The high-stakes lawsuit that Canopy Growth and other cannabis companies in Ontario, Canada, had hoped would die along with their ill-fated PharmHouse joint venture has been revived and revised.

The new lawsuit claims C$500 million ($394 million) and contains more details and allegations than the related lawsuit filed last August, which was dismissed after FarmHouse received protection from its creditors.

A group of cannabis companies, including Canopy Growth, is accused of creating a PharmHouse joint venture nearly three years ago to mass-produce cannabis for the sole purpose of driving up share prices and generating profits for company insiders, according to a new lawsuit filed in Ontario Superior Court in February.

However, the companies had no intention of honoring the agreements to buy cannabis from FarmHouse because they had more than enough product from other sources, according to the lawsuit.

The complaint, filed on behalf of 2615975 Ontarians, seeks damages for bad faith, fraud, conspiracy and breach of fiduciary duty, according to court documents obtained by Marijuana Business Daily.

The number company was formed in 2018 by a group of investors, including Paul Mastronardi, CEO of Mastronardi Produce, Ontario’s largest greenhouse vegetable grower and owner of the Sunset product brand, to participate in a joint venture with Canopy Rivers.

In addition to Canopy Growth, defendants named in the complaint include Rivers, a former subsidiary of Canopy Growth, TerrAscend and its Canadian branch, and Olivier Dufurmantel. Dufurmantel was the sole CEO of PharmHouse, the former COO of Canopy Rivers and the former Senior Vice President of Canopy Growth.

The pharmacy named as a defendant in the August appeal is not a defendant in the new appeal.

In 2020, Canopy Growth increased its stake in TerrAscend and split it with a subsidiary of Canopy Rivers, now called RIV Capital.

A spokesperson for RIVE Capital told MJBizDaily that the allegations in the new lawsuit are completely unfounded and that the company plans to vigorously defend itself against what we believe are baseless allegations.

In a separate statement to MJBizDaily, RIV Scar CEO Alexandrian said: We are very disappointed with the transfer of our partnership to the majority shareholders of PharmHouse, but we remain focused on solving the challenges PharmHouse faces in order to maximize value for PharmHouse and our shareholders.

Canopy Growth said it is not a party to the lawsuit and does not comment on pending litigation. The other companies did not immediately respond and Dufourmantelle could not be reached for comment.

Presumed replacement pump

The August lawsuit was dismissed after FarmHouse received creditor protection under the Companies’ Creditors Arrangement Act the following month, meaning it could not be sued for being involved in FarmHouse’s bankruptcy case.

In October, however, the judge allowed the plaintiff to dismiss the suspended lawsuit, which opened the door for the pharmacy to file another lawsuit outside of the bankruptcy proceedings in 2021.

The new lawsuit adds new parties to the list of defendants, namely Dufourmantelle, and adds allegations about the company’s motives, including pumping up share prices to generate profits for insiders like Canopy Growth co-founders Bruce Linton and Mark Zekulin and others.

In fact, the new trial is less about the failed cannabis purchase agreements and more about the intentions of the defendants who created the joint venture in the first place.

The indictment alleged that the key component of the greenhouse joint venture was the press release and that the defendants were not serious about honoring the withdrawal agreements or jointly building the cannabis empire.

On the contrary, according to Ontario 2615975, the defendants hoped that news of the FarmHouse joint venture would cause their shares to rise.

Defendants knew and intended that this news would cause a positive market reaction and drive up the price of their respective shares, which the complaint alleges was the sole intent of defendants in filing the complaint and in inducing plaintiff to join the FarmHouse joint venture.

In its memorandum of claim, 2615975 Ontario argued that Canopy Rivers, Canopy Growth and TerrAscend had in fact acted together as a single entity with respect to PharmHouse.

The joint venture’s principal activity, according to the complaint:

  • Canopy Rivers broker’s involvement in a purchase, or an unannounced transaction.
  • An agreement whereby Canopy and its partners commit to purchasing a certain amount of cannabis flowers from PharmHouse at fixed prices – even if the companies have obtained more than enough marijuana from other sources to meet their needs.

The defendants did not know at that time that they already had production facilities and/or agreements with other cannabis flower growers that could produce more than ten times the amount of cannabis flowers that the defendants could actually sell and/or process, the complaint states.

Substantial oversupply

When the massive 1.3-million-square-foot greenhouse produced its first commercial cannabis flower last year, Canopy Growth and TerrAscend Canada refused to accept delivery without good reason and on the basis of (the argument) that they already had more product than they could actually use and that the market price per gram of cannabis flower was lower than the fixed price guaranteed by PharmHouse in the supply contracts, the lawsuit said.

