SEC indicts CanaFarma founders on securities fraud

By Hank Schultz

- Last updated on GMT

©Getty Images - Valery Evlakhov
©Getty Images - Valery Evlakhov

Related tags Fraud stock fraud Securities & Exchange Commission

The US Securities and Exchange Commission has indicted CanaFarma hemp and its two cofounders with fraudulently raising about $15 million from investors, and misappropriating approximately $4 million of that for personal and nonbusiness purposes.

The two principals, Vitaly Fargesen and Igor Palatnik, allegedly raised funds from investors for their Vancouver, CA-based publicly traded startup.  According the SEC complaint, the pair mislead investors to believe that theirs was a vertically integrated company when in fact it purchased all of its hemp products from third parties.

Misstated revenue, bogus projections

The complaint also alleges that financial information provided to investors misstated historical revenue numbers and included baseless projections about future revenues.  In addition, according to the complaint, Fargesen and Palatnik misappropriated at least $4 million and used the funds for their personal use and purposes unrelated to CanaFarma. 

“As alleged in our complaint, the defendants pitched investors with falsehoods about a fully integrated hemp company with rosy financial projections”​ said Richard R. Best, Director of the SEC’s New York Regional Office.  “We will relentlessly pursue those who deceive investors and misappropriate and misuse their funds.”

The SEC complaint alleged that CanaFarma leased two farms and grew hemp crops at those locations in 2019 and 2020, but the hemp harvested there was stored and never used.  Rather, the hemp oil in its Yooforic brand of hemp oil infused chewing gum came from another source, and the gum itself was manufactured by a third party.

The complaint also noted that CanaFarm brought in about $3.1 million in revenue from June through November of 2019 but sales started into a free fall at the end of that period. By June of 2020 monthly revenues were down $26,000, but investors were never made aware of the true sales picture.

The SEC complaint seeks permanent injunctions, disgorgement of ill gotten gains and prejudgment interest, and civil penalties against the defendants, and also seeks to bar them from offering future penny stocks. 

Merger, acquisition deal unravels

In a complicated deal announced last week CanaFarma was to acquire the assets of Avitas Bio​, a manufacturer of dietary supplements based on herbal extracts.

Another company, Vertical Wellness, was reportedly in process of merging with CanaFarma in an attempt to gain access to the public markets.  Vertical Wellness markets CBD products under the Kathy Ireland brand. But a Vertical Wellness spokesperson told NutraIngredients-USA today that the deal had not progressed to the point that Vertical Wellness had spent a significant amount of money on due diligence.

“We are surprised by the allegations against CanaFarma and named executives.  Neither Vertical Wellness nor any of our advisors, attorneys, or those we work with every day, had any prior knowledge about this situation.  We hope that CanaFarma can work through these issues and the truth will subsequently come to light,”​ said J. Smoke Wallin, chairman and CEO of Vertical Wellness.

“Vertical Wellness, a separate corporate entity, will continue to expand our business as planned. Vertical Wellness has created or acquired several long-planned health and wellness brands; we are full speed ahead launching our CBD beverages and exciting products in the category.  We will naturally evaluate strategic options in light of today’s allegations,” ​he concluded.

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