The U.S. Securities and Exchange Commission (SEC) said it has settled with the former CEO of a leading CBD company who was charged with fraud.
Martin Sumichrast, who stepped down as CEO of cbdMD Inc. in June 2022, was accused of self-dealing and defrauding investors through a number of undisclosed and unauthorized transactions as the head of the now-dissolved investment fund Stone Street Partners LLC.
The SEC and Sumichrast asked the United States District Court for the Western District of North Carolina to either stay the SEC’s lawsuit in the case or dismiss the action without prejudice while they continue to work on their undisclosed deal.
Fudging the numbers
The illicit transactions included manipulating figures in cbdMD’s balance sheet to boost the value of a stock offering, and doubling Sumichrast’s salary, the SEC alleged. The SEC said in its case that between 2013 and 2014, Stone Street raised $3 million through the sale of 300,000 Class B shares to 16 investors at $10 per share. Sumichrast and partner Rick Siskey gave themselves 450,000 Class A shares of Stone Street for free, the SEC said.
Court documents show that in 2015, Stone Street held a second offering, raising an additional $8.73 million through the sale of 582,000 Class A shares, at $15 per share, to around 52 investors. The B shares were converted to A shares following that round. Sumichrast and Siskey ended up owning roughly 50% of the company, the SEC claims.
The SEC further alleged that Sumichrast began to borrow money from Stone Street and then repay it with worthless stock in cannabis and vape companies. Stone Street’s cash on hand had dwindled dramatically, shrinking from $2.8 million as of Dec. 31, 2015, to $176,497 as of Dec. 31, 2017, according to court documents.
Tax dodge alleged
When Sumichrast was CEO of cbdMD, the company bought 2.5 million shares of pharma company NuGene International. The SEC alleges that, after NuGene began struggling financially, Stone Street bought cbdMD’s NuGene shares as a way to improve the balance sheet for cbdMD ahead of an IPO that raised more than $12 million.
CbdMD continued to reward Sumichrast with more shares, causing him to incur a big tax bill, according to the SEC. “As part of his plan to offset this taxable income, Sumichrast transferred these shares to Washington Capital, another entity that had a suspended taxable loss from its Stone Street shares. Sumichrast then had Washington Capital transfer those shares to Stone Street for $645,000,” SEC alleged.
The SEC claims that Sumichrast never discussed any of the transactions with the other Stone Street investors.
Questions over ‘adviser’
U.S. District Judge Frank D. Whitney denied an SEC request for a summary judgment in the government’s favor last October.
In seeking that judgment, the SEC said Sumichrast had admitted to making the transactions and acknowledged that some were designed to boost cbdMD’s initial public offering. “Sumichrast admits engaging in all of the transactions alleged in the Complaint, without first making the disclosures required by the Advisers Act or obtaining the necessary consents,” according to the SEC, which added that Sumichrast “knew or should have known” he was violating the law with those transactions.
But the judge said whether Sumichrast was an investment adviser is an open question. Sumichrast had argued he was not an adviser, and therefore the SEC’s claim he failed to make proper disclosures under the Investment Advisers Act should be dismissed.
Sumichrast and the SEC told the court they expect to file settlement papers no later than May 24.
Partner’s suicide
Sumichrast’s former business partner, Siskey, was a disgraced financier who was sued by the federal government over a Ponzi scheme operation in 2015 in which he was accused of making numerous unauthorized trades that hurt his investors but benefited himself. That scheme was also operated under the Stone Street investment fund.
At the time Sumichrast was initially targeted by the SEC, his lawyer said the cbdMD CEO was being scapegoated after the agency failed to stop Siskey’s Ponzi scheme.
Siskey killed himself in December 2016 shortly after being contacted by federal investigators, and no criminal charges were ever filed in his case. Sumichrast, who was not involved in the original Ponzi scheme, was left as Stone Street’s sole manager until the damaged company’s dissolution in 2020.
Plunging fortunes
Charlotte, North Carolina-based cbdMD, a victim of the massive CBD crash that has lingered through the last several years, lost roughly $116 million on revenues of $104 million for the years 2021-2023 combined.
Shares in cbdMD reached as high as $289 in May 2019. The stock price closed yesterday at $1.01.
