Pot grower CannTrust Holdings Inc. (NYSE: CTST) had just about the worst year any company in any business could have. From a high of around $11 a share in mid-October of 2018, the share price fell to around $1.30 just 12 months later. Shares first closed below $1.00 in mid-November.

After stumbling in the final three months of the year, CannTrust stock rode a wave to crest at just under $10 by late April. Then the company announced a secondary offering of more than 36 million shares that ultimately priced on May 2 at $5.50, a discount of nearly 15%. At its initial public offering in March of 2018, CannTrust shares priced at $9.00 a share and the company raised $100 million. The secondary offering raised about $230 million.

The decline in the cannabis market that began in mid-2019 made the company’s problems worse, but there’s no question that many of its troubles were homegrown.

That Secondary Offering Lit the Fuse

Shareholders generally don’t like secondary offerings because the new shares dilute the value of the existing stock that investors already own. That’s pretty easy to understand.

What’s less easy to understand is why several CannTrust executives apparently lied to investors. In the run-up to pricing the secondary offering, former CannTrust CEO Peter Aceto and company co-founder Eric Paul allegedly misrepresented the status of the company’s federal and provincial licensing in Canada.

A former CannTrust employee-turned-whistleblower in mid-June of last year notified Health Canada, the government agency responsible for licensing marijuana growers, that CannTrust was and had been committing a variety of infractions, including growing marijuana in unlicensed facilities. A few days later, a surprise visit by regulators found 5,200 kgs (more than 11,400 pounds) unlicensed cannabis grown in one of the company’s facilities.

In July, Health Canada sent CannTrust a non-compliance letter and suspended CannTrust’s license. By the end of the month, Aceto had been replaced and co-founder Paul had resigned from the board. Not only is there evidence that Aceto knew about the illegal grows, he and others are alleged to have actively encouraged it.

Then the shareholder lawsuits began rolling in.

Who CannTrust Faces in Court

Last week, an Ontario court announced that a class-action lawsuit filed by law firms Henein Hutchison, Kalloghlian Professional, A. Dimitri Lascaris Law Professional and Strosberg Sasso Sutts best represents the interests of the shareholders who filed suit and would be allowed to proceed. Three class-action suits were filed, but the court rejected two others before selecting this one.

What makes the selection worse for CannTrust is that Henein Hutchison is one of Canada’s top litigation firms and partner Marie Henein has a reputation as a no-holds-barred litigator. The following tweet from @carymarules is illustrative.

THREAD 🌱

ICYMI: Legal badass Marie Henein is leading a class action against @CannTrust $TRST $CTST.

The claim centres on the illicit cultivation scandal from Summer 2019, when regulators found cannabis growing in several unlicensed rooms at the company’s Pelham facility. pic.twitter.com/8scou2KOXX

— Caryma Sa'd – Lawyer (@CarymaRules) February 7, 2020

In an interview last September with CTV, Henein was asked what had helped tone down her “bad reputation.” She answered “straightening irons,” which really helped because “I couldn’t manage my curly hair.” Still, she said, “If I had my druthers, I’d be as punky as you could come. I was an absolute goth in high school. I love that. That’s where I skew. It’s not an image makeover. It’s a lot of restraint on my part.”

What Unhappy Investors Are Likely to Get

CannTrust’s market cap is currently less than $120 million, about half the amount the company raised in its secondary offering last year. The company has not filed an earnings report with either the U.S. Securities and Exchange Commission or the Ontario Securities Commission since March of 2019, but is required to file bi-weekly updates with the regulators. These are essentially boilerplate filings stating that nothing has changed.

In its most recent quarterly filing, the company claimed it had just $2.4 million cash and $29.6 million in short-term assets. That did not include the cash raised in its May secondary offering.

The company listed $64.1 million in property, plant and equipment, but no goodwill. All told, CannTrust listed $168 million in assets. That number is unlikely to have grown because the company cannot sell any of its products. Even firing 140 employees to cut costs won’t go very far toward meeting claims for damages caused by CannTrust.

That’s not much for investors to look forward to, and a bankruptcy filing could take even that small recompense away. Company officers and others also may be targeted. Any reimbursement, if it comes at all, is likely to be years in the future.

CannTrust’s Other Problems

With shares trading at less than a dollar, the company has been notified by the New York Stock Exchange that it is no longer in compliance with listing standards. CannTrust has until late March to comply with rules governing its continued listing on the Toronto Stock Exchange. Short sellers continue piling on as well.

According to Midas Letter, other defendants in the class-action lawsuit include KPMG, as well as the investment banks that steered investors to CannTrust’s secondary offering. Those include, among others, Merrill Lynch, Citigroup Global Markets, Credit Suisse, RBC Dominion Securities, Jefferies and Canaccord Genuity. They have to claim that they were also lied to, didn’t do their due diligence or were complicit. Two of those three options are losers.

Even if CannTrust can overcome its compliance issues and miraculously extract itself from the pending class-action lawsuit, the company has to figure out a way to win back its medical cannabis and recreational customers. It has had to watch $56 million in unlicensed inventory literally go up in smoke with no way to replace it until their license is reissued. The good news, such as it is, is that the license was not revoked.

Another significant issue will be pricing, again assuming CannTrust can get its license reinstated. At the end of September last year, a gram of marijuana sold through a licensed retail shop cost C$10.23, compared to a street-corner price of C$5.59. While Canada’s marijuana producers may value their inventory at or near the higher number, the real value of inventories is probably no more than half the difference between the legal price and the black market price.

A final problem that all Canada-based marijuana stocks face this year is the unlikelihood that U.S. federal law will be changed, allowing cannabis to be sold without fear of violating federal law. Canadian producers have widened their scope to include exporting medical marijuana to Europe and elsewhere, but the mother lode is right next door.

After about the first six weeks of 2020, cannabis stocks in general have picked up right where they left off in 2019. Aurora Cannabis Inc. (NYSE: ACB) traded down nearly 31%, Aphria Inc. (NYSE: APHA) traded down about 20%, Hexo Corp. (NYSE: HEXO) traded down about 20%, Cronos Group Inc. (NASDAQ: CRON) traded down nearly 12%, CannTrust traded down nearly 11%, Canopy Growth Corp. (NYSE: CGC) traded down more than 6% and Tilray Inc. (NYSE: TLRY) traded down over 4%. This is not shaping up as a good year for pot stocks.

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