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Dec 6, 2018

SOL Global says Aphria shorters failed their own due diligence

SOL Global defends assets it sold to Aphria, amid short report allegations

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The head of SOL Global Investments Corp., the firm accused of selling several Latin American assets at allegedly “vastly inflated” prices to Aphria Inc., said the short sellers making the accusations failed to do their own due diligence and provided faulty evidence behind their claims that sent the Canadian pot producer’s shares into a tailspin this week.

Brady Cobb told BNN Bloomberg's Amanda Lang in an interview Thursday afternoon that the short sellers behind the report – Hindenburg Research and Quintessential Capital Management (QCM) – “purposely didn’t find what they were looking for” and that all information verifying the deal has been filed with securities regulators and stock exchanges.

“If you look at Jamaica and Marigold Enterprises, they said they went to look for the farm, they didn’t look for the farm. If they wanted to call the farm, they could have called us or called Aphria and asked for a tour,” Cobb said.

QCM and Hindenburg released a report on Monday that alleges that the foreign companies Aphria acquired in Jamaica, Argentina and Colombia appear to be “largely worthless” and that there were "systematic attempts to hide the true nature of these transactions." Both QCM and Hindenburg have taken short positions in Aphria, meaning they stand to benefit if its stock falls.

Aphria announced on Thursday that it has initiated an internal review behind the Latin American transactions through a special independent committee. The committee, which is comprised of three board members, is instructed to inspect the transactions it made with SOL Capital and confirm that it conformed with generally accepted corporate governance practices.

The company's TSX-listed shares gained back some of the losses from earlier in the week on Thursday, climbing 51 per cent - or $2.55 - to close at $7.55.

As well, Aphria's chief executive Vic Neufeld told BNN Bloomberg Wednesday the company plans to offer a “complete rebuttal” to the QCM and Hindenburg report early next week.
Cobb said that the company spent about $84 million in cash and stock to acquire the assets in Jamaica, Colombia, and Argentina that were later sold to Aphria, dismissing allegations that the company flipped the operations after holding them for only a few days.

Cobb, a lawyer who previously owned his own practice, also has close ties to Aphria after he represented the company and Liberty Health Sciences during a deal Aphria made in May 2017 for a “strategic investment” in DFMMJ Investment Ltd. DFMMJ is a special purpose private company which was founded by Delavaco Group, a company owned by Andy DeFrancesco, a key partner and advisor of Aphria. DeFrancesco is also chairman and chief investment officer of SOL Global.

“[The Latin American] transactions were all vetted by various different law firms and securities regulators, as well as investment banks that were doing fairness opinions, and these transactions withstood those reviews with all of that being disclosed,” Cobb said.

Cobb added that Haywood Securities filed an independent valuation report that showed the prices paid by Aphria for the Latin American operations were “fair” and represented the intrinsic value of those assets in emerging markets.

On Thursday afternoon, QCM and Hindenburg released the second part of their report, detailing further allegations of undisclosed insider self-dealing between executives at SOL Global and Aphria. The report focuses on Liberty Health Sciences, a U.S.-based cannabis producer that Aphria divested in September to abide by TMX Group Inc. restrictions on pot companies operating in federal jurisdictions where the drug remains illegal.

The allegations centre around the acquisition of a Florida property that was owned by DeFrancesco for less than a week before it was allegedly flipped to Liberty for about $5 million in profit. The short sellers also allege that unnamed individuals bought 242 million shares of Liberty for less than a penny per share days after Aphria announced it would buy a 38 per cent stake in the U.S. company at a substantially higher price in April 2017.​

DeFrancesco said in a text message to BNN Bloomberg that he plans to comment on the allegations after he conducts a full review of the report.

When reached for comment, an Aphria spokesperson referred to the company’s earlier statement that its board would be initiating an internal review, but declined to specifically provide a statement on the new short seller report.

The latest report by QCM and Hindenburg also questions the relationship between Aphria and Clarus Securities Inc., a Toronto-based investment bank. The short sellers highlight how Clarus’ research analyst maintained a “buy” rating on Aphria’s stock with a $22 price target, roughly 350 per cent above the current trading price, following the release of the first QCM and Hindenburg report. It also details several examples where Clarus’ banking team led several of Aphria’s deals and secondary placements.

In a phone interview with BNN Bloomberg, Clarus CEO and President Jim Christodoulis said any links made in the report between the firm’s banking and research team was “100 per cent inaccurate and false.”

“At the end of the day, my analysts are clearly a fan off the [Aphria] story,” he said. “Tying the two is not relevant at all.”

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.