Pubdate: Sat, 20 Dec 2014
Source: Globe and Mail (Canada)
Copyright: 2014 The Globe and Mail Company
Contact:  http://www.theglobeandmail.com/
Details: http://www.mapinc.org/media/168
Author: Grant Robertson
Page: B1
Part: 2

THE POT STOCK PROBLEM: ONE COMPANY'S ACTIONS AND AN INDUSTRY OF QUESTIONS

Meet CEN Biotech, the company that wants to become the $5-billion king
of Canada's new medical marijuana industry. But there are serious
questions about its conduct in capital markets, raising concerns about
the federal government's oversight of the sector. With the eyes of the
world on Canada's decision to privatize medical marijuana production,
how much does Health Canada know about the companies it is licensing?

On June 30, in a packed conference room in Denver, Bill Chaaban - a
man known to his legions of followers as "Wild Bill" - took the stage
to a rousing ovation. The room was filled with investors hungry for
the stock market's next big thing. And Mr. Chaaban knew how to play to
a crowd.

According to the emcee who introduced him, Mr. Chaaban was "probably
the most talked-about CEO in the space," which in this case was the
new medical marijuana industry rapidly coming into being across North
America.

It is a multibillion-dollar business being created from scratch - the
product of historic government reforms happening in a number of
jurisdictions, particularly in Canada. In fact, the subject of Mr.
Chaaban's talk was his plan to dominate the new Canadian market for
medical marijuana, which Ottawa had opened in April.

To those attending the first annual "Weedstock" - a conference that
had sold itself as a conduit for investors to connect with "the titans
that drive this fast-paced industry" - Mr. Chaaban seemed to be
letting them in on something remarkable.

"There's some things that I'm going to reveal that haven't been made
public yet," he said, tempting the audience with the prospect of
inside information. "We'll let you speculate from there."

Far from the scrutiny of the Canadian government - the kingmaker
deciding which companies receive a highly coveted licence to grow and
sell medical marijuana - Mr. Chaaban proceeded to talk up his plan.

His Michigan-based company, Creative Edge Nutrition, had a Canadian
subsidiary called CEN Biotech that was constructing a facility in
Southern Ontario big enough to produce 600,000 kilograms of medical
marijuana a year. Not only would it be the largest legal grow
operation in Canada, but this plant in the town of Lakeshore, just
east of Windsor across the border from Detroit, would be the biggest
of its kind in the world - bigger than all the other Canadian
companies combined. CEN Biotech was going to rule this new industry.

Mr. Chaaban, a lawyer from the Detroit area, said he'd spoken with
Health Canada only a few weeks earlier and was going to "partner with
them." He also told the room of investors that his company had
"essentially" been approved by Ottawa.

It was a tantalizing story. Because, as Mr. Chaaban said, this wasn't
just about medical marijuana. The way he saw it, Ottawa's medical
marijuana legislation was basically the end of prohibition on the drug.

"Effectively it's de facto legalization. All you need is a script from
a doctor. You don't have to prove why you need it - all you need is a
prescription to get it," he said. "I see the market being 500,000
patients in two years, and being billions of dollars."

Energized by his story, investors gave Mr. Chaaban a standing ovation.
In the weeks that followed, shares of the parent company, Creative
Edge - a penny stock traded on the loosely regulated over-the-counter
(OTC) market in the United States - rose quickly.

But what the investors in Denver didn't know was that Mr. Chaaban had
made several claims that weren't true. Health Canada does not form
"partnerships" with private-sector companies. Nor had CEN Biotech
"essentially" been approved by Ottawa to begin selling medical
marijuana in Canada.

What they also didn't know was that while Mr. Chaaban was touting his
company to them, he was simultaneously selling off his own shares in
huge numbers and pocketing millions of dollars in the process.

When Health Canada set out to design a market - under orders from the
Supreme Court - that would allow medical marijuana to be prescribed to
patients who need it, the impact on the capital markets was not on its
mind, according to thousands of pages of federal documents detailing
the process, which were reviewed by The Globe and Mail.

