Aurora Cannabis Inc. and several of its former and current executives allegedly inflated one of its quarterly earnings results in 2019 through a fraudulent scheme that involved selling $21.7 million worth of cannabis back to itself through a company it had significant influence over, according to a lawsuit filed in a U.S. federal court. 

The class-action lawsuit, which was filed in a U.S. District Court in New Jersey on Tuesday, alleged that Aurora and its executives engineered a way to artificially inflate the company's fiscal 2019 fourth-quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by selling $21.7 million worth of dried cannabis to Radient Technologies Inc. in June 2019 in a deal that "lacked commercial substance". The filing further alleged that Aurora later repurchased that same amount of dried flower back from Radient, an Edmonton-based cannabis extraction firm in which Aurora has a 12 per cent ownership stake as well as control of one board seat. 

While the class action has yet to be certified by a U.S. federal judge and the claims have not been tested in court, the allegations highlight the operational challenges that many Canadian cannabis producers undertook in the early days of Canada's recreational marijuana market, some of which ran afoul of regulations in order to meet the high consumer demand for those legal products and lofty investor expectations. 

The plaintiffs allege that as the defendants continued to misrepresent the true condition of Aurora’s business, the company's stock was trading at "artificially inflated prices", which have subsequently plunged by more than 90 per cent since mid-2019. The plaintiffs for the lawsuit allege Aurora violated two counts of the U.S. Exchange Act and requested a trial by jury. 

Other 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 also sat on Radient's board.

In a statement, an Aurora spokesperson said that the company doesn't comment on legal matters. "We maintain our standard of business practice is in accordance with all relevant securities law and fulfill any obligation to respond accordingly," the spokesperson said. 

Booth, Dobler, Battley, and Cleiren didn't immediately respond to multiple requests for comment on the lawsuit's allegations. A representative from Radient wasn't immediately available. 

The lawsuit claims that Aurora allegedly conducted its "roundtrip sale" of dried cannabis as the company was increasingly unable to meet financial targets that its executives stated it would hit during the early months of cannabis legalization in Canada when supply issues weighed on several marijuana producers' bottom lines. 

As those supply issues mounted, Aurora moved to further increase the size of its production capacity to a level that surpassed the actual annual demand believed to exist in the Canadian recreational market, the lawsuit alleges. As the company began to suffer financially from sluggish cannabis sales, the defendants allegedly devised a scheme that would ensure Aurora would meet projections of positive adjusted EBITDA by the end of its fiscal 2019 through a "sham, round-trip wholesale cannabis transaction with a related party."

As a result of the "roundtrip sale", Aurora reported a negative adjusted EBITDA of $11.7 million in its fiscal 2019 fourth quarter despite several executives, including Ibbott and Battley, claiming the company would be in positive EBITDA territory by the end of its fiscal 2019. That negative adjusted EBITDA was allegedly understated by a further $10.5 million and that "but for the sham transaction, Aurora would have missed its projection by a much wider margin", the lawsuit claims. 

According to comments provided by four former Radient employees contained in the filing, there was no plausible business reason for the cannabis processor to buy $21.7 million of cannabis from Aurora. One former employee alleged in the filing that Radient's operations were not large enough to process so much cannabis in a reasonable amount of time, while another former staffer alleged it made "no sense" for Radient to make that purchase as the company itself was having trouble paying its day-to-day operating expenses and its extraction technology was still in the testing stage at that time. 

The lawsuit alleges that the cannabis material was stored in a warehouse until it was subsequently returned to Aurora, which should not have recorded any revenue from the deal, according to international accounting standards. 

Aurora's "roundtrip sale" of cannabis to Radient was first highlighted in several research reports authored by Craig Wiggins of the cannabis industry research group The Cannalysts and first reported by Yahoo Finance Canada. In an Oct. 2019 report, which was included in the court filing, Wiggins raised the possibility that Aurora and Radient were engaged in financial engineering if the two companies were circumventing a service agreement to artificially boost their revenue. 

"If Radient was an arm’s length company, not reliant on Aurora economically, then this would not be as big a potential issue," Wiggins said in the report. ​