Legal Archives - Green Market Report

Debra BorchardtOctober 6, 2021
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The Securities and Exchange Commission (SEC) charged CanaFarma Hemp Products Corp. and its co-founders with fraudulently raising approximately $15 million from investors, and misappropriating a significant portion of the investor funds for personal use like buying luxury cars.

The SEC’s complaint alleges that in 2019 and 2020, CanaFarma, a Canadian startup hemp company with offices in Vancouver and New York City, and its co-founders Vitaly Fargesen and Igor Palatnik raised millions of dollars from investors.  According to the complaint, while raising these funds, the defendants made misrepresentations to investors, including claims that CanaFarma was a fully integrated company that was processing hemp from its own farm when in fact it had not processed any of this hemp and its products used hemp supplied by third parties.

The complaint also alleges that financial information provided to investors misstated historical revenue numbers and included baseless projections about future revenues. For example, the company claimed that it would have revenues of $25 million in the first year of operation. The company also claimed that money was used for marketing expenses like a road show in Europe that never occurred. The executives were also transferring money out of the CanaFarma account to companies owned by its largest shareholder for “services” but then sending the money back to make it look like sales. The company also claimed it used $3 million for marketing expenses which were untrue.

Fargesen was criminally charged on October 5 by the U.S. Attorney’s Office for the Southern District of New York with securities fraud, wire fraud, and conspiracies to commit both securities fraud and wire fraud in connection with the CanaFarma investment offering. Palatnik has also been charged in the indictment in the Criminal Case with securities fraud, wire fraud, and conspiracies to commit both securities fraud and wire fraud in connection with the CanaFarma investment offering.

The company is also accused of using the CEO as a figurehead only. David M. Lonsdale is listed on the company’s website as its Chief Executive Officer. He is the President of the Lonsdale Group, a boutique finance firm. He had 10+ years as president of private investment bank Allegiance Capital.

CanaFarma was incorporated in June 2017 under the name KYC Technology Inc. In March 2020, as part of a reverse merger, KYC acquired CanaFarma Corp. and changed its name to CanaFarma. The company then listed its shares on the Canadian Stock Exchange with the ticker: CNFA.CN) and is quoted on the OTC Markets using the ticker CNFHF.

“As alleged in our complaint, the defendants pitched investors with falsehoods about a fully integrated hemp company with rosy financial projections” said Richard R. Best, Director of the SEC’s New York Regional Office.  “We will relentlessly pursue those who deceive investors and misappropriate and misuse their funds.”
Hemp Farming
The company leased two hemp farms, one in Dutchess County NY, and the other in Syracuse NY. Despite harvesting hemp at the farms, none of the products was used in the company products. The SEC says the hemp was instead put into storage and never used. The company purchased hemp oil from a third party and used that to make its Yooforic hemp-infused chewing gum. The company initially got off to a good start making $832,000 in revenue for September 2019, but then sales began dropping. By June 2020, monthly sales had declined to $26,000.
The company also told investors that it was a “Vertical Integrated Hemp Business”  saying in investor presentations “From seed to counter, our fully integrated hemp business helps us promote in-demand hemp oil infused products that continue to fuel the direct response marketing engine.” The investor presentation then includes the description “processing” as one of the ways CanaFarma’s business was “integrated.” None of which was true. The company also included testimonials in its presentations, which were for a different product that the company never sold.
Vertical Wellness
Last month, CanaFarma said it was merging with Vertical Wellness, whose CEO Smoke Wallin is a long-time cannabis industry executive. Wallin was set to become the CEO of the combined businesses. The announcement claimed that the combined companies would be worth $50 million. Vertical Wellness has also partnered with Kathy Ireland Worldwide (kiWW) to produce CBD products, with the first brand release of kathy ireland HEALTH & WELLNESS CBD Solutions planned for Fall 2021. Kathy Ireland is Chair, CEO, and Chief Designer of kiWW.
Wallin issued the following statement with regards to the charges:
“We are surprised by the allegations against CanaFarma and named executives.  Neither Vertical Wellness nor any of our advisors, attorneys, or those we work with every day, had any prior knowledge about this situation.  We hope that CanaFarma can work through these issues and the truth will subsequently come to light. Vertical Wellness, a separate corporate entity, will continue to expand our business as planned. Vertical Wellness has created or acquired several long-planned health and wellness brands; we are full speed ahead launching our CBD beverages and exciting products in the category.  We will naturally evaluate strategic options in light of today’s allegations.”

The SEC said it is seeking permanent injunctions, disgorgement and prejudgment interest, and civil penalties against the defendants, and also seeks officer-and-director and penny stock bars against them.

The SEC’s investigation was conducted by John Lehmann, Lee A. Greenwood, and Thomas P. Smith Jr., and was supervised by Sanjay Wadhwa.  The litigation will be led by Mr. Lehmann and Mr. Greenwood.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.


