Some of Canada’s biggest cannabis producers are facing proposed class-action lawsuits in the United States after investors were hit with steep financial losses in the stock market.
At least nine U.S. law firms are pursuing cases against Canopy Growth, Aurora Cannabis and Hexo Corp. in American courts.
Although the allegations vary, each pot producer is accused of misleading investors or failing to disclose certain problems with their businesses. When those problems became publicly known, the lawsuits claim, share prices plunged and investors were stuck with losses.
“[Investors] are mad; they were taken by surprise,” said Reed Kathrein, a lawyer at Hagens Berman Sobol Shapiro LLP, which is pursuing claims against all three producers.
None of the allegations have been proven in court.
Each of the companies declined to be interviewed for this story. Canopy and Aurora denied the allegations in brief statements, while Hexo said only its lawyers are reviewing the claims.
Producers ride green crush
These companies were among several Canadian cannabis firms that listed on U.S. stock exchanges, riding a wave of investor enthusiasm surrounding the industry before and after Canada legalized pot.
“But when they hit obstacles, the share prices declined,” said Kevin LaCroix, a Cleveland-based lawyer who is not involved in any of the proposed class actions, but has followed the industry.
“It’s pretty common in the United States, when a company experiences a significant decline in its share price, opportunistic plaintiff lawyers will try and seize on that as an opportunity to try and make some money.”
Lawsuits could create uncertainty
Even if the lawsuits aren’t successful, they could still pose challenges to companies that are trying to win over investors, said Brad Poulos, a lecturer at Ryerson University’s Ted Rogers School of Management.
“Anytime there’s uncertainty about the future of a company, that’s going to create uncertainty in the minds of shareholders,” Poulos said.
“As the market determines the likelihood of a suit being successful, that will start to get priced into the stock,” he said.
The cases against these three companies have attracted the attention of at least nine legal firms because of a feature of U.S. law, Kathrein said. After an investor’s lawyer files an initial securities lawsuit, they publish a notice, which gives other investors 60 days to apply to the court to become lead plaintiff in the case.
‘A beauty contest’
Law firms then issue press releases seeking investors in the hopes that they can attract a client who becomes the lead plaintiff. One of the qualifications to become lead plaintiff is they suffered the greatest amount of alleged losses.
“It’s a beauty contest,” Kathrein said. “These press releases are basically saying, ‘Hey, I’m part of the beauty contest; select me.'”
A Hexo Corp. employee examines cannabis plants in one of the company’s greenhouses in Masson Angers, Que. The company told CBC it does not comment on litigation issues, but that its legal team is looking into the claims against it. (Adrian Wyld/THE CANADIAN PRESS)
Hexo, based in Gatineau, Que., is accused of failing to tell investors that it was inflating its revenue figures through a process called channel-stuffing, which involves sending retailers more products than they are able to sell. A court filing alleges Hexo didn’t tell investors its reported cannabis inventory was misstated and that it was growing pot in an Ontario facility not properly licensed by Health Canada.
A class-action complaint filed with a New York court says when Hexo announced in March 2019 it was buying rival Newstrike Brands, the company said it was acquiring Newstrike’s four production facilities. It also said it was “committing to achieving over $400 million in net revenue in 2020.”
But by October, the company withdrew that commitment after projecting its net revenue for 2019 would hit between $46.5 million and $48.5 million. It blamed a slow rollout of retail stores across Canada, a delay in government approvals for edibles and vapes and early signs of falling prices. Two weeks later, Hexo announced 200 layoffs.
In November, the company revealed one of the facilities it acquired from Newstrike was growing cannabis without the proper federal approvals. A press release said the firm learned about the problem in July, shut down production and notified Health Canada.
“All told, Hexo has lost hundreds of millions of dollars in market capitalization as a result of these disclosures,” the complaint says. “As a result of defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the company’s securities, plaintiff and other class members have suffered significant losses and damages.”
