The U.S. Securities and Exchange Commission secured consent judgments against two former executives of CanaFarma Hemp Products Corp. in a case involving an alleged $15 million investment fraud scheme, the agency announced Tuesday.
The development stems from charges filed in 2021 by the SEC in the Southern District of New York alleging that the Canadian start-up’s senior vice presidents of sales and marketing, Frank V. Barone and Kirill Chumenko, along with co-founders Vitaly Fargesen and Igor Palatnik, engaged in misleading practices over the course of two years for personal enrichment.
The court’s judgment bars Barone and Chumenko from serving as officers or directors of public companies and from participating in penny stock offerings. The court will later decide the amounts they must pay in disgorgement, prejudgment interest, and civil penalties.
According to the SEC’s amended complaint, during 2019 and 2020, the defendants misrepresented the nature of CanaFarma’s business to investors. The company, which has offices in British Columbia and New York, falsely claimed to be a fully integrated hemp processor, using its own farm produce, when it actually relied on third-party suppliers.
That misrepresentation was a key aspect of the scheme used to mislead investors, investigators claimed.
“Defendants provided financial information to investors that misstated historical revenue numbers and included baseless projections about future revenue that were unsupported by the company’s own internal forecasts,” the complaint said.
The SEC alleged that Barone and Chumenko, under the guidance of Fargesen, altered CanaFarma’s financial models to hide planned payments to the company’s co-founders. Additionally, the complaint accused the group of misappropriating at least $4 million for personal use or for activities unrelated to the company’s operations.
The SEC contended that the CEO, listed as David M. Lonsdale, was effectively a figurehead, with real decision-making power concentrated in the hands of Fargesen and Palatnik.
“Though investors were told their money would be used to fund CanaFarma’s business operations, beginning in at least April 2019, Fargesen and Palatnik—“vice presidents” on paper but the controlling persons of the Company in reality—misappropriated at least $4 million of investor funds from these raises, either for personal use or for purposes unrelated to CanaFarma’s business. Defendants concealed this misappropriation from potential investors through the use of doctored financial projections backed up by phony agreements and invoices that were intended to make the payments appear as if they were for legitimate corporate expenses.”
A consent judgment typically involves the defendants agreeing to the judgment without admitting or denying the allegations. However, their acceptance of the judgment usually implies some level of agreement with the SEC’s findings.
“Investors paid as much as $0.50 for each share of CanaFarma stock they bought through Defendants’ securities offerings,” the complaint stated. “Today, those shares are worth a fraction of what these investors paid.”