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An investor in the parent company of California cannabis brand Bloom Farms has sued the company, alleging “a pattern of deception” and financial mismanagement. The case calls for the company to improve its business practices.
Plaintiff Jeff Menashe is CEO of Demeter Group, a boutique investment banking firm serving cannabis and alcohol companies. He filed the suit last week in the Delaware Court of Chancery “derivatively on behalf” of Bloom parent American General Resources LLC (AGR) where he is a board manager. The defendants are Bloom Farms CEO Michael Ray, Chief Strategy Officer Vladimir Efros and AGR.
Menashe’s attorney Gerard Fox said the case should put all cannabis businesses on notice that they need to improve their professional standards. Cannabis is “big business now,” Fox said and companies shouldn’t operate as if they’re “one step ahead of getting busted.”
The lawsuit alleges the defendants misled Menashe about AGR before his investment vehicle DG BF invested $5M in June 2019. According to the suit, AGR made representations that the Series D financing would raise at least $15M and that Bloom Farms would reach positive monthly net income in November 2019 and increase each month after.
The representations turned out to be “a farce,” the suit says. The Series D financing closed with $12M in new equity, including Menashe’s $5M, according to the case.
“He saw that money evaporate,” Fox said.
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Within a month of the $5M investment, the suit claims, AGR revised down its historical monthly net income for each month between January and May 2019 an average of about $161,000. AGR also moved the date for positive net income forward to May 2020.
Prior to the investment, the suit says, AGR did not reveal that “a federal securities fraud case was brewing” against its then-chief financial officer Ron Roach, who was responsible for preparing Bloom’s financial projections.
In October, Roach pleaded guilty to two federal counts of securities fraud related to a solar energy “Ponzi scheme.” The project, separate from AGR, cost investors and taxpayers $1B, according to the U.S. Justice Department.
Following his invesment, the plaintiff says he sought a forensic audit of AGR’s finances, among other requests about AGR management. “However, Menashe’s demands have fallen on deaf ears,” the case says.
The suit further alleges AGR failed to follow standard corporate governance practices such as holding regular board manager meetings, keeping meeting minutes and issuing monthly financial reports.
In a statement from a company spokesperson, Bloom Farms declined to comment on Menashe’s “unfounded” claims. The company called itself “one of the most respected cannabis companies in the United States with a long history of doing what’s right for its employees, partners, communities and investors.” It said it would “defend ourselves vigorously” against the “false allegations” that are meant to “damage our reputation.”
‘No end in sight’
The suit seeks a court order requiring the defendants to comply with AGR’s operating agreement. The case alleges they breached that agreement by failing to hold sufficient board manager meetings and keep minutes, among other shortcomings.
It also requests the court to appoint a custodian to supervise AGR’s business pending a decision in the case. Any such court order could come in a month or two, Fox, Menashe’s attorney, said.
If the case proceeds to trial, Fox said he would seek to recoup the $5M investment, and what Bloom should have generated if the business was properly run. Any such trial could take place in the fall.
Menashe wants “to see the company get its act together,” Fox said.