As more and more states drop their prohibitions against cannabis, investors are flocking to businesses that sell the products. The growth potential is enormous for well-run companies with savvy, innovative management. But, on the flip side, poorly run companies are capable of squandering fortunes and leaving investors in the lurch. A class-action filed in Florida last week seems to illustrate one way a marijuana investment could go up in smoke.
On January 2, 2020, two large investor rights law firms, one in California and another in New York, announced they had filed a class action against Trulieve, Florida’s largest distributor of legal cannabis products. The class action seeks to recover shareholder losses caused by company malfeasance. The complaint alleges that Trulieve “made false and/or misleading statements” from September 25, 2018 to December 17, 2019 “and/or failed to disclose that” the company had “overstated its mark-up on its biological asset.”
As a result, the gross profit the company reported was inflated. The complaint also charges that “Trulieve engaged in an undisclosed related party real estate sale” with the husband of its CEO, Kim Rivers. In sum, the plaintiffs charge that Trulieve’s “statements about its business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis….”
Misrepresentation of material facts to induce an investor to purchase stock is securities fraud. Plaintiffs in this action claim that Trulieve violated §§10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Basically, in such fraud schemes, a company tries to influence the market, so investors pay much more than a stock is worth. Later, when the truth comes out, the price plummets and investors are left with shares that are worth far less than the initial investment. The law allows shareholders to sue to recover such losses due to unlawful conduct and/or irresponsible management.
But this class action isn’t the only legal problem facing Trulieve. According to Law360.com, the company was sued in December 2019 for “transmit[ting] unsolicited messages touting ‘prerolls and flower,’ among other cannabis products, to ‘several thousands’ of people, in violation of the Telephone Consumer Protection Act.” Were these calls part of a “pump and dump” scheme?
Or were they a desperate effort to drive up the share price to stave off the January shareholder action? It will be interesting to see what financial shenanigans these two lawsuits bring to light.
So, if you are a cannabis investor, should you be worried? It may be tempting to laugh this story off as just another item that pops up when you Google “Florida man.” But, the explosion of cannabis companies in other states, most notably California, makes it a virtual certainty that this scenario will repeat itself. Irresponsible, inexperienced, and/or reckless executives, suddenly flush with cash, may not behave…um, soberly.
Eventually, the market will deal cruelly with the fakers and the flakes, but earnest investors can be hurt in the meantime. If the share price of your investment drops precipitously, your only recourse might be a recovery lawsuit. Hochfelsen Kani LLP is here to help; contact us today.