SEC Seeks Judgment In Former cbdMD CEO's Fraud Case

Fund manager Martin Sumichrast looks like he admitted his guilt in a fraud case while simultaneously claiming through his lawyers that the claims were outrageous, according to a report in Law360.

The original case dates back to May 2022, when the SEC accused Sumichrast the former Chief Executive Officer of cbdMD (OTC: YCBD) of misappropriating fund assets and engaging in several unauthorized transactions designed to benefit himself at the firm’s expense. He resigned from the company in June 2022.

In the latest filing, the SEC wrote:

Sumichrast admits engaging in all of the transactions alleged in the Complaint, without first making the disclosures required by the Advisers Act or obtaining the necessary consents. Because there are no material facts in dispute, the Securities and Exchange Commission is entitled to judgment as a matter of law on its claims under these statutes.

Law360 wrote that the SEC is hoping for a judgment prior to a fraud trial. Sumichrasts’ lawyer Ellyn S. Garofalo told Law360, “We are vigorously defending this. This is based on legal theories not supported by statutes or decisional law.” She also told Law360 that she believes the SEC is targeting Sumichrast for failing to detect a Ponzi scheme created by his former business partner Richard Siskey. Siskey died by suicide shortly after the investigation into the Ponzi scheme began.

Stone Street

The allegations center upon a pooled investment vehicle called Stone Street Partners. The SEC said in its case that between 2013 and 2014, Stone Street raised $3 million through the sale of 300,000 Class B units to 16 investors at $10 per unit. Sumichrast and Siskey gave themselves 450,000 Class A units of Stone Street for free. In 2015, Stone Street held a second offering, raising an additional $8.73 million through the sale of 582,000 Class A units, at $15 per unit, to around 52 investors. The B shares were converted to A shares following that round. The two ended up owning roughly 50% of the company.

In 2016, in an unrelated situation, Siskey committed suicide when he learned of an SEC investigation into a Ponzi scheme he had orchestrated. Sumichrast then became the sole manager of Stone Street until it closed in 2020.

The SEC alleges that Sumichrast began to borrow money from Stone Street and then repay it with worthless stock in cannabis and vape companies. Stone Street’s cash on hand had dwindled dramatically, shrinking from $2.8 million as of December 31, 2015, to $176,497 as of
December 31, 2017.


When Sumichrast was CEO of cbdMD, the company bought 2.5 million shares of NuGene International. Not long after that NuGene began having financial troubles. The SEC alleges that Stone Street bought cbdMD’s NuGene shares as a way to improve the balance sheet for cbdMD prior to an IPO. cbdMD’s IPO was a success as it raised more than $12 million.

cbdMD continued to reward Sumichrast with more shares, but the SEC says that caused him to incur a big tax bill. The SEC claims that “As part of his plan to offset this taxable income, Sumichrast transferred these shares to Washington Capital, which had a suspended taxable loss
from its Stone Street shares. Sumichrast then had Washington Capital transfer those shares to Stone Street for $645,000.”

The SEC states that Sumichrast never discussed any of these transactions with the other Stone Street investors.

The company’s current leadership is Ronan Kennedy who is the Interim Chief Executive Officer and Chief Financial Officer. cbdMD last reported earnings in May with net sales for the March 31, 2023 quarter being $6.2 million versus net sales of $6.1 million quarter ending December 31, 2022, an increase of 2.5%. The net sales for the quarter were down 35% compared to the prior year’s quarter ended March 31, 2022. For the second quarter of fiscal 2023, the GAAP net loss improved to $1.4 million on sales of $6.2 million as compared to a $5.0 million net loss on sales of $9.6 million in the prior year’s comparative quarter.




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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