Denis Arsenault couldn't believe what he was seeing. When his company, OrganiGram Inc., made its debut on the TSX Venture Exchange this summer, the shares suddenly shot up.

Such a high valuation didn't make sense – not even to Mr. Arsenault, and he was the company's chief executive officer.

Just a few weeks earlier, OrganiGram, an upstart producer of medical marijuana based in Moncton had been valued privately at just over $40-million. But on the open market, speculators feverishly drove up the total value of shares to nearly $120-million in late August.

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It wasn't that Mr. Arsenault didn't believe in the future of his business. OrganiGram is one of only 15 companies to land a highly coveted federal licence in Canada's new medical marijuana sector, touted as a potential multibillion-dollar industry in the years to come.

But the company hadn't made a dime yet. OrganiGram was probably a year away from pulling in meaningful revenue – and it was already worth nine digits in the stock market.

"I was just shaking my head," Mr. Arsenault said of that first week of trading.

What happened was exuberant, if irrational, and OrganiGram wasn't the only company feeling the surge.

Investor appetite for Canadian marijuana stocks also turned rival Tweed Inc. of Smiths Falls, Ont., into a $100-million company before it had even logged its first shipment to patients.

Sooner or later, everyone was jumping on the marijuana trend.

Mining exploration companies, frustrated by lacklustre interest in their stocks, were turning themselves into marijuana businesses overnight.

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Companies such as Supreme Resources and Affinor Resources were suddenly rebranding themselves as Supreme Pharmaceuticals and Affinor Growers – specialists in a new field – to entice investors. And they, too, saw their stock prices lift.

It's a market craze that has made early investors rich, and left a large number of retail shareholders in some cases clutching near-worthless paper, as stocks suddenly plummet.

The industry has attracted more than its share of colourful players, from stock touts and salesmen to the multinational tobacco conglomerates, which are keeping a close eye on the developing marijuana business.

But had it not been for a failed Health Canada policy more than a decade ago, the pot stock bubble that dominated the Canadian markets for much of 2014 would have never happened.

Ottawa's efforts to build a new industry from scratch has resulted in an experiment that is moving marijuana sales from the back alley to the capital markets. It is a historic moment, even as it is fraught with problems: It is the birth of Marijuana Inc.

'Open to abuse'

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The first time Health Canada attempted to set up a medical marijuana program, the government lost control of it.

In 2000, the Supreme Court of Canada ruled that patients who use the drug to treat conditions ranging from glaucoma and epilepsy to the pain associated with cancer treatment had a legal right to possess marijuana. Furthermore, the government had a legal duty "to provide reasonable access" to the drug for that purpose.

In other words, Ottawa could not expect patients to venture on to the streets to obtain something that was considered, in this case, to be medicine.

Despite objections from the Canadian Medical Association – which argues that the medicinal benefits had not been proved in clinical tests – Health Canada had little choice. So, by 2001, the government reluctantly designed a program through which patients with a prescription could obtain the controlled substance either by growing it themselves or buying it from someone else with a prescription or from a government contractor. It seemed like the simplest solution to Ottawa's problem.

But according to hundreds of pages of Health Canada documents obtained under the Access to Information Act, the program quickly began to spiral out of control.

What began with 100 patients at the program's inception grew to 4,000 in its first three years. By late last year, no fewer than 21,986 people had prescriptions to grow medical marijuana.

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This demand sent costs soaring. Documents show that about $6-million was needed to operate the program in 2005, a figure that had climbed to $17.5-million by last year.

With that growth came more severe concerns. In 2012, Health Canada commissioned consulting firm Delsys Research Group to scrutinize the program. The resulting 180-page report, which was obtained by The Globe and Mail, showed the federal department was failing miserably to manage its own policy.

Between 2003 and 2010, police discovered 190 cases of crime relating to marijuana licences. Some offences were violent – about 8 per cent involved attacks or home invasions – but that wasn't the biggest concern. Police also believed that some licences were producing "well in excess of their authorized daily amount" and much of that was finding its way to the street.

Not only did Health Canada not have enough inspectors to enforce the rules, it needed either permission or a warrant to make sure a home grow-op was complying with regulations.

According to government documents, the department attempted to carry out 75 such inspections without a warrant in 2010. In only 27 cases, did anyone answer the door and, of those, roughly half refused to let the inspectors in. Based on statistical modeling of existing police data, Delsys estimated as much as 35 per cent of Health Canada's licences may involve "some degree of misuse and diversion of marijuana intended for medical use into the illicit market."

