Questionable DOJ conduct comes to light in cannabis company criminal case Fusion Pharm

Authored By: Teri Buhl

Veteran DOJ prosecutor Ken M. Harmon thought he had scored a big criminal case against two cannabis businessmen for the Department of Justice in the early days of pot stocks trading on U.S. stock markets.

Ken Harmon

 

He personally led a raid of Colorado based Fusion Pharm in 2014 off a warrant that said the DOJ thought the company was, amongst other things, really growing and selling cannabis and booking it as revenue for their Pharm Pods products which would mean Fusion Pharm was nothing more than a publicly traded Ponzi Scheme that was making false statements about their financials in filings with regulators.

The SEC subsequently halted the stock for two weeks in mid-2014 and eventually in September 2016 the two Colorado men who built the company, Scott Dittman and William Sears, were indicted on multiple charges of conspiracy to commit securities fraud, wire fraud, and mail fraud.

 

Scott Dittman Explains Pharm Pods Video

 

Dittman and Sears are set to be sentenced this week and are facing years in jail while at the same time filing motions with the Colorado Federal Judge, William J. Martinez, showing some alarming behavior by the DOJ prosecutor Ken Harmon which was discovered after they had made plea deals.

In 2016 Assistant United States Attorney (AUSA) Ken Harmon was able to freeze Dittman and Sears funds and threatened that their families would lose their homes if they didn’t cooperate with authorities. The government estimated the securities fraud constituted $US12 million and Sears had $US9 million in an account for them to grab off of stock sales.

Harmon was confident he had a rock star case. But now, new court records show behind the scenes the DOJ’s case was falling apart.  Issues included the FBI agent, Kate Egan-Funk, lying about her credentials as a registered CPA in Colorado, to obtain the initial raid warrant

 

Kate Funk search warrant application

 

……..and, also confidential informant, Chris Haddad, misleading the bureau about the company growing and selling marijuana and misleading the government about Fusion’s sales figures.

Additionally, South Florida based securities attorney, Fred M. Lehrer, who wrote many of the company’s OTC filings, disclosures and most opinion letters for free trading stock appears to have gotten a major hall pass from the DOJ for his alleged role with Fusion Pharm. In fact, the defendants learned AUSA Harmon had not disclosed that he previously worked with attorney Fred Lehrer for a year when they were both working with the DOJ in South Florida. Attorney Lehrer was hired as corporate counsel for Fusion Pharm around August 2013 and also represented Billy Sears marketing and sales company Meadpoint.

 

 

Fusion Pharm began in 2010 building portable containers that grow produce like lettuce. As new cannabis-friendly legislation paved a way for legitimate products related to marijuana their principal business was the development, manufacture, and sale of steel shipping containers retrofitted and refurbished for use as hydroponic growing pods, branded as “PharmPods,” for indoor plant cultivation, primarily cannabis. Via a reverse merger, the company went public in February 2011 trading under the symbol $FSPM. The cannabis stock was stuck below a dollar trading with low share volume for the first few years but in January 2014 the stock took off and with millions of shares trading, eventually soared to a high of $9.

 

 

 

During the stock run attorney Fred Lehrer, who according to Billy Sears received stock as part of his compensation, was also responsible for advising the company on disclosures and OTC filings. On May 16, 2014 the SEC halted the stock. The same day the FBI raided the Commerce City, Colorado offices of Fusion Pharm taking computers, books and records from the property and also looked for cannabis which they never found. According to a person who worked for the company at the time; a few weeks before the raid attorney, Lehrer had called Fusion’s CEO Scott Dittman, sounding intoxicated, and said he was ‘getting concerned’ about the company disclosures.

Fusion’s stock was able to continue trading on the grey markets and no charges were brought by the SEC or the DOJ until two years later. In the spring of 2014 cannabis stock analyst Alan Brochstein wrote that he had noticed an SEC agenda of shutting down cannabis stocks without any charges being filed. Seven cannabis companies had been halted that spring while the Benzinga 402 Marijuana index showed a 300% increase from 2012 to spring 2014. The SEC halt of Fusion Pharm for alleged accounting irregularities and the FBI raid of Fusion Pharm, which was disclosed in filings, effectively shut down this early-stage marijuana business in mid-2014. A review of government testimony, internal emails, communication with the DOJ attorneys and recorded conversations with company executives and their attorneys by Cannabis Law Report show all the SEC had was really Section Five violations for the sale of unregistered securities.

But AUSA Harmon managed to persuade the Fusion executives to plead early by seizing assets, a move that could be appealed because the FBI agent, Kate Egan-Funk, lied in her warrant report.

And a well-respected lawyer in the microcap space even wrote a whistleblower letter…

 

PP-Brenda-to-Matt-Kirsh

 

…to the head of the DOJ in Denver, Matthew Kirsch, in April 2017 to warn him of what looked like judicial misconduct by AUSA Harmon. The letter also included documents that showed how attorney Lehrer made alleged false statements in SEC interviews and never disclosed his conflicts of interest to Fusion Pharm. The whistleblower also called the SEC lawyers on the case.

