Cannabis Company and Former Senior Executive Settle Accounting Fraud Charges
SEC Investment Advisor

Cannabis Company and Former Senior Executive Settle Accounting Fraud Charges

Oct. 24, 2022 — The Securities and Exchange Commission today charged Cronos Group Inc., a Nasdaq-listed cannabis company based in Toronto, for improperly accounting for millions of dollars of revenue and for other accounting misconduct in multiple reporting periods. The SEC also charged Cronos’s former Chief Commercial Officer, William Hilson, with fraud and aiding and abetting the company’s violations. In agreeing to settle with Cronos, the Commission determined that the company should not incur a financial penalty, given its timely self-reporting, significant cooperation, and remediation.

According to the SEC’s order, in three separate quarters between 2019 and 2021, Cronos submitted financial statements with the SEC that contained material accounting errors related to, among other things, revenue recognition and goodwill impairment. The order also found that, in one of the quarters, Hilson entered into an undisclosed oral agreement to sell cannabis raw material and to repurchase cannabis product in the following quarter. This agreement was neither known nor accounted for by Cronos, which discovered the $2.3 million accounting error during an internal investigation. After discovering the accounting errors, Cronos promptly reported the misconduct to the SEC and provided extensive cooperation that meaningfully advanced the Commission’s investigation. It also took effective remedial steps to enhance its internal accounting controls.

“It is critically important for issuers to have adequate controls in place before they take on the reporting obligations required of public companies,” said Mark Cave, Associate Director in the SEC’s Enforcement Division. “While today’s order finds that Cronos’s controls were not up to standards when it began filing financial statements with the SEC, Cronos avoided penalties by promptly self-reporting its accounting misconduct as it came to light within the company, cooperating with our investigation, and promptly taking effective remedial steps.”

The SEC’s order against Cronos finds that the company violated the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws. finds that he violated the antifraud provisions of the federal securities laws and further aided and abetted and caused Cronos’s violations of the reporting, books and records, and internal controls provisions.

Without admitting or denying the SEC’s findings, Cronos and Hilson offered to settle the matter by agreeing to cease and desist from future violations of the charged provisions. In addition, Cronos agreed to retain an independent compliance consultant to review, assess, and make recommendations with respect to the firm’s financial reporting and accounting controls. Hilson agreed to a three-year officer and director bar and agreed to be suspended from appearing and practicing before the SEC as an accountant for at least three years. The Commission determined not to impose a financial penalty on Hilson in light of his consent to pay $70,000 (CAD), or approximately $54,000 (USD), to the Ontario Securities Commission for similar conduct.  

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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

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