The Pitfalls of Exotic Alternative Investments: A Summary of Recent Cannabis Related Scams

In the last decade the legalization of cannabis spread across the county. As of recently, medical and recreational marijuana is legal in 37 states. It is expected that under the current administration, the cannabis industry will experience a further boost, with president’s support of federal decriminalization, and the numbers appear to confirm it. For 2022, the nationwide projected sales for recreational use cannabis are expected to exceed $15 billion, while the sales of medical cannabis projected to surpass $7 billion[i], with the global legal marijuana market size expected to reach $ 84 billion by 2028.[ii]

Optimistic projections combined with favorable political climate led to a rapidly increasing number of cannabis-related investment opportunities, but as with every anecdotal “next big thing” the number of cannabis-related investment scams also increased.

2020 Cannabis Alleged Investment Fraud Schemes

It’s been three years now since the Securities and Exchange Commission warned investors[iii] about the risk of marijuana-related investment opportunities. More recently, the SEC issued an alert informing investors that the number of investment scam complaints is on the rise[iv].

While the spate of investments in the popular plant are likely to continue to grow, it’s likely that so, too will the opportunities for trusting investors to run headlong into people who are promising too much and delivering far too little.

With the FDA’s approval of cannabidiol (CBD) for use in health supplements, even states that had not legalized cannabis for recreational or medical consumption saw the spread of businesses seeking investments. The widespread popularity of both these supplements and hemp goes along with marijuana’s legalization to create a burgeoning market.

With a growing sector comes rampant opportunities for cannabis investment fraud. A number of alleged schemes were exposed over the past year.

For instance, in late January 2020, the Securities and Exchange Commission alleged[v] that Guy S. Griffith and Robert W. Russell combined to try and bilk investors out of millions of dollars. Russell and his wife did own a company that was licensed to grow marijuana in Washington. However, he and Griffith allegedly sold shares in a company, Renewable Technologies Solution, that the federal complaint alleges was not actually tied to the grower. The defendants reportedly violated securities law, depositing nearly $2 million into personal accounts.

A similar alleged event triggered an SEC complaint regarding six men, nine issuers and three marketing companies. The men, led by brothers Todd and Jeremy Johnson, allegedly promised a guaranteed annual return of 100 percent based on a marijuana farm and a CBD extraction facility. The charges include counts that the Johnsons allegedly mishandled nearly $3 million of investor money, including using it to pay off investors in a completely different entity[vi].

The allegations against Steven L. Brickner of Florida and security fraud convictions for Terrell William Moss[vii] indicate how intricate these schemes can become, even more than the two alleged frauds above. Moss was convicted in 2018 of two counts of securities fraud and required to pay back some investors. However, the estate of an elderly woman who had invested in Moss’ project, alleges that the tendrils of conspiracy spread far further.

Indeed, the trust of Catherine Newman is reportedly seeking millions of dollars from High Country Healing, a company that operated at least eight dispensaries in Colorado. The company’s current owner is fighting the claims in the Colorado courts, alleging that issues regarding the alleged cannabis investment fraud are time-barred or were already decided in other cases. There hasn’t been a finding of liability as to those allegations.

Still, Newman’s estate has already led federal officials to another promoter. Brickner was one of the named defendants in the fraud case and is also the subject of an open SEC case in a separate matter[viii]. The SEC alleges that Brickner told potential investors that he was seeking to expand High Country Healing into other states like Florida and Ohio.

Instead, according to the cannabis investment fraud complaint allegations, Brickner used up to $3 million in money obtained from investors to purchase luxury cars, classic vehicles and disbursed $300,000 at an “adult entertainment club”. According to witnesses cited in the lawsuit, Brickner told investors that there was a merger that would occur or that an IPO would result in a massive windfall for the investors.

Separately, a $1.2 million scheme was allegedly perpetrated in Florida by David Bruce Cohen of Boca Raton, who was reportedly arrested on charges of theft, fraud, and money laundering according to a press release[ix] issued by the Florida Office of Financial Regulation. Cohen allegedly persuaded the victim to invest in a cannabis dispensary operating in Massachusetts called Mass Alternative Care, Inc. by promising annual return of 8%. The investor funds however were never invested and were instead used to fund Cohen’s extravagant lifestyle, the ORF reports.