Debra BorchardtOctober 5, 2021
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New York’s Cannabis Control Board is moving quickly to make up for the lost time under the previous administration. In the group’s first meeting since incoming Gov. Hochul stepped in and nominated people for the board, they approved raw cannabis flower as a medical product effective immediately.

Boris Jordan, the founder and chairman of Curaleaf (OTC: CURLF) said on Twitter:

Thank you, NY Gov. Hochul & the Office of Cannabis Management for allowing the sale of whole flower. This decision impacts 151k+ medical patients in NY who will now have access to quality & safe whole flower. Action (not talk) from our new Gov!

In addition to approving flower, the Board also loosened other restrictions.

  • Doctors can approve medical patients
  • 30 day supply increases to 60 day supply
  • $50 registration fee for patients is waived
  • Streamlining dispensation

Currently, New York cannabis law states that adults 21 and older can possess up to three ounces of cannabis or 24 grams of concentrates in New York. The irony is that regular citizens could legally smoke cannabis flower in public, while medical patients weren’t allowed such a form factor.

The meeting was a quick one and lasted roughly 30 minutes. The board members are Tremaine Wright (Cannabis Control Board Chair) , Jessica Garcia, Rueben McDaniel III, Jen Metzger, Adam Perry and Chris Alexander (Executive Director). The meeting also named Jason Starr as the Chief Equity Officer. He served as assistant counsel to former New York Gov. Andrew Cuomo (D) and also worked at the New York Civil Liberties Union.

Patrik Jonsson, Regional President of the Northeast at Curaleaf said, “The expansion of New York’s medical program allowing the sale of whole flower is a very big deal for the thousands of patients affected who now have access to the most cost effective and natural form of the plant. On behalf of Curaleaf and our patient community, I want to thank legislators and the Office of Cannabis Management for their leadership on this issue. This continued evolution of the medical program, which includes expanded qualifying conditions and the removal of application fees, will empower more patients to make choices that work best for their needs. These changes will give New Yorkers access to whole flower that has undergone standardized procedures and testing protocols, ensuring quality and safety. Curaleaf looks forward to expanding our product offerings to best serve our valued patients.” Curaleaf said it could have products on the shelf in November after state testing.

Stocks See Lift

Several of the cannabis companies with large exposure to New York saw stock prices immediately jump on the news. Curaleaf Stock rose as did Green Thumb Industries (GTBIF).


Debra BorchardtOctober 5, 2021
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Last week, Sundial Growers (OTC: SNDL) enjoyed some success in the courtroom when a case brought against the company by investors was dismissed. In May 2020, several investors had charged that Sundial made claims in investor presentations that weren’t true. However, U.S. District Judge Andrew L. Carter Jr. said that the various statements made in the presentations were either protected, forward-looking statements or weren’t all that misleading at the time the statements were made.

The issue stems back to 2018 when Sundial tried to raise $50 million in order to buy an agricultural company based in the UK called Bridge Farm. According to the court filing, the January Investor Presentation said that Bridge Farm had a hemp license that would allow for cultivation, processing, and export of finished products from the UK. It went on to say that Bridge Farm would “provide a platform for scalable growth with only ~C$20 mm in incremental Capex needed to facilitate CBD production and extraction” and that the “[o]peration enables us to produce and distribute at scale almost immediately and more quickly than competitors.” At the time, Sundial said it expected Bridge Farm to generate C$256 million in revenue and C$115 million of EBITDA in 2020.

Bridge Farm Plans

Then Sundial upped the fundraise and said it wanted $70 million versus the original $50 million. The investors say they ponied up $7 million in the pre-IPO round based on the projections of the Bridge Farm acquisition. In 2019, Sundial filed to go public and stated in Form F-1 that Bridge Farm’s hemp license would expire in December 2021. In August 2019, the company went public pricing its shares at $13 and netting $134 million. The investors were unable to sell their shares for the next six months.

Also in August, the case says that during an investor call Tamy Chen from BMO (one of Sundial’s IPO bankers) said “I know that there’s a couple of licenses, you’re waiting for before you can start really converting and growing hemp at Bridge Farm’s facilities.” BMO then issued a note stating that “Bridge Farm requires key licenses and we expect there will be a natural ramp and learning curve associated with the conversion of Bridge Farm’s greenhouses from growing herbs and ornamental flowers to growing hemp.” The lawsuit  also stated that BMO wrote, “That there was no indication as to if, or when, Bridge Farm would receive the necessary licenses to extract CBD and/or to make over-the-counter CBD products.”

