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Regulation and Compliance > Federal Regulation > SEC

Pot Firm Lied About Cheech & Chong Connection, SEC Says: Enforcement

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The Securities and Exchange Commission charged Bud Genius Inc. and its CEO with defrauding investors by making exaggerated and misleading claims about the medical marijuana company’s business operations and financial condition.

The SEC’s complaint alleges that Bud Genius and Aaron “Angel” Stanz issued false and misleading press releases about a purported licensing agreement with comedian Tommy Chong, of the famed Cheech & Chong duo.

In one press release, Stanz allegedly described Chong as a “partner,” and in a subsequent blog post, he described the purported licensing agreement as a “crowning achievement.” The agreement never materialized, and the defendants allegedly knew at the time that, in light of Bud Genius’ weak financial position, it was extremely unlikely that an agreement would ever be reached.

The defendants’ false and misleading claims about the purported agreement were picked up by multiple media outlets. The defendants also are alleged to have published fraudulent financial statements and to have facilitated an unregistered offering of Bud Genius securities.

Without admitting or denying the Commission’s allegations, Stanz agreed to the judgment, which imposed five-year officer-director and penny stock bars, and ordered disgorgement and prejudgment interest of nearly $159,000. Without admitting or denying the Commission’s allegations, Bud Genius also agreed to the judgment. The settlements are subject to court approval.

The unregistered offering of Bud Genius securities is also the subject of a separate action filed by the SEC against Taylor Moffitt, Carlos Febles and U.S. CoProducts LLC. The SEC alleges that the defendants acquired, offered and sold billions of shares of unregistered Bud Genius stock for a total profit of more than $540,000, approximately $140,000 of which was paid to Bud Genius and Stanz.

Moffitt, Febles and U.S. CoProducts will be jointly and severally liable for $435,500 in disgorgement and prejudgment interest. In addition, Moffitt and Febles agreed to penny stock bars of three years and one year respectively, and to pay civil penalties of $35,000 and $20,000 respectively. These settlements also are subject to court approval.

SEC Shuts Down Fake Pre-IPO Share Scam

The SEC announced the unsealing of fraud charges against a defendant who stole at least $400,000 from investors through the sale of nonexistent pre-IPO shares of stock.

The SEC’s complaint alleges that Keenan Gracey sold investors purported pre-IPO shares in Perspecta Inc., a new company that will be formed as a result of the merger of three other companies. Although the merger is planned, Gracey’s claims of ownership of pre-IPO shares in Perspecta were false.

According to the SEC, Gracey has no interest in the not-yet-formed company and no IPO is planned for its stock. The SEC alleges that Gracey used publicly available information about the merger and false claims about his supposed connections with the companies involved to convince investors that they would recover 60 times their investment if they purchased pre-IPO shares from him.

The court granted the SEC’s request for an asset freeze and a temporary restraining order against Gracey from further violations of the federal securities laws, as well as other emergency relief. The SEC complaint also seeks preliminary and permanent injunctions, return of any ill-gotten gains with interest, and civil penalties.

SEC Fines Event Center CEO for Fraud

The SEC filed a complaint against The Falls Event Center, a Utah limited liability company, and its CEO, Steven Down, for making material misrepresentations to investors concerning the profitability of certain of The Falls’ event centers.

As alleged in the SEC’s complaint, The Falls builds and operates small event centers. Since 2011, The Falls and Down raised approximately $120 million from more than 300 investors from the offer and sale of, among other things, convertible secured promissory notes.

According to the complaint, Down solicited investments in The Falls by making presentations to groups of professionals during continuing education seminars that he sponsored. In his presentations, Down represented that some or all of the event centers were and continued to be profitable.

However, according to the complaint, from the first half of 2016 forward, members of The Falls’ executive team informed Down that the event centers were not profitable. In addition, they informed Down that his event center model was unsustainable because of the millions of dollars owed to investors and to the event center mortgage holders.

In addition, The Falls’ own accounting records, which Down received regularly from the Falls’ CFO, indicate that, from inception through September 2017, the event centers were never profitable.

Without admitting or denying the SEC’s allegations, Down has agreed to pay a civil penalty of $150,000. The Falls and Down have consented to the entry of a final judgment permanently enjoining them from future violations of Sections 17(a)(2) of the Securities Act of 1933.

Security Guard to Heinz Board Member Settles Insider Trading Charges

A federal district court entered a consent judgment against Kingston, Pennsylvania resident Todd David Alpert for insider trading.

According to the SEC’s complaint, Alpert, who worked as a security guard at the home of an H.J. Heinz Co. board member, misappropriated material nonpublic information concerning the then-impending acquisition of Heinz by Berkshire Hathaway Inc. and 3G Capital Partners Ltd.

The complaint alleged that shortly after learning about the potential deal in the course of his employment, Alpert breached a duty of trust and confidence by purchasing 1,000 shares of Heinz stock and 30 call options. The morning that the deal was announced, Feb. 14, 2013, Alpert sold these Heinz securities for total profits of nearly $44,000.

The judgement orders Alpert to pay disgorgement of his profits of $43,873 with prejudgment interest of $1,627; and orders him to pay a civil penalty of $43,873.

SEC Obtains Preliminary Injunction and Continuing Asset Freeze Against Biotech Start-up and CEO

A federal district court in Massachusetts entered a preliminary injunction against biotech start-up PixarBio Corp., its CEO, an employee and the CEO’s friend, restraining the defendants from violating federal securities laws and maintaining an existing asset freeze until further notice.

The SEC’s complaint alleges that PixarBio’s founder and CEO, Frank Reynolds, and employee Kenneth Stromsland misled investors with false claims about PixarBio’s progress in developing a purported method of delivering non-opiate, post-operative pain medication, including that they falsely told investors that the FDA had lowered PixarBio’s hurdles for regulatory approval.

The complaint also alleges that Reynolds, his close friend M. Jay Herod, and Stromsland engaged in a fraudulent scheme to acquire and merge PixarBio with a publicly traded company and to secretly manipulate the sales of shares in the new entity.

From these sales, Reynolds and Herod pocketed about $400,000, and they used an additional $500,000 to keep PixarBio afloat as Reynolds misled investors about how much money they had raised in the unregistered offering.

The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with interest, penny stock bars, officer and director bars and financial penalties.

— Check out New Cybersecurity Laws Provide Direction, and Hurdles, for Advisors on ThinkAdvisor.


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