Hexo Corp.’s share price has fallen in the past year. (CBC )
According to the filing, anyone who bought Hexo shares on U.S. stock exchanges between Jan. 25 and Nov. 15, 2019 can join the proposed class action. During that period, Hexo’s shares plunged by 65 per cent on the New York Stock Exchange.
In a brief email to CBC News, Hexo said it does not comment on litigation issues, but that its legal team is actively handling the matter.
A high bar for lawsuits
LaCroix, the Cleveland lawyer not involved in any of these claims, says law firms pursuing the cannabis class actions have to meet a high bar. It’s not enough to argue that investors lost money. Their lawyers have to prove the defendant companies and executives intended to mislead shareholders when they made the allegedly false or misleading statements, a concept called scienter, he said.
“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,” LaCroix said.
“That’s often where shareholder claimants fall short, is they don’t sufficiently plead scienter.”
Kathrein, one of the lawyers pursuing the class actions, said he wouldn’t be involved in the cases unless he was convinced he could meet the scienter test.
“We don’t just rely on public facts,” he said. “We have investigators that get out there and try and find witnesses who can tie the information that was allegedly known to them, tie that information to the senior executives.”
Dale Wilesack, senior person in charge, looks at cannabis seedlings at an Aurora Cannabis facility in Montreal in November 2017. The Edmonton-based company is facing claims it exaggerated or over-estimated the demand for its pot and produced too much, leading to oversupply. Aurora denies the allegations. (Ryan Remiorz/The Canadian Press)
Edmonton-based Aurora Cannabis is facing claims the company exaggerated or over-estimated the demand for its pot and produced too much, leading to oversupply. In November, Aurora said it was halting or deferring construction at production facilities in Denmark and Medicine Hat, Alta. It also reported disappointing financial results, including a 24 per cent drop in quarterly net revenues.
A couple of months later, the company told media it was selling a greenhouse in Exeter, Ont.
Another allegation is that Aurora was not up front with investors that it didn’t secure necessary approvals from German authorities to use a certain growing method in that country. After a Marijuana Business Daily report revealed German pharmacists were ordered to stop selling Aurora’s medical pot until there was a review, the lawsuit says, the company’s share price dropped.
“As a result of defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the company’s securities, plaintiffs and other class members have suffered significant losses and damages,” states the complaint, filed a week ago in a New York court.
Aurora shares plunge
The filing says anyone who bought Aurora shares on U.S. stock exchanges between Oct. 23, 2018 and Jan 6, 2020 can join the proposed class action. During that period, Aurora’s shares plunged by 75 per cent on the New York Stock Exchange, from $7.51 per share to $1.90.
Aurora denies the allegations.
“The company believes it has conducted itself in accordance with all relevant securities laws, and refutes these claims,” it said in a brief statement. “The company intends to pursue a full defence against these suits.”
Canopy shares were ‘artificially inflated,’ suit claims
Canopy Growth, Canada’s largest pot producer, is facing allegations it exaggerated or overestimated the potential market for its products in Canadian retail stores, leading to inventory writeoffs and restructuring charges.
One class-action complaint says the Smiths Falls, Ont.-based company issued press releases leading up to legalization that it was expanding its production capacity to meet projections of growing demand for cannabis in Canada and around the world.
“As a result of the dissemination of the aforementioned false and misleading reports, releases and public statements, the market price of Canopy securities was artificially inflated,” the complaint states.
In November 2019, the company reported lower-than-expected revenues and a $374.6-million loss.
Then-CEO Mark Zekulin told analysts at the time the disappointing results were the result in part of a slow rollout of retail stores in Ontario, which cut its potential Canadian market in half. He said some provinces had slowed their purchases of cannabis because of high inventories, though Canopy’s shipments were up in its most recent quarter.
Mark Zekulin was CEO of Canopy Growth when it reported disappointing financial results in November. He said a slow rollout of retail stores was partially to blame. (Submitted by Canopy Growth)
Canopy’s stock fell on the news.
Between Sept. 8, 2017 and Nov. 13, 2019 — the period that the proposed class action covers — Canopy’s share price on the New York exchange fell by more than a third, from $28.26 per share to $18.50.
