As I have detailed in prior post on this site (most recently here), in recent months plaintiffs’ lawyers have filed a number of securities class action lawsuits against companies in cannabis-related businesses. According to an April 22, 20202 report from the Goodwin Procter law firm entitled “Update on Securities Litigation Against Cannabis Companies” (here), the number of securities suits against cannabis companies jumped significantly in 2019 compared to 2018. As discussed further below, these litigation trends have continued in 2020.
According to the law firm report, during 2018 and 2019, there were a total of 19 cannabis-related companies hit with U.S. securities class action lawsuits. (This count includes companies involved in both the cannabis and cannabidiol sectors.)
The number of securities suits against cannabis companies increased 116% between 2018 (when there were 6 cannabis-related companies hit with securities suits) and 2019 (when there were 13 cannabis companies hit with securities suits). I reviewed many of the 2019 filings in a November 2019 post, here.
Two of the companies hit with securities suits during the 2018-2019 time frame were hit with parallel suits filed in federal and state court.
There are a number of factors that have driven the rise of securities litigation involving companies in this sector. According to the report, the rise in the number of suits involving cannabis companies has to do with the “growing number of companies in the sector, regulatory uncertainties, and overall market volatility in the legal cannabis industry.”
A big factor in the increased number of companies in the sector is the 2018 legalization of marijuana in Canada. More than half of the 19 companies hit with securities suits during the period 2018-2019 were Canadian companies. A December 2019 guest post on this site reviewed the “unique” liability exposures of Canadian cannabis companies (here).
Most of the securities class action lawsuits filed against cannabis companies during the period 2018-2019 focus on disclosures related to “operations, transactions, financial guidance, or financial restatements and internal controls.” Several of the lawsuits followed “purported exposé reports published by activist short-seller stockholders.”
An example of a securities class action lawsuit that was filed following a short-seller report is the October 2018 lawsuit filed against Namaste Technologies. Namaste was hit with the securities suit after short-seller Citron Research published a report stating that the company’s sale of a subsidiary that the company had said was an arms-length transaction in fact involved a former company executive.
Other litigation has involved regulatory issues and concerns. For example CannTrust holdings was hit with a securities suit in July 2019 after the company disclosed that Canadian regulators had penalized the company for growing cannabis in unlicensed facilities.
The report includes a detailed review and analysis of several of the securities suits filed against cannabis companies during the period 2018-2019.
2020 has been an unusual year so far; the coronavirus outbreak has been so disruptive in so many ways. However, notwithstanding the pandemic’s disruptive impact, the litigation trend involving suits against cannabis companies has continued this year.
By my count, there have been at least three securities class action lawsuits filed so far in 2020 involving cannabis companies: the suit filed on March 6, 2020 involving Tilray, Inc. (here); the lawsuit also filed on March 6, 2020 against PharmaCielo, Ltd. (here); and the lawsuit filed on March 11, 2020 against Cronos Group (here). All three of the defendant companies are Canadian companies. Also of note is the fact that Cronos group was the target of a prior securities class action lawsuit, filed against the company in 2018.
In the Tilray lawsuit, the plaintiff alleges that the company misrepresented a third-party agreement in to which the company had entered. In the PharmCielo, the plaintiff alleges that the company engaged in an undisclosed related-party transaction. In the Cronos Group lawsuit, the plaintiff alleges that the company’s revenue recognition practices were misleading.
In addition to these three securities class action lawsuit, there has also been at least one cannabis-related shareholder derivative lawsuit filed in 2020 – on April 24, 2020, a plaintiff shareholder filed a derivative suit in the District of Delaware against the board of Zynerba Pharmaceuticals, Inc. Zynerba, by contrast to the three companies named in securities suits as described in the prior paragraph, is not a Canadian company, it is based in the U.S. Zynerba previously was hit with a securities class action lawsuit in 2019 based on substantially the same grounds as are alleged in the newly filed derivative suit.