But in forming this lucrative new industry, Ottawa has unwittingly
left the door open for stock promoters to spin tales of vast
opportunity, and enrich themselves on the backs of unsuspecting
investors. And Ottawa appears to have no answer for how to stop it.

A Globe and Mail investigation has found that while Health Canada
performs background checks on those who want to operate medical
marijuana companies, the department has not looked into how these same
companies conduct themselves in the capital markets, or what they are
telling investors.

When asked about CEN Biotech's conduct, Health Canada refused
questions, saying it could not comment.

But Mr. Chaaban has continued unabated. As he concluded his remarks in
Denver, he couldn't help but entice investors further. "Stay tuned,"
he said. "We just started."

Selling a story

Before he set his sights on dominating Canada's nascent marijuana
sector, Mr. Chaaban's primary business was Creative Edge Nutrition, a
company on the outskirts of Detroit that made nutritional supplements
and energy drinks.

Mr. Chaaban told investors in the U.S. that Creative Edge Nutrition
ships around the world and is a major player north of the border,
"supplying every major nutrition store in Canada." The Globe and Mail
has been unable to verify this claim. Staff at three of the country's
largest retail chains - GNC, Popeye's Supplements, and Nutrition House
- - said they had never heard of the brand. When asked for a list of
Canadian stores that sell Creative Edge products, Mr. Chaaban and his
spokesman did not respond.

The focus shifted to medical marijuana on Sept. 5, 2013, when Mr.
Chaaban announced the creation of a subsidiary, CEN Biotech.

However, the company did not seek a listing in the Canadian markets,
which would have required it to file audited financials and other key
documents with regulators. Instead, Creative Edge Nutrition and its
new subsidiary continued to trade as a single penny stock in the lax
U.S. over-the-counter market - sort of a back alley of the capital
markets.

These shares, sometimes known as the "pink sheets," carry few
disclosure requirements, leaving investors in the dark on companies'
finances. And because penny stocks are so volatile, even the smallest
rumour can send a stock soaring. Thinly traded, the market is
notorious for stock manipulation.

Interest in Creative Edge's move into marijuana was muted at first, 
primarily because CEN was an unknown stock trading at a fraction of a 
cent, with more than three billion shares outstanding. Then, on Dec. 30, 
2013, in an article titled, "Big Marijuana: Is it the Future?," Mr. 
Chaaban made a huge splash. A writer for financial website Forbes.com 
stated that CEN Biotech "has been approved to grow, distribute, import 
and export medicinal marijuana" by Health Canada.

In the article, Mr. Chaaban predicted the operation would be running
in seven months, or by late July. "By the end of year five, we'll be
doing $100-million in sales, with a margin of 80 per cent," Mr.
Chaaban said.

The article was posted at 1:09 p.m. that day. At 4:23 p.m., Creative
Edge issued a press release trumpeting the story. The company said it
was "proud to announce that it has received its regulatory approval
from Health Canada to become one of Canada's commercial medicinal
marijuana growers. This was announced today in Forbes Magazine."

It was great news, and the stock price began to soar as investors
piled in. Based on what other entrants had experienced, a licence from
Health Canada was worth more than $40-million to a company's value in
the stock market, because it meant revenue would soon be flowing.
"That's a conservative estimate," said Andrea Hill, a securities
lawyer in Toronto with Wildeboer Dellelce. She pegs the value as high
as $70-million.

As fever over marijuana stocks gripped the markets in the first few
months of this year, Creative Edge's shares climbed from 0.37 cents
last Dec. 30 to 10.68 cents on Feb. 10 - a staggering 2,800-per-cent
increase. Creative Edge was suddenly worth more than
$360-million.

But CEN Biotech had not been approved for a licence.

Mr. Chaaban's company had only been issued a preliminary nod from
Health Canada, based on its paperwork. It was not an approval. That
couldn't come until it passed a formal inspection, and there was no
telling when that would happen.

Forbes eventually issued a correction to this effect, but the company
itself was conspicuously silent. Health Canada sent Mr. Chaaban a
reprimand letter on Jan. 26, informing him that "you cannot in any way
suggest that a licence has been obtained or that the issuing of a
licence is imminent."

