How the head of cannabis company Cronos dealt with a negative report from indicted short seller Andrew Left

By Steve Gelsi

Canadian executive worked to calm shareholder concerns about the 'inaccurate' and 'questionable' report published in 2018

Cronos Group's Chief Executive Mike Gorenstein was giving a tour of one of the company's cannabis growing facilities in 2018 when he heard that his company's stock was down sharply.

The executive was seeing slews of messages about a negative report on the company from Citron Research, the firm led by short seller Andrew Left, who was indicted last week by the U.S. attorney's office. Left also faces securities fraud allegations from the U.S. Securities and Exchange Commission.

The lengthy report "looked like it was written by a high school kid" and contained an allegation that Cronos had not been disclosing pre-orders for cannabis from Canadian provinces, Gorenstein said.

The report raised the prospect that the company was inflating its sales numbers in a sign of "possible" fraud as a reason to dump the stock, Gorenstein said.

"The report was long and negative but "it didn't make any sense," Gorenstein told MarketWatch.

If Cronos had made any major supply agreements, it would have been required to disclose them, he said. And if it had pre-sold cannabis to the extent that Citron alleged, the company wouldn't have needed to spend any money on marketing, he argued.

It seemed designed to frighten people into making a panic decision to sell, he said. The stock fell 30% that day.

The report lacked proper research and Citron never contacted the company, said Gorenstein. Overall, it was "questionable and completely inaccurate" and the allegations in it could have been cleared up with a phone call or email.

Cronos had to deal with hundreds of queries from individual shareholders, potential strategic partners, and institutional investors.

Once Cronos explained the baselessness of the accusations, institutional investors dismissed the report.

The stock was volatile for several days but then settled down.

Not long after, Cronos disclosed a $1.8 billion investment from Altria Group Inc. (MO)

The indictment contains some interesting details, including that Left said, "I have a hot voice in cannabis [;] lets take advantage of it....We can make money in weed....we can destroy CRON," in an August, 2018 email to a hedge fund portfolio manager.

Days later, he accumulated a short position in Cronos of about 884,000 shares and then posted the following statement on his public Twitter account: "CRON: The Dark Side of The Cannabis Space....All hype with possible securities fraud," the indictment said.

Left then posted on Twitter, "Andrew Left from Citron on CNBC Fast Money 5:25 p.m. ET to discuss why $CRON is the most overhyped of all the 'pot stocks' with a target price of $3.50," according to the government's case against him.

Left allegedly bragged that putting out a critical article about Cronos and trading off the resulting stock moves was "like taking candy from a baby."

Cronos decided against filing a suit against Citron at the time because it was focused on running the business. And lawsuits would have kept the allegations in the public spotlight even though they were false.

A Cronos spokesperson declined to comment on whether it would take any potential legal action against Left or Citron Capital in light of the indictment.

Left has pleaded not guilty to the charges.

Left's report came at a particularly active time for Canadian cannabis stocks as Canada had just become the first G-7 country to legalize adult-use cannabis and speculation about wider acceptance in the U.S. was rising.

Both individual stock market investors and institutions were circling the sector, and interest grew more keen when liquor giant Constellation Brands Inc. (STZ) invested $4 billion in Canopy Growth Corp. (CGC) (CA:WEED) in 2018.

Along with Cronos and Canopy Growth, other Canadian cannabis stocks in the spotlight at the time included Tilray Inc. (TLRY), Aurora Cannabis (ACB) and OrganiGram Holdings Inc. (OGI).

Also read: Cannabis company Tilray made a huge bet on craft beer. It's already paying off.

-Steve Gelsi

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08-02-24 1116ET

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