Even legitimate growers were raising questions. One man sent an e-mail to Health Canada in 2012, which The Globe and Mail obtained through access to information, saying he had never been inspected in six years to see if he was complying with the law.

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In another e-mail, a physician warned Health Canada that he had seen a patient authorized to produce 40 grams of marijuana per day who was, in the doctor's opinion, producing at least 20 times what his average daily prescription should be. "This is obviously not all being used by one patient," he wrote.

Another physician told Health Canada of seeing patients who'd been given prescriptions to grow "excessive amounts." He added: "Somebody has clearly dropped the ball on this one."

One doctor complained of a colleague he knew in a nearby community, "who for $50, would sign anyone's form."

Soon officials at Health Canada were forced to admit things had gone awry. In a draft of a 2013 letter signed by Louis Proulx, assistant director of the Bureau of Medical Cannabis, the department stated bluntly that its program "was widely open to abuse." The reference was deleted before the final draft of the letter was sent (to an unknown recipient), but it was clear Health Canada needed to scrap the program.

That decision would set the stage for a historical shift – the creation of a large-scale medical marijuana industry run by private companies. Rather than retool its efforts, Ottawa wanted out of the business.

A new industry

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Health Canada concluded it would be better to license a few large-scale producers, rather than dole out thousands of individual permits.

This new industry, the Delsys report said, could be quite lucrative. "It is anticipated that the regulated market will grow to be reasonably large, competitive and profitable," the report explained, adding that Canada has 450,000 projected users of medical marijuana. "Provided they obtain support of a health-care practitioner, these persons could potentially make a strong market base."

That estimate got people in the business world thinking. "The federal government said, 'We think there will be about half a million people who have a prescription over the next few years in Canada,' " said Bruce Linton, founder of Tweed Inc., one of the first producers to land a federal licence. "Everybody in the market said, 'If the government thinks that's the number, it's going to be a lot bigger, and a lot faster.'"

With the lure of big profits hanging over these licence applications, Health Canada introduced a two-stage approval process. First, candidates had to design a secure operation, which would be subject to federal approval. Then they had to build that operation, risking the capital up front, without knowing if a licence would be granted.

Even with those unusual hurdles, the response was overwhelming. Health Canada, originally concerned that not enough companies would seek a licence, received more than 1,000 applications between last fall and this summer. At one point, 25 were coming in every week.

Applicants knew what a licence was – a permit to make money. "There's no denying, there is tremendous wealth that is going to be created from this," Mr. Arseneault said, comparing the situation to alcohol in the U.S. "You can go back to Prohibition – it's the same concept. There is a race mentality."

Andrea Hill, a securities lawyer at Toronto-based Wildeboer Dellelce, says the licences are like winning lottery tickets. "When these [companies] go public, they've consistently been going public at market capitalizations of $70-million plus."

OrganiGram's $120-million debut was an example of this, as was Tweed's market capitalization of more than $100-million. With every licence it issues, Health Canada is essentially minting millionaires.

"It's a constitutionally protected drug-dealing industry," Ms. Hill said. "There's not very many of those."

But most companies pursuing these licences are playing a longer, more speculative game, betting that the market will be even bigger in the future, should the drug be legalized.

That idea is not far-fetched. Ethan Nadelmann, head of the Drug Policy Alliance, a powerful lobby group that has been instrumental in having marijuana made legal in Colorado and Washington state, sees Canada as inevitable, having embraced the medical market.

And with legalization comes a huge opportunity for profit.

"We all stand today at the intersection of something relatively unique in American history," he said. "If you look at other movements for freedom and justice – movements around gay rights, or women's rights, or civil rights … the sudden transformation of those fields did not have these remarkable economic consequences."

The emergence of a legal marijuana industry in North America is worth "tens of billions of dollars," Mr. Nadelmann said, reiterating that "if somebody asks me what's going to be the next country to legalize marijuana, my bet is Canada."

Statements like that have brought a wave of speculative investment north of the border.

The impending invasion

The push for a legal marijuana market is hardly new. Industry documents show that the tobacco industry has sought a way into the business for decades.

And if Canada were to make the drug broadly legal, many in the marijuana sector believe it's only a matter of time before the tobacco companies claim a significant chunk of the market for themselves.

Documents newly uncovered in the University of California's archives show that Big Tobacco first became interested in the early 1970s, as a U.S. presidential commission was about to recommend marijuana be decriminalized, and similar talk was circulating in Canada.