Then during its fourth-quarter earnings call for 2019, Sundial reported that its net loss for that quarter was C$145.1 million which was “primarily due to the impact of a non-cash  impairment charge of $100.3 million related to the goodwill recorded upon the acquisition of Bridge Farm.” The Plaintiffs alleged that Sundial’s accountants determined that “(i) the goodwill the Company had attributed to the purchase price for Bridge Farm . . . was grossly inflated . . . and/or (ii) Bridge Farm’s ability to generate cash flows deteriorated such that the fair value of Bridge Farm’s goodwill dipped below its book value.” Not long after Sundial said its core management team was leaving the company and the stock continued to slide on negative news.

By March 2020, Sundial said it was selling the Bridge Farm property and in April 2020, the stock had slid from its offering price of $13 to just fifty cents. The investors believed that Sundial wasn’t being truthful when telling them about the Bridge Farm’s hemp licenses. They allege that Sundial used the Bridge Farm acquisition as a reason for people to invest in the company, but knew all along that it didn’t have the hemp licenses it said it had.

Judge Disagrees 

However, Judge Carter said the investors didn’t demonstrate that Sundial didn’t believe the claims it had made in the presentations. The court order stated, “Corporate officials need
not be clairvoyant; they are only responsible for revealing those material facts reasonably available to them.” It went on to say, “The Second Circuit has repeatedly stated that plaintiffs must do more than simply assert that a statement is false—“they must demonstrate with specificity why and how that is so.” The judge also pointed out that the company was covered by saying the claims about Bridge Farm were forward-looking statements, which were accompanied by cautionary language about risk.

The Judge said that the plaintiffs hadn’t proved that Sundial knew the statements were false.

The investment companies behind the complaint are SUN, A Series of E Squared Investment Fund LLC; E-Squared Capital Fund LP; S.H.N Financial Investments Ltd.; Flamingo Drive M&M LLC; and Stable Road Capital LLC.

Current Day Sundial

Sundial shares were lately trading at roughly 64 cents per share. In January, the company priced an offering in which it would receive approximately $100 million. The company said it planned to use the money for possible acquisitions of, or investments in, equipment, facilities, assets, equity or debt of other businesses, products or technologies and for working capital and general corporate purposes. The additional issuance of shares wasn’t viewed favorably by the market and the price of shares dropped. The company now has a whopping two billion outstanding shares

In August the company reported that its total net revenue for the quarter ending in June was just $18.6 million,  while the net loss was $52.3 million. “Following Sundial’s restructuring in 2020, we have been able to rapidly reshape the business model to focus on a two-pillar strategy that we believe will position our shareholders for future success,” said Zach George, Chief Executive Officer of Sundial. 

He went on to say, “Our second-quarter performance continued to be impacted by the liquidation of discounted inventory and our refusal to push sub-optimal product into the market. We have undertaken a significant retrenchment in our cultivation activities, which has included changes to our cultivation processes as well as workforce and other cost reductions. We have seen continuous improvement in our cultivation outcomes as we remain focused on best practices to deliver strong results in potency, yield and terpenes. In the last two months of the quarter, we experienced the highest successive average potency at harvest since operations began at Olds.”

Sundial did acquire the Inner Spirit and the Spiritleaf retail network on July 20, 2021. The company said in a statement, “Adding Canada’s largest cannabis retail store network will enable Sundial to reach consumers through an entirely new channel, generate a deeper understanding of consumer buying trends, and provide depth of data to enhance decision making around product and distribution strategies. System-wide retail sales through Spiritleaf stores reached $124 million on a trailing 12-month basis to March 31, 2021, the last reported period prior to acquisition. In July 2021, the retail network achieved its highest ever one-day and monthly sales since inception. Through the acquisition of a retail segment, Sundial now has direct access to more comprehensive customer data and expects revenue increases to be generated by the integration of our distribution channels commencing in the third quarter of 2021.”

 

 

 


StaffOctober 4, 2021
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Top cannabis attorney David Feldman has formed a new law firm, Feldman Legal Advisors, PLLC. Feldman, who has focused on cannabis and psychedelics since 2013 and recently helped build and lead the 60+ attorney cannabis industry group at an AmLaw100 firm, will focus the new firm’s efforts on business and transactional matters in the industry. The CEO and Co-Founder of Skip Intro Advisors, LLC, a cannabis and psychedelics-focused consulting firm, Feldman said he believes the combination of legal and advisory services will offer a “one stop shop” for entrepreneurs, investment banks and investors in the space.

“I’ve had a very blessed career. I am always happiest on the cutting edge, whether in helping bring IPO alternatives into legitimacy and transparency, or over the last decade bringing cannabis and psychedelics into the mainstream. I’m so lucky to have gathered a wonderful group of talented friends who now will be colleagues at Feldman Legal Advisors,” said Feldman.

