The US Securities and Exchange Commission (SEC) has charged Nasdaq listed Cronos Group - active in the Cannabis sector - with "improperly accounting for millions of dollars of revenue and for other accounting misconduct in multiple reporting periods", although it did not apply a financial penalty.
The SEC also charged Cronos's former chief commercial officer, William Hilson, with fraud and aiding and abetting the company's violations.
The company only avoided that penalty, the SEC said, because of "its timely self-reporting, significant cooperation, and remediation.
That did not work in Canada, where, in a separate regulatory action, the Ontario Securities Commission (OSC) forced Cronos to pay more than C$1m for accounting and control failures, in a deal approved by the Capital Markets Tribunal.
The SEC said that in three separate quarters between 2019 and 2021, Cronos submitted financial statements with the SEC that contained "material accounting errors related to, among other things, revenue recognition and goodwill impairment."
"The [SEC] order also found that, in one of the quarters, Hilson entered into an undisclosed oral agreement to sell cannabis raw material and to repurchase cannabis product in the following quarter. This agreement was neither known nor accounted for by Cronos, which discovered the $2.3m accounting error during an internal investigation. After discovering the accounting errors, Cronos promptly reported the misconduct to the SEC and provided extensive cooperation that meaningfully advanced the Commission's investigation. It also took effective remedial steps to enhance its internal accounting controls."
Mark Cave, associate director in the SEC's Enforcement Division, said: "It is critically important for issuers to have adequate controls in place before they take on the reporting obligations required of public companies."
"While [the] order finds that Cronos's controls were not up to standards when it began filing financial statements with the SEC, Cronos avoided penalties by promptly self-reporting its accounting misconduct as it came to light within the company, cooperating with our investigation, and promptly taking effective remedial steps."
As part of the agreement between the regulator and the company, Hilson has been slapped with a three-year officer and director bar, has been suspended from appearing and practicing before the SEC as an accountant for at least three years, and avoided a fine from the SEC only because the US regulatory cited the OSC's action through which he already agreed to pay C$70,000 as a financial penalty for similar conduct.
In Canada, the OSC noted: "As part of its settlement with the OSC, Cronos admits that it failed to file interim financial statements prepared in accordance with applicable generally accepted accounting principles. Additionally, the company has paid an administrative penalty of C$1.3 million, and a further c$40,000 towards the cost of the OSC's investigation. Cronos will also pay for an independent consultant, acceptable to the OSC, to review its internal controls and ICFR."
ETF effects
The Cannabis sector has come on in leaps and bounds over the past decade, as the regulatory environment has shifted.
In Canada, the House of Commons passed the Cannabis Act in 2017, which resulted by 2018 in the substance being regulated as a legal product in a similar way to alcohol, and with similar penalties for misuse - such as while driving a vehicle.
In the US, while it remains a controlled substance in federal law, around 20 jurisdictions - including states and territories - have legalised recreational use, while a larger number still have to varying degrees legalised its use for medical purposes.
VettaFi's etfdb.com database lists some 11 ETFs invested in the sector via equity holdings. A number of these in turn have exposure to Cronos.
