Aurora Cannabis, Canopy Growth, and Hexo Corp. are usually making headlines for their dominance in the Canadian cannabis sector. These three companies are acknowledged as the largest cannabis producers in Canada; where the plant was legalized completely in 2018 following the passing of the Cannabis Act.
Unfortunately for these three cannabis companies, their reputations could be on the line, what with lawsuits being filed against them by at least nine U.S. law firms. Allegedly, Aurora, Canopy and Hexo have failed to divulge problems they have been facing to hopeful investors. Consequently, the lawsuits claim that they misled investors by being dishonest about business going-ons.
Cannabis stock investors were unpleasantly surprised to discover that stock prices sunk drastically as of late; all three of the Canadian cannabis producers have reported loss in revenue and employee lay-offs.
Canadian cannabis producers laid off employees and exaggerated prospects
Following the acquisition of Newstrike Brands Ltd. back in March of 2019, Hexo was optimistic about the company making $400 million in revenue this year; this was affirmed by co-founder Sebastien St-Louis. Things don’t appear to have gone as planned, however. Upon discovering that 2019 net revenue was forecast to be somewhere in the range of $50 million, the company laid off 200 employees.
Something that has seriously stifled Hexo’s revenue growth was the November 2019 raid of the company’s Ontario facility. Cannabis was being grown illegally inside the facility, which was not licensed by Health Canada. In addition to this, a court filing accused Hexo of falsifying its cannabis inventory.
In regards to the allegations made against Canopy, the company has been accused of over-exaggerating prospects for its marketed products; which are distributed throughout Canadian retail stores. Aurora, on the other hand, is said to have bolstered product demand without paying thought to the repercussions. The cannabis producer has allegedly experienced restructuring problems and oversupply issues as a result of its poorly executed growth tactics.
Claims filed against Canadian cannabis producers could seriously damage their reputation
At the current time, it’s uncertain as to whether or not the lawsuits will be successful in favor of the plaintiffs. According to a lawyer who operates in the Cleveland area, Kevin LaCroix, the U.S. law firms must dig up hard evidence to prove that all three Canadian cannabis committed wrongdoing; a theory known as ‘scienter’.
This legal concept pertains to situations whereby the individual(s) knew of their wrongdoing before actually committing it.
“Scienter is meant to encompass not only actual intent to deceive but reckless indifference or just total indifference to whether or not investors are misled,” explained LaCroix. “That’s often where shareholder claimants fall short, is they don’t sufficiently plead scienter.”
In the event that the claims cannot be proven in a courtroom, the Canadian cannabis companies won’t necessarily leave unscathed. Shareholders are unlikely to feel uncertain about investing in the companies after their names have been dragged through the dirt; something that could potentially lead to their collapse.
Allegations have been dismissed by Aurora and Canopy in official statements to CBC News network. Lawyers are currently reviewing Hexo’s claims, according to the company.
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