Cannabis Musings - October 2, 2024
Fraud is bad.
Friends, if you want to hear the melodious sound of my voice, I was interviewed by stalwart cannabis lawyer, Hilary Bricken, Partner at Husch Blackwell, for the Cannabis Law Now podcast, about myths and pitfalls about our industry. Tell your friends!
The past week gave us a veritable steaming-hot bowl of kasha varnishkes of interesting legal actions in the cannabis industry. We saw Pelorus Fund REIT file for receivership against storied California cannabis company, StateHouse Holdings, effectively asking a court to appoint an outsider to run a sale process in order to get the creditors paid. We saw the U.S. Hemp Roundtable and various hemp operators file suit against the State of California over the ban on so-called “intoxicating hemp” beverages and foods, and other hemp products.
The tastiest of all these was the Securities and Exchange Commission’s indictment of financier Paul Blizerian and Ignite International Brands, which dropped late last week. If you’re not familiar, Ignite was a so-called cannabis lifestyle brand founded by Paul’s son, Dan Blizerian. If you’re not familiar with Dan Blizerian, let’s just say that he’s an Internet personality who also happens to hold some curious beliefs about those with certain religions. If you’re not familiar with what I’m referencing, feel free to research that yourself, but you don’t really want to know (this is a family newsletter).
Dan gained fame and/or notoriety for posting online about his excessive spending on shmontses, which is a thing. Ignite gave up trying to draft on the cannabis aura in 2021, shifting to nicotine instead, although it still sells CBD products. Journalist and friend of Cannabis Musings, Chris Roberts, wrote a nice piece on the history of Ignite’s failures back in 2022. Dan’s holding company, Blitz NV, filed for bankruptcy last year, in a sordid tale told by Las Vegas-based journalist, Eli Segall.
So, imagine my utter lack of surprise when I saw that Ignite was allegedly a key part of a years-long scheme by Paul Blizerian, who was convicted back in 1989 for securities fraud, to hide millions of dollars from the SEC. A cannabis company being used to hide money? Not a good look.
Also imagine my utter lack of surprise when I saw that the indictment and complaint also alleged that Ignite misled investors. The SEC filed civil charges back in 2022 against Ignite for failing to respond to a subpoena investigating possible securities fraud. The other shoe finally dropped (allegedly):
The defendants also allegedly misled Ignite’s investors by making materially false statements about the company’s revenues for the fourth quarter of 2020, inflating sales figures by including unsold inventory stored by a different business. In January 2021, after Ignite issued a false and misleading press release about its sales, its share price increased from 42 cents to $1.20 per share, representing a gain of approximately $84 million in market capitalization.
What was wrong about those reported sales? Well, allegedly:
Months later, when Ignite’s auditor could not verify the sale of the unsold inventory, [Paul] Bilzerian caused Ignite to “sell” approximately $4.63 million in vape products to a shell company he controlled. Bilzerian and Rohleder backdated the sale to make it falsely appear that it occurred in 2020. In later reporting the “sale” to Ignite’s investors, the defendants concealed Bilzerian’s ownership of the shell company and the fact that the shell company was not a vape product distributor, meaning it could only sell the inventory by competing with Ignite.
Dan Blizerian wasn’t indicted, but he was the face of Ignite, even though he allegedly wasn’t really:
On paper, Ignite’s CEO was Bilzerian’s son D.B. – a professional poker player who gained notoriety on social media for his glamorous and ostentatious lifestyle. In fact, Bilzerian exercised de facto control of the company. Together with Rohleder, Bilzerian oversaw Ignite’s operations, strategy, marketing, and fundraising, to the point of holding daily management meetings. Bilzerian also exerted significant influence in decisions to hire and fire Ignite’s executives and members of its board of directors.
Even better:
Rohleder [CFO of a related company] allegedly assisted in the preparation of D.B.’s tax returns, which included false and fraudulent representations that caused a tax loss of approximately $1,536,949 to the IRS for the tax years 2018 to 2020. Rohleder did so by falsely characterizing D.B.’s Las Vegas mansion, which he purchased in 2018 for $8.5 million, as a rental property. When listing D.B.’s personal address on the tax returns, Rohleder used an address corresponding to a hangar at Harry Reid International Airport.
I wonder how long it took the IRS to think to check Google Maps for that address. Oy gevalt. There’s so much goodness in this indictment and the Complaint. Even if none of it is true, it develops for the reader a cautionary tale.
First off, if you’re (allegedly) going to engage in a “scheme” or any sort of fraud, keep away from texts and email. The SEC’s Complaint against Blizerian et al. cites a lot of them. This isn’t legal advice, but remember the old legal chestnut that the “e” in “email” stands for “evidence.” It’s like videotaping your crime spree.
Second, the story is emblematic of the freewheeling, heady days of that first licensed cannabis growth wave between 2016 and 2019. Flush with stupid cash being thrown at them by starry-eyed speculators and wildcatter bankers, too many people thought they were a gantzer makher and took advantage of the moment, ignoring things like fiduciary duties, good faith, and a desire to build something genuine. Ehreh iz fil tei’erer far gelt. (“Honor is dearer than money.”)
A lot of that has flushed out of the system since the cash spigot stopped up in 2019 and income has remained elusive, but there are still bad actors in our industry. It’s hard for the good actors to convince investors that this is a legitimate, investible industry when indictments and fines for (alleged) securities fraud populate the headlines. Even for an operator contracting with another company, it’s hard to detect fraud (if it were easy, there probably would be less of it) – so much of doing business is based on trust.
Stories like this really highlight the importance of due diligence. Of course, there’s only so much you can do, particularly with a public company, but, for too long, “hairy deals” (a facetious way of saying that the target company has problems - financial, compliance, governance, whatever) were tolerated, and even embraced, in the name of blitzscaling. We, as an industry, need to continuously strive to do better.
Be seeing you.
© 2024 Marc Hauser. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. The foregoing represents my own views and not those of Jardín.