MedMen Wins Case Accusing the Company of Fraud

The initial case revolved around whether MedMen misrepresented stocks used in an acquisition.

MedMen Enterprises Inc. (CSE: MMEN) (OTCQX: MMNFF) chalked up another victory against allegations brought by Whitestar Solutions LLC.

In the initial case, Whitestar alleged that MedMen “fraudulently induced Whitestar to contract to sell part of its business to MedMen” by misrepresenting the nature of the stocks put up to fund the deal.

That case was filed in 2020. Whitestar said it agreed to an all-stock deal to sell EBA Holdings Inc., which operated a cannabis cultivation and dispensary business in Arizona. The company expected to  receive unrestricted stock. But the stocks transferred were encumbered by the fact that they were foreign-issued shares.

In this latest victory, the Arizona Court of Appeals upheld the earlier decision that sided with MedMen.

Restricted Stock

According to the lawsuit, in October 2018, MedMen‘s then-head of investor relations, Stephanie Van Hassel, confirmed that the shares were foreign stock bearing a restrictive legend, in line with the U.S. Securities Act of 1933. Despite that, Whitestar closed the deal in December 2018.

Whitestar founder Dustin Johnson tried to have the legend removed from his shares, contacting FineMark National Bank and Trust to help out. In February 2019, a FineMark representative sent Johnson an email saying the shares would have to be sold on the Canadian stock exchange within 30 days of the legend being removed.

Johnson was also told that if the legends were removed from his shares, “we would need to have ALL of them sold within 30 days of removing the restriction at Odyssey.” In addition, they would need to “have everything ready to go before the restrictive legend is removed.”

Johnson said it was the first time he learned of the purported 30-day re-legending requirement, as “no such requirement was specified in MedMen’s instruction letters to Odyssey or applied to the closing shares.”

Since that time, the value of the shares has fallen, and Whitestar sought to stop the sale by raising the issue surrounding the legend of the stock certificates.

According to case documents, Whitestar applied for the appointment of a receiver to protect its interests and for a temporary restraining order and preliminary injunction, largely to enjoin MedMen from selling Monarch.

Judge Danielle Viola held an evidentiary hearing in August 2020 and later denied the application to appoint a receiver. She did grant the application for a preliminary injunction upon Whitestar’s posting of a bond after concluding the company demonstrated a strong likelihood of success.

MedMen Wins

In April 2022, the case was reassigned to Judge Daniel Martin, who, in October 2022, found in favor of MedMen, saying that Whitestar did not provide any evidence that the shares were tied up or that its members were harmed.

“This case revolves around a relatively uncomplicated question of an alleged misrepresentation for which no supporting evidence exists. Once the weakness of that foundation is exposed, the remaining structure collapses around it,” Martin wrote in his decision.

“Further to the foregoing, the Court agrees with MedMen that there is no evidence in the record of any damages proximately caused by the alleged re-legending requirement,” he added.

Whitestar argued that the court erred in coming to that decision. However, the new judge disagreed and said he would not reverse the judgment.

Martin noted that Whitestar identified various factual disputes between the parties, but said there were no disputed material facts.

1773000-1773590-1 ca-cv 22-0738 whitestar

Debra Borchardt

Debra Borchardt is the Co-Founder, and Executive Editor of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Master's degree in Business Journalism from New York University.

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