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Calgary-based cannabis producer Sundial Growers facing class-action lawsuit for allegedly misleading investors

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Suit claims Sundial failed to disclose mold and rubber contaminated pot shipment prior to going public

A Calgary-based cannabis producer is facing a class-action lawsuit. (CBC)

A U.S.-based law firm has filed a class action lawsuit against Calgary-based Sundial Growers Inc. on behalf of investors who purchased shares during the licensed cannabis producer's initial public offering (IPO) on the Nasdaq this summer for allegedly failing to disclose some key pieces of information about supply problems and quality control issues.

Yimin Huang is listed as the plaintiff in the Rosen's class action lawsuit. It doesn't say how much the investor lost or what he's seeking in damages.

"Everyone we represent, we represent other investors who've already contacted us, you know, they've lost substantial amounts," said Phillip Kim, lawyer with the Rosen Law Firm.

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The court documents allege Sundial's registration statement and prospectus, which Kim says is like the company's sales pitch or brochure to investors, contained inaccurate information.

The registration statement and prospectus are filed with the U.S. Securities and Exchange Commission prior to a public offering and cannot, according to Kim, contain any material misstatement or omission.

The lawsuit says these filings failed to disclose that one of Sundial's customers, Zenabis Global Inc., returned 554 kilograms of cannabis because it contained mold and parts of rubber gloves.

Once the contaminated shipment was made public by U.S. financial information website Marketwatch on Aug. 16, stock prices fell substantially below Sundial's IPO price of $13 per share.

The company raised more than $140 million when it sold 11 million shares of common stock at the IPO offering.

The stock has not closed higher than its IPO price since the offering.

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The defendants in the lawsuit include Sundial's CEO, CFO, board members — one of whom is the former president of the University of Calgary, Elizabeth Cannon — as well as the company's underwriters.

Sundial has operations in Alberta, B.C., and the United Kingdom.

CBC News reached out to Sundial for comment on the lawsuit and the company responded with the following statement:

"We are aware of the complaints that have been filed. ​It is our policy not to comment on active litigation; however, we believe that the claims are without merit and the company intends to vigorously defend itself. Sundial remains focused on what has made us successful: the growth of our business through a commitment to producing safe, innovative and high-quality products."

Phillip Kim is a lawyer with New York-based Rosen Law Firm. (Rosen Law Firm)

The lawsuit also said Sundial did not let potential investors know about the returned half-ton of pot during a roadshow presentation in Toronto, according to one investor who heard the pitch.

Bruce Campbell, portfolio manager at Stonecastle Investment Management, which invests in cannabis stocks, says since Sundial went public its stock has been fairly active.

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Campbell says typically a company, its lawyers and underwriters are very careful to disclose everything in the IPO filings, which can be hundreds of pages long.

Otherwise he says investors lose faith in the way a company is being run.

"Let's assume you had full faith in management before and then you find out wait, they did something that wasn't the best move, and now we find out after the fact, well can I trust them with financials, can I trust them with my money," said Campbell.

Claims are serious, says lawyer

Kim says this type of lawsuit is rare and U.S. security laws take these types of claims about IPOs seriously, because investors rely heavily on what the company tells them about the business conditions and the financial conditions.

"In a claim like this, it'll be the defendant's obligation to demonstrate that the price declines were caused by something other than the misstatement in the offering," said Kim.

CBC News reached out to Zenabis to ask when the reported shipment of contaminated pot was returned.

In an emailed response, a spokesperson for Zenabis said, "Disclosure rules prohibit me from saying anything on that matter, but I can tell you that we disclosed all material information about returned product in second quarter results."

Zenabis's second quarter ended June 30, 2019.