In addition to Feldman, the initial legal team will include Gretchen Temeles, Ph.D., an intellectual property attorney and scientist who will focus on patent and licensing issues in the cannabis and psychedelics space, and associate Melissa Greenberg, an experienced attorney focused on cannabis and wellness (she is also a certified yoga instructor), who joins from cannabis-focused law firm Hiller PC. Temeles and Greenberg will also offer non-legal advisory services at Skip Intro. Feldman said he plans to add additional specialties relevant to their cannabis and psychedelic clients to offer a comprehensive suite of services.

Skip Intro

In 2019, Feldman launched Skip Intro Advisors, LLC to assist growing businesses in the cannabis and psychedelics space as they reach key inflection points. Skip Intro has a strong team of successful and experienced professionals both from within and outside the cannabis industry focused on strategy, finance and M&A, branding and marketing, technology and real estate. The firm, whose slogan is “Fast Forward to Growth,” also offers assistance with cannabis licensing applications. In a recent win, in May 2021 the firm negotiated the sale of Keystone Canna Remedies, a 3-dispensary group in Pennsylvania, to multistate operator TerrAscend Corp. (OTC: TRSSF) at a $70 million enterprise value. The firm is currently active in engagements relating to equipment and media businesses in the cannabis space, as well as assignments for psychedelics companies planning a go-public strategy.

”We offer personalized service at a much lower cost than the large law and consulting firms, lower even than many boutiques. For clients to know that we can find and negotiate business transactions on their behalf, then continue to assist with the legal work, provides simplicity, efficiency, predictability and cost-saving to the process. We are excited to add this integrated law practice to the growing success we are humbled to have achieved at Skip Intro,” added Feldman.

Author

Feldman, who has published four books on finance and entrepreneurship, came to prominence in the 2000’s as a leading attorney in alternatives to traditional IPOs such as reverse mergers and direct listings. Starting in 2010, he worked with the SEC in implementing regulations regarding Regulation A+, a simplified and streamlined IPO created under the JOBS Act. Feldman is credited with coining the term “Regulation A+” now widely utilized to refer to the new technique and led the first Regulation A+ IPO onto the Nasdaq in 2017. Since 2013, he has worked on complex business transactions in the cannabis and psychedelics space, earning numerous accolades. These include top recognition from the global legal guide Chambers & Partners, being named a “Cannabis Law Trailblazer” by the National Law Journal and a top lawyer in the cannabis industry by Business Insider. He has also been listed in the Top 200 Cannabis Lawyers published by Cannabis Law Digest for the last two years.

 

Editors Note: Feldmen represented Green Market Report with its recent acquisition by Crain Communications. 

 

 


Debra BorchardtSeptember 28, 2021
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The Securities and Exchange Commission has filed a lawsuit against Wyoming-based VerdeGroup Investment Partners, Inc. and its principal Thomas Gaffney (Gaffney), who is a repeat securities fraud offender. The SEC also included the company’s investor relations contact, Lisa Gordon. They are accused of raising more than $600,000 from over two dozen investors for a cannabis investment that never occurred. The SEC noted that Gaffney has done this before having been previously charged by the SEC and prosecuted by criminal authorities for securities fraud.

The SEC’s complaint alleges that, from January 2018 through July 2019, VerdeGroup and Gaffney raised the money to supposedly finance a legal marijuana business. Instead, the group which listed Wyoming as the company’s location used the money to fund the Florida-based Tommy’s Pizza, which was founded and run by Gaffney and his wife Cynthia Gaffney. The SEC also alleges that investor funds were used for a variety of Gaffney’s personal expenses, including Tiffany jewelry and travel on the Carnival Cruise lines. They are accused of taking $467,110 of investor money.

Unregistered Stock

Gaffney and VerdeGroup are also accused of making material misrepresentations to investors and prospective investors about VerdeGroup’s business partners and its efforts to form an initial public offering (IPO). The offering was a Private Placement Memorandum (“PPM”) that offered $25,000,000 in promissory notes at $5,000 per unit with a minimum purchase of $10,000. The PPM said that the notes would give a 12% annual rate of return that matured in 24 months and converted to equity at maturity. The IPO was planned for 2019. Investors were told the money would be used to provide high-interest loans to cannabis companies and put deposits on properties.  VerdeGroup also is said to have claimed in the PPM that it “invests in equity positions with legal marijuana companies.”

The PPM also said that VerdeGroup’s President was named Thomas Lynch, but in actuality, it was Gaffney that was running the show. The group also claimed it had filed an S-1 registration form with the SEC, but that never happened. The group ran advertisements in several states to raise money.