The Globe and Mail obtained the details of the letter. When asked
about this reprimand, CEN Biotech spokesman and head of investor
relations William Swalm said he was not aware of any such letter.

However, what Creative Edge wasn't highlighting - for Health Canada or
its investors - was that, as Mr. Chaaban was boldly touting the
company in the market, he was also selling off his own shares by the
millions.

According to documents filed with the U.S. Securities and Exchange
Commission, he sold 12.1 million shares after that initial price
surge, for approximately $1.11-million (all figures U.S.) Almost all
of that was profit since, as an insider, he had been issued a vast
number of shares at fraction of a cent apiece.

Despite the reprimand letter from Health Canada - which was at most a
slap on the wrist - the company continued touting its prospects,
becoming a serial issuer of misleading press releases and statements.

On Feb. 21, CEN Biotech held an open house for investors and Mr.
Chaaban said the company would list on NASDAQ - one of the largest
U.S. exchanges - as early as May, a move that would bring it more
credibility in the capital markets.

To date, there is no NASDAQ listing for the company. However, the
claim helped to buoy the stock in otherwise falling markets, and
between Feb. 24 and April 29, Mr. Chaaban sold another 12.7 million
shares for about $1.03-million.

On April 30, with the stock in decline, he issued a press release
announcing that the Lakeshore facility was ready for a "pre-licence
inspection." The announcement pushed the shares up 5 per cent, even
though it was not a significant event in any way. That day, Mr.
Chaaban unloaded another 3.1 million shares for more than $261,000.

Then, on May 6, an article appeared in The New York Post with a bold
headline: "World's Largest Legal Pot Facility to Open." The story said
Creative Edge was on the verge of launching a "legal marijuana
production facility ? that could produce $5-billion in sales per year,
when it starts producing in a few weeks after it passes government
inspections." Mr. Chaaban was quoted saying that "the facility is
done, it's ready" and that it would be run by a "dream team" of top
executives. The stock rose 6 per cent.

The suggestion that the facility would start producing "in a few
weeks" was, again, inaccurate and misleading. Rather than object to
the article, Creative Edge spokesman Mr. Swalm pointed The Globe and
Mail to the article as a credible piece of research on the company.

In the six weeks after the claims were published, Mr. Chaaban sold
another 18 million shares, for $1.4-million.

Then came the Colorado investor conference on June 30. Apart from
inventing a "partnership" with Health Canada, Mr. Chaaban told
investors that Creative Edge had retained auditor Deloitte, suggesting
the company was going to subject itself to greater scrutiny and
transparency and likely file more detailed financial statements. The
stock finished the week up 8 per cent, but more than five months later
there is no evidence that Creative Edge or CEN is audited by Deloitte.
When asked why by The Globe and Mail, Creative Edge refused to say.

However, in mid-July, Mr. Chaaban sold a further 1.8 million shares
for more than $94,000.

In an Aug. 5 interview in Canada, Mr. Chaaban said he was certain the
company would have its licence and be operating by the end of that
month. Again, there was no licence. But the stock rose 18 per cent by
the end of August, and Mr. Chaaban sold another 5 million shares in
that span, for $317,000.

Starting on Oct. 1, as the boom in medical marijuana stocks was
fading, a series of events helped to push up the company's shares. It
began with a peculiar bit of information regarding CEN Biotech that
made its way onto several investor websites.

The blurb was titled "A Pat On The Back - Health Canada Associate
Deputy Minister Paul Glover to Highlight Creative Edge ? Facility Asa
Positive Example For Other Applicants." That is, the federal
government was about to give CEN Biotech an unprecedented
endorsement.

But just as Health Canada doesn't "partner" with companies in the
medical marijuana industry, it doesn't endorse them. As the blurb made
its way around the Internet - to the dismay of Health Canada, sources
in the department say - CEN Biotech did nothing to clarify the
situation. As the markets slumped, the misinformation helped to give
its stock a 3-per-cent lift.

Another strange virtual tout came on Oct. 22, as a document relating
to Health Canada's pre-licence inspection of the Lakeshore facility
was leaked on the Internet.

