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The parent company of California cannabis brand Bloom Farms defended itself and its leaders, after an investor sued over its business practices. In a court filing, the defendant called the investor’s demands baseless and unreasonable.
The lawsuit, filed last week in Delaware Court of Chancery against Bloom Farms‘ parent company, American General Resources LLC (AGR), made allegations about the company’s corporate governance and financial management. Plaintiff Jeff Menashe is CEO of cannabis and alcohol investment banking firm Demeter Group. The defendants are Bloom Farms CEO Michael Ray, Chief Strategy Officer Vladimir Efros and AGR.
AGR’s response called the lawsuit “Menashe’s latest attempt to force [AGR] to acquiesce to his unreasonable, self-serving demands.”
The initial suit alleges defendants misled Menashe about AGR before his June 2019 investment of $5M. 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 thereafter.
The Series D financing closed with $12M in new equity, including Menashe’s $5M, the suit says. Soon after the $5M investment, it states, AGR revised down its historical monthly net income for each month from January to May 2019 and moved the date for positive net income forward to May 2020.
It also says AGR did not reveal a federal securities fraud case “brewing” against the then-AGR CFO Ronald Roach involving a separate solar energy “Ponzi scheme.” Roach later pleaded guilty to two counts of federal securities fraud.
AGR’s Tuesday filing counters that the board of directors has periodically out-voted Menashe on business matters. It says he tried to gain more control over the company through further cash investment. But when negotiations hit an impasse, he “started swinging wildly for a litigation home run.”
According to the filing, Menashe has made “baseless demands” and tried to block AGR’s next round of investment capital. “He is leveraging this litigation and the chaos of a worldwide pandemic in an ill-conceived effort to gain control.”
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The Tuesday filing says AGR was valued at about $100M when it started its Series D financing in early 2019. But while the round was underway, various economic events forced it to revise its financial projections.
AGR says it made updated financial information available on June 25, 2019 — days after Menashe’s $5M investment on June 20, 2019 — and explained the basis of the revised financials and projections to him. While it initially planned to raise between $15M and $25M, the round closed at $12M, including the $5M from DG BF.
In the suit, Menashe alleges AGR ignored several requests he made including for forensic audits of company finances. AGR responds that the company operating agreement doesn’t oblige it to do so at the request of a single board member.
The lawsuit also objects to the company continuing to raise capital, without certain provisions. AGR responds that it can do so with majority board approval.
AGR says it has received verbal and written commitments of about $3.6M to $4.7M for its Series E financing.
AGR says there’s no basis for Menashe’s claims that the Series E financing violates the operating agreement or defendants’ fiduciary duties. According to the company’s response, the third-party audit Menashe requested would cost at least tens of thousands of dollars, when there is no foundation to establish financial fraud in the complaint and no contractual right to such relief.
The filing also criticizes “plaintiffs’ repeated emphasis on Ronald Roach” as “pure opportunism” and an “attempt to create guilt by association without a shred of evidence.” It notes a lack of allegations that Roach did anything improper in his tenure at AGR. Roach’s legal troubles arose at a different company, led by different management, the filing states. And he has been gone from AGR for about nine months.
Menashe’s attorneys said they plan to file a brief Thursday which will review issues involving AGR’s revised financials and concerns with Roach, according to Olga Viner, an associate with Menashe’s attorney Gerard Fox Law.
“I’m not concerned,” Fox said. As he sees it, Menashe invested the money, AGR put off his questions and didn’t comply with bylaws. For examples, the suit cites an absence of monthly financial reports, not enough board meetings and inadequate meeting minutes. “All he wanted were answers,” Fox said.
In a statement, Bloom Farms said its filing “makes clear that Menashe’s claims far exceed his documented rights as a director or shareholder.” It says he seeks remedies with no legal basis and that would be detrimental to the other shareholders he must represent as a board member, the company said.
The company said Menashe had recently sought to lead the current investment round on terms favorable to him, “but now sees the Company as rife with nefarious activity.” Bloom Farms pointed to commitments for new equity financing as evidence that “sophisticated investors with an understanding of the cannabis industry do not share Menashe’s concerns.”