The cases combined to victimize dozens if not hundreds of investors, over several states and millions of dollars. Sometimes, it appears that the best way to keep a cannabis investment program going is to double down on existing claims and to continue to pitch new investors about the prospects of fabulous returns on investment.

Registered Brokers Allegedly Selling Cannabis Investments

In late 2020, a New York based broker was sanctioned by FINRA for failure to participate in FINRA’s investigation into his alleged participation in an undisclosed outside business activity. Without admitting or denying the allegations, former broker Brian Radoo consented to being barred in all capacities, indefinitely.

A further examination of Radoo’s Brokercheck Report reveals that one of his customers filed a dispute in early April, 2020, claiming that Radoo offered them an investment in a cannabis cultivation company, and that Radoo’s broker dealer at that time, NEXT Financial Group, failed to supervise Radoo’s alleged outside activity.

On the West coast, in Pasadena, CA, a former Morgan Stanley broker Henry Chia-How Chang has been the subject of a lawsuit filed by investors claiming losses on in cannabis related investments. The complaint filed in April 2020 brings allegations of breach of contract, breach of fiduciary duty, and negligence, and claims that Chang offered investments in two cannabis related companies outside of his employment with Morgan Stanley.

After investing a total of $920,000 in both companies back in 2017, the investors allegedly never received any distributions. In addition, investors were allegedly convinced to invest an additional $250,000 in an OTC traded cannabis related company that allegedly lost 95% of its value in one year since the investment was made.

Will Things Change for Cannabis Investors?

An important change might come if Congress adopts new banking rules that will allow federally regulated banks to work with marijuana businesses. Members from states like Washington where marijuana has been legalized for recreational use along with the others where it can be obtained with a prescription have been pushing the SAFE Banking Act since 2019.

The full name, Secure and Fair Enforcement, would keep banks’ corporate officers and others from being exposed to criminal liability if they are providing financial services to entities operating in their state legally. Other similar legislation would provide protections for insurers and other companies.

While the above cannabis alleged investment fraud schemes have been fought with existing laws based on securities fraud, common fraud and related charges, the more transparency provided to any sector, the better.

Protecting Against Fraudulent Investment Schemes

Even if legislation can open up the possibilities for better integration into the business world, there will always be people who are looking to take advantage of unwary investors. As the Securities and Exchange Commission has noted, the best ways to avoid losing your money in an illegal scheme are to:

1) Be cautious with unsolicited offers — remember that in business, you should be able to provide value. If someone is seeking your money, check to see if it’s too good to be true.

2) If an offer includes guaranteed rates of return, ask for proof. Anyone can claim they can guarantee anything — but do they have the financial ability to make good on their word? A promissory note may not mean that you can obtain your money back from your investment. If there are no contracts in place and no verifiable guarantees, you could be at risk.

3) Ask for the paper trail — People who sell you interests in a company should be licensed by FINRA. If they say that they are linked to a known entity, be sure that someone with a legal background can actually verify that the two businesses are linked.

These steps may not completely eliminate all risk, and the potential for loss is a realistic outcome for any investment. But they can help investors better protect their hard-earned life savings.

[i] National Cannabis Industry Projections as of April 15, 2021, https://thecannabisindustry.org/ncia-news-resources/state-by-state-policies/

[ii] Legal Marijuana Market Report by Grand View Research, March 2021, at https://www.grandviewresearch.com/press-release/global-legal-marijuana-market

[iii] SEC Investor Alert, September 5, 2018, at https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_marijuana

[iv] SEC Investor Alert, December 14, 2020, at https://www.sec.gov/oiea/investor-alerts-and-bulletins/investment-scam-complaints-rise-investor-alert

[v] SEC Litigation Release №24722 / January 21, 2020, at https://www.sec.gov/litigation/litreleases/2020/lr24722.htm

[vi] SEC Litigation Release №24857 / July 29, 2020 at https://www.sec.gov/litigation/litreleases/2020/lr24857.htm

[vii] The Gazette, Marijuana biz that pitched plans to become “largest” in U.S. built through fraud, theft and deceit, lawsuit alleges, November 21, 2020

[viii] SEC Litigation Release №24800 / April 21, 2020 at https://www.sec.gov/litigation/litreleases/2020/lr24800.htm

[ix] November 9, 2020 Press Release by the Florida Office of Financial Regulation.