SEC Goes After $30 Million Cannabis Stock Fraud

The Securities and Exchange Commission (SEC) filed a complaint for a case involving fraudulent securities offering in American Patriot Brands or APB, a cannabis cultivation and distribution company. The SEC says that from August 2016 through the present, APB’s Chief Executive Officer Robert Lee, Chief Operating Officer Brian Pallas, and Chief Financial Officer Bernard Rice have solicited investments and raised over $30 million from more than 100 investors through a variety of material misrepresentations and omissions. The SEC claims the owners used the money to enrich themselves and sometimes paid themselves more money than the revenue produced by the company.

“As the SEC complaint alleges, American Patriot Brands Inc. and some of its senior executives fabricated business profits and prospects to entice investors with falsehoods that in the end left investors with essentially worthless securities,” said Carolyn M. Welshhans, Associate Director of the SEC’s Enforcement Division. “This action reflects the SEC’s ongoing commitment to holding accountable those who seek to profit through lies and deception.”

The SEC complaint states APB urged investors to act quickly to invest before APB made its securities more widely available, an event APB claimed was imminent. In fact, the SEC registration APB needed for widespread public trading was in jeopardy and was revoked in the midst of an offering. APB told investors that it had multistate and worldwide operations when it had no operations outside of Oregon.

“Although APB produced only a small amount of sellable cannabis a year, it promoted itself as one of the largest cannabis farms in the country and provided wildly inflated financial information to support extremely high revenue projections. To make the investment appear even more attractive, APB promised that investments would be secured by a lien on APB’s
cannabis farm, at times when the farm likely did not have enough equity to secure investments.” The SEC claims the company is still actively marketing the securities to investors.

The Players

The players named in the complaint include

• APB, which is a Nevada corporation, was formed in 2009, with its corporate headquarters in Newport Beach, California. APB owns and operates subsidiary companies that farm and sell cannabis.
• DJ & S is an Oregon limited liability company with its principal place of business in Medford, Oregon, and the owner of the real property and improvements constituting a cannabis
  farm. APB owns and operates DJ & S.
• Urban Pharms is an Oregon limited liability company that operates the Oregon Farm. APB owns and operates Urban Pharms.
• TSL is an Oregon limited liability company with its principal place of business in Portland, Oregon. TSL sells cannabis from APB and other growers. APB owns and operates TSL.
• Lee, 58, is a resident of Newport Beach, California. He is the Chief Executive Officer of APB and Chairman of its Board of Directors.
• Pallas, 76, is a resident of Laguna Beach, California. He is the Chief Operating Officer of APB, Urban Pharms, and TSL. He is also a member of APB’s Board of Directors.
• Rice, 68, is a resident of Roswell, Georgia. He was the Chief Financial Officer and Executive Vice President of Corporate Development for APB from at least February 2017 to 2019

The Alleged Scheme

Starting in 2016, APB has offered its securities for sale and represented that the funds would be used to pay for, among other things, the operation or expansion of Urban Pharms, DJ & S, and TSL. The SEC says that some investors participated in the offerings by purchasing stock or options to buy stock in APB. Other investors loaned APB funds pursuant to convertible promissory notes that granted investors the right to receive note payments in either APB stock or cash. Other investors were offered the right to receive rent and a percentage of the sales from a field on the Oregon Farm called Garden #1or also called the “Garden Units”.

The SEC said that the convertible promissory notes are securities because, among other things, they were: (1) promoted as a way to raise funds for the operation and expansion of APB’s business;(2) sold to nearly 50 investors and promoted to hundreds more; (3) promoted by APB as investments, titled as “securities;” and (4) were unsecured or under-secured. They are not subject to regulation by another federal agency.

Fake Numbers

The group raised $20 million from roughly 50 people in its first offering which lasted from 2016 to 2019. They did this by overinflating the value of the company. The presentation they presented to investors according to the SEC falsely stated that in 2016 APB had “achieved [w]holesale cannabis revenues of over $3.3 million and EBITDA [earnings before interest, taxes, depreciation, and amortization] of over $1 million.” In fact, APB had only achieved $330,905 of gross revenue and had a negative EBITDA of $9,606,543 for 2016.

The SEC claims that the presentation projected that APB would achieve “annualized revenue of over $16 million and positive cash flow of over $5 million for fiscal year 2017.” To meet that projection, APB would have had to achieve revenues of $11.9 million in the next 36 days, almost 3 times the total revenues APB had achieved from January to November 2017.

The presentation also projected that, in 2019, APB would achieve $128.5 million (CAD) in revenue from seven existing California cannabis businesses that APB did not then own. The company also said that the Oregon farm was worth $190-275 million, which in fact a professional appraisal pegged the value at just $3.5 million.

The complaint went on to allege that APB falsely told investors that it had dispensaries, farms, and customers in other states and countries and would be operating a cannabis business in Puerto Rico through a company called PR-One. In the April 2018 presentation described above, APB claimed that PR-One would be operating retail cannabis stores in Puerto Rico, had already completed four asset acquisitions, and was projected to generate revenue in the third quarter (July – September) of 2018. In fact, PROne reported to the Puerto Rican government in both 2018 and 2019 that it did not own any property.

Living the High Life

Lee also told investors that they weren’t taking salaries and the SEC also claims this was false.

The total monies APB paid to Lee, Rice, and Pallas in 2017 exceeded all of APB’s revenues from the sale of cannabis products.

The executives used the money to pay for land and apartments in Puerto Rico. They spent it on luxury beach resorts in Newport Beach and shopping trips to Bed, Bath & Beyond, Marshalls, a Chili’s restaurant, a Disney Store, Toys R Us, GameStop, and Harley Davidson.

No Audits

The company also quit preparing audited financial results for the investors and while it claimed the audited results were imminent, they weren’t. Without the financial reports, the stock was unable to trade on the OTC Link platform. Indeed, the SEC claims that APB would hire accountants, but not take their advice and not pay them.

The company began a second offering to raise $30 million starting in 2019 and going through 2020. The company implied it would soon be trading on the NASDAQ exchange despite its inability to file the required financial statements. The company also kept claiming that a famous retired United States Army General was APB’s “Chief Humanitarian and Global Economic Advisor,” when APB had previously claimed that the General resigned from the company in 2016.

Turn Down For What?

Despite the company being sued by the first offering investors, a creditor, and the stock no longer trading due to a lack of updated financials, APB created a third offering. In 2021, the company got a fake appraisal on the Oregon farm and released a video to investors asking for more money. The complaint states, “In the video, Lee claimed that investors could have “absolute confidence and peace of mind that [the notes] were a collateralized, protected investment” because they were secured by the Oregon Farm.”

Still not done, The SEC says that from at least 2022 through the present, DJ & S has offered the Garden Units through at least two publicly available real estate brokerage websites.

The SEC wants to bar the executives from working with stocks or acting as an officer at a company. It also wants them to pay civil penalties and disgorge some of the ill-gotten gains. The SEC is asking for a trial by jury.