Cannabis-Related Schemes

SEC Warns Investors on Cannabis-Related Schemes

Cannabis-Related Schemes
SEC warns investors

While The Industry Spread recently spotlighted some of the opportunities with the burgeoning US cannabis sector, that sector appears fraught with fraud as well. 

The Securities and Exchange Commission recently announced it had busted a scheme to sell fictitious shares in a marijuana company. 

Here is part of the SEC press release

“The Securities and Exchange Commission today announced charges against Guy S. Griffithe and Robert W. Russell, and three companies they controlled, for an alleged scheme that defrauded investors who thought they were purchasing interests in a Washington-licensed recreational cannabis company out of approximately $4.85 million.

The SEC’s complaint alleges that between August 2015 and December 2017, Griffithe, of California, used Renewable Technologies Solution, Inc., an entity he controlled, to sell investors purported ownership interests in SMRB LLC, a Washington company owned by Russell that held a license to grow marijuana under the state’s recreational cannabis laws. 

According to the complaint, Griffithe and Russell led investors to believe their investments in Renewable would be used to operate SMRB, but in reality, the securities did not convey any legitimate stake in SMRB. Instead, Griffithe allegedly spent approximately $1.8 million of investor funds on personal and unrelated business expenses, including payments toward several luxury cars for himself and a yacht for Russell. 

Griffithe also allegedly deposited approximately $1.7 million into Russell’s personal bank accounts. To create the illusion that the marijuana business was profitable and paying dividends as promised, Griffithe allegedly paid out purported profit distributions to some investors, which were partially funded in a Ponzi-like fashion using funds from other investors.

“As alleged in our complaint, Griffithe and Russell exploited popular interest in the cannabis industry to obtain millions of dollars from investors who thought they were buying into a profitable business,” said SEC Associate Director Melissa R. Hodgman. “Instead, Griffithe and Russell deceived investors and used the money to enrich themselves.”  

Along with the press release, the SEC reiterated its previous alert on potential risks of marijuana investments. 

That alert noted, Scam artists often exploit ‘hot’ industries to trick investors, including by making false promises of high returns with low risks. The SEC’s Office of Investor Education and Advocacy (OIEA) and Retail Strategy Task Force are warning investors about these kinds of cannabis-related investment schemes involving marijuana-related companies.”

On January 1, 2020, Illinois became the eleventh of fifty US states to legalize recreational marijuana while another twenty-three and the District of Columbia legalize medical marijuana use. 

In Illinois, the demand thus far has been overwhelming, with some dispensaries with lines as long as seven hours. 

That has made the industry “hot” as the SEC suggested. 

Some of the things the SEC said investors should be on the lookout for were unregistered and unlicensed sellers, guaranteed returns, and unsolicited offers, particularly through social media.

The alert also noted that technically marijuana is still illegal. 

“In addition to the potential for investment schemes associated with marijuana-related stocks, some marijuana-related companies may be at risk of criminal prosecution because of the business they are in. In January 2018, the U.S. Department of Justice (DOJ) issued a marijuana enforcement memorandum noting “…Congress’s determination that marijuana is a dangerous drug and that marijuana activity is a serious crime.”

“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.”

Marijuana remains illegal on the federal level however starting with then-President Obama and continuing with President Trump, it has been decriminalized, meaning no resources have been dedicated to prosecuting it, making it effectively illegal on the federal level. 

Democratic presidential candidate Bernie Sanders recently called for its legalization in a tweet. 

“The criminalization of marijuana has been a disaster. We need to legalize it. We need to expunge past convictions. And we need to invest in communities destroyed by the war on drugs,” Sanders said in the Tweet.