In a handwritten internal memo, George Weissman, then president of Philip Morris Inc., said the maker of Marlboro cigarettes needed to seize the moment, given the potential upside.

"While I am opposed to its use, I recognize that it may be legalized in the near future and put on some sort of restricted sale, if only to eliminate the criminal element," he wrote.

"Thus, with these great auspices, we should be in a position to examine … a possible product [and] at the same time, co-operate with the government."

Another unsigned internal memo offered up a rationale for the tobacco giant's planned expansion into pot: "We are in the business of relaxing people who are tense and providing a pickup for people who are bored or depressed. The human needs that our product fills will not go away. Thus, the only real threat to our business is that society will find other means of satisfying these needs."

One particular concern appears to have rattled Philip Morris – the fact that young people were gravitating toward marijuana, which meant a lost generation of customers. "Many regard marijuana as an alternate, and perhaps superior, method of satisfying the needs that cigarette smoking satisfies," the memo read. "In this situation, business theory strongly suggests that we learn as much as possible about this threat to our present product."

When the commission's recommendation to legalize pot was quashed by Richard Nixon's administration, the company's foray into marijuana also halted. Philip Morris never spoke publicly about its strategy. Discussions in Canada also lost momentum.

However, a similar internal memo from executives at rival R.J. Reynolds Tobacco Co., maker of Camel cigarettes, shows that the industry revisited the subject in 1992 amid rumours that "certain European countries" were on the verge of legalizing the drug, raising "the possibility of its future, more frequent use."

Today, with Canada and more than 20 U.S. jurisdictions now permitting marijuana for medical use, along with legalization in some states, the tobacco companies say they have no plans to explore the business, but that hasn't left the rest of the sector at ease.

Inside the industry, the possibility of Big Tobacco entering the fray is referred to as the "impending invasion." The consensus is that when the market reaches the point where significant profits are being made, the cigarette makers will muscle their way in. That notion – accurate or not – has helped to feed the appetite for marijuana stocks, raising the spectre that some companies could be takeover targets, triggering lucrative shareholder payouts if that day ever comes.

Pot stock billionaire

The same fever over marijuana stocks that emerged in Canada also ran rampant south of the border. With numerous U.S. states moving to legalize marijuana – Alaska and Oregon approved ballot initiatives this year – the resulting stock-market frenzy sent company valuations into the billions.

The king of North American pot stocks – and undoubtedly the company destined to be the lasting symbol of the marijuana stock bubble – is Las Vegas-based CannaVest Corp.

From early 2013 to the spring of this year, when the hype over marijuana stocks was at its most dizzying heights, CannaVest shares shot up more than 1,200 per cent to $160. At that price, the company was worth more than $3-billion, despite having almost no profits and only an indirect connection to marijuana: CannaVest claimed to be a producer of hemp-based compounds.

Nevertheless, its largest shareholder, Las Vegas lawyer Bart Mackay, became the first pot-stock billionaire, at least on paper.

Canada got its own symbol of the pot stock craze in Toronto-based Satori Resources Inc. With shares in the junior mining sector slumping more than 40 per cent early this year, Satori announced out of the blue that it was exploring new opportunities in agriculture – namely medical marijuana.

It was far from alone. Satori was one of several dozen miners to have gone this route, joining Supreme Pharmaceuticals and Affinor Growers. The way Satori founder and chairwoman Jennifer Boyle sees it, public companies need a story to take to investors. If you find something that works, use it. She is unapologetic.

"In a downward market, which the mining industry is, if there is something that you can raise money on, it's our obligation to consider it," Ms. Boyle said. "If you can't beat 'em, join 'em."

It reminds her of the heady days of the tech boom in the late 1990s when mining companies slapped dot-com on their name just to capture some of the money flooding into that market.

"Mining was headed for the tank back then and these dot-com companies were doing very well, so a lot of the mining promoters converted themselves into high-tech companies," she said. "Then when that all blew up, they went back to being mining companies. It was mining dot-com back then. Now it's mining dot-pot."

This has sapped credibility from the sector, analysts say. "A lot of times, you'll find people that are telling these great stories," said Allan Brochstein, one analyst who follows the sector. "There's a lot of people that are in the marijuana industry – [but] they're not in the marijuana industry. They're in the stock-promotion industry."

