High crime

As the date for the national legalization of marijuana approaches, so do a host of hustlers, false advertisers and stock promoters.

In June 2017, Scott Pack, a Denver-based businessman who held 14 marijuana licences, was indicted, along with a former Colorado Marijuana Enforcement Division (MED) officer and three others, in an alleged marijuana trafficking ring that attorney Matthew Buck called “the largest fraud case in the history of Colorado’s marijuana industry.” According to the Denver Post, the men were indicted by a grand jury for illegally producing and selling millions of dollars’ worth of marijuana across state lines.

The charges followed on the heels of a related March indictment of 16 people who allegedly “ran a massive home-grown marijuana operation across the Denver metro area that produced hundreds of pounds of pot each month for distribution across the country,” especially in Illinois, Arkansas, Minnesota and Missouri, the newspaper reported.

Also in March, Pack and his colleague Rudy Saenz were sued by former investors who claimed they lost close to US$1 million because of their fraudulent scheme. “There are potentially victims for as much as US$10 million,” Buck said, in filing the suit. “Pack’s company is one of the larger marijuana companies in Colorado … and through a series of shell companies, it holds the leases on many buildings across the state.”

According to the lawsuit, Pack had convinced Pierre and Christophe Raygot to invest US$500,000 in Harmony & Green LLC, one of Pack’s marijuana companies that he said managed his businesses in Colorado and California. The Raygots were promised that their investment would reap substantial profits within a year. The suit notes Pierre Raygot was shown documents that said Pack had invested US$2.5 million in Harmony & Green and that Saenz’s wife had invested US$4 million. Neither assertion was true, Buck told Westword, Denver’s alternative weekly newspaper. “That money’s not real,” he said.

In fact, he said, another of Pack’s companies owns all the licences and is the only one with any actual value. Harmony & Green is a management company that owns nothing. “It’s effectively a shell company they used to launder money,” said Buck.

Those weren’t the only things wrong with the transactions, Buck said. “Neither Pierre nor Christophe are US citizens, so they aren’t allowed to make investments in a marijuana company under Colorado law.” In addition, “all these investments should have been disclosed to the MED. They were not — and the investors should have been fingerprinted and badged, and they weren’t, either, because in almost no instances were the investors Colorado residents, and at least three of them weren’t citizens.”

In a statement provided to Westword, Pack said, “We have structured our business abiding by the governing laws and regulations, and there is no reason why we would need to deceive our stakeholders, who still hold value in our company. We deny the allegations in this case, which will easily be proven false once facts and evidence are revealed in court.”

Those allegations amount to 11 felony charges, the Denver Post reported: pattern of racketeering under the Colorado Organized Crime Control Act; conspiracy/endeavoring under the act; two counts of conspiracy to distribute or possess or intent to distribute 50 pounds or more of marijuana; conspiracy to commit cultivation of marijuana (more than 30 plants); two counts of securities fraud; money laundering; forgery; tax evasion; and attempt to influence a public official.

Since Colorado formally legalized recreational and medical use of marijuana in January 2014 (12 states now have similar or related legislation), “the weed industry is getting to know a time-honored tradition of the American business world: corporate fraud,” vice.com reported in September 2016.

It is a message that should interest Canadians as the date for the national legalization of marijuana approaches.

TRIPLE GREEN PLAY

The sale and trafficking of pot has been a crime since 1923 (Canada was one of the first countries in the world to criminalize the drug). As the pros and cons of the Liberal government’s decision to permit recreational marijuana use continues to be debated, the prospect of an addition to the fraud menu perhaps has not been contemplated.

Vice cites the case of FusionPharm Inc., a Colorado company that “promoted a triple green play — profits from the conversion of old shipping containers into greenhouses, primarily to cultivate cannabis, which has struggled with a shortage of indoor space available for commercial-scale grow facilities,” the Denver Post reported. According to the US Securities and Exchange Commission (SEC), in September 2016, the company’s two owners “illegally sold restricted FusionPharm shares issued to three companies that [one of the owners] controlled, misleading brokers and raising US$12.2 million. Some of that money was funneled back to FusionPharm and reported as revenue from the sale of the company’s PharmPods containers. Investors, duped into thinking the company’s financial condition was stronger than it actually was, pushed up the share price, which got as high as US$8.70 on March 5, 2014, the SEC said.”

The disputed stock sales and transfers occurred from April 2011 to May 2014.

The accused all agreed to settle civil charges in return for monetary sanctions, the SEC said. They also agreed to a ban on participating in any future penny-stock offerings and are permanently barred from serving as an officer or director of any public company. However, the criminal case against them for using about US$1.3 million they obtained through illegal stock sales to create phoney revenue for the marijuana container company is still pending.

AS POTENT AS ADVERTISED?

In addition to corporate fraud involving marijuana, another potential problem Canada’s provinces — and their consumers — could face involves a central question: is the pot as potent as the sellers claim it to be?

As California approached the January 1, 2018, date when pot became legal in the state, NBC ran a report that shared what it described as “one of the marijuana industry’s dirty secrets.”

Like most states that have legalized marijuana, NBC said, California would require pot products to be tested for purity and potency. It interviewed an expert who said he could get some labs to give him more favourable results. “Industry insiders say lab fraud is an ongoing problem in states that already have recreational weed markets, and some warn it’s happening in California as growers and sellers search for testing companies that will give them the most favorable results,” NBC reported.

Although California released rules requiring labs to show they have the proper equipment, expertise and quality controls to accurately test pot products, “labs can’t all come into compliance with those rules overnight, and some in the industry say bad actors will still cheat unless the state comes up with a robust enforcement plan,” NBC said.

Because the amount consumers pay for cannabis is, in part, determined by the percentage of THC in the product, many labs are willing to inflate the potency of their clients’ products to keep their business, the expert NBC interviewed said.

Vice also found that, despite tests requiring labs to reveal potency and purity so consumers know what they’re buying, “the labs that conduct these tests are governed by rules that vary widely from state to state, and there are concerns within the industry that unscrupulous labs are operating without adequate oversight and colluding with growers to falsify results.”

Vice had visited a testing lab in Washington state where it uncovered inaccurate labelling on a package of legal marijuana. “We talked to a grower who says some labs have offered to inflate his marijuana’s THC content in order to make it more valuable — a practice he believes jeopardizes the future of the industry.”

Why is the marijuana industry likely to entice fraudsters? The answer is the oldest in the book: the potential for enormous profits. High Times, a magazine that covers the pot industry, noted in an August 2017 article that in 2016 “sales from the North American cannabis industry came in around US$6.7 billion. By 2021, they are expected to exceed US$20 billion. That’s a compound annual growth rate of about 25%. That’s bigger and faster than what we saw back in the dot-com days. And it’s bigger than anything else you can get into today. But with this tremendous growth and opportunity comes the inevitable conga line of hustlers and shady stock promoters.”

Although it agreed that legitimate profit can be made from investing in marijuana stocks, High Times concluded that “most of the cannabis stocks you can buy today are complete dogs.” For every legitimate player, “there are dozens of others that are nothing more than empty promises and pump & dumps.”

Those who remember the heady days of the dot-coms, when promises fell short of results, will likely approach this booming industry with a degree of caution. But those who believe they failed to jump on the dot-com bandwagon might think they have to capitalize on every opportunity the marijuana hoopla offers. Just as caution should be used with marijuana, it should also be the buzzword before becoming involved in what is being touted as the next big financial thing.