The lawsuit alleges that Canopy Growth established a cannabis-specific quality control and inspection system that included impossible quality standards designed to ensure that any product manufactured by PharmHouse, regardless of its actual quality, would pass inspection to reject the flower manufactured by PharmHouse.

The inspection regime was so strict that the crop would not have come through, the statement said.

Without a buyer for the cannabis, FarmHouse could not pay wages or meet its financial obligations, and last year it intervened to protect its creditors.

The complaint also alleges that the defendants failed to take care of the large amount of excess cannabis flowers in their possession.

Instead, their sole purpose was to form a joint venture, cultivated to artificially inflate the value of their respective stock prices in order to generate profits for a select group of insiders, including Canopy co-founders Linton and Zekulin, Phil Sher, Canopy’s General Counsel, and Dufourmantelle.

The lawsuit alleges that the defendants’ strategy of unjustly enriching themselves at the expense of the plaintiff was successful, noting that more than $75 million in proceeds from the sale of shares were collected by Canopy insiders after news of the company was made public.

Losses in billions

As Marijuana Business Daily reported in January 2018, major Canadian producers produced more than enough to meet the demand for adult-use cannabis in the first few years of legalization.

Despite this, the companies have continued to expand their acreage by several million square feet, to the point where cannabis has become the fourth largest cash crop in Canada in terms of acreage harvested.

This then led to a massive oversupply of cannabis, a drop in wholesale prices and the emergence of unprofitable large-scale cultivation across the country, resulting in billions in losses for some producers.

In total, a dozen licensed growers have lost more than $5 billion since cannabis was legalized in Canada – largely due to rampant cash crop cultivation in Canada and beyond.

Canopy Growth alone lost $1.3 billion in 2020.

By mid-2020, Plaintiff had invested more than C$100 million ($79 million) in the goods, equipment and product claimed by Plaintiff.

In addition to monetary damages, plaintiff also alleges that its credibility in the community and in the greenhouse industry was damaged after the joint venture was unable to pay its bills as a result of defendants’ conduct.

In 2020, Canopy Growth increased its stake in TerrAscend and split it with a subsidiary of Canopy Rivers, now called RIV Capital.

In a statement emailed to MJBizDaily, a spokesperson for RIVE Capital said:

On the 10th. In February 2021, we received an updated claim from 2615975 Ontario Ltd, the majority shareholders of FarmHouse and the principal shareholders and operators of Mastronardi Product Ltd. As in the original September 2020 claim, we believe that the allegation regarding our conduct is wholly without merit. We intend to defend ourselves tooth and nail against allegations that we believe are unfounded.

FarmHouse entered into an asset purchase agreement in early March as part of a sale and investment process led by BMO Capital Markets and announced by RIV Capital last week.

The price has not been disclosed and court approval for the sale is required.

Matt Lamers is the international editor of Marijuana Business Daily in the Toronto area. He can be contacted at [email protected].

canopy stock,canopy growth stock,canopy growth news,mj stock,Privacy settings,How Search works

You May Also Like

Little-Noticed FAA Memo On Marijuana Emerges Amid Local Airport Controversy In Arizona

Despite numerous last-minute concessions to lower the marijuana tax and ensure that the measure would not conflict with the Initiative 65 medical marijuana program, which voters included in the state constitution in a massive vote in November, there was bipartisan…

Reddit’s WallStreetBets Drives Market Volatility for Cannabis Stocks

Influenced by traders on /r/WallStreetBets, the Reddit-based forum that stirred the stock market last month with the launch of GameStop shares, shares of cannabis companies have seen volatile highs and lows this week, reports Business Insider. On Thursday, Tilray shares…

Elon Musk Thinks CBD Is ‘Fake,’ But Joe Rogan Teaches Him A Lesson

Elon Musk may know a bit more about rockets and electronic machines, but in an interview with podcaster Joe Rogan this week, he revealed a blind spot regarding cannabis, saying he thinks CBD is “fake.” This does not mean that…

Connecticut Governor Unveils Adult-Use Legalization Proposal in Budget Request

After Steven Meland and Jeremy Breton, co-owners of Hotbox Farms, opened the doors to their 2019 clinic in Ontario, Oregon, lines formed, as they did at other clinics in the city. It was 5 a.m. when he heard someone knocking…