Such documents are not usually public information. The 12-page report
identified a few deficiencies with the proposed facility, such as
concerns over security cameras. But over all, the inspector seemed
satisfied, concluding "the applicant will be ready and able to meet
the requirements" of obtaining a licence, provided the reported
deficiencies were dealt with.

The inspection report was great news for the company, even moreso when
it mysteriously showed up online. The shares rose 5 per cent over the
next two days. About a week later, on Oct. 30, the company issued a
press release containing a link to the same report. The shares,
trading on this recycled information, closed 12 per cent higher over
the next five days.

Between Oct. 21 and Nov. 7, as these tidbits circulated in the market,
Mr. Chaaban unloaded more than 18.9 million shares, pocketing another
$397,000.

At the height of its valuation, more than $360-million, the fledgling
company was worth more than the combined market capitalizations of the
four licenced Canadian producers that were publicly traded at the
time: Bedrocan Canada Inc., Mettrum Ltd., OrganiGram Inc., and Tweed
Inc.

Without producing a thing, and without a licence, Creative Edge had
somehow become the most valuable company in the Canadian sector.

In all, Mr. Chaaban executed at least 57 stock sales between Feb. 10
and Oct. 9, unloading more than 71 million shares at a significant
profit.

Because he had been issued those shares for as low as a tenth of a
cent, he pocketed more than $4.6-million during that eight-month span,
selling the maximum shares allowable for a CEO under securities rules.

It was highly unusual behaviour. Yet an official with Health Canada -
overseer of the new medical marijuana market - said the agency was
unaware of these stock sales, and had not been keeping track of how
the company was conducting itself in the capital markets.

More bold claims

In his bid to become the undisputed giant in the Canadian medical
marijuana industry, Bill Chaaban has stated numerous times that he is
building a "dream team" of executives and expertise to manage the
company, which will be a "super grower" of the drug.

When the company held an open house in Lakeshore in October to assuage
local concerns, some of this expertise was on hand.

James Whitfield, a project manager, fit the bill as an executive with
an impressive resume. According to his LinkedIn page, Mr. Whitfield
worked for the White House Military Office from July, 2009, to
December, 2012. But he doesn't go into much detail online about his
job. "Perhaps one day we'll be able to talk about that," his LinkedIn
page says.

However, when neighbours attending the Lakeshore event asked how the
company planned to contain the pungent smell of marijuana plants, Mr.
Whitfield invoked his previous experience numerous times. "My job at
the White House was to provide a clean breathing environment for the
president," he told told the crowd, pointing to a mechanical air
filter the company plans to install. "This system is used to save lives."

The comments fit with Creative Edge's tendency toward bold statements.
Meanwhile, neighbours' questions about the facility were met with
murky replies, such as an unwillingness to say how much water the
facility would use.

But the most unusual moment came when company officials held up a
large photo of the inside of a grow-operation. Residents asked if that
was a rendering of the proposed facility. "No," Mr. Whitfield said.
"That's of an operation in Japan."

But was it? The Globe and Mail determined that the picture belongs to
Caliber Biotherapeutics, a company in Texas that posts photos of its
operations on its website. How CEN Biotech obtained the photo is not
clear. When asked by The Globe, Mr. Chaaban did not respond.

The "dream team," meanwhile, also includes Morgan Petitti, an Ohio
lawyer who was sued by the U.S. Securities and Exchange Commission in
2011 for her alleged involvement in an oil-and-gas stock scam that
targeted Canadian investors with promises of returns as high as 141
per cent. Ms. Petitti, who advises CEN on securities matters, agreed
to pay a $25,000 fine without admitting or denying the
allegations.

The SEC also came down on another person connected with Creative Edge
when it charged Randy Hamdan last December.

Mr. Hamdan, like Mr. Chaaban a Michigan resident, runs a firm that
generates online attention for companies in exchange for fees ranging
between $15,000 and $30,000. He has a large stake in Creative Edge,
having been issued shares in exchange for his services.

