The Aphria debacle stems from corporate governance issues, Lorne Steinberg says

The controversy surrounding embattled cannabis company Aphria Inc (Aphria Stock Quote, Chart TSX, NYSE:APHA) and a short-seller’s report earlier this week is a clear sign that investors need to pay attention to corporate governance, especially with companies in the newly-opened pot space, says investment manager Lorne Steinberg, who claims that Canadian standards concerning reporting requirements need to be upgraded.

Leamington, Ontario’s Aphria is seeing its share price nosedive this week after allegations surfaced that some of the company’s Caribbean and Latin American assets were bought at “vastly inflated” prices and are, in effect, “virtually worthless.” Moreover, the report from Quintessential Capital and Hindenburg Research claims that Aphria insiders had acquired stakes in the assets before Aphria bought them, leading to huge windfalls.

So far, Aphria has yet to produce a response, other than to say that the allegations are untrue and that a statement will follow.

“We need a complete rebuttal, not a piecemeal rebuttal. There are lots of allegations of impropriety and we want our deck to speak on the facts,” said Aphria CEO Vic Neufeld on Wednesday to BNN Bloomberg. “[Aphria’s] report will be very sequential and factual to tell our side of the story.”

The Aphria story betrays a need for more diligence in vetting companies, says Steinberg, president and portfolio manager at Lorne Steinberg Wealth Management, who spoke to BNN Bloomberg on Wednesday.

“If the accusations are true, this points to the reason why investors need to spend more time looking at corporate governance,” says Steinberg. “The accusations are quite nasty, I have to say.”

“I’ve also said that Canada is lacking in comparison with the US in terms of reporting requirements on some of these issues,” he says. “Here we are, the stock is already down. If the accusations are true, it could imply massive write-downs. I wouldn’t venture to put a valuation on this stock but it’s a lesson to take —great companies have good corporate governance.”

Quintessential Capital Management founder Gabriel Grego, who says his company only goes public with its allegations in cases where they have strong evidence to indicate that “serious fraud or serious crime” has been committed, has said investment banks are partly to blame for the problem by not doing their due diligence before selling stock to investors.

“Would these parties have to be more entrepreneurial and dig a little deeper and do proper due diligence? My answer is yes. Am I surprised about it? No,” said Grego, to BNN Bloomberg.

Steinberg says his firm has avoided the cannabis space altogether, in part because many of the newly-formed companies are untested.

“We weren’t there on the way up, we’re not there on the way down,” he says. “And I’m guessing that some of these companies are going to look like very bad investments a year or two or three from now, but undoubtedly someone will win.”