What happened

Aphria (NYSE:APHA) stock crashed on Monday, with shares plunging 19.5% as of 11:41 a.m. EST after falling as much as 29% earlier in the day. This huge drop came after hedge fund manager Gabriel Grego announced a short position in Aphria and referred to the Canadian marijuana producer as "a black hole" for investors' money.

Grego's Quintessential Capital Management and forensic analysis firm Hindenburg Research jointly issued a report that expressed their belief that Aphria "is primarily a scheme to funnel funds from retail shareholders into insiders' pockets." This report stated that Aphria insiders bought positions in "virtually worthless corporate entities overseas through shell companies," then led Aphria to buy these overseas companies at unjustifiably high prices.

Finger on middle shell of three shells that are part of a shell game

Image source: Getty Images.

So what

As of the time of this writing, Aphria had not responded publicly to the allegations made by Grego. It's always good to hear both sides of a story before reaching any conclusions. However, the report issued by Quintessential Capital Management and Hindenburg Research is concerning.

One aspect of the report is easy to confirm: Aphria indeed acquired three Latin American companies recently in whole or in part. In September, Aphria announced the closing of a transaction with Scythian Biosciences that gave Aphria a 90% stake in Colombia-based Colcanna, 100% ownership of Argentina-based ABP, and a 49% stake in Jamaica-based Marigold. It's also true that Aphria Chairman and CEO Vic Neufeld was once chairman of Scythian Biosciences. 

The report also seems to make a pretty good case that Aphria overpaid for these acquisitions. What remains only conjecture at this point, however, is whether there were any company insiders who benefited from the deals.

Controversy arose earlier this year with Aphria's acquisition of Nuuvera when it was revealed that Aphria executives disclosed stakes in Nuuvera just before the closing of the deal. Quintessential Capital Management and Hindenburg Research suspect -- but didn't prove -- that Aphria insiders also owned positions in the Latin American companies recently acquired by Aphria.  

Now what

This could play out in a couple of ways. The issue could prove to be much ado about nothing, or it could become an even greater scandal for Aphria.

Another Canadian marijuana producer, Cronos Group, came under fire from a noted short-seller in August. But Cronos bounced back from the initial sell-off before giving up its gains in the bigger pullback for marijuana stocks in October. The allegations from the short-seller had a short shelf life. That could be the case with Aphria as well.

In some ways, though, the latest allegations against Aphria are more troubling than the ones made against Cronos. Aphria has a lot of promise, but until all the facts come out, it's probably best to watch this marijuana stock from the sidelines.