The investor case against Parallel Cannabis’ former CEO William “Beau” Wrigley Jr. and other executives will move forward after a Florida Judge ruled that the investors provided enough evidence of fraud.
The case involves TradeInvest Asset Management Co. (BVI) Ltd., First Ocean Enterprises SA, and Techview Investments Ltd., which all claim that Wrigley and the other executives misled them on the company’s debt and about how their investments would be used.
This is a separate case from the one filed in the state of New York against Surterra Holdings Inc. dba Parallel, which appears to be in discussion for a settlement, according to a letter requesting a stay of litigation to Aug. 18.
However, the Florida case is very similar in the scope of allegations, namely that Parallel convinced investors to buy debt in the company without disclosing its debt default status and not being transparent on the use of the proceeds.
The investors allege that Parallel continued to borrow money to make needed payments, including a settlement of $38.5 million owed to the company’s former CEO Robert Bergmann, but essentially it ran out of cash.
The case claims that in June 2021, Parallel couldn’t make a $13.5 million payment to Bergmann and borrowed money from a Wrigley Family Office fund – the PE Fund – that included a $2.5 million transaction fee and a 16% interest rate. This triggered a continuation of adding more debt to make debt payments, while using a potential public offering as the incentive to buy company debt.
TradeInvest and Ocean Enterprises came onto the scene in July 2021 to discuss a $25 million investment in the Simple Agreement for Future Equity Investment (SAFE), a new type of security under which an investor’s cash investment generally converts to equity in the issuing company under specified conditions.
The money was to be considered a bridge funding until the company could go public through a Special Purpose Acquisition Corp.
The investors claim that Director James Holmes never disclosed the extent of the debt problems during the SAFE negotiations. They allege that in August 2021, Parallel projected its revenue for 2022 to be $618 million, with an adjusted EBITDA of $167 million. Those figures were adjusted down by 20% and 40%, respectively, in October 2021.
The investors state in their case that they sought assurances from the company about its financial health. According to the case, Parallel’s Chief Development Officer, James Whitcomb, and Holmes said that the company already had another $50 million in SAFE investment money and that investors wouldn’t have to commit their funds until the other interested parties did so first. The $25 million commitment was funded on Sept. 27, 2021.
Parallel’s lawyers argued that the offering documents spelled out the various risk scenarios, but the judge noted omissions of information. In particular, the judge agreed that Whitcomb and Holmes neglected to tell the investors that the company “was about to experience a cascade of defaults on $300 million of its outstanding debt beginning just three days later.”
The judge also noted that the risk factors did not mention the debt levels of the company nor impending payments.
In addition, the judge agreed that Parallel took that $25 million investment, even though the investors were told it would not be accessed until the other SAFE investors delivered the promised $50 million.
The judge did agree to dismiss claims related to Georgia securities fraud, saying that Techview was the only entity filing the Georgia claim and that the claim happened before the SAFE negotiations.
“Techview’s GVUTA claim is not a part of the same ‘case or controversy’ as the SAFE Plaintiffs’ federal securities fraud claims. The Court declines to exercise supplemental jurisdiction over Count VI,” the judge wrote.
Techview owns $10 million of the Parallel senior debt and $10 million of the company’s Series D Preferred Stock and represents a minority holder in the senior notes.