As the cannabis industry has found itself struggling to compete against unlicensed players, high taxes and falling prices – the ripple effect continues. Late last week, another shareholder filed suit in Maryland against cannabis real estate investment trust Innovative Industrial Properties (IIP) (NYSE: IIPR) for failing to be truthful to investors about its business dealings with Kings Garden.
The case also names IIPR’s CEO, Paul Smithers; its chief financial officer, Catherine Hastings; co-founder and executive chairman of the board Alan Gold; and several other officers.
The complaint filed by Ross Weintraub piles on to another class action shareholder lawsuit against IIP filed in New Jersey also over the failure of client Kings Garden. The Weintraub complaint is very similar to the New Jersey case in that it alleges that IIP should have been aware that Kings Garden was a Ponzi scheme. The complaint states that IIP consistently told investors that it performed due diligence on all the companies it worked with, but as other third parties pointed out the problems at Kings Garden, IIP insisted that the company was fine.
The complaint specifically highlights a report from Blue Orca Capital that described Michael King of Kings Garden as having a background filled with fraud and theft allegations, name changes, and litigation, and that this information was available from early 2019, before IIPR ever contracted with Kings Garden.
The complaint states, “Further, the Report detailed that IIPR had purchased properties at far higher prices than the sellers they entered into sale-leaseback transactions had paid for the properties, and that by recording the fair value of the properties as the purchase price, IIPR was hiding its true financial condition by overvaluing its assets.”
Weintraub says IIP accused the Blue Orca report of having false and misleading statements. The company went even further and continued to support Michael King and Kings Garden.
Then in July 2022, IIP did an about-face and IIPR announced that Kings Garden had failed to pay its July 2022 rent under any of its leases. The complaint says that IIPR filed a civil lawsuit against Kings Garden, King, and related parties, alleging fraud, theft, and violations of the Racketeer Influenced and Corrupt Organizations Act.
The complaint points out that, “In that lawsuit, IIPR acknowledged it never did a thorough investigation of Kings Garden or King. In fact, IIPR did not even do a rudimentary background check on King.”
The case also alleges that in addition to making false and misleading statements, the company executives violated Generally Accepted Accounting Principles (GAAP) which “allowed IIPR to overstate rental revenues, real estate held for investment, net book value, earnings, net earnings, and earnings per diluted share. Further, IIPR’s GAAP violations led to it filing false financial statements, preventing investors from fairly evaluating the risk of investing in IIPR.”
The complaint went on to say, “Instead of following the clearly defined accounting standards, IIPR recorded the assets it acquired in sale-leaseback transactions from Parallel and Kings Garden at their full cost without recognizing excess of cost over fair value as advances to these cannabis producers, thus overstating the initial carrying values of IIPR’s real estate assets and completely avoiding showing advances to these cannabis producers on IIPR’s balance sheet. This practice enabled IIPR to hide the true extend of its lending activities. Moreover, because none of the rental payments IIPR received were allocated to debt service, its rental revenues were overstated during the Relevant Period.”
IIP said in response to the complaint that it had identified concerns with Kings Garden and took steps to investigate, which included the lawsuit against Kings Garden.
The case is asking for court costs and damages to the investor along with finding the executives in breach of their fiduciary duty.
IIP stock has been selling at the bottom of its 52-week range. Shares were recently trading at $80, near the year’s low of $78 and far from the year’s high of $211.