"You have to understand what type of industry you're investing in," said Mr. Arsenault of New Brunswick's OrganiGram. "There is a lot of hype in the industry. And that's unfortunate."

For many of these stocks, the model is often the same. The insiders at the company hold vast numbers of shares, often in the millions, which they have been issued at a nominal price – often a fraction of a cent. They list the company as a penny stock, or adopt marijuana as a newfound business, and proceed to spin tales of bold plans to make money by pursuing a licence. If the stock moves by a few cents, the insiders can make hundreds of thousands, if not millions, of dollars, over a period of months.

All that's required is a supply of willing investors, which the market always seems to provide. "So many scams purport to allow Main Street investors to get in on the ground floor of the next big thing," said Gerri Walsh, senior vice-president of investor education for the Financial Industry Regulatory Authority (FINRA), based in Washington.

Along with other regulators, FINRA took an unusual step warning investors this year about pot stocks, urging people to do more research in the frothy market.

"We were concerned that there might be some element of fraud or at least pumping and dumping of these types of securities," Ms. Walsh said.

But with so many companies flooding the market, and at such a rapid pace, there has been very little follow-up by those same regulators, including FINRA. Health Canada admits it knows little of what Canadian companies are doing in the markets, noting that it is not a financial regulator.

The right to get rich

If any one person captures the ethos of the marijuana stock bubble, it's probably Todd Davis.

In June, the former stockbroker was a keynote speaker at an industry event in Denver attended by marijuana executives from across Canada and the United States. The Globe and Mail viewed a recording of his speech.

Mr. Davis cut his teeth as a broker in the 1990s selling penny stocks in fledgling biotech companies. He was no expert on the industry, but it didn't matter, he explained. For every company with a story to tell, there was an investor willing to believe in future riches. It was easy money.

"I didn't know anything about biotechnology," Mr. Davis told the room. "But I'm telling a story about something that's going to happen in the future – and people were buying it. I would call 10 people and five people would buy [stock] from me. And I was going 'This is awesome' ... We were making a killing."

These days, Mr. Davis runs a marijuana start-up and likens the industry to his days of selling biotech stocks.

"What I wanted to talk about tonight is why we are all here," he told the executives. "The primary function – besides our belief in cannabis and what it can do for a patient or a person, and how it can benefit life – is we're here to make money."

"It's a unique opportunity that's been presented to us."

But it is much more than just an opportunity to make money, he explained. The industry is so ripe for the picking that everyone in the room is entitled to get rich.

"You have the right to make a million dollars," he told the executives in no uncertain terms. It was an opportunity none of them should waste.

But the good times in the stock market couldn't last forever.

In Canada, marijuana stocks lost their lustre a few months ago as investors started to realize that companies like Tweed and OrganiGram would need several quarters, if not longer, to build their businesses and start generating real earnings – just as Mr. Arsenault had suggested. OrganiGram's stock now trades at less than 80 cents, well off the $2.27 that shares garnered at their height.

South of the border, though, some marijuana companies grew impatient when their shares began to slide. And so they found a new saviour.

With the deadly Ebola epidemic dominating global headlines in October amid fears the virus might spread in North America, a new phenomenon swept the capital markets. A company that claimed to be working on a cure, a technology or a product that could somehow assist in the fight against this deadly disease was suddenly a hot commodity.

One in particular was quick to capitalize.

On Oct. 13, former New Mexico governor Gary Johnson appeared on Fox Business News ostensibly to discuss the U.S. government's response to Ebola.

But Mr. Johnson wasted little time in divulging that he had, in fact, recently been named chief executive officer of Cannabis Sativa Inc., a company working on the use of medical marijuana to cure the disease. "We actually believe we have efficacy with regard to treating Ebola," he said.

Was the company actually suggesting marijuana could work?

"If you're dying from Ebola, and it's a hail Mary," Mr. Johnson said, "you're going to take the hail Mary."

It was the boldest and most far-fetched effort yet to promote a marijuana stock – and proved to be quite good for business. The stock climbed 33 per cent in the ensuing two weeks, and the market value of Cannabis Sativa Inc. soared by $40-million.

With stocks now falling across the sector, such antics are a cry for attention in a softening market.

The fact that share prices have cooled, though, is somewhat comforting to Mr. Arsenault. The faster Canada can get away from the bubble market, the better.

"Finally, the hype has started to come out, and people realize that it's a business like any other business," he said.

"That's welcome. Anybody that sits there and says they've got this all figured out, they're just blowing smoke at you."