The SEC said that Gordon was hired by Gaffney to handle VerdeGroup investor relations and acted as an unregistered broker-dealer in connection with the offering and directly offered and sold securities by soliciting investors through phone calls and emails. The securities offering was not registered with the SEC as required by the Securities Act and some of the investors were not provided a registration statement that is required. At least one of the investors was unaccredited. Gaffney and VerdeGroup also tried to convince investors into not withdrawing funds and to encourage investors to invest more and/or rollover funds to a different entity. Gordon told Law360 that she was unaware of the complaint filed against her.

VerdeGroup claimed on its website that it was associated with the Marijuana Business Association (MJBA) and the National Cannabis Industry Association (NCIA), which wasn’t true. NCIA found out and requested that its badge be removed from the website and the company complied.

According to the lawsuit, one elderly investor asked about her supposed annual return. She received a check that had the Florida address associated with the pizza place. Once she received her check, Gordon is accused of asking her for additional investment. The woman gave another $10,000 in 2019.

Gaffney’s Past

Gaffney is listed as a VerdeGroup director in its Wyoming corporate filings. He apparently had practice at defrauding investors. the SEC sued him in 2013 when he was the CEO of Health Sciences Group, Inc., for a fraudulent scheme involving a company’s stock. That scheme involved illicit kickbacks to encourage the purchase of the stock and phony agreements to mask those kickbacks. The SEC said that Gaffney entered a guilty plea and was sentenced to time served, followed by three years of supervised release with a special condition of eight months of home confinement, among other things.

Punishment

The SEC said it wants the court to permanently prohibit the defendants from violating federal securities laws and to give back the money raised from the scheme. The agency also wants to permanently prohibit Gaffney from participating in the issuance, purchase, offer, or sale of any security in an unregistered offering by an issuer, except for securities for his own personal account. Gaffney’s wife Cynthia and Tommy’s pizza are both requested to give back money received from the fraud.

Unfortunately for investors, it looks like Tommy’s Pizza Ventures was dissolved last week and the Wyoming Secretary of State’s website indicates VerdeGroup was dissolved in April.

 

 


Debra BorchardtSeptember 22, 2021
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The latest twist for the SAFE Act, which would provide safe harbor to banks working with cannabis companies, is that it is now in the defense policy bill. Rep. Ed Perlmutter wanted to add the SAFE Act to the defense policy bill that Congress is expected to enact into law this fall. It is one of 812 amendments that were submitted to the House Rules Committee to be included in the defense bill, but most are actually related to national defense. It was approved by the House on a voice vote. 

“This will strengthen the security of our financial system in our country by keeping bad actors like foreign cartels out of the cannabis industry. But most importantly, this amendment will reduce the risk of violent crime in our communities,” Perlmutter said on the floor ahead of the vote. “By dealing in all cash, these businesses and their employees become targets for robberies, assaults, burglaries and more.”

The language that is being put forward in the defense bill does not include capital markets access. That would mean that a new amendment would be needed and that seems unlikely. That means access to the exchanges would not improve. 

Jaret Seiberg of Cowan & Co. wrote that he believes there are significant hurdles to this happening.  Seiberg said that he thinks Perlmutter knows there is not another non-spending bill that will pass this fall and that the House often adds amendments to bills that it knows will become law. “We saw that last year with efforts to add the SAFE Act to other bills. It is rare for those amendments to survive in the Senate. Senate Banking has not approved the SAFE Act. It has not even held a hearing on the bill. That would make it highly unusual for it to get added to a broader legislative package.”

He went on to write, “We believe Democrats are not going to give up the capital markets issue without getting social justice measures added to the bill. And we don’t see how one puts social justice provisions on this package as that would then require an excise tax. And once there is an excise tax then you are addressing 280E. In short, this quickly goes from a small protection for banking to a controversial package that could sink the broader bill. Adding the SAFE Act to the defense bill would derail Senate Majority Leader Chuck  Schumer’s broader push to legalize cannabis. Comments on his bill were due this month. We believe Schumer wants to keep momentum for his effort.”

In a similar vein, Stifel’s analysts also wrote that they don’t believe anything will happen with regards to the SAFE Act. They wrote in a recent report, “Senate Majority Leader Schumer (D-NY) said he is not interested in pursuing this piecemeal solution while Senator Booker said he would do everything in his power to oppose something “making the rich richer”. Some Democrats view this as only benefiting banks, and they are unwilling to give a “win” to the industry without restorative justice, which is a bridge too far for some Republicans. Federal decriminalization and expungement would accomplish very little, given minor drug cases are handled by the states.”

 


Debra BorchardtSeptember 21, 2021
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The Securities and Exchange Commission (SEC)  filed charges against three individuals and one issuer on a crowdfunding scheme for two cannabis companies that raised $2 million. The money was supposed to be used to buy and invest in cannabis properties, but no money was ever used for those purposes. Instead, the money was siphoned off for personal use. In addition to that, the SEC also charged the registered crowdfunding portal, TruCrowd, and its CEO Vincent Petrescu, who placed the offerings on the portal’s platform.

