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SEC Hits Another Marijuana Company Over Alleged Sham Earnings

The nascent legalized marijuana industry has never been easy for regulators, forcing difficult decisions over how to enforce federal laws in states that have cleared cannabis for medical and—in some cases— recreational use.

(Credit: Shutterstock.com)

The nascent legalized marijuana industry has never been easy for regulators, forcing difficult decisions over how to enforce federal laws in states that have cleared cannabis for medical and—in some cases— recreational use.

But the U.S. Securities and Exchange Commission has a decidedly simpler calculation: If a marijuana company misleads investors, it’s as ripe an enforcement target as another firm.

Nearly three years after issuing a warning about weed-related investments, the SEC recently went after Medbox, a California-based marijuana vending machine startup, over accusations it falsely touted “record” revenue based on illegal stock sales.

The company’s founder, Vincent Mehdizadeh, agreed to pay $12 million in disgorgement and penalties under the settlement, which is subject to court approval. He also agreed to be barred from serving as an officer or director of a public company.

In a prepared statement, Michele Wein Layne, director of the SEC’s Los Angeles office, said investors “were misled into believing that Medbox was a leader in the burgeoning marijuana industry when the company was just round-tripping money from illegal stock sales to boost revenue.”

According to the SEC, Mehdizadeh created a shell company named New-Age Investment Consulting to make illegal stock sales, the proceeds of which he used to increase Medbox’s revenue. In press releases, the company advertised “record” revenues when, in fact, much of that money came from the stock sales, regulators alleged.

Mehdizadeh made his fiancée at the time, Yocelin Legaspi, New-Age’s chief executive and used profits from the stock sales to purchase a luxury home in the Pacific Palisades, the SEC said.

The SEC said in its complaint that the “false track record of operating revenue distinguished Medbox from other companies in the burgeoning marijuana industry at the time, an outcome no doubt intended by defendants. As Mehdizadeh put it in a text message to [Bruce] Bedrick, ‘the only thing we are really good at is public company publicity and stock awareness. We get an A+ for creating revenue off sheer will but that won’t continue.’”

That text message was prominently featured in the SEC’s complaint and press release. But it was not a “smoking gun,” said Mehdizadeh’s defense lawyer, Andrew Holmes of the Los Angeles-based firm Holmes, Taylor & Jones.

“In and of themselves, [the texts] don’t prove or disprove anything. They’re just another straw on the camel’s back,” said Holmes, a former SEC attorney. “When you add them to the other evidence the SEC has alleged, they start to paint a telling picture.”

The SEC also filed complaints—in U.S. District Court for the Central District of California—against Legaspi and Medbox’s former CEO, Bedrick, who are both fighting the accusations.

Bedrick is represented by Morgan, Lewis & Bockius partner Steve Korotash, a former top SEC official in Texas. Seth McGinnity, of McGinnity Law, is defending Legaspi and New-Age. Neither lawyer was immediately reached for comment.

The SEC brought similar charges last year against two brothers-in-law who allegedly coordinated a scheme to funnel illegal stock sales to FusionPharm Inc., a company that makes containers for growing marijuana. According to the SEC, FusionPharm falsely reported the money as legitimate revenue from sales of its PharmPods containers.

FusionPharm, along with the brothers-in-law involved in the scheme, reached a settlement with the SEC in September. The SEC earlier had suspended trading in the Denver-based company, citing “questions that have been raised about the accuracy of assertions by FusionPharm.”

Announcing the suspension in 2014, the SEC said: “fraudsters often exploit the latest growth industry to lure investors with the promise of high returns.”

Originally published on National Law Journal. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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C. Ryan Barber

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