Ken Harmon left the DOJ in the middle of Fusion Pharm case in December 2017 after working for the government for 28 years mainly on financial fraud cases. A current review of his LinkedIn profile shows he didn’t leave for a big law high paying job immediately. Instead, in an odd move he set up a one man private practice.

Then, in December 2018 he finally got a job at a mid-tier Denver firm, Springer & Steinberg, known for  ambulance chasing cases in personal injury law. Rumors swirled in the Denver legal community that Harmon had been forced out of the DOJ.

When reached for comment Harmon told Cannabis Law Report that this was not true, stating, he had been planning on retiring for a while and was trying to wait till the Fusion Pharm case ended but it kept dragging on so he left the department. Harmon also claimed he had multiple good job offers while planning to leave the DOJ but his LinkedIn profile doesn’t show he secured those jobs.

Not totally Innocent

Fusion Pharm, also, wasn’t totally forthcoming to investors in OTC filings or their press releases. The fact that Billy Sears had a prior criminal record for a securities violation and served 30 days in jail was never disclosed.

On paper Sears was paid as a sales consultant for the company and initially owned the sales distribution company Meadpoint. He then transferred the company into his mother’s name but kept his name of the broker account at Scottsdale Advisors. Emails showed attorney Lehrer warned Sears and the company CEO Dittman about what role Sears could and could not have regarding management decision to keep his consultant status. The DOJ brought in undercover agents posing as investors and even recorded Scott Dittman calling Sears his partner and co-founder of the company.

On top of that, the llcs that made convertible debt deals with Fusion should have been disclosed as converted stock going to Sears as an affiliate of the company because he is the brother-in-law of Dittman. Investors had the right to know someone with millions of converted stock was also a family member and not a true independent non-controlling investor in the company. The government also initially charged Sears with making fake convertible debt loans. Meaning they thought Sears never loaned real money to the company but still got converted stock. AUSA Harmon and his team latter learned that was wrong the company did really receive cash for the convertible debt deals.

Another theory the SEC brought in their parallel case was that Sears had sold his convertible stock and then used that cash to give it back to the company to book as sales of the PharmPods. But that theory came up as questionable also. On advice from attorney Lehrer, Sears through his sales and marketing company bought all the pods and then resold them at a markup. Sears says he was advised by Lehrer that the money from stock sales could only be used to put back in the company for equipment purchases and not operations which is what they did. A third party investigator then verified the over 70 pods Sears sold went to actual customers.

To get the convertible debt free trading for Sears to sell, a prior lawyer for the company agreed to backdate the notes. An illegal move that landed attorney, Guy Jean-Pierre, with an indictment and was found guilty on 28 counts of securities, wire and mail fraud. Haitian-born, he earned his law degree at Columbia. Guy Jean-Pierre also wrote numerous false opinion letters from 2011 to beginning of 2013 but not at the time the stock was flying high in 2014.

 

 

 

 

 

Additionally attorney Lehrer allegedly misled the SEC in interviews about how and when he learned prior counsel and corporate secretary Guy Jean-Pierre had been fined by the SEC for previously false opinion letters in another case years before. Lehrer knew about Guy Jean-Pierre because he actually worked with his ex-wife, a lawyer, to make a whistleblower report to the SEC. When Lehrer came on-board as counsel he could have advised the company to contact the SEC and report that the company could have unregistered securities issued and could need to restate filings. But that never happen.  

 

Why the DOJ didn’t charge Lehrer even though he also allegedly wrote false opinion letters like Jean-Pierre has never been explained. Or why the SEC ignored the whistleblower letter and told one of Dittman’s defense lawyers it didn’t matter because in their eyes the case was closed after Sears and Dittman plead is concerning. According to emails with Sears’s lawyers and the DOJ, AUSA Harmon had warned Sears he couldn’t talk to the whistleblower because that person could be called as a witness against Lehrer who ‘could be a target of the investigation’. This move by Harmon is highly questionable since Lehrer was never charged and the SEC never filed a case against him. Keep in mind the whistleblower had outed Harmon for his likely conflict in the case because he had a prior working relationship with attorney Lehrer.

 

Harmon was equally combative when first contacted by Cannabis Law Report demanding to speak with the publisher instead of answering simple questions. It took four follow up emails to get him to answer why he left the DOJ and admit he had worked with Lehrer. He also said that he heard Billy Sears was making defamatory statements about his work on the case. When we kept asking about problems in the case he deferred to the DOJ and said call the current staff at the agency. Harmon knows the DOJ doesn’t comment on open cases except in press releases.