“Crowdfunding offerings enable issuers to cast a wide net for potential investors, emphasizing the importance of full and honest disclosure,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “As companies continue to raise funds through crowdfunding offerings, we will hold issuers, gatekeepers, and individuals accountable and enforce the protections in place for all investors.”

Scam Cannabis Real Estate Companies

According to the SEC’s complaint, Robert Shumake, alongside associates Nicole Birch and Willard Jackson, conducted fraudulent and unregistered crowdfunding offerings through two cannabis and hemp companies, Transatlantic Real Estate LLC and 420 Real Estate LLC. The complaint alleges that Shumake and Birch raised $1,020,100 from retail investors through Transatlantic Real Estate, while Shumake and Jackson raised $888,180 through 420 Real Estate. Shumake, Birch, and Jackson allegedly diverted investor funds for personal use rather than using the funds for the purposes disclosed to investors.

Birch was the CEO of Transatlantic Real Estate and Bangi, Inc. The complaint alleges that Birch facilitated the payment of money from the Transatlantic Real Estate offering to herself and to H.B. Associates. Birch is also CEO of Bangi, which is a publicly-traded company that supposedly specializes in the acquisition and leasing of properties that support the cannabis industry. Bangi’s common stock trades in the over-the-counter market under the symbol “BNGI.”  Jackson was the CEO of 420 real Estate and is accused of Jackson taking the payment of money from the 420 Real Estate offering to the Jackson Entities. 420 Real Estate is a Houston TX LLC.

Shumake’s Criminal Past

Investors were unaware of Shumake’s criminal past when they invested in the real estate companies. According to the filing, in December 2017, Shumake pled guilty to two misdemeanor violations of the Michigan Credit Services Protection Act, and on behalf of his business, to two felony counts of obtaining money by false pretense, for improperly taking upfront fees for mortgage audit services that he promised, but failed to deliver (People v. Shumake, et al., Mich. 46th Jud. Dist. (Feb. 15, 2017)). The filing went on to say that the presiding court sentenced Shumake to a probationary period of 18 months, during which time Shumake was forbidden to work in a position where he could have “direct control over, or access to, another person’s money.” Before his probation ended in May 2019, he is said to have begun working with the Transatlantic Real Estate offering with Birch and set in motion the 420 Real Estate offering with Jackson.

The complaint suggested that Shunake’s personal relationship with Birch led them to create the crowdfunding scheme and hide Shumake’s involvement with the company. The complaint also says that “Shumake regularly attended and participated in Bangi Board meetings, gave direction to the company’s officers and directors, and conducted business on behalf of Bangi. Board minutes identify Shumake as the founder of Bangi. Bangi Directors and Shumake discussed his criminal history and its potential impact on prospective investors. Despite his involvement in the affairs of Bangi, Shumake elected not to serve as an officer or director of the company. Nor was he listed on Bangi’s website.”

Through the Bangi company, Shumake connected with Jackson to create 420 Real Estate and also hide his involvement with that company. The fear was that if investors became aware of Shunake’s criminal past they wouldn’t want to commit any money.

Lies To Investors

The SEC alleges that The Transatlantic Real Estate offering statement lied to potential investors. They claim that Transatlantic Real Estate told investors it had employed a senior management team that had significant experience in the real estate industry and sophisticated finance and capital markets expertise, which wasn’t the case. Investors were also told that Transatlantic Real Estate had acquired a 9-plus acre property with 80,000 Square Foot Green Houses located in California; and that Transatlantic Real Estate would use $584,220 of the proceeds for “property improvement.” None of which was true. 420 Real Estate is also being accused of making similar false claims to investors.

Shumake’s connection to the company was kept secret even though he directed communications with current and prospective investors, lined up a transfer agent for Transatlantic Real Estate, helped prepare documents and promote the offering, solicited Transatlantic Real Estate advertisements from third parties, and drafted advertising scripts for social media.  Shumake is also accused of performing similar duties for 420 Real Estate without that being disclosed to investors.

TruCrowd is Not So Truthful

The crowdfunding site called TruCrowd is a registered funding portal. The SEC alleges that CEO Vincent Petrescu hosted the Transatlantic Real Estate and 420 Real Estate offerings on its platform but is accused of failing to address red flags including Shumake’s criminal history and involvement in the crowdfunding offerings, and otherwise failed to reduce the risk of fraud to investors. Some 2,000 investors from various states gave money to the companies without knowing that they were being given false information about the companies.

Petrescu is responsible for selecting the companies for his site. He also assisted in preparing the documents for the offerings. In exchange for its services in connection with the Transatlantic Real Estate and 420 Real Estate crowdfunding offerings, TruCrowd received $91,679 and $48,412, respectively. Petrescu was aware of Shumake’s deep involvement with the companies and continued to keep investors in the dark about his connections. Petrescu continued to work with Shumake despite learning of his past through a securities lawyer who declined to work with Shumake for a Reg-A offering proposed for Bangi.

