The U.S. Securities and Exchange Commission (SEC) scored a big W this week when a California federal judge ordered cannabis investment firm VerdeGroup to pay more than $1 million in civil penalties, disgorgement, and interest. Law360 reported the final judgment was issued on January 20, 2022, and the defendants have 14 days to pay the SEC. In addition to the payments, the judge has permanently banned VerdeGroup, Thomas Gaffney, and Lisa Gordon from the securities industry.
U.S. District Judge Stanley Blumenfeld Jr. has ordered VerdeGroup to pay a civil penalty of $500,000. VerdeGroup, Tommy’s Pizza, Gaffney and his wife Cynthia Gaffney are jointly and severally liable for disgorgement of more than $470,000, including prejudgment interest. Gaffney and Lisa Gordon were also ordered to pay civil penalties of $100,000 and $5,000, respectively.
The SEC had alleged that from January 2018 through July 2019, VerdeGroup raised approximately $612,765 from about 27 investors from several states. Thomas Gaffney is described in the original complaint as a recidivist violator of the securities laws. Gaffney was sued by the SEC in 2013 for engaging in a fraudulent stock scheme involving illicit kickbacks and phony agreements to mask the kickback. He was sentenced to time served, followed by three years of supervised release with a special condition of eight months of home confinement,
among other things.
In this alleged scam, Gaffney is accused of fooling 27 investors and raising nearly $612,765 that was supposed to go towards cannabis investments. Instead, the funds were “transferred from that third party account to an account in the name of relief defendant Tommy’s Pizza Ventures, Inc. (“Tommy’s Pizza”), the signatories of which are Gaffney and relief defendant Cynthia Gaffney. Investor funds were then used for Gaffney’s personal expenses, and a pizza parlor business, among other things. VerdeGroup and Gaffney misappropriated approximately $467,110 of investor money. To further generate investor interest in the offering, defendants Gaffney and VerdeGroup also made material misrepresentations to investors and prospective
investors about VerdeGroup’s business partners and its efforts to undertake an initial public offering. Gaffney and VerdeGroup made the same or similar misrepresentations
to lull investors into not withdrawing funds and to encourage investors to invest more and/or rollover funds to a different entity.” Some of the personal expenses included cruises and Tiffany’s jewelry.
Lisa Gordon was hired by Gaffney to handle VerdeGroup investor relations and acted as an unregistered broker-dealer in connection with the offering and directly offered and sold securities by soliciting investors through phone calls and emails. Gordon did not have a securities license. The securities offering was not registered with the SEC as required by the Securities Act and at least some of the investors were not provided with the information that a registration statement is required to provide for the protection of investors. In addition, the complaint said that at least one of the investors was unaccredited.
The offering was conducted using a Private Placement Memorandum (“PPM”) that offered $25,000,000 in promissory notes at $5,000 per unit with a minimum purchase of $10,000.
The PPM stated that the notes provided a 12% annual rate of return that matured in 24 months and converted to equity at maturity. VerdeGroup also claimed in the PPM that it “invests in equity positions with legal marijuana companies” and that it “anticipates ‘Going Public’ in 2019.” Investors were fooled when the PPM stated that Thomas “Lynch” was the person involved with VerdeGroup not Thomas Gaffney.
Investors May Get Some Money Back
According to the court order, the SEC “Shall hold the funds (collectively, the Fund) and shall distribute the Fund in a manner consistent with the Supreme Court’s admonition in Liu that the disgorgement remedy must be for the benefit of investors. Liu v. SEC, 140 S. Ct. 1936, 1947–49 (2020). The Court shall retain jurisdiction over the administration of any distribution of the Fund. The SEC may disburse funds to the defrauded investors without seeking leave of Court. If the SEC wishes to send any portion of the Fund to the United States Treasury or otherwise dispose of the Fund in any manner besides compensating the defrauded investors, the SEC must first obtain approval from the Court unless it has already distributed the full
disgorgement amount to investors.”