Montana Cannabis Investors Say They Were Ripped Off

Two Montana investors Tom and Jerry Reed filed a lawsuit claiming they were ripped off in a cannabis investment scheme to the tune of $5 million. Law360 reported that the suit was filed earlier this week in the U.S. District Court in the Montana Butte division.

The story begins with Michael Smith and Philip Marc Hays creating MBM Management and Consulting in December of 2020 to develop a cannabis company in Montana. However, they needed investors and so they turned an online website called www.bizbuysell.com, which provides advertisements for a variety of different businesses. This is where the Reeds came across the duo.

According to the complaint, the reeds attempted to do their due diligence. They visited Montana, where Smith had started a grow operation in Ennis, Montana. When Tom Reed was at the location, he claims Smith showed him the grow operation of around 250 to 300 plants representing that all of the plants were grown for MBM to sell on January 1, 2022, when recreational marijuana sales went legal in Montana. Smith also sent Tom Reed videos of the grow operation.

Size of Operation

Tom Reed says that based on the number of plants he saw he expected that the operation should have been somewhere in the neighborhood of 500 to 600 lbs. The complaint also claims that Smith suggested that there would be roughly $ 1 million in inventory that it was ready to sell when it began adult-use operations on January 1, 2022, in the state.

The Reeds also say that MBM said it had initiated production with a 1000 sq ft area with $100,000 worth of product and that it expected to open 12 stores within the first year of operation, would grow to 40 stores by 2023, and would seek to expand to a national scope of operation. Smith and Hays also told the Reeds that a 1000 sq ft operation would yield 489 pounds per year and that they had three stores in which company operations had been initiated. All together the complaint claims that in the first year of business there would be about $ $4 million in revenue, with a net profit of $ 1.35 million.

Investment

On April 30, 2021, Hays offered the Reeds 32 ownership units in MBM at a price of $ 75,000 a piece for $ 2.4 million dollars. MBM had been upfront that it needed investment money for the operation. By May, 3, though Hays dropped the price by $200,000 and the Reeds could get the 32 units for just $2.2 million. On May 24, 2021, through their business Green Venture Holdings, LLC, the Reeds wired $2.2 million dollars. This is when things quickly began to go off the rails.

Hays wanted to start moving the money around like using some of the money to close on the building in Ennis, but this prompted red flags with Chase, which recalled $1.8 million. The complaint states that Smith said he needed money to close on the building and asked the Reeds to wire $500,000 to Madison Valley Bank for the title company to purchase the building for MBM. The Reeds wired the funds on July 8, 2021, for the building and it was understood that this investment went towards the $ 2.2 million dollar purchase price for 32 units. Then Smith said he wanted to sell more units. The Reeds agreed to buy more units and even brought in a friend, Nerik Yakubov, who bought one unit for $75,000. Throughout July and August of 2021, the Reeds ultimately wired roughly $2.4 million to a variety of small banks and credit unions for 35 units. 

Signs of Trouble

By November 2021, Smith was claiming the company was about to be bankrupt and needed more money. The Reeds wanted to protect the investment they had made and decided to directly buy the Ennis building and conserve the cash for the operation. The cannabis company wouldn’t have to pay rent for a year and this would be considered part of the investment into MBM.

Then things really get crazy as the court document says Smith got into a dispute with a member of the community in Ennis and informed the Reeds on February 9, 2022, that he feared for his safety and would have to leave Montana. “He started pushing hard at that point for both Tom Reed and Jerry Reed to invest in a New Mexico property so that the business could expand and he could run another operation in a different state.”

The Reeds talked about buying Smith out of the Montana operation and possibly setting up something in New Mexico, but never came to an agreement. Apparently, Smith decided to jump to New Mexico without the Reeds’ consent and begin using MBM money there.

By April 2022, Smith began claiming bankruptcy again and allegedly told the Reeds that they needed to fork over more money and since they didn’t have the majority ownership could potentially lose all of their investment. The Reeds came to an agreement to buy Smiths’s shares, which prompted Hays to want out as well. 

Over the next few months, the Reeds continued to send more money to keep the operation going, but the Smiths are accused of using the money for personal reasons. Once the Reeds gained control of the company, they claim they realized Smith had been draining the funds for personal use and not to run the company. For example, almost $169,000 was used to pay for an American Express card. It isn’t known if the credit card purchases were for MBM operations or personal purchases. 

The complaint says, “On June 15, 2022, Tom Reed requested information on the American Express cards as well as the various wires made by Smith. (Exhibit A, pg. 24). Smith refused to provide the requested information, and instead accused Tom Reed of fraud, and called him a “motherfucking lying thiefy fucking fraud,” instead of providing him the requested information.”

Where’s the Weed?

Instead of the expected 250 pounds of cannabis, the MBM operation during the summer of 2021 only yielded 16 pounds. The Reeds say they can’t account for the missing inventory. 

Where’s the Property?

Green Market Report tried to find the location online. However, the two properties mentioned in the complaint aren’t buildings that would house a grow operation. 69 Haypress Lake Trail in Ennis is a residential property as shown on Zillow and in the picture below taken from Google Maps. The other address of 47 Prairie Way in Ennis is vacant land – also based on Google maps. If the Reeds visited a grow operation that could generate 500 pounds of cannabis it wasn’t at either of these locations. However, the comment section suggests that there was a grow facility at the residential property, but we haven’t confirmed that.

Montana Market

The Montana cannabis market has turned out to be pretty strong. The Department of Revenue reported that adult-use cannabis sales logged $17 million in June. The adult-use and medical cannabis had combined sales of $150 million in 2022. According to local news station NBC Montana, the sales have generated nearly $21 million in state taxes so far this year. Cannabiz Media lists 166 total licenses in the state, but a search for the specific location for MBM in Ennis turns up no license. Nor is there a license in the state for MBM. There is one company called CannaConnection located in Ennis, Montana, but even that can’t be confirmed as this company online lists Bozeman MT as its location and is unrelated to MBM.