This summer's fraud charges against CannaVEST Corp., now CV Sciences (OTC:CVSI), and its CEO for overstating assets in 2013 had many investors questioned the safety of investing in the industry.
FINRA once warned investors that a company once issued over 30 press releases in the first half of 2013 that included overly optimistic and potentially false projections, followed by promotions touting that a company was "poised to light up the charts." This stock completely mislead investors while they had nothing but losses on the balance sheet.
Bad apples can hinder capital flows into the space, so we wanted to remind cannabis investors of the importance of due diligence.
Back in March, the Securities and Exchange Commission charged a California-based company and its founder with falsely touting “record” revenue numbers to investors and claiming to be a leader in the marijuana industry while some of its earnings came from sham transactions with a secret affiliate. Medbox Inc., now doing business as Notis Global, Inc. was alleged to have been carrying out illegal stock sale transactions with a shell company to falsely boost revenues. Founder Vincent Mehdizadeh allegedly acknowledged in a text message that “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.”
Back in June, the Securities and Exchange Commission filed fraud charges against a Las Vegas-based hemp oil company and its CEO for inflating the company's assets on its balance sheet. "The SEC complaint filed in federal court in Nevada alleges that CannaVEST Corp. (now known as CV Sciences, Inc.) and CEO Michael Mona Jr. materially overstated the company's total assets in quarterly reports for the first and second quarters of 2013. According to the complaint, CannaVEST reported purchasing a company called PhytoSphere Systems LLC, including its existing rights under contracts with hemp production and processing facilities, for $35 million, even though Mona knew that the purported purchase price was substantially inflated."
As early as 2014, the SEC was issuing investor alerts related to questionable activity in some pot stocks. While these two aforementioned cases are not indicative of all operators in the space by any means, we think it's important to remember that in such a hot sector anything can happen. We can't speak to the current operations at the aforementioned companies, but as the saying goes, "those who do not learn history are doomed to repeat it."
For those looking to avoid this sort of mess, just do your due diligence and do it well.
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