fraud Archives - Green Market Report

Debra BorchardtOctober 6, 2021
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8min17231

The Securities and Exchange Commission (SEC) charged CanaFarma Hemp Products Corp. and its co-founders with fraudulently raising approximately $15 million from investors, and misappropriating a significant portion of the investor funds for personal use like buying luxury cars.

The SEC’s complaint alleges that in 2019 and 2020, CanaFarma, a Canadian startup hemp company with offices in Vancouver and New York City, and its co-founders Vitaly Fargesen and Igor Palatnik raised millions of dollars from investors.  According to the complaint, while raising these funds, the defendants made misrepresentations to investors, including claims that CanaFarma was a fully integrated company that was processing hemp from its own farm when in fact it had not processed any of this hemp and its products used hemp supplied by third parties.

The complaint also alleges that financial information provided to investors misstated historical revenue numbers and included baseless projections about future revenues. For example, the company claimed that it would have revenues of $25 million in the first year of operation. The company also claimed that money was used for marketing expenses like a road show in Europe that never occurred. The executives were also transferring money out of the CanaFarma account to companies owned by its largest shareholder for “services” but then sending the money back to make it look like sales. The company also claimed it used $3 million for marketing expenses which were untrue.

Fargesen was criminally charged on October 5 by the U.S. Attorney’s Office for the Southern District of New York with securities fraud, wire fraud, and conspiracies to commit both securities fraud and wire fraud in connection with the CanaFarma investment offering. Palatnik has also been charged in the indictment in the Criminal Case with securities fraud, wire fraud, and conspiracies to commit both securities fraud and wire fraud in connection with the CanaFarma investment offering.

The company is also accused of using the CEO as a figurehead only. David M. Lonsdale is listed on the company’s website as its Chief Executive Officer. He is the President of the Lonsdale Group, a boutique finance firm. He had 10+ years as president of private investment bank Allegiance Capital.

CanaFarma was incorporated in June 2017 under the name KYC Technology Inc. In March 2020, as part of a reverse merger, KYC acquired CanaFarma Corp. and changed its name to CanaFarma. The company then listed its shares on the Canadian Stock Exchange with the ticker: CNFA.CN) and is quoted on the OTC Markets using the ticker CNFHF.

“As alleged in our complaint, the defendants pitched investors with falsehoods about a fully integrated hemp company with rosy financial projections” said Richard R. Best, Director of the SEC’s New York Regional Office.  “We will relentlessly pursue those who deceive investors and misappropriate and misuse their funds.”
Hemp Farming
The company leased two hemp farms, one in Dutchess County NY, and the other in Syracuse NY. Despite harvesting hemp at the farms, none of the products was used in the company products. The SEC says the hemp was instead put into storage and never used. The company purchased hemp oil from a third party and used that to make its Yooforic hemp-infused chewing gum. The company initially got off to a good start making $832,000 in revenue for September 2019, but then sales began dropping. By June 2020, monthly sales had declined to $26,000.
The company also told investors that it was a “Vertical Integrated Hemp Business”  saying in investor presentations “From seed to counter, our fully integrated hemp business helps us promote in-demand hemp oil infused products that continue to fuel the direct response marketing engine.” The investor presentation then includes the description “processing” as one of the ways CanaFarma’s business was “integrated.” None of which was true. The company also included testimonials in its presentations, which were for a different product that the company never sold.
Vertical Wellness
Last month, CanaFarma said it was merging with Vertical Wellness, whose CEO Smoke Wallin is a long-time cannabis industry executive. Wallin was set to become the CEO of the combined businesses. The announcement claimed that the combined companies would be worth $50 million. Vertical Wellness has also partnered with Kathy Ireland Worldwide (kiWW) to produce CBD products, with the first brand release of kathy ireland HEALTH & WELLNESS CBD Solutions planned for Fall 2021. Kathy Ireland is Chair, CEO, and Chief Designer of kiWW.
Wallin issued the following statement with regards to the charges:
“We are surprised by the allegations against CanaFarma and named executives.  Neither Vertical Wellness nor any of our advisors, attorneys, or those we work with every day, had any prior knowledge about this situation.  We hope that CanaFarma can work through these issues and the truth will subsequently come to light. Vertical Wellness, a separate corporate entity, will continue to expand our business as planned. Vertical Wellness has created or acquired several long-planned health and wellness brands; we are full speed ahead launching our CBD beverages and exciting products in the category.  We will naturally evaluate strategic options in light of today’s allegations.”

The SEC said it is seeking permanent injunctions, disgorgement and prejudgment interest, and civil penalties against the defendants, and also seeks officer-and-director and penny stock bars against them.

The SEC’s investigation was conducted by John Lehmann, Lee A. Greenwood, and Thomas P. Smith Jr., and was supervised by Sanjay Wadhwa.  The litigation will be led by Mr. Lehmann and Mr. Greenwood.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.


Debra BorchardtAugust 4, 2020
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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. 

Alleged Actions

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.

C-Quadrant Property

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.  

Punishment

The SEC is asking the group to disgorge all the money received and pay civil fines.


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