A Canadian cannabis company is facing a class-action lawsuit in California federal court alleging that it misled investors and committed securities fraud.
Daniel Gabbard is the lone plaintiff, but the lawsuit requests class-action status from the U.S. District Court for the Central District of California. Filed March 6, the lawsuit culminated a bad week for PharmaCielo, headquartered in Toronto.
On March 2, Hindenburg Research published a report alleging that PharmaCielo was “nothing more than the latest self-enrichment scheme drummed up by its co-founder Anthony Wile, who had been charged by the SEC over allegations of securities fraud, stock promotion and market manipulation in the past.”
Company stock fell 32% after the report was published. PharmaCielo issued a statement calling the Hindenburg report “a malicious attempt to manipulate PharmaCielo’s common shares by spreading false, distorted and misleading statements.”
Wile, the company’s co-founder, has not been an officer, director or consultant of PharmaCielo since December 2018, the statement noted.
PharmaCielo sent the same statement to InsuranceNewsNet when contacted for this story.
PharmaCielo describes itself as focused on cultivating, processing and supplying all-natural medicine-grade cannabis oil extracts to large channel distributors via its greenhouse facilities in Colombia. The company owns a pair of properties there: nearly 30 acres worth of open-air greenhouses at Rionegro and a smaller parcel in Northeastern Cauca.
The issue concerns press releases and statements the company officers have made regarding its progress. In particular, the lawsuit alleges, instances of self-dealing that went unreported to investors, along with other setbacks to properties. The lawsuit lists company CEO David Attard and Scott Laitinen, chief financial officer, as defendants.
The lawsuit quotes from the Hindenburg Research report for three significant allegations of information withheld from investors:
- PharmaCielo recently announced a U.S. distribution deal with an opaque company called General Extract LLC. “We found that this is yet another undisclosed related party deal, involving PharmaCielo’s former COO,” Hindenburg wrote. General Extract’s parent company corporate address (“Suite D 357″) was actually a mailbox at a Colorado UPS store.
- PharmaCielo’s other main partnership, a distribution deal with nanocap company XPhyto, “appears to be little more than a shell game,” Hindenburg wrote. PharmaCielo is supplying XPhyto with cash so XPhyto can turn around and buy PharmaCielo’s products.
- The company’s Rionegro cannabis oil processing center, a key element of its plan to export oils, remains unfinished after almost six months of delays. According to local sources, Hindenburg wrote, the Rionegro greenhouse facilities “have issues with mold and residual pesticides from the flower-growing operation that preceded the company’s use of the facility.”
‘Right On Track’
In its statement, Attard urged investors to stick with PharmaCielo.
“We are right on track to achieve our objectives this year,” he said. “We expect 2020 to be an important year for PharmaCielo, as we transition from building one of the most scalable cultivation, processing and extraction footprints in the global cannabis sector today to selling at commercial scale.”
In a disclosure, Hindenburg Research revealed that it has taken a short position in shares of PharmaCielo. According to the research company, PharmaCielo is running low on cash, with an estimated $11.7 million remaining. The company has made $60,843 in cannabis revenue to date, Hindenburg added.
The lawsuit asks for class-action status, as well as damages. Gabbard’s attorney is The Rosen Law Firm, which has extensive nationwide experience handling class-action lawsuits.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at firstname.lastname@example.org. Follow him on Twitter @INNJohnH.
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