Must-Knows of Fraud Investigations into ACB and CGC

Yesterday, Aurora Cannabis (ACB) rose 12.82% and closed at $2.64 on the NYSE, and rose 12.54% to close at 3.50 Canadian dollars on the TSX (Toronto Stock Exchange). Meanwhile, Canopy Growth (CGC) jumped by 15.14% to $17.64 on the NYSE and by 15.66% to 23.49 Canadian dollars on the TSX. Several prominent law firms have launched investigations into ACB and CGC for potentially violating federal securities law.

Marijuana stocks were up after the House Judiciary Committee supported a bill that would decriminalize marijuana at the federal level in the US. Curaleaf’s (CURLF) better-than-expected earnings also buoyed investor sentiment. This news was a much-needed relief for the cannabis sector, which has been battered by the dismal earnings results of major players such as Aurora, Canopy, Cronos Group (CRON), Charlotte’s Web Holdings (CWEB) (CWBHF), HEXO (HEXO), and Tilray.

The spate of good news seems to have stopped the cannabis sector’s downward slide. However, certain company-specific risks continue to weigh on investor sentiment. This year, ACB and CGC are down 46.77% and 34.35%, respectively, on the NYSE. On the TSX, ACB and CGC are down 50.63% and 40.20% year-to-date, respectively. Let’s look at the investigations ACB and CGC are facing

Hagens Berman’s investigation into ACB for giving misleading information

In a November 18 press release, Hagens Berman stated that ACB had been publishing incorrect and contradictory information about its operations and growth initiatives. On October 3, the company said it would continue construction of its Aurora Sun and Aurora Nordic 2 projects. However, in its first-quarter earnings call on November 14, ACB announced plans to immediately halt construction at those facilities. In the first quarter, the company’s revenue fell 24% sequentially, and its loss was larger than anticipated.

In the press release, Hagens Berman accused ACB of misleading investors. The law firm also held the company responsible for the 17% decline in its stock price on November 15, which cost investors significantly. The fall was the largest single-day decline for the company in the last five years.

In the press release, Hagens Berman also referred to a MarketWatch article in which Jeffries analyst Owen Bennett seemed to justify investors’ distrust for the company. The analyst expressed concerns about the company’s cash position, stalled capital projects, debenture conversion, and possible goodwill write-off. He does not expect the company to be EBITDA or cash positive in fiscal 2020.

Other law firms join

On November 18, The Rosen Law Firm also announced an investigation into ACB for issuing misleading information to investors. Specifically, the law firm pointed out discrepancies in the company’s anticipated earnings performance and capital expansion plans. It also discussed the risk associated with early conversion for debenture holders. Debentures worth 230 million Canadian dollars will mature in March 2020.

The Schall Law Firm, Law Offices of Howard G. Smith, Pomerantz, Glancy Prongay & Murray, and Ademi & O’Reilly are also investigating the company for potential securities fraud.

Hagens Berman’s investigation into CGC for misleading information

In a November 20 press release, Hagens Berman announced an investigation into CGC for potentially violating securities law. The law firm is questioning the accuracy of the company’s revenue and inventory accounting. Additionally, it holds the company responsible for investor losses on or before November 15. On November 14, CGC stock fell 14% after the company’s second-quarter earnings release.

In the press release, Hagens Berman discussed the termination of the company’s co-CEO and board member, Bruce Linton, on July 3. His departure came after the company posted a net loss of $323 million in the fourth quarter of fiscal 2019. However, the company then posted disappointing earnings results for the first quarter and second quarter of fiscal 2020. CGC has blamed its poor second-quarter performance on inventory write-offs and restructuring charges. However, as reported by StreetInsider, MKM Partners analyst Bill Kirk believes the company’s “excessive equity comp policy” is the major reason for the losses.

The Rosen Law Firm and Bragar Eagel & Squire are also investigating CGC for potential securities fraud.