The gradual decriminalization of marijuana in several states around the country has created unusual legal pitfalls. The U.S. Securities and Exchange Commission (SEC) has taken an interest in efforts to attract investors to the legal marijuana trade. This is practically unexplored legal territory, since such investments would have been unambiguously illegal just a few years ago. The SEC recently filed a civil complaint for securities fraud against a California company involved in legal marijuana sales, as well as its founder and two corporate officers. The founder and the corporation settled with the SEC, which is the civil equivalent of pleading no contest. SEC v. Notis Global, Inc., et al., No. 2:17-cv-01905, final judgment (C.D. Cal., Mar. 21, 2017).
“Securities fraud” encompasses a wide range of activities. The Securities Act of 1933, 15 U.S.C. § 77a et seq., regulates the issuance of new securities, including corporate stocks. The Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., deals with the trading of securities after they have been issued, such as in the various stock exchanges. Both statutes prohibit fraudulent statements and other deceptive acts in connection with the sale or purchase of securities. Violations may result in civil liability and, in some situations, criminal penalties. 15 U.S.C. §§ 77x, 78ff; see also 18 U.S.C. §§ 1348, 3301.
Lawmakers and law enforcement must often figure out how to reconcile new marijuana laws with old systems. One state might have removed criminal penalties for the production, distribution, sale, and possession of marijuana, but financial institutions subject to federal regulations might still shy away from doing business with them. In 2014, the SEC issued a memorandum about potential microcap investment scams, also known as penny stock fraud, in the marijuana business. The memo sought to warn investors about “pump-and-dump” scams, which involve making false or misleading statements about a company in order to artificially inflate its stock price.
The defendant corporation in the case cited above was one of the first companies in the world to produce a vending machine for marijuana products. As early as 2013, critics were floating the term “pump-and-dump,” but the SEC alleged that the defendants falsely inflated the company’s stock price with sham stock transactions. According to the SEC’s complaint, the founder created a shell company, transferred about 226,000 shares to this company, and created documentation to make it appear that the shell company had paid over half a million dollars for the shares. The SEC claimed that additional fraudulent transactions, along with misleading press releases and regulatory filings, further inflated the stock.
The SEC charged the defendants with fraud in the purchase and sale of securities under the Securities Exchange Act, 15 U.S.C. § 78j, 17 C.F.R. 240.10b-5; fraud in the offer or sale of securities under the Securities Act, 15 U.S.C. § 77q; various reporting violations; and other claims. The company founder agreed to the entry of a final judgment in March 2017, and the corporation followed the next day. The final judgment included various injunctions and a total penalty of about $12 million, which consisted of the disgorgement of about $6 million in proceeds from the fraudulent conduct and a civil penalty in an equal amount.
These blog posts are meant to be illustrative only. Unless expressly stated to the contrary herein, these matters are not the result of any legal work of Michael J. Brown, but are used to communicate a particular point of view. Michael J. Brown does not claim credit for any legal work done by any lawyer or law firm either generally or specifically, with respect to the matters contained in this blog.
Board-certified white collar crime attorney Michael J. Brown has defended people in West Texas against alleged state and federal charges since 1992. Contact us today online or at (432) 687-5157 to schedule a confidential consultation with an experienced and knowledgeable advocate for criminal justice.
More Blog Posts:
SEC Files Securities Fraud Claims Against Bitcoin Mining Companies, Texas Criminal Lawyer Blog, April 22, 2016
SEC Rejects Constitutional Challenge in Securities Fraud Case, Texas Criminal Lawyer Blog, December 23, 2015
Manager of Mortgage Finance Company Convicted in Federal Court of 28 Counts of Fraud, Texas Criminal Lawyer Blog, October 23, 2013
Photo credit: Leon Brooks [Public domain], via Wikimedia Commons.