The SEC charged him with "conducting a pump and dump scheme" in the
market. It alleges that he is "a penny stock promoter" who
orchestrated an elaborate scheme to drive up the price of shares in a
dormant tech company named CompuSonics. According to the SEC, he did
this by "engaging in manipulative trading, conducting a fraudulent
marketing campaign, and by pretending to be a representative of
CompuSonics, causing a news service to issue a false press release on
behalf of the tech company."

The scheme, which targeted an unnamed Canadian newswire service to
issue false information, involved Mr. Hamdan using numerous tactics to
hide his identity, the SEC said. The matter is currently before the
courts and the SEC allegations have not been proved.

Such situations present a quandary for Health Canada. While the health
regulator runs extensive criminal checks on key executives and
employees involved in proposed medical marijuana operations, it
admitted to The Globe that it does not delve into the business
dealings of the companies it is licensing.

Backlash

Those who have dared to question Mr. Chaaban and Creative Edge have
been met with an onslaught - from the company and its
shareholders.

Matthew Finston, a graduate student and penny stock investor who
writes for the financial website Seeking Alpha, faced intense
criticism when he brought up the SEC's case against Mr. Hamdan on
social media.

In a testy Facebook exchange, Mr. Chaaban warned Mr. Finston that he
was going to be sued for some of his remarks.

"The lawyers already have all your information. They now [sic] your
sister's name, your parents' name. Your address in California. Your
phone numbers etc.," Mr. Chaaban told Mr. Finston.

"Did you just threaten my family?" Mr. Finston replied, wondering why
his sister had been invoked.

Mr. Hamdan did file a suit, which he later dropped.

Meanwhile, Creative Edge investors have accused Mr. Finston of
short-selling the stock - that is, making a bet that its price will
fall.

Mr. Finston says he has never owned shares in the company, nor has he
taken a short position. His interest in the company stems from its
habit of issuing boosterish press releases while the CEO sells off
huge numbers of shares, he said.

This was especially problematic as the shares began to fall in the
second half of this year, Mr. Finston noted. "Bill's a millionaire,
and a lot of investors are under water," he said.

Yet Mr. Chaaban says he is the victim - that there are people paid to
denigrate his stock in public. "We're legitimate," he said in Denver.
"We've found and confirmed there's paid bashers on our stock and we
know who they are and we know who's paying them. And we'll come after
them. And we're going to do it."

When asked by The Globe to identify who is paid to discredit his
stock, Mr. Chaaban would not say, but Mr. Finston seem an unlikely
culprit. All he receives for what he has written about the company for
Seeking Alpha is around $150 an article, depending on the number of
clicks it gets.

Others who have criticized Creative Edge have experienced a similar
backlash.

When Chris Parry, a columnist at investor website Stockhouse,
questioned Mr. Chaaban's claims, he was met with a barrage of insults
from shareholders on social media. "It's an orchestrated means of
discrediting anybody who says anything negative about the company,"
Mr. Parry said. "There were certainly points where I just stopped
putting Twitter on my screen."

David Jimenez, a Miami real-estate agent, became interested in
marijuana stocks when he heard about the changes happening north of
the border. He admits he was taken in by all the talk online - "I just
wanted to invest in Canada."

One company in particular caught his attention because of the grand
claims it was making. He also liked how the CEO of CEN Biotech's
parent company would go online and talk to investors through Facebook.
"That guy Bill Chaaban, he was on there ? and I felt good being part
of that group, because I'm thinking, 'Wow, the CEO is commenting back.' "

Mr. Jimenez saw other investors taking huge positions and wanted in.
He made a small investment to start, buying 15,000 shares for about
$1,300. When the stock started to fall this summer, he began to wonder
about the company's claims.

He tried to bring up his concerns in a CEN Biotech Facebook group, but
twice suddenly found his account suspended. Someone had reported him
as having sent spam.

"I just wanted to be heard," he said. "I don't want to see others
lose. If I had my life savings in there, I would be so depressed."

Meanwhile, as investors vacated slumping marijuana stocks this fall in
favour of greener pastures, and Creative Edge shares dropped further
in November, someone claiming to be a shareholder posted a recording
of a song on the Internet. It mocked critics and implored other
shareholders not to lose faith - even as the CEO was selling millions
of his shares.

