Allegations of Ponzi Scheme, Forged Documents Plague Cannabis REIT IIPR

Monday's lawsuit alleges that IIPR violated Maryland law by not investigating previous claims.

Cannabis real estate investment trust Innovative Industrial Properties Inc. (NYSE: IIPR) is facing more legal fury from its shareholders. The plaintiffs allege that the REIT’s directors neglected to properly vet two of its largest tenants, Southern California-based Kings Garden and Parallel, resulting in considerable financial losses when the tenants became embroiled in scandal.

The derivative lawsuit, filed Monday in the U.S. District Court for the District of Maryland by investor Franco DeBlasio, alleges that the two tenants together contributed 18% of IIPR’s rental income before defaulting on their payments.

IIPR’s operations center on acquiring industrial properties and leasing them to cannabis companies, providing liquidity to companies typically shut out from standard investments. The lessees bear the costs associated with the property and its operations, with some costs reimbursed by IIPR.

However, despite assuring investors of robust risk management policies, IIPR reportedly failed to thoroughly investigate Kings Garden and Parallel until after a damaging 2022 report from research firm Blue Orca Capital. That report suggested that both companies would soon default on their rental obligations, leading to a 7.5% drop in IIPR’s stock price at the time.

While IIPR refuted the report as “flawed,” a subsequent review of Kings Garden’s $48 million in reimbursement requests revealed that the majority of the requests, most of which IIPR had already paid, were forged. According to Law360, this included inconsistencies in font types and other elements from previous invoices.

The review also found that more than $15 million had suspiciously left Kings Garden’s accounts via loans connected to organized crime.

IIPR sued Kings Garden for fraud, labeling it a Ponzi scheme, shortly after IIPR informed investors that Kings Garden had ceased paying rent.

Parallel also faced litigation in mid-2022 over an undisclosed debt obligation nearing $300 million.

Rewind the Clock

It’s not IIPR’s first round in court over the claims. Investor Michael Mallozzi sued IIPR in April 2022 following the Blue Orca report.

Mallozzi was later joined by investors Alejandro Handal and Stephen Forrester, and in January the group accused IIPR of misleading investors, incompetence, and violating securities laws. According to the lawsuit, IIPR allegedly knew of the fraudulent nature of Kings Garden’s operations but failed to inform investors.

That January suit further pointed to “irregular” transactions worth millions of dollars involving Kings Garden and its managing directors and multiple related-party transactions between Kings Garden and entities its managing members owned or controlled. The lawsuit stated that Kings Garden lacked transparency around its financial affairs, with evidence of “self-dealing.”

However, IIPR continued to assure investors of Kings Garden’s stability until it sued the company for rent. At that point, IIPR expressed suspicions that Kings Garden was not truthful in its dealings. Investors argued that IIPR could not simultaneously claim ignorance of Kings Garden’s dishonesty while accusing the company of lying in another lawsuit.

Monday’s Maryland suit

DeBlasio’s lawsuit further alleges that IIPR violated Maryland law by not investigating claims in response to investor demands in 2022 for the REIT to examine and address the failure to conduct due diligence.

Investors want IIPR to improve its corporate governance and internal procedures to ensure compliance with the law and provide better financial decision-making oversight. They also contend that IIPR’s failure to conduct due diligence has financially harmed the REIT through legal fees, potential settlement costs, and compensation and benefits costs for the directors who allegedly breached their duties.

The lawsuit posited that IIPR’s corporate reputation and goodwill have been damaged, which could have a long-term impact on its stock price and ability to attract investors and tenants. It cited a decline in the company’s stock price after the revelations about Kings Garden.

Still, despite its legal woes, IIPR has stayed firm on its business dealings, and its recent revenue and earnings report exceeded Wall Street expectations. By the end of the first quarter this year, the firm posted more than $40 million in profit.

The company also went through a C-suite shuffle. In March:

  • Catherine Hastings was promoted to chief operating officer.
  • Ben Regin was promoted to chief investment officer.
  • David Smith was hired as chief financial officer.


Adam Jackson

Adam Jackson writes about the cannabis industry for the Green Market Report. He previously covered the Missouri Statehouse for the Columbia Missourian and has written for the Missouri Independent. He most recently covered retail, restaurants and other consumer companies for Bloomberg Business News. You can find him on Twitter at @adam_sjackson and email him at

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