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.
Netflix (NFLX) stock slid as much as 9.6% Friday after the company gave a second quarter revenue forecast that missed estimates and announced it would stop reporting quarterly subscriber metrics closely watched by Wall Street.
On Thursday, Netflix guided to second quarter revenue of $9.49 billion, a miss compared to consensus estimates of $9.51 billion.
The company said it will stop reporting quarterly membership numbers starting next year, along with average revenue per member, or ARM.
“As we’ve evolved our pricing and plans from a single to multiple tiers with different price points depending on the country, each incremental paid membership has a very different business impact,” the company said.
Netflix reported first quarter earnings that beat across the board on Thursday, with another 9 million-plus subscribers added in the quarter.
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Subscriber additions of 9.3 million beat expectations of 4.8 million and followed the 13 million net additions the streamer added in the fourth quarter. The company added 1.7 million paying users in Q1 2023.
Revenue beat Bloomberg consensus estimates of $9.27 billion to hit $9.37 billion in the quarter, an increase of 14.8% compared to the same period last year as the streamer leaned on revenue initiatives like its crackdown on password-sharing and ad-supported tier, in addition to the recent price hikes on certain subscription plans.
Netflix’s stock has been on a tear in recent months, with shares currently trading near the high end of its 52-week range. Wall Street analysts had warned that high expectations heading into the print could serve as an inherent risk to the stock price.
Earnings per share (EPS) beat estimates in the quarter, with the company reporting EPS of $5.28, well above consensus expectations of $4.52 and nearly double the $2.88 EPS figure it reported in the year-ago period. Netflix guided to second quarter EPS of $4.68, ahead of consensus calls for $4.54.
Profitability metrics also came in strong, with operating margins sitting at 28.1% for the first quarter compared to 21% in the same period last year.
The company previously guided to full-year 2024 operating margins of 24% after the metric grew to 21% from 18% in 2023. Netflix expects margins to tick down slightly in Q2 to 26.6%.
Free cash flow came in at $2.14 billion in the quarter, above consensus calls of $1.9 billion.
Meanwhile, ARM ticked up 1% year over year — matching the fourth quarter results. Wall Street analysts expect ARM to pick up later this year as both the ad-tier impact and price hike effects take hold.
On the ads front, ad-tier memberships increased 65% quarter over quarter after rising nearly 70% sequentially in Q3 2023 and Q4 2023. The ads plan now accounts for over 40% of all Netflix sign-ups in the markets it’s offered in.
Netflix reported first quarter earnings after the bell on Thursday. REUTERS/Dado Ruvic/File Photo (REUTERS / Reuters)
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
Oil prices initially spiked on Friday due to unconfirmed reports of an Israeli missile strike on Iran.
Prices briefly reached above $90 per barrel before falling back as Iran denied the attack.
Iranian media reported activating their air defense systems, not an Israeli strike.
Oil prices gave up nearly all of early Friday’s gains after an Iranian official told Reuters that there hadn’t been a missile attack against Iran.
Oil surged by as much as $3 per barrel in Asian trade early on Friday after a U.S. official told ABC News today that Israel launched missile strikes against Iran in the early morning hours today. After briefly spiking to above $90 per barrel early on Friday in Asian trade, Brent fell back to $87.10 per barrel in the morning in Europe.
The news was later confirmed by Iranian media, which said the country’s air defense system took down three drones over the city of Isfahan, according to Al Jazeera. Flights to three cities including Tehran and Isfahan were suspended, Iranian media also reported.
Israel’s retaliation for Iran’s missile strikes last week was seen by most as a guarantee of escalation of the Middle East conflict since Iran had warned Tel Aviv that if it retaliates, so will Tehran in its turn and that retaliation would be on a greater scale than the missile strikes from last week. These developments were naturally seen as strongly bullish for oil prices.
However, hours after unconfirmed reports of an Israeli attack first emerged, Reuters quoted an Iranian official as saying that there was no missile strike carried out against Iran. The explosions that were heard in the large Iranian city of Isfahan were the result of the activation of the air defense systems of Iran, the official told Reuters.
Overall, Iran appears to downplay the event, with most official comments and news reports not mentioning Israel, Reuters notes.
The International Atomic Energy Agency (IAEA) said that “there is no damage to Iran’s nuclear sites,” confirming Iranian reports on the matter.
The Isfahan province is home to Iran’s nuclear site for uranium enrichment.
“Brent briefly soared back above $90 before reversing lower after Iranian media downplayed a retaliatory strike by Israel,” Saxo Bank said in a Friday note.
The $5 a barrel trading range in oil prices over the past week has been driven by traders attempting to “quantify the level of risk premium needed to reflect heightened tensions but with no impact on supply,” the bank said, adding “Expect prices to bid ahead of the weekend.”
At the time of writing Brent was trading at $87.34 and WTI at $83.14.
