SEC Names Medford Cannabis Farm in $30 Million Securities Fraud Case

Joan McGuire

Federal investigators say American Patriot Brands, which owns the Urban Pharms cannabis grow in Medford, misrepresented the size and scope of its facility. 

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 The U.S. Securities and Exchange Commission has filed a complaint against the Nevada-based cannabis company American Patriot Brands that hinges in part on claims the company made about the size and scope of its Medford farm, Urban Pharms.

On March 16 the company and its CEO Robert Lee, along with five other parties, were charged with a “long-running scheme” in which, the SEC alleges, they defrauded more than 100 investors, raising more than $30 million.

According the official filing, previously reported on by MJ Biz Daily, Lee and former executives Brian Pallas and J. Bernard Ricebegan raising money from investors in 2016 by selling fraudulent security offerings.

“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,” the complaint reads. “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 complaint also alleges that executives siphoned “millions in investor funds” to two companies: one partly owned by Lee, and a second company company APB does not control. Officers also used the investment proceeds to pay themselves in totals which exceeded the total revenues APB generated from the sale of its cannabis products.

The complaint goes onto say that the executive “have also used investment proceeds to enrich themselves through payments that, in some years, vastly exceeded the revenues APB generated from the sale of cannabis products.”

The SEC also alleges that at the time of its filing, APB was still actively marketing securities to potential investors. The company also still has an active license with the Oregon Liquor and Cannabis Commission, which regulates Oregon’s legal cannabis sector.

According to public records, Urban Pharms incorporated as a limited liability corporation in Oregon in June 2015. American Patriot Brands appears to have acquired the farm in 2017.

Mark Pettinger, director of communications and education at the Oregon Liquor and Cannabis Commission, says the agency was not aware of the SEC filing against Urban Pharms. He also tells Oregon Business the company’s license is and will continue to remain in operation unless criminal charges are filed.

“Our agency only has administrative powers, as opposed to the Washington Liquor and Cannabis Board, which has criminal enforcement powers,” Pettinger says. “There was a recent case in Southern Oregon that involved the murder of a couple of licensees living in Houston, Texas. We had to stay out the investigation until the Jackson County Sheriff’s department office was done with it.”

SEC investigations are civil, not criminal, but the agency can refer cases to law enforcement or coordinate SEC investigations with criminal investigations involving the same conduct.

Lee has previously served as chairman of the video rental chain Video City and as chairman and CEO of U.S. Dry Cleaning, one of the largest operators of dry cleaning operations in the United States. The latter underwent Chapter 11 bankruptcy and successful reorganization between 2011 and 2013.

In 2012 Lee became chairman and interim CEO of The Grilled Cheese Truck, Inc., stepping into the role of permanent CEO in 2016. The company, formed in 2009 by two Los Angeles chefs, changed its name to American Patriot Brands in 2016.

In September 2019 the SEC issued an order of suspended trading against APB, saying the company had failed to comply with periodic filing requirements, resulting in “a lack of current and accurate information” concerning the company’s securities. In October of that year, the SEC issued another order revoking the registration of APB’s securities.

Pettinger says the SEC filing shows no sign of a “white hat/black hat” operation from Urban Pharms, referring to scenarios where growers hide an illicit cannabis growing operation behind a legitimate one. He says due to the financial nature of the allegations, the OLCC is unlikely to get involved.

The SEC declined to comment on the filing beyond the scope of the initial report.

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