Canadian cannabis company Cronos Group and its former chief commercial officer each avoided fines in reaching settlements with the Securities and Exchange Commission (SEC) announced Monday over alleged accounting fraud.
Cronos, a Nasdaq-listed company since 2018, submitted inaccurate financial statements to the SEC in two quarters in 2019 when it improperly recognized revenue from the sale of cannabis flower and purchase of a finished cannabis product, the agency stated in its order. In one of the quarters, William Hilson, Cronos’s former chief commercial officer, allegedly entered into an undisclosed oral agreement to sell cannabis flower and then repurchase finished cannabis product in the following quarter.
Hilson didn’t report the agreement to the SEC or Cronos, which discovered the accounting errors through an internal investigation, according to the SEC.
Cronos filed restated statements to the SEC, showing it had overstated its revenues in the first and third quarters of 2019 by $5.8 million. The company also found in the second quarter of 2021 it should have recorded about $235 million in impairment charges related to its U.S. unit, the SEC said.
Cronos violated the antifraud, reporting, books and records, and internal controls provisions of federal securities laws, the SEC said.
The agency decided not to fine the company because of its cooperation and willingness to remediate.
“While today’s 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,” said Mark Cave, associate director in the SEC’s Enforcement Division, in a press release.
Cronos enhanced its internal accounting controls, according to the agency’s order. The company agreed to hire an independent compliance consultant to review its financial reporting policies and make recommendations.
Cronos will be unable to rely on the private offering exemptions provided by Regulations A and D under the Securities Act for a period of five years. It also loses its status as a well-known seasoned issuer for three years and can’t rely on the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 for a period of three years.
Hilson is barred from serving as an officer or director for three years and suspended from practicing or appearing before the SEC as an accountant for at least three years, according to his order with the agency. He left Cronos in December 2019.
Cronos settled with the Ontario Securities Commission on Monday to resolve similar charges and agreed to pay a penalty of 1.34 million Canadian dollars (U.S. $980,000). Hilson agreed to pay about U.S. $54,000 to the OSC.
“We are pleased to have resolved these matters,” said Mike Gorenstein, chief executive officer of Cronos, in a statement. “Important steps have been taken to strengthen our internal controls, and we are committed to continuing this work.”