The complaint stated, “This case concerns Defendant’s fraudulent offering and sale of securities of C3 International, Inc., a purported medical cannabis company, to investors. From July through December of 2018, Defendant offered and sold approximately $477,500 worth of C3 securities through material misstatements he made and disseminated to at least six investors, who lost all of their investments. C3 and its principals paid Defendant a total of $66,205 in commissions on those sales.” Arkells had not registered the securities and had not registered as a broker-dealer in order to sell the securities.
The SEC claims that Arkells gave prospective investors documents created by C3’s CEO Steele Smith that contained misstatements that he knew, or was reckless in not knowing, that were materially false and misleading. Arkells allegedly provided investors with financial reports that falsely showed tens of millions of dollars in revenue, profits, and cash flows for C3, when he knew that the company had no cannabis growing facility, products or revenue. In addition, the SEC claims that Arkells falsely claimed that C3 had received $30 million in funding from financial backers, even though he knew at the time that this was untrue and there was no such deal.
The SEC wants Arkells to pay a civil penalty, disgorge ill-gotten gains, and be barred from selling securities.
SEC Sues C3 Founders
In September of 2021, the SEC filed a suit against the company C3 International and its founders Steele Smith and his wife Theresa Smith. In that case, the SEC claimed Mr. & Mrs. Smith raised approximately $2 million from more than 40 investors by selling stock in C3 through Steele Smith’s material misrepresentations and omissions regarding the company’s business and its cannabis pill called Idrasil.
The SEC alleged that “On C3’s and Idrasil’s websites, in offering materials, on social media and in investor communications, C3 through Steele Smith misrepresented, among other things, that Idrasil was patented or patent-pending or trademarked, that most insurance companies reimbursed for Idrasil, and that investor funds would be used for business purposes. In addition, C3 and Steele Smith made statements about Steele Smith’s background, education and legal history, but omitted the material fact of Steele Smith’s prior criminal conviction. In addition to these false and misleading statements and omissions, the Smiths misappropriated over $1 million of investor funds to pay for their own living expenses. In one instance where an investor sent $100,000 to purchase C3 shares in August 2018, Steele Smith sent $40,000 of it that same day to a Jeep dealership, as a down payment on an expensive SUV for himself.” Smith was convicted in 2021 in a conspiracy to grow at least 1000 marijuana plants in United States v. Smith.
The SEC also alleged that when early investors went on a tour of C3’s cannabis growing facility, Steele Smith would pull out a piece of paper in his office and say that it was a patent for Idrasil. He also described to investors in 2016 that C3 held patents for extracting cannabinoids from a liquid to a solid. The complaint stated, “These claims were false. Instead, Steele Smith had filed a provisional patent application in January 2012 with the U.S. Patent and Trademark Office (“USPTO”). Provisional patent applications expire after a year if they are not followed by a related non-provisional patent application. Since Steele Smith never filed a related non-provisional application, the first application expired and no patent was ever issued. Steele Smith admitted in investigative testimony to Commission staff that he never filed a non-provisional patent application related to Idrasil.”
However, the company puts a trademark symbol after the drug name when in reality the drug isn’t registered. Smith even confirmed in investigative testimony that he knew that the “Idrasil” application was denied by the USPTO (U.S. Patent and Trademark Office).
The SEC said in its complaint that Smith used another $38,000 in investor funds in the C3 account to pay the monthly loan payments on the SUV until it was repossessed. The Smiths also admitted that they used investor funds for their apartment rent, their food, their dogs’ veterinary and grooming expenses, their hair salon, their dentist, and their personal cars. The complaint states, “In an email, she wrote in 2018, Theresa Smith stated that, “everything, including our personal [expenses], needed to run out of the business account due to our status of having an EBT food card…and state-funded health insurance…. I must continue…to carry a less than $2k balance in my personal bank account to keep tour [sic] health insurance.” Theresa Smith admitted that, regarding the use of investor funds, investor disclosures ‘could have been worded better.’”
The SEC asked in its claim that the Smiths be barred from selling any securities, pay a civil penalty and pay back money received. According to Law360, the Smiths had until August 2022 to respond and if they don’t, the court will enter a default judgment.