(Bloomberg) -- Something strange was going on in the cannabis business last fall. Pot company mergers were getting snarled in antitrust reviews even though the market, which is highly fragmented, raised no red flags with the competition police.

According to a whistle-blower, the delays weren’t the result of antitrust watchdogs trying to understand a relatively new industry, as marijuana executives and analysts had thought.

Instead, Attorney General William Barr had ordered special scrutiny of the deals because he doesn’t like cannabis companies, the whistle-blower said, resulting in the Justice Department holding up 10 merger deals and skewing the marketplace.

The extra scrutiny hurt a nascent industry, said Joe Caltabiano, co-founder and former president of Cresco Labs Inc., whose merger with Origin House, formerly known as CannaRoyalty Corp., was among those delayed. “The entire sector was negatively affected by this. It slows the introduction of new investors, has a chilling effect on capital raising. It raises concerns where there is no reason for concern,” said Caltabiano.

Cannabis stocks have declined by about 27% year-to-date, affected by the pandemic and other factors unrelated to the antitrust reviews. Marijuana stocks were even under-performing the broader market as it cruised to a pre-pandemic high in mid-February, judging by Cannabis ETF, the exchange-traded fund for the industry.

But financial problems appear to be worse for companies, such as Los Angeles-based multi-state marijuana operator MedMen Enterprises Inc., whose deals were delayed by the reviews.

It was MedMen’s $682 million proposed takeover of Chicago-based PharmaCann LLC, one of the U.S.’s largest medical cannabis providers, that first caught Barr’s interest, said John Elias, a lawyer who has worked in the antitrust division for 14 years, testifying before the House Judiciary Committee Wednesday.

The antitrust division staff had determined the deal didn’t raise competition issues because the industry is fragmented with numerous companies, said Elias, who at one point served as the chief of staff to the division head.

But Barr rejected that analysis after meeting with division leadership in March 2019. In an unusual move for an attorney general, he ordered an in-depth antitrust investigation because of a personal dislike for the industry, according to Elias.

The Justice Department disputed Elias’s claim that the antitrust division acted improperly. It said the Office of Professional Responsibility found the investigations of the cannabis deals were appropriate.

“OPR found that the cannabis industry provided a unique challenge to federal and state regulators alike, and it was reasonable” to seek additional information from the industry, the department said in a statement.

Barr’s move, however, prevented MedMen from closing the all-stock deal, which would have given PharmaCann shareholders about 25% of the new company.

As the review dragged on, MedMen shares slid along with those of the whole industry. An index of cannabis stocks lost around half its value from October 2018, when the deal was announced, to September 2019, when the Justice Department approved it.

A month after winning approval, MedMen said it was terminating the deal. It blamed “regulatory hurdles” for delaying synergies that were initially factored into the value of the merger. It also said it had to be careful spending capital given the industry’s weakness. The company said that PharmaCann’s business required “significant capital expenditures.”

Justice Department scrutiny of the industry didn’t stop there, Elias said. The antitrust division went on to conduct investigations of nine other cannabis deals, even though he said none raised competition concerns. In two proposed mergers, the companies operated in different geographic areas and didn’t compete at all, he added.

Caltabiano’s former company, Chicago-based Cresco, received a second request from the Justice Department -- formally starting an in-depth review -- on its plan to buy Origin House in 2019. “It was odd for us, especially because we were acquiring a company in California where we had little operations and there are thousands of operators, and no one company with a dominant position -- there was no apparent antitrust violation,” he said.

Caltabiano estimates that the extra review delayed the deal by about six months, costing Cresco and Origin at least $2 million each to comply with the government’s demands for additional information. Cresco’s deal with Origin House ultimately closed in January.

Another proposed merger was held up in 2019: Curaleaf Holdings Inc.’s acquisition of Cura Partners Inc.’s Select brand, a deal that was valued at about $950 million. At the time, the scrutiny of the deals was seen as the result of competition officials trying to get up to speed on a new industry.

Second requests are rare and generally reserved for the biggest takeovers that unite close competitors. They typically make up 1% to 2% of mergers that are filed each year. But pot mergers made up 29% of second requests in the government’s 2019 fiscal year, according to Elias’s written testimony.

In September, the head of the antitrust division responded to staff concerns about the investigations saying that the cannabis industry was unpopular “on the fifth floor,” a reference to Barr’s office, Elias said.

Elias said he reported his concerns about the cannabis investigations and another probe of automakers to the Justice Department’s inspector general because to him they were “evidence that our nation’s antitrust laws were being misused.”

“These laws have protected American markets and consumers for more than a century,” he said. “The hundreds of career staff antitrust division take this mission seriously and expect DOJ’s political leadership to as well.”

©2020 Bloomberg L.P.