Sears who pled guilty to conspiracy to commit securities fraud and a tax violation is facing up to eight years in jail. He will be sentenced Thursday January 30, 2020 and says he plans to file an appeal after sentencing. Dittman has his sentencing the same day and faces up to five years in jail for his plea of conspiracy to commit securities fraud. Dittman would not return a call for comment. Guy Jean-Pierre was sentenced to 84 months in jail on Wednesday, January 29, 2020.

Attorney Lehrer told the SEC in interviews he wouldn’t be writing any more opinion letters for publicly traded companies but has no official ban on him and is believed to be continuing that work for microcap companies. Lehrer, through his counsel, didn’t respond to the allegations made by Dittman and Sears in recent court filings of his alleged role in the scheme and wouldn’t answer any detailed questions for Cannabis Law Report.

UPDATE 1.30.20 12:25pm –

After the story was published Lehrer’s attorney and friend James Sallah has finally decided to respond for Fred to our questions. Fred now says he did not receive any stock or warrants for his work writing opinion letters for Fusion Pharm and never had beneficial ownership of Fusion Pharm stock.

Cannabis Law Report reviewed an email sent by Fred Lehrer to Billy Sears on August 28 2013 that said he would require a block of stock from 200,000 to 400,000 shares as part of his compensation as corporate counsel for legal work to do registration statements.

Lehrer said today that transfer agent records show there was no stock transfer in his name. Lehrer was not able to provided CLR with copies of these transfer agent records.

Fred Lehrer also wants to point out he cooperated with the SEC and DOJ investigation.

UPDATE 1.30.20 5:20pm –

Scott Dittman the CEO of Fusion Pharm got the maximum sentence, five years in jail, with three years probation upon release.

The monetary penalties are $1.1 million for Dittman who has to report to prison in Eastern Pennsylvania on March 5, 2020.

UPDATE 1.13.20 –

William (Billy) Sears was given the max sentence of 96 months, eight years, for both counts and three years of probation upon release. His personal monetary penalties are $1,160,160.81 and for the tax evasion charge, he is ordered to pay restitution of $2,433,818.00.

Sears was remanded to prison at his sentencing because the DOJ lawyers complained to the judge about Sears creating a website with discovery evidence about his case called Colorado Corruption, which included photos of FBI agent Kate E. Funk, her husband and some children at their wedding. The photos [exhibit 16] are public on the photographer,s website and could be considered fair use assuming the photographer didn’t argue copyright.

Additionally the DOJ argued Sears violated his bond because he did not get permission from pre-trial services to start a new business. The DOJ argued a business called Montverde Partners LLC, which is not registered with the state of Colorado in Sears name, was really his business. And the DOJ found another business called BJ’s Rocks LLC they said belonged to Sears. Sears had previously been charged on two other cases in New York and Florida unrelated to this case which the judge took into account.

The current DOJ lawyers on the case are: Robert Brown, Jeremy Sibert and Tonya Andrews. When I reached DOJ press person Chris Larson this morning and asked about the sentencing he bragged that it was a good outcome because the defendant ‘got a lot of months’.

Peter Bornstein, Sears attorney, told Cannabis Law Report, that he will still try to appeal the judge’s denial of his motion to change Billy Sears plea.

FURTHER MATERIALS

 

I’m a professional financial investigative journalist who has written for the Greenwich Time, Hearst CT Newspapers, Forbes Magazine, Fortune.com, The Atlantic.com, New York Magazine, New York Post, Trader Monthly, Housingwire, ML-Implode, The Business Insider, Long Island Business News, Dealbreaker, New York Observer, Bitcoin Magazine, DealFlow Media, SIRF.org and more. For the last five years I have been a contributing reporter for Market Nexus Media who publishes a financial trade publication called Growth Capital Investor.

I earned my breaking/investigative news chops reporting during the financial crisis in 2008 for the Sunday edition of the New York Post. I was one of the first to report on the missteps at IndyMac that lead to government investigations and lawsuits against the banks founders. Caught hedge funds like Carrington Capital abusing investors without disclosing conflicts of interest with senior RMBS bond holders; they were sued by Wilbur Ross for Civil RICO. I exposed Bear Stearns misleading their own investors and monoline insurers on the quality of the loans in their mortgage-backed securities, which led to a fraud lawsuit against JP Morgan/Bear Stearns and the $13 billion settlement with the DOJ in 2013. Since 2010 multiple Wall Street firms, that my reporting warned about first, have been [JP Morgan, SpongeTech, Security Savings Bank, SAC Capital, Palm Beach Capital Management, New Stream Capital, NIR Group/Cory Ribotsky, Bear Stearns RMBS Traders, Mike Perry IndyMac CEO, Steven Muehler and the Nanocap MarketPlace, Barry Honig and The Frost Group] investigated or charged for financial violations by the FBI/SEC/State AG or shut down by bank regulators.

The Huffington Post named me the number three most dangerous financial journalist for being willing to challenge the establishment and inform readers best. I’m working on trade-marking “Smashmouth Journalism”

Read More About Teri’s Work At: https://www.teribuhl.com/about/

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Teri Buhl


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