When asked for comment on the allegations, Canopy referred to a November 2019 press release, in which the company said it believes it has acted “in accordance with all relevant securities laws, and that the claims are without merit.
“The company intends to vigorously defend itself against any such suits.”
Lawsuits could drag on
Kathrein, whose law firm is seeking the class actions, said the cases will start to move ahead after deadlines to select lead plaintiffs elapse, starting Monday. Ultimately, he believes the cases will likely be collapsed into one proposed class action for each of the three companies.
The defendant companies will likely file motions to dismiss the cases against them, Kathrein said. It could take months to debate those motions, which means they may not be resolved until the end of the year, if not later, he said.
If the lawsuits survive that stage, it could take years to reach a resolution through the courts, though both sides could negotiate a settlement.
Telus Corp. says it is avoiding offering “unprofitable” discounts as fierce competition in the Canadian telecommunications sector shows no sign of slowing down.
The company said Friday it had fewer net new customers during its third quarter compared with the same time last year, as it copes with increasingly “aggressive marketing and promotional pricing” that is prompting more customers to switch providers.
Telus said it added 347,000 net new customers, down around 14.5 per cent compared with last year. The figure includes 130,000 mobile phone subscribers and 34,000 internet customers, down 30,000 and 3,000, respectively, year-over-year.
The company reported its mobile phone churn rate — a metric measuring subscribers who cancelled their services — was 1.09 per cent in the third quarter, up from 1.03 per cent in the third quarter of 2023. That included a postpaid mobile phone churn rate of 0.90 per cent in its latest quarter.
Telus said its focus is on customer retention through its “industry-leading service and network quality, along with successful promotions and bundled offerings.”
“The customers we have are the most important customers we can get,” said chief financial officer Doug French in an interview.
“We’ve, again, just continued to focus on what matters most to our customers, from a product and customer service perspective, while not loading unprofitable customers.”
Meanwhile, Telus reported its net income attributable to common shares more than doubled during its third quarter.
The telecommunications company said it earned $280 million, up 105.9 per cent from the same three-month period in 2023. Earnings per diluted share for the quarter ended Sept. 30 was 19 cents compared with nine cents a year earlier.
It reported adjusted net income was $413 million, up 10.7 per cent year-over-year from $373 million in the same quarter last year. Operating revenue and other income for the quarter was $5.1 billion, up 1.8 per cent from the previous year.
Mobile phone average revenue per user was $58.85 in the third quarter, a decrease of $2.09 or 3.4 per cent from a year ago. Telus said the drop was attributable to customers signing up for base rate plans with lower prices, along with a decline in overage and roaming revenues.
It said customers are increasingly adopting unlimited data and Canada-U.S. plans which provide higher and more stable ARPU on a monthly basis.
“In a tough operating environment and relative to peers, we view Q3 results that were in line to slightly better than forecast as the best of the bunch,” said RBC analyst Drew McReynolds in a note.
Scotiabank analyst Maher Yaghi added that “the telecom industry in Canada remains very challenging for all players, however, Telus has been able to face these pressures” and still deliver growth.
The Big 3 telecom providers — which also include Rogers Communications Inc. and BCE Inc. — have frequently stressed that the market has grown more competitive in recent years, especially after the closing of Quebecor Inc.’s purchase of Freedom Mobile in April 2023.
Hailed as a fourth national carrier, Quebecor has invested in enhancements to Freedom’s network while offering more affordable plans as part of a set of commitments it was mandated by Ottawa to agree to.
The cost of telephone services in September was down eight per cent compared with a year earlier, according to Statistics Canada’s most recent inflation report last month.
“I think competition has been and continues to be, I’d say, quite intense in Canada, and we’ve obviously had to just manage our business the way we see fit,” said French.
Asked how long that environment could last, he said that’s out of Telus’ hands.
“What I can control, though, is how we go to market and how we lead with our products,” he said.
