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Marijuana Mayhem

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.


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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 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.

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