Canopy Growth being sued by an investor claiming it misled the market on pre-roll launch costs

Canopy Growth Corp. (NASDAQ: CGC) is being sued in a class action case by an investor who claims the company misled the market about the costs of launching the Claybourne pre-rolls. The complaint also references the statements made around the company’s Storz & Bickel business, which didn’t result in the forecasted way that Canopy told investors it would.

The complaint alleges that due to the misleading comments, the stock value plunged when the truth was eventually admitted.

Claybourne prerolls

Bruce Baron filed the case in a New York Federal court, alleging that Canopy Growth told investors that its new automated preroll machine would save money on expenses for the launch of Claybourne infused prerolls.  He cites many instances where the company’s CFO Judy Hong and CEO David Klein touted how the savings would improve the company’s gross margins and save on labor costs. Instead, Baron says that Canopy Growth faced significant costs around the launch, which was eventually disclosed during the company’s third-quarter earnings announcement.

The case says that the Canopy executives continually told investors in 2024 that it would be saving money and, in turn, increasing gross margins. Baron also alleges that the company suggested that these efforts to save money were sustainable and would be ongoing.

Instead, when the company reported its third-quarter earnings, Hong said,

The company’s Claybourne product launch costs were “primarily attributable to [the] higher initial cost to produce Claybourne” products.

The complaint also states that the company did not disclose the risk of the launch expenses in its financial filing.

Storz & Bickel expenses

It was a similar story for the vaporizer products from Storz & Bickel. The executives claimed that the gross margins in the product line improved to 41% in the fourth quarter of the fiscal year 2024, driven primarily by a positive shift in the product mix. The company also touted the lower input costs for the segment.

The case highlights the positive statements made about the brand, where Canopy Growth was clearing out old stock, leading to better gross margins. The risks to the segment for indirect costs were not outlined in the company’s filing section on risks. Instead, the complaint says the company just repeated boilerplate language.

During the third-quarter earnings announcement, however, Canopy Growth told investors that shipping costs for the products had risen, hurting the segment’s gross margins.

Stock drop

Baron says that when investors learned about the higher expenses for the two products, the stock price plunged by over 27%. He says investors were “Swayed by the company’s representations that its profits would continue to rise.”

The case wants to represent a class of investors who bought stock between May 30, 2024, and Feb. 7, 2025, and the suit makes claims for violations of the Securities Exchange Act. The suit also names as defendants Klein and Hong.