An irreverent Wall Street Blog
[In]Securities Guest Blog: Rolled Up and Smoked by Aegis Frumento Esq
January 30, 2020
[In]Securities
a Guest Blog by
Aegis J. Frumento, Partner, Stern Tannenbaum & Bell
Aegis J. Frumento, Partner, Stern Tannenbaum & Bell
Rolled Up and Smoked
There is, in Washington State, a Liquor and Cannabis Board. It is charged with enforcing the state's booze and pot laws. A look at the Board's Twitter feed reveals that it spends much of its time shutting down unlicensed weed dispenseries (whose employees are known as "budtenders") and recalling buds from farms using too much pesticide. And warning people that they are twice as likely to crash if they drive lit, even if they think they are better drivers while lit. https://twitter.com/wslcb?lang=en
All that makes perfect sense for a state agency. Still, there is something inherently funny about a "Cannabis Board" because it sounds like bureaucrats are assessing the quality of grass. You can easily imagine such Board members judging, say, a wine show, where they can stick their noses in a glass and expound on color, aroma, legs, sweetness, tannicity, and so on, without ever swallowing a drop. But no one ever judged a joint in terms of its gout de terroir. The only test of pot quality is the high it gives you, and that conjures up images of state officials several tokes over the line, like the lit motorcycle cop in Cheech and Chong's Up in Smoke. See https://www.youtube.com/watch?v=4-DZdZIMhAk.">https://www.youtube.com/watch?v=4-DZdZIMhAk">https://www.youtube.com/watch?v=4-DZdZIMhAk.
Tommy Chong spent some time in a federal joint for selling, in more benighted days, bongs and water pipes. It is a fun fact that Tommy's cellmate was -- I kid you not - Wolf of Wall Street Jordan Belfort, who was in for securities fraud (duh!). https://www.businessinsider.com/jordan-belforts-prison-bunkmate-was-tommy-chong-2014-2. That odd jailhouse pairing had the seeds of one stoner of a sit-com. But the moment may have passed. Today, the sort of high finance comedy that might have won an Emmy instead gets us an SEC enforcement case.
Back in Washington State, there is Green Acres Pharm. According to its website,
Green Acres Pharm is Washington's premier boutique cannabis producer and curator. Our mission is to provide you with the highest quality of naturally grown cannabis in the industry. Unlike large scaled commercial operations, we are able to nurture every plant with the love and affection needed to achieve an incomparable level of quality.
https://www.gapharm.com/. Later, they make it sound like they're really back in Hooterville:
Our team of expert master growers meticulously maintain our garden utilizing natural and organic techniques so our valued consumers can have peace of mind when choosing Green Acres Pharm products. Our prodigious consistency is the outcome of our labor intensive procedures . . . . We hand water each and every plant 7 days a week 365 days a year, to ensure no plant goes left without the needed attention to produce the highest-caliber cannabis available on the market.
https://www.gapharm.com/about-us. Sounds like a lot of work. Maybe too much. As one Canadian source notes, "Growing cannabis at home isn't rocket science. Since cannabis is a 'weed,' it requires little attention -- rule of thumb is to avoid overwatering." https://www.macleans.ca/news/canada/growing-cannabis-home/.
Overwatering the weed may now be the least of Green Acres' problems. According to an SEC complaint filed last week, Green Acres Pharm is a trade name of SMRB LLC, which has a license from the above-mentioned Cannabis Board to produce and process marijuana. https://www.sec.gov/litigation/complaints/2020/comp-pr2020-14.pdf. SMRB is one of a constellation of entities owned and controlled by Guy Griffithe and Robert Russell. It really does exist -- at least to the extent of having code and safety violations. https://secure.lni.wa.gov/verify/Details/safetyViolations.aspx?UBI=603350333%20&LIC=&VIO=&SAW=false&inspectionID=1208403. But it doesn't appear to have produced much ganja. According to the SEC Complaint, SMRB was never profitable. Of course, that didn't stop it from crowing to investors that it was projecting a "gross revenue range of 1.3 to 1.4M per month with profits at 40-42%. WE ARE HERE!!!!" I mean, why ruin a good story with the truth.
And the truth is, there is glut of marijuana out there. Oregon is reporting stockpiles to last 6 years, long enough to see Oregon (at least) through a second Trump term. https://www.governing.com/topics/mgmt/sl-oregon-marijuana.html. Oh, the demand is there, alright. Marijuana sales may reach $30 billion in a few years. https://www.forbes.com/sites/irisdorbian/2019/09/24/new-cannabis-report-predicts-legal-sales-to-reach-nearly-30-billion-by-2025/#70d67baa1121. The problem is that much of that demand is not on the West Coast, where the supply is. As a result, there's so much surplus weed coming out of the West that it is becoming the major black-market supplier to the rest of the country. https://www.nytimes.com/2019/04/27/us/marijuana-california-legalization.html. Even Mexican cartels are moving on to a healthier cash crop -- avocados. https://www.businessinsider.com/mexican-cartels-are-fighting-for-control-of-the-avocado-business-2019-9.
None of that stopped SMRB from raising money. According to the SEC complaint, it raised almost $5 million by telling investors that their capital would be used to grow its cannabis business. It promised to purchase equipment, acquire additional real estate, and expand its existing facilities. In return, investors were promised monthly dividends from all of the resulting marijuana profits. The SEC alleges that none of that happened. Instead, SMRB's principals used some of the money to pay "dividends" to past investors in a simple Ponzi scheme. And, of course, they used almost half of it for such perks as four cars (including a Bentley and a Benz), a 65-foot yacht and a 42-foot powerboat. Not to mention some unspecified movie deals. You know, the usual stuff that budtenders dabble in.
Even funnier, however, is that they weren't even selling securities, or at least not equity interests in a cannabis company. Before raising money, SMRB had to request and receive pre-approval from (yup) the Liquor and Cannabis Board, and of course they didn't ask or get it. Also, all investors in a Washington state cannabis company have to be state residents, and some of SMRB investors were aliens from California, Arizona, and Texas. So, SMRB had no power to convey any equity interest to anyone. Its attempt to do so violated state law and so has now put even its cannabis license at risk.
As Green Acres' website says, "Marijuana, as is art, is here to be interpreted, not labeled. Define Green Acres for how you see fit." https://www.gapharm.com/index. The way these guys defined it one has to ask what they were smoking. They used a busted weed company to sell fake securities to unwitting investors so they could buy themselves fancy cars and boats. The story seems way too simple, and yet Tommy Chong and Jordan Belfort sitting in the joint couldn't have written a better script. All that remained was for the SEC to roll'em up and smok'em.
ABOUT THE AUTHOR
Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters. Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.
Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.
He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.
NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.