Fighting Investment Fraud in the Marijuana Business Industry
On September 5, the Securities and Exchange Commission (SEC) charged Greenview
Investment Partners L.P. with defrauding investors about returns in cannabis
businesses after Greenview used misleading marketing materials to raise
over $3 million from investors. The SEC has the powers, inter alia, to
impose sanctions for violations of laws, rules, and regulations, can issue
cease and desist orders to marijuana companies to prevent fraud or injury
to the investing public, can punish for contempt, and suspend or revoke
a corporation’s certificate of registration.
One regulatory power the SEC holds is its ability to request an officer-and-director
bar, which involves asking a court to bar a defendant charged with securities
fraud from serving as a director or officer of a public company. Michael
E. Cone, founder of Greenview, settled the criminal charges brought by
the SEC by agreeing to an officer-and-director bar and a permanent injunction
requiring him to comply with federal law. The SEC has also elected to
impose civil financial penalties, which the court has yet to decide.
The Ongoing Battle of Marijuana Investment Fraud
This is not the first SEC effort against investor fraud in the marijuana
business industry. For example, in March the SEC sued a Denver businessman
Jeffrey O. Friedland for fraud involving Friedland’s failure to
disclosure the fact he was a paid consultant to OWC Pharmaceutical Research
Corporation while publicizing the company’s stock for compensation.
The lawsuit also alleges Friedland violated trade laws by publicly promoting
the stock while also trying to sell his own shares in the stock. The SEC
asked the court to require Friedland return all the money earned from
his sale of the stocks with interest, and also to permanently prohibit
Friedland from trading penny stocks.
The same day the SEC brought charges against Greenview the SEC’s
Office of Investor Education and Advocacy (OIEA) released an “Investor
Alert” warning investors in marijuana-related companies of investment
fraud and market manipulation.
The Alert advises investors in marijuana-related companies to be cautious
of media coverage related to the legalization of marijuana, as fraudsters
may use the media as a channel to promote a scam. The Alert also explains
how fraudsters may spread false and misleading information about a company
to manipulate stock prices.
Although the Alert at first appears to be the OIEA’s good-faith effort
to warn investors of fraud and market manipulation, the OIEA concluded
the Alert with a “Risk of Prosecution” segment, which indicates
“Some marijuana-related companies may be at risk of criminal prosecution
because of the business they are in”. The Alert references the U.S.
Department of Justice (DOJ) marijuana enforcement memorandum released
in January. The January memorandum deferred to a phrase frequently voiced
in DOJ memos: “…Congress’s determination that marijuana
is a dangerous drug and that marijuana activity is a serious crime”.
It is possible the Alert was truly meant to put marijuana business investors
on notice of the rise of scam artists in the Industry, and the Risk of
Prosecution warning was just meant to cover the federal government’s
bases with regards to the current legal status of marijuana in the United States.
It is also possible the bright-yellow, italicized and boxed warning of
the risk of prosecution to marijuana-related companies was aimed to be
the central purpose of the Alert. Marijuana industry operators were left
unfazed when Jeff Session’s marijuana enforcement memorandum was
released in January and the Obama era “Cole Memo” was rescinded,
which relaxed the use of federal resources to prosecute marijuana businesses
in compliance with state law.
Protecting Marijuana Business Investors: Past, Current and Future
The good news for investors is the warning also instructs “If you
are considering investing in a company with operations relating to the
marijuana business industry, understand that the company may be criminally
prosecuted and this may impact the value of your investment”. Interpreted
textually, this clause could be read as instruction that investors will
not be criminally prosecuted for investing in marijuana businesses.
It is also important to note the language used in the Alert that only “some marijuana-related companies may be at risk of criminal prosecution”.
Could this be the federal government exempting marijuana-related businesses
that are in compliance with state-law from being at risk of prosecution?
Whether the DOJ is pushing its anti-marijuana agenda through the SEC cannot
be determined at this time with certainty, but what can be determined
is how critical it is for marijuana industry operators to be in total
compliance with both federal and state law, and for investors to be diligent
when vetting marijuana companies of potential investment interest. At
Feldmann Nagel Cantafio & Song PLLC, our diversely skilled attorneys prepare our clients
for the prospect of federal intervention. Attorney Charles Feldmann, former
DEA Task Force Commander and current Managing Partner, utilizes his unique
background and network to ensure our clients are on-top of the rapidly
changing marijuana laws and regulations. If you are an investor or marijuana
business and need assistance navigating the often complicated laws applicable
to you or your business, contact Feldmann Nagel Margulis today.