SEC accuses founders of Canadian hemp company CanaFarma of securities fraud

The Securities and Exchange Commission has accused CanaFarma Hemp Products Corp. and its co-founders for fraudulently raising around $ 15 million from investors and embezzling a “significant portion” of the funds for personal and other unrelated purposes.

CanaFarma CNFA,
a small Canadian cannabis company listed on the Canadian Stock Exchange, announced in July its intention to merge with Vertical Wellness, a U.S. company specializing in cannabinoid-based wellness and health products, as part of a deal that would make Vertical the first CBD brand house to go public. The case is not yet concluded.

Smoke Wallin, CEO of Vertical, said he and his team were taken aback by the fraud accusations, which only came to light when the SEC released his statement.

“Neither Vertical Wellness nor any of our advisers, lawyers or people we work with on a daily basis had any prior knowledge of this situation,” he said in a statement. “We hope that CanaFarma can resolve these issues and that the truth will eventually be revealed. “

Vertical had not completed all due diligence on the transaction and the company is now evaluating all of its options. “We had checked the public records and nothing turned out to be problematic, but we weren’t done with it,” Wallin told MarketWatch on Wednesday.

Wallin said Vertical will continue to execute its business plan, while considering its next steps. Model turned entrepreneur Kathy Ireland, who offers a line of CBD wellness products Vertical is expected to launch later this year, continues to support the business, he said.

The The SEC complaint alleges that CanaFarma co-founders Vitaly Fargesen and Igor Palatnik have made false statements to investors, including claiming that the company is processing hemp on its own farm, when it actually uses hemp supplied by third parties.

The complaint also states that the financial information provided to investors distorted historical income and included unfounded projections for future income. Fargesen and Palatnik embezzled at least $ 4 million and used the funds for their personal use and for purposes unrelated to CanaFarma, the SEC said.

The SEC complaint has been filed in the U.S. District Court for the Southern District of New York and accuses CanaFarma, Fargesen and Palatnik of violating anti-fraud provisions of federal securities laws.

“The SEC is seeking permanent injunctions, restitution and prejudgment interest, as well as civil penalties against the defendants, and is also seeking officer and director and penny stock bullion against them,” the SEC said in a statement. communicated.

Separately, federal grand jury indictment unsealed on Tuesday claim the pair also made false statements to investors using a bogus CEO who did not make trading decisions.

“For example, the alleged CEO did not have access to the company’s bank accounts or a seat on the board of directors, and worked directly for Fargesen and Palatnik, sending emails and signing contracts exclusively under their direction. “, did he declare. The pair also used $ 100,000 of funds raised from investors as a down payment for a luxury car, instead of the promised marketing activities, he said.

“Vitaly Fargesen and Igor Palatnik presented themselves as entrepreneurs developing a new business for an emerging industry”, US lawyer Audrey Strauss said in a statement. “But, as it is claimed, Fargesen and Palatnik were simply using a startup’s traps to launch an old-fashioned scam: lying to investors to take money for themselves.”

CanaFarma shares last traded at 8 cents.

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