With the growth of marijuana businesses across several states, many see it at a sector ripe for investment with the possibility of big returns. While states approve the sale of marijuana, it’s not entirely legal. Federal law still lists it as a controlled substance. That makes banking difficult and oversight difficult for investors. It also makes it a target for less than scrupulous middlemen.
That’s where we find Guy Griffitthe and Robert Russell. Mr. Russell and his wife had created a company in Washington that held a license to grow marijuana under the state’s recreational cannabis laws.
According to the SEC complaint, Russell cut a deal with Griffithe to offer a stake in his marijuana growing business. That was the first problem.
Under the Washington law for marijuana businesses, ownership is tightly controlled and regulated. Russell couldn’t sell an ownership interest without approval from the state Liquor and Cannabis Board. According to the complaint, Russell and Griffithe tried to structure it as a right to receive profits and not an ownership interest. I don’t think it worked.
That didn’t seem to stop Griffithe from selling interests in the company that bought the interest in the marijuana growing company. The pitch was that the investment would help the marijuana grower to expand by providing capital for equipment, land and physical facilities.
The next problem is that Griffithe didn’t register the securities for sale and didn’t make sure the sale was happening within an exemption. He used a website and openly advertised the sale of the securities.
The third problem was that they spent most of the $4.85 million they raised on non-business purchases. The SEC loves to list out the extravagant purchases made by fraudsters with their ill-gotten cash. This was no exception.
- 2008 Bentley Continental
- 2012 Mercedes Benz C Class
- 2013 Ford Mustang (I’ll assume this was a Boss 302 or Shelby GT500 model)
- 2015 Porsche Panamera
- $250,000 towards a 65-foot Pacific Mariner yacht
The final straw was that the marijuana growing business was not actually profitable. According to the SEC, it never made a profit. Meanwhile Griffithe’s marketing material proclaimed a 40% profit margin. They faked the profitability by using some of the investor paid-in capital to make distributions. That turned it into a Ponzi scheme.
Fraudulent investment activity in marijuana business has become so widespread that the SEC has published an Investment Alert: Marijuana Investments and Fraud.
This case points out one of the shortcomings in that SEC alert. It fails to point out the very common limitation on changes of ownership in marijuana businesses. Even if the investment is legitimate, the likely requirement of approvals for the acquisition and later sale will have a big impact on the investment.
Sources:
