Illegal Stock Sales : SEC Whistleblower Info

Types Of SEC Cases: Illegal Stock Sales

SEC Fines Founder Of Marijuana Company $12 Million For Illegal Stock Sales

The SEC charged a marijuana consulting company and its executives with conducting illegal stock sales. The SEC alleged that the company’s founder and another executive made false public statements regarding the company’s industry performance and conducted sham transactions to falsify the company’s financials. (For more information about public statement frauds click here.)

Shell Company Used To Conduct Illegal Stock Sales

The SEC filed its court Complaint in California against Medbox, Inc., a marijuana consulting services company that also claimed to sell biometric identification vending machines capable of dispensing marijuana.

The SEC’s court Complaint

The SEC alleged that Medbox’s founder, Vincent Mehdizadeh created a shell company (“New-Age”) to conduct millions of dollars worth of illegal stock sales pertaining to Medbox. The Medbox shares sold through New-Age were restricted securities that were not eligible for public sale. According to the Complaint, Mehdizadeh funneled the capital raised in those illegal stock sales back into Medbox in exchange for (1) an assignment of Medbox accounts receivables that New-Age never collected; (2) additional restricted shares; (3) dispensary “management rights” that Medbox did not own; and (4) other rights that Medbox did not possess. The Complaint stated that this illegal scheme enabled Medbox to claim higher revenue and earnings performance than the company actually achieved from 2012-2014. Medbox subsequently cited those fictitious revenues in press releases to promote record revenues and establish itself as a highly successful, rapidly growing business. According to the SEC, the majority of Medbox’s revenue during this period was actually derived from the illegal stock sales conducted through the New-Age shell company. Mehdizadeh also purportedly transferred capital from New-Age into a real estate escrow account that he then used to acquire a luxury home in Pacific Palisades, CA.

Medbox’s CEO And Founder’s Fiancée Also Charged In Illegal Stock Sales Scam

The SEC also charged Medbox CEO Bruce Bedrick with being complicit in Mehdizadeh’s scheme. Per the court Complaint, Bedrick was aware that New-Age was owned by Mehdizadeh, and he approved specific transactions while being aware that they provided no tangential value to New-Age. Bedrick allegedly sold over 710,000 of his Medbox shares in private placements or public sales, garnering $6,483,180 in total sales proceeds. Mehdizadehʼ s then-fiancée Yocelin Legaspi, who was supposedly acting as New-Age’s CEO, was also charged with participating in the fraud through the unlawful selling of unregistered securities.

The SEC’s press release

Reporting, Books And Records, And Internal Control Violations; Auditor Fraud

In addition to the foregoing, the Complaint charged various reporting, books and records, and internal control violations. It also charged Medbox with lying to its auditors. (For more information about these types of frauds, click here.)

Specifically, the Complaint alleged that Medbox made materially false filings with the SEC.

Supposedly, Medbox maintained false books and records that did not truthfully reflect its accounts receivable, revenue, and related-party transactions. These things constituted books and records frauds.

By failing to implement adequate controls to ensure the proper recognition of those things, Medbox committed internal controls violations.

Furthermore, according to the Complaint, Mehdizadeh knowingly or recklessly lied when he signed false management representation letters that were provided to Medbox’s auditors.

Sanctions and Penalties

Mehdizadeh and Medbox agreed to settle the SECʼs charges. According to the SEC’s press release, Mehdizadeh agreed to pay over $12 million in disgorgement and penalties. He also agreed to be barred from serving as an officer or director of a public company, and to be barred from participating in any penny stock offerings.

Whistleblowers Can Report Illegal Stock Sales To The SEC

This case illustrates some types of misconduct that could give rise to SEC whistleblower cases if reported to the Commission through the SEC whistleblower program. However, the SEC has not made any public statement as to whether this case was itself an actual SEC whistleblower case. The SEC Office of the Whistleblower posts Notices of Covered Action (“NoCA”) for Commission actions where a final judgment or order results in monetary sanctions exceeding $1 million. The NoCA list does not disclose if a particular Enforcement action was brought as the result of an SEC whistleblower case, tip, complaint, or referral being filed with the Commission.

Additional Information

For more information about illegal stock sales, click on the links below:

The SEC’s court Complaint in SEC v. Medbox, et al. (External link to the SEC’s website.)
The SEC’s Press Release announcing the court Complaint. (External link to the SEC’s website.)