Medical Marijuana Biz Goes Up In SEC Smoke

February 10, 2017

WARNING! Today's Blog reports about a Securities and Exchange Commission case against a medical marijuana company. This story includes discussion of drugs and drug use, and contains obscene language and disturbing depictions of drug use and drug users. If you are easily offended, please do not read beyond this point. Readers of today's article may experience dizziness, nausea, projectile vomiting, constipation and a four-hour erection.  

Purple SEC Haze

Securities and Exchange Commission, Plaintiff, v. Christopher R. Esposito, Anthony Jay Pignatello, James Gondolfe, Renee Galizio, Lionshare Ventures LLC, and Cannabiz Mobile, Inc., Defendants (Complaint, United States District Court for the District of Massachusetts, 16-CV-10960 / May 26, 2016). we are provided with this intriguing background about one of the defendants:

15. Cannabiz Mobile, Inc. is a corporation purportedly based in Cambridge, Massachusetts, but in reality operated out of shared office space with Lionshare. Cannabiz initially claimed to be in the business of mineral exploration in Brazil and, later, servicing businesses in the medical marijuana industry. It had other names and purported business operations prior to the adoption of its current name, Cannabiz, including ReBuilder Medical Technologies, Inc. ("ReBuilder" from March 2007 through August 2012) and Lion Gold Brazil, Inc. ("Lion Gold" from August 2012 through May 2014). Cannabiz's stock is not registered with the Commission and it has never registered any securities offerings with the Commission. Since at least March 2007, Cannabiz (and its predecessors) has been quoted on the Over-the-Counter (OTC) securities markets ("OTC Markets"). 

Maybe it's me -- and, yeah, I know, it's often me -- but I'm not all that big of fan of cutesy corporate names like Cannabiz. Of course, that observation comes from the same idiot who uses BrokeAndBroker for a serious website about Wall Street legal/regulatory/compliance matters, right? 

Going Mobile

In any event, Cannabiz Mobile is "purportedly" based in Cambridge, MA but in "reality" operated out of shared space. Okay, at least now we know that we're talking about a business dedicated to sales of pot. 

Imagine a bunch of stoners from Harvard or MIT starting off in their dorms with this idea and then: hey dude, stop bogarting that blunt and share it. Okay, where were we? Oh, yeah, we were going to start our grass biz in Cambridge but, wow, let me blow your mind with this concept, how about we just go down to the Square and share another joint and ponder the numbers and reality and all of, you know, like, what? What were we talking about?

Regardless of this fictional musing about how any medical marijuana business in a college town could get started, we're still left to ponder how or why Cannabiz Mobile started off claiming to be in mineral exploration in Brazil. After we work through that whole mineral thing in Brazil, we're then left to tackle what the "Mobile" thing means. You use your cellphone to place an order? They got a truck circling around that drives to your house with medical marijuana?

Is It Heavy Stuff, Man?

As initially noted in the "Summary" portion of the Complaint:

1. This case involves Esposito's scheme to defraud investors by misappropriating for his own purposes funds from investors in Lionshare, and concealing his ownership and control of the publicly-traded company Cannabiz in order to enrich himself and others by colluding in the sale of millions of shares of Cannabiz into the public market, in violation of SEC statutes and regulations.

2. Esposito accomplished the first phase of his fraudulent scheme by (a) raising more than $550,000 from investors between June 2011 and June 2012 in an unregistered offering of securities in his company Lionshare; (b) spending almost $300,000 of Lionshare investor funds for unauthorized personal expenses; and (c) using $75,000 of Lionshare investor funds to acquire control of Cannabiz by purchasing all of its convertible debt.

Was a time when smokin' dope was about a bunch of nervous kids trying to score a nickle bag and hoping that they weren't buying from an undercover cop or that they hadn't just paid for oregano. That was then. This is now. And now it's about concealing ownership of a publicly-traded marijuana biz. $300,ooo in "unauthorized personal expenses" -- but how much of that went to buy Oreos and chips? Some say this is progress: The Doobie Brothers are now SEC enforcement lawyers.

What Do You Guys Want?

Having taken the first toke on this case, we now move into what the "Summary" portion of the 
Complaint calls the second phase:

3. In the second phase of his fraudulent scheme, between May 2012 and August 2015, Esposito, with Pignatello, concealed his de facto control of Cannabiz and a large percentage of Cannabiz's securities in order to profit by evading SEC Rule 144 [17 C.F.R. §230.144], which limits securities sales by affiliates, such as control persons. Esposito did this by, among other things, (a) installing Gondolfe as the sole officer and director of Cannabiz-even though Esposito secretly controlled the company-to make false statements in Cannabiz's public filings and other documents; (b) paying third-party stock promoters to tout Cannabiz in order to increase its stock price and trading volume; (c) selling significant amounts of Cannabiz convertible debt to others for almost $304,000; and (d) with Pignatello and Galizio, selling millions of shares of Cannabiz stock directly into the market.

4. The Defendants' conduct violated various registration, disclosure and antifraud statutes and rules and regulations of the SEC, including Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"), and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder.

5. Based on these violations, the Commission seeks the following relief: (i) entry of permanent injunctions prohibiting Esposito, Pignatello, Gondolfe, Lionshare, and Cannabiz from engaging in future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act; (ii) entry of permanent injunctions prohibiting all Defendants from engaging in future violations of Section 5 of the Securities Act; (iii) an order requiring all Defendants to disgorge their ill-gotten gains and pay pre-judgment interest; (iv) an order requiring all Defendants to pay appropriate civil monetary penalties; (v) an order barring Esposito, Pignatello, and Gondolfe from serving as an officer or director of a public company, pursuant to Section 20(e) of the Securities Act [15 U.S.C. § 77t(e)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)]; and (vi) an order barring Defendants Esposito, Pignatello, Gondolfe, Lionshare, and Galizio from participating in any offering of penny stock, pursuant to Section 20(g) of the Securities Act [15 U.S.C. § 77t(g)] and/or Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)].

Leave it to the SEC to harsh everyone's mellow. Where's deregulaton when the stoners need it?  

No Show. No Way Dudes. Really? Wow? Awwwwesome.

According to "SEC Obtains Final Judgments Against Medical Marijuana Industry Company and CEO for Involvement in Fraudulent Scheme" (SEC Litigation Release No. 23730 / January 27, 2017), 
DMA entered default judgments that enjoined

[G]ondolfe and Cannabiz from future violations of Sections 5 and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The judgments also order Gondolfe to pay disgorgement and pre-judgment interest in the total amount of $106,681 plus a $160,000 civil penalty and Cannabiz to pay disgorgement and pre-judgment interest in the total amount of $11,694 plus a $775,000 civil penalty. Additionally, the final judgment against Gondolfe bars him from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, and permanently bars him from participating in an offering of a pennystock 

The SEC's litigation in this matter continues against Esposito, Lionshare Ventures, LLC, Pignatello and Galizio.

Is that Permanent Bar against Gondolfe the Grey or Gondolfe the White? As to Esposito, Lionshare, Pgnatello, and Galizio, well, as the song says:

Sittin' and starin' out of the hotel window
Got a tip they're gonna kick the door in again
I'd like to get some sleep before I travel,
But if you got a warrant, I guess you're gonna come in

Bill Singer's Comment

Alas, Cannabis Mobile is old news.What's next? Hmmm, let's see, we got legal drugs, so I guess we will need drug testing kits to weed out (pun intended) those who abuse medical marijuana . Only a matter of time until someone launches a stock offering for a company in the medical marijuana urine testing business. What are they going to call that: Cannapiss?