Apparently, it didn’t take investors long to suspect they were being scammed and began sending complaints to Petrescu, who either ignored them or assured the investors that everything was okay. No registration statements were filed with the SEC.

The SEC’s complaint, which was filed in the U.S. District Court for the Eastern District of Michigan, charges Shumake, Birch, Jackson, and 420 Real Estate with violating the antifraud and registration provisions of the Securities Act of 1933 and Securities Exchange Act of 1934, and seeks disgorgement plus pre-judgment interest, penalties, permanent injunctions, and officer and director bars. The complaint also charges TruCrowd and Petrescu with violating the crowdfunding rules of the Securities Act and seeks disgorgement plus pre-judgment interest, penalties, and permanent injunctions.


Debra BorchardtSeptember 17, 2021
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Turning Point Brands, Inc. (NYSE: TPB), the owner of ZigZag rolling papers announced that the Food and Drug Administration (FDA) had issued a Marketing Denial Order or MDO in response to a Premarket Tobacco Product Application (“PMTA”) covering some of the company’s vapor products. Turning Point bought the Solace vape company in 2019.  The company’s stock was slipping in early trading in response and was lately selling at $46.35.

Turning Point has reported spending $14 million in 2020 on the PMTA application according to the company’s annual filing. In 2019, the company spent  $2.2 million on the PMTA.

“While we believe the FDA’s current conclusion is misguided, we will continue our dialogue with the agency in search of a path forward,” said Larry Wexler, President, and CEO, Turning Point Brands. “As we explore options for appealing this decision, we are hopeful that the agency reaffirms its commitment to science-based decision making and to its announced Comprehensive Plan, which includes fully transitioning adult consumers down the continuum of risk in order to reduce the morbidity and mortality associated with combustible cigarette use by preserving the diverse vapor market.”

Turning Point said in a statement that it stands behind the high quality of its PMTA. “We believe established that the products’ continued marketing would be ‘appropriate for the protection of public health,’ the standard established by the Family Smoking Prevention and Tobacco Control Act of 2009. These products are crucial to improving public health by helping adult smokers migrate to less harmful products. TPB will continue to engage with the FDA and other stakeholders as we consider options moving forward, including a formal appeal of the decision and potential legal relief.”

The PMTA denied by this MDO included an in-depth toxicological review, a clinical study, and studies on patterns and likelihood of use. Turning Point said, “We believe the data demonstrated that TPB products do not appeal to never users, youth, or former users and that a significant majority of users of TPB products had completely ceased use of combustible cigarettes. The scientific literature on lower-risk nicotine delivery systems shows that these products can significantly improve public health by providing alternatives that are much less harmful than combustible cigarettes.”

Solace Vapes

Turning Point had been selling vape products under the label Solace with flavors like Peach, Mango, and Marshmallow Crispy. These sugary flavors have been very popular with underage consumers and were a big selling point for the competitor Juul. Solace noted on its website that Federal law required e-liquid companies to submit a Premarket Tobacco Product Application (PMTA) to the U.S. Food and Drug Administration (FDA) in order to continue selling products in the United States. These applications require that e-liquid companies demonstrate that products are “appropriate for the protection of public health.”

The application deadline for the PMTA was September 9, 2020. After that date, any tobacco vapor product on the market would need to have submitted an application or be removed from commerce. Solace had already stated that it was no longer shipping its products to Arkansas, Rhode Island, Utah, Vermont, Massachusetts, New Jersey, New York, and Maine.

Past Sales

The past sales for vape products were significant. Turning Point reported that for 2019, net sales in the NewGen products segment increased to $153.4 million from $131.1 million in 2018, an increase of $22.2 million or 16.9%. The increase in net sales was primarily driven by higher Nu-X alternative products sales in 2019 (includes the Solace acquisition) and an additional eight months of IVG net sales in 2019. IVG is International Vapor Group that operates a strong B2C eCommerce business with direct sales to consumers nationwide and abroad through the Direct Vapor and VaporFi brands. Net sales were negatively impacted by the vape disruption in the fourth quarter of 2019.

 

 

 


Debra BorchardtSeptember 13, 2021
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4min4590

The former mayor of Massachusett’s town Fall River Mayor Jasiel Correia could face 11 years in prison for shaking down cannabis license applicants. The corrupt mayor was found guilty in May for stealing from investors with regards to an app he developed, but also for extorting money from cannabis applicants. He was convicted of 21 of the 24 counts he faced. On Friday, the government suggested Correia should be sentenced to 11 years in prison, then 24 months’ supervised release, $298,190 in restitution to certain SnoOwl investors. In addition, they are requesting that he pay $20,473 in restitution to the IRS, forfeit $566,740, and a final mandatory special assessment of $2,100.

