Where There’s Smoke, There’s … Fraud: Marijuana-Related Charges Net $12 Million Settlement

MarijuanaThe promoter of a California-based marijuana products company paid $12 million to settle SEC fraud charges that he and his company, Medbox, used sham stock sales to an undisclosed affiliate to inflate the firm’s revenues.

While the claimed earnings set Medbox apart from many companies in the cannabis industry that struggle to turn a profit, the promoter, Vincent Mehdizadeh, revealed the true nature of the business when he wrote to another individual charged in the scheme 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.”

As alleged in a civil action filed in the U.S. District Court for the Central District of California, Mehdizadeh created a shell company called New-Age Investment Consulting for use in the scheme. Mehdizadeh transferred Medbox shares to New-Age for cash, and then created a phony paper trail to make it appear that New-Age had provided valuable services in exchange for the securities. New-Age in fact provided no consideration for the Medbox stock, which it then allegedly sold in unlawful transactions and funneled the proceeds back to Medbox. New-Age transferred the cash back to Medbox and Mehdizadeh by:  

  • paying Medbox $1.37 million in exchange for an assignment of Medbox accounts receivable that New-Age never subsequently collected;
  • capitalizing Medbox by paying $1 million for another 100,000 shares of restricted Medbox stock; and
  • contributing to Mehdizadeh’s purchase of a luxury Pacific Palisades home. 

The SEC also charged Medbox’s former CEO, Bruce Bedrick, with being complicit in the scheme and personally profiting from the misconduct, as well as charging New-Age and Mehdizadeh’s then-fiancée, Yocelin Legaspi, with unlawfully selling unregistered securities. According to the SEC complaint, "faced with repeated and clear indicia of Mehdizadeh’s malfeasance, Bedrick took no action and abdicated his governance responsibilities as Medbox’s CEO." He allegedly authorized Medbox’s issuance of shares to New-Age despite knowing that Mehdizadeh controlled New-Age, and conceded that one of the deals transacted between Medbox and New-Age "made no economic sense from New-Age’s perspective."

As alleged, Legaspi made illegal stock sales through New-Age, or was a necessary participant and substantial factor in the sales. The SEC claimed that she communicated directly with purchasers, made payment demands for the shares, signed the stock purchase agreements, on New-Age’s behalf, paid all associated transfer agent fees out of a New-Age bank account in which she had signatory authority, received the stock sale proceeds through New-Age’s bank account and funneled the stock sale proceeds out of the New-Age bank account to either Medbox or Mehdizadeh.

Medbox and Mehdizadeh settled the charges against them. In addition to agreeing to pay more than $12 million in disgorgement and penalties, Mehdizadeh agreed to an order barring from serving as an officer or director of a public company or participating in any penny stock offerings. "Investors were misled into believing that Medbox was a leader in the burgeoning marijuana industry when the company was just round-tripping money from illegal stock sales to boost revenue," said Michele Wein Layne, director of the SEC's Los Angeles Regional Office.

The actions against Bedrick, Legaspi and New-Age are continuing.

In a 2014 investor alert on the risks of investing in the marijuana industry, the SEC advised that "[f]raudsters often exploit the latest innovation, technology, product, or growth industry – in this case, marijuana – to lure investors with the promise of high returns." According to the alert, "[w]hen publicly-available information is scarce, fraudsters can more easily spread false information about a company, making profits for themselves while creating losses for unsuspecting investors."

Due diligence by investors would have certainly been useful in this case, as the SEC charges were not Mehdizadeh's first encounter with charges akin to fraud. In 2013, as described by the Los Angeles County Department of Consumer Affairs, Mehdizadeh and his father pretended to be a law firm to defraud victims seeking immigration help. The pair pleaded guilty to charges of grand theft, including felony charges against the son. Mehdizadeh and his father took money for immigration cases and either did nothing or filed fraudulent documents with immigration officials. Mehdizadeh pleaded guilty to two felony grand theft counts, and his father entered a guilty plea to a misdemeanor charge. The pair agreed to pay restitution of approximately $500,000.