New York-based multistate cannabis operator Acreage Holdings agreed to pay a $225,000 fine in a settlement with the U.S. Securities and Exchange Commission (SEC) stemming from a late 2019 transaction.
Acreage was recently acquired by Canopy USA LLC, allowing Canadian cannabis titan Canopy Growth Corp. to chase opportunities in the U.S. cannabis industry through a nonconsolidated, non-controlling interest in Canopy USA.
According to an SEC cease-and-desist order from Jan. 10, Acreage violated the Securities Exchange Act of 1934 when it orchestrated a nearly $4.2 million round-trip transfer of cash with an affiliated but unconsolidated entity (“Entity A”) in December 2019 and January 2020.
Acreage did not own Entity A but rather had contractual arrangements with the entity that included a management consulting and service agreement. The services that Acreage provided to Entity A included billing, day-to-day operational support, employee training, and “financial oversight, controls, planning, and access to capital,” according to the SEC.
The nearly $4.2-million transfer between the companies temporarily inflated Acreage’s year-end 2019 cash balance on its internal accounting records in violation of Section 13(b)(2)(A) of the Exchange Act, according to the SEC.
“Shortly before the close of Acreage’s fiscal year ended Dec. 31, 2019 (“FY 2019”), Acreage caused Entity A to transfer approximately $4.2 million from Entity A to Acreage’s bank account with the express understanding that Acreage would return all the money to Entity A in early January 2020, after the end of FY 2019,” the order states. “Acreage received cash in the amount of approximately $4.2 million from Entity A on Dec. 26, 2019, and Acreage returned that exact same amount of cash to Entity A on Jan. 3, 2020.”
According to the order, Acreage subsequently created financial records that mischaracterized the round-trip transaction, first as a debt repayment owed by Entity A and then as a short-term loan from Entity A to Acreage.
“Both characterizations misrepresented the true nature of the transfers,” the SEC order states. “After certain employees’ concerns about the roundtrip nature of the transaction were escalated to a member of Acreage’s board of directors and the director began making inquiries, Acreage recorded an additional journal entry that effectively reversed the transaction from an accounting perspective, and the money that Acreage had received from Entity A was not included in Acreage’s publicly reported financial statements for FY 2019.”
During the audit of Acreage’s FY 2019 financial statements, Acreage created and provided written documents to the accounting firm conducting the audit that also misrepresented and omitted material facts about the round-trip cash transfer with Entity A, according to the SEC.
During an audit of Acreage’s fiscal year 2019 financial statements, the company also created and provided documents that misrepresented and omitted material facts about the round-trip transfer, according to the SEC.
According to the Jan. 10 SEC order, Acreage’s senior management became increasingly concerned about the company’s cash balance in late 2019.
“On Nov. 26, 2019, a senior officer of Acreage (“Officer A”) emailed another senior officer (“Officer B”) with the subject line ‘Cash Flow’ and wrote: ‘Let’s discuss tomorrow. All of our competitors are showing [cash flow] positive. Why are we so far off?’” the order states. “During this period, industry analysts were focused on the cash balances at companies in the cannabis industry, including Acreage.”
At that time, Entity A owed Acreage roughly $4.65 million in principal, and additional amounts for interest, on the line of credit, according to the SEC. However, up until that time, Acreage typically did not require Entity A to make payments for the management fees owed under the services agreement or to repay amounts owned on its line of credit, according to the SEC.
As Acreage’s senior management members explored in November 2019 ways to boost its cash flow before the year-end reporting period, they targeted the amounts Entity A owed to the company that had accrued over time. Specifically, an Acreage employee who provided accounting services to Entity A informed Acreage management that it appeared likely the entity could afford a $1.5 million payment, according to the SEC order.
However, in December 2019, rather than asking Entity A to pay down its debt under the line of credit, Acreage’s senior management devised a different plan that involved the nearly $4.2 million round-trip transfer, according to the SEC.
“On or about Dec. 24, 2019, Officer A and two additional senior officers of Acreage (“Officer C” and “Officer D”) held a call with Entity A’s CEO,” according to the Jan. 10 SEC order. “During the call, Officer A directed Entity A’s CEO to send all of Entity A’s cash to Acreage, except for what was needed to cover Entity A’s immediate short-term expenses. Officer A assured Entity A’s CEO that Acreage would return the money to Entity A at the beginning of January 2020. Entity A’s CEO initially objected to the request but ultimately acquiesced. Entity A’s CEO asked that Acreage put in writing the assurance that Acreage would return the money to Entity A at the beginning of January.”
After Acreage assured in writing it would return the money, Entity A’s CEO initiated a wire transfer of $4,164,458.06 to Acreage’s bank account, which temporarily increased Acreage’s existing cash balance by approximately 15%, from $26.5 million to $30.7 million, according to the SEC.
Acreage and Entity A both understood from the outset that the cash transfer was not a bona fide repayment of debt owed, according to the SEC. Still, on Jan. 3, 2020, Acreage accounting staff made a journal entry dated Dec. 26, 2019, that recorded the transaction, in part, as a credit to “Investments – Consolidated: Investment in [Entity A],” an asset account; on Jan. 7, the staff changed that entry to “Other Current Liabilities,” a liability account, according to the SEC.
Then, on Jan. 17, 2020, Acreage’s senior management directed the company’s accounting staff to record another journal entry to inaccurately show the funds were returned to Entity A on Dec. 31, 2019, three days before Acreage sent the return wire, according to the SEC.
“This entry effectively reversed the transaction from an accounting perspective and negated any net impact on Acreage’s publicly reported financial statements, essentially treating the cash transfers as if they had both occurred in December 2019,” the Jan. 10 order states. “This entry was made a few days after [one of Acreage’s board directors] began questioning Officer B about the round-trip cash transfer.”
In May 2020, Acreage created and provided two documents to an audit firm that was charged with auditing the company’s fiscal year 2019 financial statements that contained “materially false and misleading statements” about the year-end cash transfers with Entity A, according to the SEC.
On Jan. 10, 2024, the SEC ordered Acreage to cease and desist from committing or causing any future violations of Section 13(b)(2)(A) of the Exchange Act.
In addition, the SEC ordered Acreage to pay a civil penalty of $225,000 within 10 days.
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