SEC Charges Cronos and Former COO with Fraud

The SEC has formally charged Cronos and its former COO with fraud related to alleged accounting misconduct and filing false financial statements.

Full story after the jump.

The U.S. Securities and Exchange Commission (SEC) on Monday charged NASDAQ-listed cannabis producer Cronos and the company’s former chief commercial officer with fraud related to falsely accounting for millions of dollars in revenue and other accounting misconduct. The SEC said former Chief Commercial Officer William Hilson aided the company in the violations.

Neither Cronos nor Hilton admitted or denied the allegations, the SEC said.

According to the SEC, from 2019 to 2021 Cronos filed financial statements in three separate quarters with the commission that contained material accounting errors.

In two of the three quarters – the first quarter of 2019 and the third quarter of 2019 – the SEC alleges that Cronos “improperly recognized revenue in connection with certain transactions with the same counter-party where the sale of cannabis raw materials (or cannabis flower) by Cronos occurred simultaneously with the purchase by Cronos of processed cannabis product.”

Separately, in the third quarter of 2019, the SEC says, “a since terminated senior executive of Cronos entered into an undisclosed oral agreement with a different counter-party to sell cannabis raw material to the counter-party but then repurchase the cannabis product, either as a derivative product or in some other form, in the following quarter.”

“This oral repurchase agreement made it inappropriate for Cronos to recognize revenue in connection with the sale transaction. Finally, in the second quarter of 2021, Cronos failed to timely record impairment charges in connection with goodwill and intangible assets associated with its U.S. reporting unit. As a result of the foregoing accounting errors, Cronos furnished to and/or filed with the commission, periodic reports that contained materially inaccurate financial statements.” — SEC, in the Matter of Cronos Group Inc, Oct. 24, 2022 

According to the SEC, after discovering the accounting errors, Cronos filed restated financial statements for the relevant quarters.  

“In connection with the first and third quarters of 2019, Cronos disclosed that it had materially overstated its revenue by $5.8 million,” the SEC alleges. “In connection with the second quarter of 2021, Cronos disclosed that it should have recorded approximately $234.9 million in impairment charges in relation to its U.S. reporting unit. Concerning all three quarters, Cronos disclosed that it had identified material weaknesses in its internal control over financial reporting.” 

In a statement to CFO Dive, Mark Cave, associate director of the SEC’s Enforcement Division, said “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.” 

“It is critically important for issuers to have adequate controls in place before they take on the reporting obligations required of public companies,” he said. 

In a statement, Cronos President and CEO Mike Gorenstein said that the company has “resolved these matters” by agreeing to pay C$1.34 million. 

Hilson agreed to a three-year officer and director ban and to a suspension from practicing before the SEC as an accountant for the same period, the SEC said. It did not fine Hilson after he agreed to pay the Ontario Securities Commission a C$54,000 penalty.

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