In the government filing, which was posted on Law360, it was noted that Correia remained defiant despite having 33 witnesses testify against him saying that the truth would come out. Correia even suggested he refused a plea deal because he was innocent, but the government said no such deal had been offered.

Marijuana Vendors

The sentencing request noted that several immunized marijuana vendors testified at trial that “they felt forced to pay Correia a bribe if they wanted a license to operate in Fall River. While the marijuana vendors are not victims under the Crime Victims’ Rights Act due to their participation in the extortion conspiracies, it is nevertheless worth noting the adverse collateral consequences each has had to endure, including lost business opportunities, retaining counsel and obtaining immunity, and having to testify publicly, subject to effective cross-examination.”

The filing highlighted Matthew Pichette who provided emotional testimony regarding the humiliation his family endured when the bribe he agreed to pay (designed as campaign
contributions) became public, including the formal matter involving his wife that was initiated by the Office of Campaign Finance, ultimately resulting in a $5,000 fine. The filing also stated that “like Pichette, Charles Saliby testified that he was never able to open his business, despite all the money he had invested, “[b]ecause the Cannabis Control Commission deemed me unsuitable because of my involvement with Jasiel Correia.”

Impact Fees

The Mayor was able to extort the applicants through a Massachusetts “community impact fee.” The state allowed communities to charge cannabis companies 3% as a way to cover higher costs associated with the new businesses. While some states used the money for things like traffic improvements, Correia took the money for himself. Correia managed to get $600,000 in illegal cash payments from four cannabis applicants looking to get his approval.

The mayor’s former chief of staff Genoveva Andrade pled guilty in December for shaking down the applicants. Andrade admitted to helping Correia get $150,000 in exchange for a critical approval letter from the city, which would have allowed for an adult-use dispensary. Andrade also paid Correia nearly $23,000 in bribes in order to be named chief of staff. Andrade’s plea deal was rejected by a judge in June.

 

 


StaffSeptember 1, 2021
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6min28960

It was confirmed that Governor Kathy Hochul named Chris Alexander to be the Executive Director of the Office of Cannabis Management. Alexander is the government relations and policy director at the cannabis company Vill LLC, a Multi-State Cannabis Company based in Canada. He was also an Associate Counsel in the New York State Senate and Policy Coordinator for the Drug Policy Alliance.

At a webinar in May Alexander was quoted as saying, “What we have in terms of our social economic equity program is really an MWBE program on steroids, essentially, where we’re really trying to target the folks who want to access the market. That includes people who have been impacted by prohibition, that includes people who live in communities that have been over policed. For marijuana possession offenses, that includes you know, social and economically disadvantaged farmers who are struggling to keep, you know, products flowing and keep their industry alive.”

Kassandra Frederique, Executive Director of the Drug Policy Alliance said, “By moving swiftly to establish the adult use cannabis program after delays under her predecessor and nominating leaders who have long been involved in the fight for marijuana justice in New York, Governor Hochul is sending a strong signal that the landmark racial and economic justice provisions we fought so hard for in the Marijuana Regulation and Taxation Act will be taken seriously and implemented accordingly.

“We applaud the nominations of Chris Alexander, who she has nominated for Executive Director of the Office of Cannabis Management, and former Assembly member Tremaine Wright, who she picked for Chair of the Cannabis Control Board. They both understand the deep harm that criminalization has caused to individuals and communities – especially communities of color – across the state. Their past work has reflected a commitment to working with people who have been directly impacted by prohibition and demonstrated a belief in evidence-based policies that center equity and justice.”

 

In addition to Alexander, Tremaine Wright will be named Chair of the Board. Wright is a former representative for the 56th District of the New York State Assembly, which includes parts of Bedford-Stuyvesant in Brooklyn. Wright ran for State Senate in 2020, but lost to Jabari Brisport. Wright has been active in the New York cannabis scene for years fighting for legalization. She is currently the Director of the Office of Financial Inclusion and Empowerment in the NYS Department of Financial Services.

The process to get the New York legal adult-use market established was stalled by a lack of enthusiasm by former Governor Cuomo. When the Governor resigned following a sexual harassment scandal, many had hoped that the process would gain steam and that looks to be the case. “Nominating and confirming individuals with diverse experiences and subject matter expertise, who are representative of communities from across the state, to the Cannabis Control Board is a priority for Gov. Hochul,” spokesperson Jordan Bennett told The New York Post a week ago. “We look forward to working with the legislature to keep this process moving forward.”

The Senate would still need to confirm the appointments, but insiders say they don’t expect any opposition to these two individuals.


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