the market and the OSC, and authorizing, permitting or acquiescing in the commission of an offence.

The OSC, which has a spotty record of convictions over the years outside its tribunal, formed a special quasi-criminal enforcement division in 2013 called the Joint Serious Offences Team. Operating from the OSC’s Toronto headquarters, it is staffed by members of the RCMP’s financial crime program, the Ontario Provincial Police’s anti-rackets branch, and the OSC’s enforcement team. The CannTrust investigation also involved the RCMP’s Integrated Market Enforcement Team, or IMET.

“This matter demonstrates how the OSC’s quasi-criminal team, working closely with policing partners, is evolving to focus on more complex cases involving senior level market participants, in addition to fraudsters and repeat offenders,” said Jeff Kehoe, the OSC’s director of enforcement.​

Inspector Vance Morgan, the officer in charge of the RCMP’s Toronto IMET section, said the case is “a good example of the RCMP IMET working with regulatory partners to investigate serious capital market offences that are of regional or national significance and that threaten investor confidence or economic stability in Canada.”

In 2005, the OSC secured a high-profile quasi-criminal conviction against former RBC Dominion Securities managing director Andrew Rankin in the Ontario Court of Justice on 10 counts of tipping. However, that conviction was overturned by another judge the following year, and the OSC ultimately settled the allegations against Rankin in its civil tribunal.

The OSC lost another high-profile quasi-criminal insider trading case in 2007 against John Felderhof, the only person to be prosecuted for the Bre-X gold fraud. Felderhof relied in part of what is known as the due diligence defence, where the accused can try to prove they made reasonable efforts to comply with laws and regulations even if those efforts for some reason fell short.

Going through the criminal courts to pursue white collar crime has also proved challenging in Canada, with Crown prosecutors winning convictions in a criminal fraud and forgery case against the founders of live theatre company Livent Inc. in 2009, but failing to prove allegations of fraud against former executives of telecom giant Nortel Networks, resulting in their acquittal in 2013.