“I think the conditions within the market will have to adjust accordingly over time. We’ve continued to focus on digitization, continued to bring our cost structure down to compete, irrespective of the price and the current market conditions.”
Still, Canada’s telecom regulator continues to warn providers about customers facing more charges on their cellphone and internet bills.
On Tuesday, CRTC vice-president of consumer, analytics and strategy Scott Hutton called on providers to ensure they clearly inform their customers of charges such as early cancellation fees.
That followed statements from the regulator in recent weeks cautioning against rising international roaming fees and “surprise” price increases being found on their bills.
Hutton said the CRTC plans to launch public consultations in the coming weeks that will focus “on ensuring that information is clear and consistent, making it easier to compare offers and switch services or providers.”
“The CRTC is concerned with recent trends, which suggest that Canadians may not be benefiting from the full protections of our codes,” he said.
“We will continue to monitor developments and will take further action if our codes are not being followed.”
French said any initiative to boost transparency is a step in the right direction.
“I can’t say we are perfect across the board, but what I can say is we are absolutely taking it under consideration and trying to be the best at communicating with our customers,” he said.
“I think everyone looking in the mirror would say there’s room for improvement.”
This report by The Canadian Press was first published Nov. 8, 2024.
CALGARY – TC Energy Corp. has lowered the estimated cost of its Southeast Gateway pipeline project in Mexico.
It says it now expects the project to cost between US$3.9 billion and US$4.1 billion compared with its original estimate of US$4.5 billion.
The change came as the company reported a third-quarter profit attributable to common shareholders of C$1.46 billion or $1.40 per share compared with a loss of C$197 million or 19 cents per share in the same quarter last year.
Revenue for the quarter ended Sept. 30 totalled C$4.08 billion, up from C$3.94 billion in the third quarter of 2023.
TC Energy says its comparable earnings for its latest quarter amounted to C$1.03 per share compared with C$1.00 per share a year earlier.
The average analyst estimate had been for a profit of 95 cents per share, according to LSEG Data & Analytics.
This report by The Canadian Press was first published Nov. 7, 2024.
BCE Inc. reported a loss in its latest quarter as it recorded $2.11 billion in asset impairment charges, mainly related to Bell Media’s TV and radio properties.
The company says its net loss attributable to common shareholders amounted to $1.24 billion or $1.36 per share for the quarter ended Sept. 30 compared with a profit of $640 million or 70 cents per share a year earlier.
On an adjusted basis, BCE says it earned 75 cents per share in its latest quarter compared with an adjusted profit of 81 cents per share in the same quarter last year.
“Bell’s results for the third quarter demonstrate that we are disciplined in our pursuit of profitable growth in an intensely competitive environment,” BCE chief executive Mirko Bibic said in a statement.
“Our focus this quarter, and throughout 2024, has been to attract higher-margin subscribers and reduce costs to help offset short-term revenue impacts from sustained competitive pricing pressures, slow economic growth and a media advertising market that is in transition.”
Operating revenue for the quarter totalled $5.97 billion, down from $6.08 billion in its third quarter of 2023.
BCE also said it now expects its revenue for 2024 to fall about 1.5 per cent compared with earlier guidance for an increase of zero to four per cent.
The company says the change comes as it faces lower-than-anticipated wireless product revenue and sustained pressure on wireless prices.
BCE added 33,111 net postpaid mobile phone subscribers, down 76.8 per cent from the same period last year, which was the company’s second-best performance on the metric since 2010.
It says the drop was driven by higher customer churn — a measure of subscribers who cancelled their service — amid greater competitive activity and promotional offer intensity. BCE’s monthly churn rate for the category was 1.28 per cent, up from 1.1 per cent during its previous third quarter.
The company also saw 11.6 per cent fewer gross subscriber activations “due to more targeted promotional offers and mobile device discounting compared to last year.”
Bell’s wireless mobile phone average revenue per user was $58.26, down 3.4 per cent from $60.28 in the third quarter of the prior year.
This report by The Canadian Press was first published Nov. 7, 2024.
