2019: The Year of the Corporate Cannabis Lawsuit?

$20 million suit filed Jan. 8 by early investors alleges fiduciary irregularities by MedMen executives.

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LOS ANGELES – Cannabis 2019 appears to be picking up where 2018 left off, with lawsuits filed by investors or former employees against firms they once trusted, worked for, or both. A related narrative has been developing with each filing: As more cannabis companies go public and endure the glare of SEC-mandated filings, more lawsuits can be expected as a result of the complicated nature of these companies’ financial arrangements.

A lawsuit brought this week against MedMen Enterprises, its subsidiaries, and top executives alleges as much. In a complaint filed Jan. 8 in Superior Court in Los Angeles, original investors Brent Cox and Omar Mangalji describe MedMen as “a complex web of interconnected subsidiary entities, virtually all of which are directly managed, directed, controlled and owned by [CEO Adam] Bierman and [President Andrew] Modlin, and all of which always pursue the best interests of Bierman and Modlin, rather than the best interests of any stakeholder or entity.”

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Cox and Mangalji are founders of The Inception Companies and an investment entity called MMMG-MC, a minority investor in a previous MedMen entity on whose behalf the suit was filed. Individual allegations charge MedMen with retaliatory actions against Cox and Mangalji for trying to exercise a contractual right to acquire additional MedMen equity, as well as other behavior the plaintiffs believe warrant charges of direct or indirect breath of fiduciary duty.

MedMen denied any wrongdoing today in a point-by-point rebuttal of the charges calling the lawsuit “meritless,” and including a statement by MedMen senior vice president of corporate communications Daniel Yi alleging, “This is clearly and egregiously an attempt to devalue the shares of the enterprise for [the plaintiffs’] own personal gain at the expense of all other stakeholders.”

MedMen, which also faces a class action lawsuit brought in December by former employees alleging numerous violations of labor law, is not the only cannabis company facing legal challenges. In early December, following a harshly critical report of the company published by Hindenburg Research, “a slew of class-action lawsuits were filed against Aphria on behalf of shareholders that concerned Aphria’s recent acquisition,” reported The Motley Fool.

“And Aphria certainly isn’t the only pot stock to draw the ire of lawyers,” added the same article. “Before Aphria had a bull’s-eye on its back, Las Vegas, Nev.-based CV Sciences was a go-to for class-action law firms… You see, back in August, noted short-seller Citron Research released a report showing that patent application requests for this CBD-nicotine combo had been rejected by the U.S. Patent and Trademark Office. Yet, per the lawsuits and Citron, this rejection was never disclosed to shareholders.

Lawsuits also will be as varied as the state programs that help spawn them. Per New Cannabis Ventures reporting, “A former owner of a company that just missed out on a cannabis license award in New York in 2015 but then was later awarded a license in the second round in 2017, NYCANNA, is suing the company and several other defendants, including Acreage New York LLC, part of Acreage Holdings, a multi-state operator set to debut in public trading on the Canadian Securities Exchange next week. The complaint, filed on behalf of plaintiff EPMMNY LLC, alleges that the owner of 25% of NYCANNA, now doing business as Terradiol New York, made ‘concerted and illegal efforts to deprive Plaintiff of its rightful twenty-five percent (25%) share ownership of all of the equity.’”

“Acreage Holdings now owns the entire NYCANNA organization. According to the lawsuit, it lacks proper title to this ownership,” the article continued. “EPMMNY is seeking no less than $100 million to compensate it for sustained damages as well as punitive damages of at least $300 million.”

Buckle your seat belts. It looks like Cannabis 2019 is going to be a very litigious year.

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