A cautionary tale for cannabis companies and the Securities & Exchange Commission (SEC) was laid bare last week when the Central District of California filed a $25 million complaint against nine defendants. The group raised money from investors by selling the unregistered stock for the purpose of funding a marijuana farm in Salinas California.
The individuals named included Anthony Todd Johnson (aka Todd Johnson), Jeremy Johnson, Richard Portillo, Charles Lloyd, Mark Heckele, and Michael Gregory. The companies that wanted funds for the marijuana farm were named as Smart Initiatives, LLC, Valley View Enterprises LLC, Target Equity LLC, Zabala Farms Group, LLC, and Green Growth Ventures, LLC. The companies that raised money for a CBD extraction facility were named as – C Quadrant LLC, GPA Enterprises LLC, RJ Holdings Group, LLC, and Extraction Capital Tier 1, LLC.
The group engaged in so many alleged actions, it’s easiest to just list them as follows:
- Claimed the investments would generate returns of 100% or more
- Misrepresented their compensation
- Misappropriated $2.7 million
- misled and deceived investors about a purported “business loan,” secured by C-Quadrant’s real property
- Rather than using that business loan for the benefit of C-Quadrant, Gregory used the loan proceeds to pay off different investors in an entirely unrelated entity.
- Falsely claimed a relationship with a prominent California University
- Acted as unregistered broker-dealers in connection with the offerings, none of which were registered with the Commission
- Used general solicitation to attract prospective investors, including via cold calls, Craigslist, Facebook, and other websites and social media.
- None of the securities offerings were registered with the Commission as required by the Securities Act
- Many of the investors in each offering were unaccredited and unsophisticated.
- The defendants did not take reasonable steps to verify the investors’ accreditation status
The alleged behavior took place between 2017 and 2019. The Johnsons used pro-forma numbers when soliciting investors. The farm though revised those figures. The revised pro forma P&L statement adjusted the farm’s projected net income significantly downward, from a range of $23 to 37 million per year to a range of just $6 – $23 million per year. The group though continued to raise money knowing the farm could not generate the amounts they are accused of touting. They also told the investors they would get quarterly payments, which the farm said it had not agreed to make.
The case says that the sales team touted C-Quadrant’s ownership of the property, the Johnsons and Gregory failed to disclose that they had collateralized C-Quadrant’s property and that Gregory had used the loan proceeds to pay off investors in an unrelated entity. In early 2018, C-Quadrant purchased a former recycling plant, where it planned to locate its extraction facility. In October 2018, prior to the start of the second C-Quadrant offering, the Johnsons and Gregory transferred ownership of the property to another entity they controlled and used it as collateral for an almost $2.9 million loan. Gregory used the majority of the loan proceeds to make payments to investors in an unrelated cannabis farm that he owned.
Less Than Honest Bios
The group was also less than honest with investors about their backgrounds. Johnson told prospective investors, in Gregory’s presence, that Gregory had an MBA, which he apparently did not have. Jeremy Johnson had filed for personal bankruptcy in 2012 but did not disclose this to investors.
Portillo has an extensive criminal record that also wasn’t disclosed to investors. In June 2018, Portillo was convicted of felony domestic violence and witness intimidation. He had at least two prior convictions for domestic violence, and was on probation and subject to a restraining order at the time of the 2018 assault. Portillo also has prior convictions for felony possession of marijuana for sale, felony taking of a vehicle, and felony assault with a deadly weapon. Investors, no doubt, would have liked to have this information.
The SEC is asking the group to disgorge all the money received and pay civil fines.