What happened

Shares of Aphria (NASDAQ:APHA) plunged 20.5% as of 10:38 a.m. EST on Tuesday, marking the second consecutive day of declines of greater than 20%. The Canadian marijuana stock fell sharply on Monday after a short-seller alleged that Aphria insiders bought stakes in "virtually worthless corporate entities overseas" then led Aphria to acquire these international companies at unjustifiably high prices.

Tuesday's big drop was an extension of the sell-off that began because of the allegations. The free fall continued even though Aphria released a public statement that the company "unequivocally stands behind" its recent acquisitions of Latin American businesses.

Marijuana growing in a greenhouse

Image source: Getty Images.

So what

The allegations against Aphria are serious. Investors should be troubled -- and livid -- if Aphria insiders deliberately guided the company to significantly overpay for acquisitions that would deliver little value to shareholders. And that's what Gabriel Grego, his Quintessential Capital Management hedge fund, and forensic analysis firm Hindenburg Research are alleging happened.

However, Aphria disputes these allegations. The company stated in a press release that its board of directors received advice from an independent and qualified financial advisor about the valuations of the acquisitions of the Latin American operations that it acquired from SOL Global Investments (formerly Scythian Biosciences). Aphria also maintained that the purchase price was in line with Latin American deals made by some of its peers.

Furthermore, Aphria said that its representatives conducted due diligence by meeting with the management teams of the Latin American businesses and visiting sites. The company added that it retained legal counsel "who completed extensive legal due diligence on the assets, licenses, and businesses in each jurisdiction." 

Aphria disclosed in the press release announcing the Latin American acquisition transaction that some insiders in the company owned "a de minimis amount of shares and warrants of SOL." This is the second time that Aphria insiders owned a stake in a company with which Aphria conducted a significant financial transaction. Aphria executives came under fire earlier this year because some of them owned stakes in Nuuvera prior to Aphria's acquisition of the company

Now what

While a sell-off over a potential scandal is to be expected, such sell-offs can also be overdone. Aphria has already lost a lot more in market cap than the total value of its controversial acquisitions. It's likely that the stock could bounce back if no further damaging revelations emerge.

Perhaps the biggest impact of the recent allegations, though, is that they could hurt Aphria's prospects of landing a partnership with a major company outside of the cannabis industry. Investors might want to look elsewhere until the dust settles with Aphria's latest controversy. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.