Well, they came and they bought. And they sold. Couldn't even see that
what they were holding. It was gold. But all the bashers, all the
noise, all the puppets and the toys. All the doubters and
Debbie-downers. Well, the naysayers, bitches, and straight-ass
clowners. They couldn't hold little CEN that day. Because little CEN
Bio is going to be okay.

The Canadian loophole

Were it not for a convenient loophole in Canadian securities
regulations, shareholders would be able to know a lot more about CEN
Biotech. And Canadians could more closely examine the company that
seeks to dominate the medical marijuana industry.

Last summer, securities administrators across the country discussed a
new rule called Multilateral Instrument 51-105, which states that OTC
market companies in the U.S. that want to operate in Canada must
comply with Canadian reporting rules - which means filing
prospectuses, audited financials and other disclosure documents
typically expected of a public company.

The goal was to improve disclosure standards for these companies and
to discourage abusive "promotional activities," such as inaccurate or
exaggerated claims made to investors.

The new rule, proposed by British Columbia, was accepted by the other
provinces - except Ontario, which disagreed that it was needed.

That means a company like Creative Edge doesn't have to answer to the
Ontario Securities Commission.

In an e-mailed statement, the OSC said it investigated last year to
see if such problems were an issue but "has not found sufficient
evidence of abusive activity being conducted in Ontario."

Health Canada now finds itself in the position of potentially granting
a licence to a company that does not fall under the watch of any
financial regulator.

The introduction of 51-105 stemmed from "a desire to step in and be
the regulator of last resort, if you will, for companies that weren't
otherwise regulated," said Rob Lando, a corporate securities lawyer at
Osler. "It says, since no one else is regulating you, we will."

But Ontario's refusal to sign on creates a "safe haven" for OTC
companies, he added. "Maybe the word is out that Ontario is open
season because it's the only province that doesn't have 51-105. It's
possible."

'I see the elusiveness'

Trying to get information from Creative Edge isn't easy. A visit to
the company's facility in Lakeshore is met with a stern stare from a
security guard behind a chain-link fence and barbed wire.

Mr. Chaaban has arranged, then cancelled, five interviews with The
Globe and Mail since October. One such cancellation happened as Mr.
Swalm, the company spokesman, was trying to get the CEO on the line.
The explanation for the last-minute change of plans was that Mr.
Chaaban was unexpectedly delayed in court while representing a client.
The company refused to elaborate, rescheduling the call and then later
cancelling that one, too.

As well, the company has not discussed Mr. Chaaban's numerous stock
sales with its base of shareholders. In a recent conversation, Mr.
Swalm acknowledged that it is less than forthcoming with
information.

"To be honest with you, I would think that Bill would want to be more
transparent as a CEO," he said.

"I see the elusiveness. We do tell Bill that there should be increased
transparency here. But again, he's the company."

He admitted that "I don't like representing a company like this, where
they are so evasive. I'm just a soldier."

With CEN Biotech seeking to become a giant in Canada's new marijuana
sector, there are many troubling questions about the company's
conduct, raising concerns about how much Health Canada has probed
beyond simply its application paperwork.

Those troubles have not abated. On Nov. 19, after markets closed,
Creative Edge stunned investors by announcing that it was spinning off
CEN Biotech as a separate stock.

The reasons for this move are not clear, but it was an abrupt change
in strategy, one analyst noted, since it went against the strategy the
company had laid out for shareholders all year, and it cast doubt on
the value of Creative Edge's shares.

For that reason, anyone who knew the press release was coming would
likely also know that, after months of relentlessly boosterish
announcements, this development was bound to have a negative effect on
the stock - and it did.

The next day surprised investors sent the shares down 32.6 per cent to
less than 2 cents, removing nearly $32-million from the value of the
company, which had already eroded in recent months and now was worth
just $65-million.

What investors didn't know is that, a week earlier, Mr. Chaaban had
quietly moved to sell 1.7 million more shares, thereby avoiding the
steep drop the rest of the shareholders would suffer.

Health Canada, which is now evaluating the company for a federal
licence, said it was not aware of the trade.
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MAP posted-by: Matt