Lawsuit accuses Aurora execs of ‘sham round-trip’ deal to inflate earnings

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A lawsuit filed in a U.S. federal court alleges Aurora Cannabis Inc. and a group of past and current executives inflated quarterly earnings results in 2019 through a fraudulent scheme in which the company sold $21.7 million worth of cannabis back to itself through a third company.

That company, Radient Technologies Inc., was significantly controlled by Aurora and the executives, according to the class-action suit filed in U.S. District Court in New Jersey. The plaintiffs allege that Aurora and its executives artificially inflated the company’s fiscal 2019 fourth-quarter adjusted earnings by selling $21.7 million worth of dried cannabis to Radient in June 2019. The lawsuit further alleges Aurora later repurchased that same amount of dried flower back from Radient in a deal that “lacked commercial substance.” Aurora owns 12% of Radient, an Edmonton-based extractor, and has a seat on the company’s board of directors.

BNN Bloomberg first reported the lawsuit.

‘Artificially inflated prices’

The plaintiffs, who requested a trial by jury, further allege that as Aurora continued to misrepresent the true condition of its business, the company’s stock was trading at “artificially inflated prices,” which have plunged by more than 90 percent since mid-2019. They allege Aurora violated two counts of the U.S. Securities Exchange Act. 

In addition to the company, defendants named in the lawsuit include former Chief Executive Officer Terry Booth, former president and board member Stephen Dobler, Chief Financial Officer Glen Ibbott, former Chief Corporate Officer Cam Battley, executive chairman Michael Singer, board member Jason Dyck and former Chief Operating Officer Allan Cleiren, who held the seat on Radient’s board.

As Aurora struggled from sluggish cannabis sales, the defendants allegedly devised a scheme to meet projections by the end of its fiscal 2019 through a “sham, round-trip wholesale cannabis transaction with a related party,” according to the lawsuit.

As a result of the questionable sale to Radient, Aurora reported negative adjusted earnings of $11.7 million in its fiscal 2019 fourth quarter despite several executives giving rosy outlooks. “But for the sham transaction, Aurora would have missed its projection by a much wider margin”, the lawsuit claims. 

Radient was struggling

Radient employees quoted in the filing said there was no business reason for the cannabis processor to buy $21.7 million worth of cannabis from Aurora. One former employee alleged Radient’s operations were too small to process such a large amount of cannabis in a reasonable amount of time; another former employee said it made “no sense” for Radient to make the purchase because the company was having trouble paying its ongoing operating expenses, and its extraction technology was still in a testing phase.​

Aurora, a producer of both medical and recreational marijuana as well as hemp-derived CBD products, left the New York Stock Exchange for the Nasdaq Global Select Market and shook up its board last May in what it said was a cost-cutting move.

Aurora, which lost $16.8 million during the second quarter of 2021, announced this week it will shut down a facility in Edmonton to further rationalize operations.

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