Debra Borchardt
An investor lawsuit that accused cannabis REIT (real estate investment trust) Innovative Industrial Properties (IIP) (NYSE: IIPR) of knowing about a fraudulent scheme by its tenant Kings Garden was dismissed by a New Jersey Judge. The case alleged that IIP should have been aware that its tenant Kings Garden was taking money for construction on its grow facility but not performing the work. The investors believed that IIP’s due diligence should have uncovered the fraud.
However, on September 19, Judge Evelyn Padin disagreed with the investors and dismissed the case. The lawsuit filed by Michael Mallozzi as a class action lawsuit used a short seller report written by Blue Orca Capital as an impetus to accuse the REIT of knowing about the fraud and not being honest with investors about the situation. The Blue Orca report was published in April 2022 and suggested that Michael King, the founder of Kinds Garden had a background filled with fraud and theft allegations including a case against Michael King by his own brother.
The report went on to claim that IIP hid the true financial condition of Kings Gardens from its investors. After the report was published the IIP stock fell from $183 to $169. Blue Orca is a short seller and bases its trading strategy on the stock price dropping, which it did following the report. IIP quickly released a report disputing what Blue Orca had written. However, it seems not long after the report IIP did review the Kings Garden situation and by July 2022 told investors that the tenant wasn’t paying its rent. This caused the stock to fall even further.
Risk Warnings
IIP noted in its securities filings that there were risks attached to investing in the company. Similar language was used by Blue Orca as well. In fact, the IIP language specifically stated that the company may not know everything about its clients and that tenants may be unable to pay rent. Since the risk warnings were in the IIP securities filings from the beginning, it basically covered the company as the events occurred after the warnings were stated.
Judge Padin said an event after a risk warning was stated “cannot retroactively demonstrate” that the statement itself was false or misleading. The judge noted that Kings Garden began to defraud IIP in July 2021 and the risk warning would have had to been stated after that date in order to be considered actionable.
The court also touched on the accusations that IIP made positive comments about Kings Garden on various investor earnings conference calls, but the judge said these were covered under the disclaimer about forward-looking statements. The case also alleged that IIP was overly generous in its earnings reports with regard to the valuations of the Kings Garden investment and that these were accounting violations, but again the judge sided with IIP. The fair market value of these investments, she said, were opinions and subjective in nature.
Finally, the investors alleged that IIP made glowing statements about Kings Garden and Michael King when they thought IIP should have stated that King was a fraudster. However, the judge stated that these optimistic statements were just “puffery” and not material. Judge Padin said, “A reasonable investor would not base decisions on such statements.”
Ultimately, the court found that the investors just couldn’t support their accusations. The investors now have 30 days to file an amended complaint.