Premier David Eby is warning real estate investors and speculators that his government is tilting the rules toward families seeking homes as it tightens the rules on short-term rentals.
Eby said Thursday that the rule changes on May 1 will limit short-term rental units to within the principal home of a host, but the move isn’t a ban on platforms such as Airbnb if they aren’t used to create de facto hotels from B.C.’s housing stock.
“If there’s a major event [such as a] Taylor Swift concert, a FIFA-like event and somebody wants to rent out their primary residence and go away for the weekend to avoid the crush of the crowds, they can still do that,” Eby said.
The changes were announced by the government last spring, giving those who own short-term rentals a year to conform.
Eby said the changes will allow both the province and local governments to crack down on speculators.
“If you’re flipping homes, if you’re buying places to do short-term rental, if you’re buying a home to leave it vacant, we have consistently, publicly, repeatedly sent the message: Do not compete with families and individuals that are looking for a place to live with your investment dollars.”
Eby made his comments as the province announced new figures gathered in March that showed more than 19,000 entire homes being listed as short-term rentals.
Housing Minister Ravi Kahlon said the new rules also require short-term rental platforms such as Airbnb to share listed property data with the province and local governments.
He said they expect a significant amount of the homes listed on short-term sites to be back in the long-term rental pool.
“Our view is even if half of those units were to come back onto the market, that is substantial,” Kahlon said. “The cost that it takes to build new housing, when you can get even half of the 19,000 back on the market, that’ll make a substantial difference in our communities.”
He said previous efforts to limit short-term rentals are increasing housing supply in some places.
“We’re seeing, already, in many communities that action happening,” Kahlon said. “We have heard many stories of people finding rentals now because of opportunities when it comes to short-term rentals coming onto the market.”
The new principal residence requirement for short-term rentals will allow local governments to request that a platform remove listings that don’t display a valid business licence.
Valid short-term rental hosts will also be required to display a business licence number on their listings if a licence is required by local government.
The new rules will apply to more than 60 B.C. communities, and Kahlon said a compliance enforcement unit will be phased in to help municipalities deal with rule violations.
Much of the monitoring and enforcement, however, will be conducted online through a new rental data portal that will allow local governments to track and request removal of listings from platforms.
“With this new digital portal, local governments will be able to upload, within moments, listings that they believe are operating illegally within their community,” Kahlon said.
The platform will have five days to remove listings that aren’t following the rules, and if they don’t, they will be fined, he said, noting there’s an up-to-$10,000-a-day-per-listing fine for platforms that don’t co-operate.
“We believe that’s enough of a deterrent for the platforms to co-operate with local governments,” said Kahlon
A website launched Thursday for hosts will allow them to get information about their requirements from the province and their municipality, and their responsibility to notify anyone that’s booked.
“Hosts and platforms have a responsibility to notify anyone that’s booking of all the changes that have been coming,” said Kahlon. “They’ve been notified about this since September or October when the legislation has come in, and they’ve had plenty of time to set up their policies to do that.”
The rules do include some exceptions, including some strata hotels and motels operating before last December being exempt if certain criteria are met.
Eby said the overall message to property investors looking for short-term gains is clear: Build homes that people need and government will do all it can to help expedite the process.
“But if you are standing neck and neck with a family that’s looking for a place to live, and you’re trying to do a speculative investment, [while] they’re looking for a place to live, we are going to tilt the deck every single time towards that family,” Eby said. “And we’re gonna keep doing it.”
Eby also said a positive side-effect of short-term rental regulation has been the re-emergence of hotel construction, with 1,400 rooms “in the development pipeline” in Vancouver.
“Those investors in those hotel rooms weren’t able to make the decision to proceed,” Eby said, citing the previous competition from short-term rentals. “Very clearly, with these regulations in place, there will be visitors to stay in hotel rooms, there will be a market for hotel rooms and they’re making the decision to proceed. This is very good news.”
Victoria-based Property Rights B.C. has filed a lawsuit against the province and city of Victoria to fight the new regulatory system.
It maintains the province overstepped its authority and its lawsuit is focused on preserving the rights to own and operate short-term vacation rentals. The organization is also seeking a delay in enforcement.
Asked about the lawsuit, Eby said he can’t comment on a matter that’s before the courts, “but what I can say is we’re very confident in the legal authority of the province to regulate the housing sector in this way and we’ll make the arguments that are needed in court to address that.”
More communities initially exempt from the province’s new regulations have opted in, including Gabriola Island, Mill Bay/Malahat, Cobble Hill, Cowichan Station/Sahtlam/Glenora, Cowichan Lake South/Skutz Falls, Saltair/Gulf Islands and North Oyster/Diamond. Tofino previously announced it would opt in.
Municipalities with fewer than 10,000 people, resort communities and regional districts are exempt from a requirement restricting short-term rentals to principal residences and either a secondary suite or laneway home/garden suite.
