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The Six Outrageous Marijuana Business Scams You Should Know About

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The Six Outrageous Marijuana Business Scams You Should Know About

One of the side effects of legalizing a previously illicit business: fraud is a lot harder to hide. Like any hot sector, legal weed has attracted a fair amount of con artist looking to raise money from gullible investors, then take the money and run. Their schemes are beginning to attract regulatory attention.

The U.S. Securities and Exchange Commission is warning about the rise of scammers tricking marijuana investors through market manipulation and “making false promises of high returns with low risks.”

Putting aside the irony of government enforcement agents protecting the sanctity of pot sales, the feds make some good points.People who want to sink their hard-earned savings into legal weed should take care to make sure the company they're dealing with is doing things correclty.

Here are six examples of the bad actors that have come out of the woodwork so far.

1. Greenview Investment Partners

Founder Michael Cone is accused of using misleading marketing materials about a pot business to raise more than $3.3 million from investors. While they thought they were sinking money into a company with a long track record in the cannabis industry, the investors were really funding a lavish lifestyle for Cone, with designer clothes and luxury cars, and feeding a Ponzi scheme, according to the SEC. Cone also faces criminal charges over the alleged scheme.

Cone is accused of running a boiler room operation, where employees cold-called investors and promised them double-digit returns. Cone also allegedly made false claims to investors about his expertise in the field, including lying about having a former U.S. Drug Enforcement Administration agent on staff.

Although he claimed to have had a long track record in the cannabis business, he really had only made one $400,000 investment, and the company had not even harvested a single crop, according to the SEC.

2. Medbox

The founder of a California company who claimed to sell biometric identification-based pot vending machines was accused of selling investors of fantasy that served only to line his own pocketbook.

The company, called Medbox, purportedly issued press releases touting phony profits and claimed to bring in “record” revenue numbers. In fact, virtually all of the company’s revenue was a sham, created using a shell corporation.

In a text message, the founder, Vincent Mehdizadeh, acknowledged the fraud, telling an associate that “the only thing we are really good at is public company publicity and stock awareness.”

Meanwhile, according to the SEC, Mehdizadeh used some of the millions of dollars raised through the scheme to buy a luxury home in the Pacific Palisades. Mehdizadeh ultimately agreed to settle the case against him and agreed to pay $12 million in disgorgement and penalties.

3. Bud Genius

Unfortunately, the people behind “Bud Genius” were not exactly geniuses. Aaron “Angel” Stanz scored investors for his supposed marijuana startup by falsely claiming to have struck a licensing deal with comedian Tommy Chong.

Chong, who is also an actor, writer, director, and cannabis activist, is famous for his marijuana-themed comedy work with Cheech Marin. He did not, evidently, reach any agreement with Stanz’s Bud Genius.

Stanz, however, described Chong as a “partner” in his venture and called the deal a “crowning achievement” in blog posts. His claims received media attention, spurring investors to sink funds into the ill-fated company.

Bud Genius had a fragile financial position, according to the SEC. The company covered up its poor condition with fake financial statements. Stanz was also accused of conducting an unregistered securities offering.

The SEC alleges that the company sold billions of shares of unregistered Bud Genius stock, bringing in $540,000, approximately $140,000 of which was paid to Bud Genius and Stanz. Stanz reached a settlement with the SEC.

4. GrowLife

Lest you think the marijuana securities market is free from the traditional evils of capitalism, US regulators have also unearthed some Wolf of Wall Street-style penny stock fraud schemes involving pot.

In one such plot, four promoters were accused of conducted wash trades, pre-arranged orders and other illegal dealings to “pump and dump” shares of several marijuana stocks including GrowLife Inc. and Hemp Inc. The companies were purportedly related to the medical marijuana industry but actually had little if any business operations. The promoters reaped more than $2.5 million in illegal profits through the schemes.

5. SK3

In a similar manipulation scam, Henry LinHan Jan and Artemus Mayor agreed to settle with US securities regulators over alleged fraudulent dealings involving a medical marijuana industry company called SK3 Group.

The SEC found that the fraudsters orchestrated a scheme that involved promoting the stock through false press releases, touting that the company had secured acquisitions worth millions of dollars.

The claims were a sham, however, according to the SEC. The press releases led to a spike in trading activity and caused prices to shoot up. Through the manipulation scheme, the two promoters were able to reap millions of dollars in illegal profits.

6. Fortitude

The name of the company was somewhat more sophisticated than “Bud Genius,” but the promoters of Fortitude were no less sketchy. According to the Sec, Fortitude and its founder Thomas Parilla made misleading statements in various publicly-disseminated press releases and a financial report concerning Fortitude's purported efforts to enter into the rapidly growing legal marijuana business industry.

The press releases falsely claimed that Fortitude had a track record of successful pot-related partnerships. The company even falsely alleged that it had Discover-branded debit cards for pre-paid marijuana transactions, and had distribution agreements for vaporizers with marijuana dispensaries.

The company also made “dubious” projections of multi-million-dollar annual revenues, according to the SEC.

In 2014, Fortitude announced an agreement to distribute “VaporVites,” which it described as an e-cigarette that could be used with “a wide array of dry herbs.” Fortitude claimed it would initially process orders for dispensaries in Colorado with the expansion of an additional 70 dispensaries in the coming weeks.

Parilla claimed that Fortitude “should derive roughly $15 million in 2014 from the VaporVites initiative,” according to the SEC. The company announced that it received over 15,000 individual orders with as many as 15,000 more to come.

“In fact, Fortitude never received any funds from any sale of the VaporVites product,” the SEC said. “Moreover, Fortitude never entered into a VaporVites deal with any legal marijuana dispensary.”

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David Kani

David Kani is a Newport Beach, California based business lawyer with a focus on cannabis companies, their investors, employees and cannabis-related litigation.
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