The weed industry is getting to know a time-honored tradition of the American business world: corporate fraud.
Federal prosecutors in Colorado last week charged the men behind FusionPharm, a publicly traded hydroponic marijuana farming company, with securities fraud over an alleged plot to pocket more than $12 million from the sale of phony shares.
Regulators first caught wind of some suspicious behavior at FusionPharm back in 2014—enough to suspend trading of its shares, along with that of four other businesses. But there were no criminal charges filed against the company until this month.
The case is moving ahead at an auspicious moment, with a growing number of states edging toward legalizing marijuana for recreational use and thereby opening the floodgates for corporate capitalism to assert a grip on weed in America. As the industry lumbers from straight-up criminality toward a hazy, quasi-legal status (with an infusion of cash from Wall Street and Silicon Valley), some companies have begun to list on major and minor stock exchanges around the country, providing the public with the opportunity to essentially invest in the future of weed—for better and for worse.
The details of the alleged corporate conspiracy in Colorado are arcane, to put it mildly. According to the charging papers, executives William Sears and Scott Dittman, Sears's brother-in-law, manufactured fake shares by forging documents funneled through dummy corporations they controlled. Shares in hand, Sears and Dittman then allegedly sold the stock on the public market, using the proceeds to line their own pockets before pumping some of the cash back into FusionPharm in order to provide the illusion of revenue.
Rinse and repeat, and you've got yourself a serious cash cow.
To put it in the simplest possible terms, Sears and Dittman stand accused of tricking investors into buying stock in FusionPharm when the company's financial health was a fabrication. The alleged fraud is not nearly as massive as in the case, say, of the Bernie Madoff Ponzi scheme or recent Wells Fargo shenanigans, but it does involve a healthy amount of cash in America's favorite new industry.
Attorneys for Dittman and Sears—who each face up to up to five years behind bars for conspiracy to defraud—did not return voice mail messages from VICE requesting comment on the case.
FusionPharm's main business was supposed to consist of converting old shipping containers into hydroponic grow houses that could be used for pot—or, theoretically, other stuff. "They had a good idea, and they had units," Jason Spatafora, a marijuana savvy investor who runs Marijuanastocks.com, told VICE. Spatafora says he invested $10,000 in the company, buying shares on the over-the-counter market, or pink sheets.
He eventually lost about 75 percent of his investment, Spatafora claims.
"When their financials came out, they looked awful," he told me. "But, the stock traded up, and I took a closer look and was like: What the fuck is this? The financials might as well [have] been done in crayon."
At the time, to weed out bad stocks and shit companies, Spatafora would often meet with execs in person. But the SEC suspended trading of FusionPharm's stock the same day Spatafora flew to Colorado to meet with Dittman, the CEO, he told me.
Spatafora added that he never met the guy, and when he arrived at FusionPharm's offices, it was eerily quiet. "I met some employees, one of who I think was the brother of the CEO," Spatafora told me. "He just had that look of, 'We're totally fucked.'"
Despite the appeal of marijuana as a potentially massive emerging industry, many new investors—who may or may not have ever been stoned—don't seem to understand it. That leaves plenty of room for greed to rear its head. "The industry has arrived," said attorney Matt Kumin, a veteran San Francisco–based attorney who's worked extensively on marijuana cases. "It's engaging in the same types of crimes that other industries are engaging in. It shouldn't surprise anyone."
Along with the alleged crooks, there are also dozens of pot businesses that are legit-as-can-be given the current regulatory environment. It's possible to make pharmaceutical-themed marijuana investments on NASDAQ, for example, though not in a company that is directly growing and selling bud. Over-the-counter markets, where FusionPharm traded (think Wolf of Wall Street penny stocks), are teeming with businesses that produce equipment the cannabis industry uses to grow and process marijuana; they are considerably riskier than stock on a major index like NASDAQ, however.
In addition to the public markets, there is a fast-growing cadre of venture capital projects of all shapes and sizes looking to cash in on widely anticipated legalization in major markets such as California, and existing ones like Colorado, Oregon, and Washington State.
Even though most public marijuana businesses shy away from handling weed directly, some do not. In early 2015, the feds granted a request from California-based Terra Tech, a company directly involved with growing and selling marijuana, to register its stock for sale to investors. Other businesses closely involved with marijuana, such as Aquarius Cannabis, have filed similar requests with the SEC.
But with the good comes some bad. That the alleged scheme engaged in by FusionPharm executives is as complex as it is unexciting is sort of the point: Corporate-misbehavior Americans have become accustomed to has seeped into what was once a clandestine—and fun!—industry.
Today, it's looking like the marijuana criminal kingpins of the future might be more adept at boardroom hijinks and stock market manipulation than smuggling dope in a Cessna across the border.
"FusionPharm strikes me as kind of garden-variety securities fraud, and that the marijuana industry is stable enough to have garden-variety securities fraud at this point shows it's mainstream," said Matt Kaiser, a seasoned white-collar criminal defense lawyer. "It's the same way you see investment fraud in other industries, which is cool today and probably won't be in two years. It will be just how the world is."
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