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Death penalty, chewing gum, a property in Jamaica: Lawsuits run the gamut

Hemp Industry News
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Back in autumn 2018, investors began piling into U.S.-based India Globalization Capital, Inc., (IGC) which had announced in September of that year the startup of a CBD beverage called Nitro G. The company had been touting a distribution deal with a partner in Malaysia that would make the business go. IGC eventually raised $30 million in a secondary offering on the New York Stock Exchange.

Due diligence: By October 29 of that year the NYSE had delisted IGC’s common stock, flagging the company for promoting ventures the “success of which is problematical” after analysts pointed to a flaw in the company’s plans. As a class action lawsuit filed against IGC in November 2018 described the strategic weakness: “Plaintiffs alleged that the company failed to disclose to investors that cannabis was illegal and punishable by death in Malaysia.”

That’s only one of the more colorful among pending federal class action lawsuits against cannabis enterprises in U.S. courts in which investors are crying over the money they lost blindly chasing risky stocks. 

Meanwhile, as the hemp industry wobbles like any other toddler, everybody from independent farmers to big, loud public companies find themselves before the judge these days.

Standard fare

The claims such as those against IGC are standard fare in the public markets, particularly those companies traded as penny stocks. They generally fall into the “made materially false and misleading statements” category, with companies and their executives sued for allegedly lying about this or that, or forgetting to disclose some fundamental problem, causing stock prices to drop.

Here are some other legal cases in the hemp and CBD sectors, most of which continue to wind their way through federal courts under U.S. securities laws:


CV Sciences

Chewing gum conundrum

Plaintiffs allege U.S. CBD maker CV Sciences made misleading public statements about the status of a patent application for a CBD chewing gum. The patent was later rejected, hitting CV’s share price. (Filed August 2018)


Aphria, Inc.

Some property in Jamaica

Investors allege Canada-based Aphria, Inc. paid C$193 million (US$137 million) for a bundle of assets in Jamaica, Argentina and Colombia that have “virtually zero worth.” Plaintiffs say the deal’s real purpose was to help executives siphon money from the company through a web of other deals. (Filed December 2018)


Sundial Growers, Inc.

What licenses?

A plaintiff group is seeking up to $4 million from cannabis producer Sundial Growers, Inc. of Canada through a lawsuit alleging the company misled them regarding the potential for CBD sales through its acquisition of Bridge Farm, a UK-based ag firm. The plaintiffs say Sundial claimed the British company held hemp farming and export licenses when in fact it did not. Sundial is also facing a number of suits in the marijuana space. 


Greenlane Holdings, Inc.

Puff puff-ery

Greenlane Holdings, Inc. has been targeted with a lawsuit for allegedly failing to disclose that the city of San Francisco was planning to ban e-cigarettes, after touting its relationship with JUUL, a San Francisco-based e-cigarette maker, causing a drop in Greenlane’s share price. (Filed September 2019)


Paragon Coin, Inc.

Ka-ching!

Paragon Coin, Inc. of the U.S, which says it is incorporating blockchain technology into the cannabis industry, is alleged to have sold tokens that were not registered as securities. The lawsuit is yet unsettled, but SEC has in the meantime settled other charges against Paragon over its initial coin offerings, imposing a $250,000 fine and ordering investors compensated. (Filed January 2018)


Zynerba Pharmaceuticals

How do you feel now?

Investors allege that Zynerba Pharmaceuticals, a CBD maker, mischaracterized the results of clinical trials of a transdermal CBD gel, Zygel, causing shares to suffer. Plaintiffs claim the company reported that the gel was well-tolerated among subjects who participated in the trial, while in truth nearly all patients in the trial reported mild to serious adverse effects, and eight patients discontinued the trial altogether. (Filed October 2019)


Tilray

Authentic losses

Petitioners say Canadian cannabis giant Tilray violated federal securities laws by inflating the potential of a revenue sharing agreement signed with Authentic Brands Group (ABG) in March 2019. The plaintiffs say Q4 2019 results later showed charges of $112.1 million “related to impairment of the ABG agreement.” Tilray reported net 2019 losses of $321.2 million, or $3.20 per share. (Filed April 2020)


Canopy Growth Corporation

Gelatinous

Shareholders say Canopy Growth, also of Canada, misled them on the potential for a line of soft gels and oils, saying on a conference call that demand for the products was strong as late as November 2019. That eventually led to a restructuring charge of CA$32.7 million (US$23.2 million) due to poor sales, excessive returns and a bloated inventory. (Filed November 2019)


Hemp Inc.

A marathon 5 years running

Hemp Inc. is the target of an ongoing federal case by the U.S. Securities & Exchange Commission (SEC) in which it is charged with violating securities laws. The original 2016 SEC complaint against the company and three executives charges them with committing a long-running fraud and running an illegal scheme to sell unregistered stock. A Nevada federal judge in April 2020 upheld sanctions against the three executives.


Bad seeds, dumb cops and trouble in Kentucky

While public companies had their share of legal troubles, private enterprises also are finding themselves the subjects of claims by stakeholders as litigation in the cannabis, CBD and hemp sectors proliferates. The cases reflect the wide range of potential pitfalls at this formative stage of the industry: 


American Hemp Seed Genetics

Is that mold?

Nevada-based Industrial Hemp Manufacturing LLC (a subsidiary of Hemp Inc. – see above) sued American Hemp Seed Genetics LLC (AHSG), an Oregon company for $700,000 over a seed contract signed in April 2018, claiming that an initial shipment for which it paid $70,000 contained dead and moldy seeds, while others had a germination rate of only 24%. IHM was to sell $700,000 worth of American Hemp Seed Genetics’ seed under an arrangement between the two companies. AHSG in March 2020 lost an appeal to dismiss the lawsuit on jurisdictional grounds, so the case continues.


Up in smoke again

Oregonized Hemp Co. LLC and owner Justin Pitts filed a $2.5 million lawsuit against Josephine and Jackson counties in Oregon, alleging that police seized more than two tons of legal industrial hemp from his warehouse, then later destroyed the crop thinking it was marijuana. At least 5,000 pounds of plant material was seized from the greenhouse during the raid, which Pitts said was legal industrial hemp with THC concentrations at or below 0.3 percent. The lawsuit, filed in April 2020, charges civil rights and due process violations.


Earth Animal Ventures

Pet supplies

CBD supplier Sage Fulfillment sued the pet product distributor Earth Animal Ventures in Connecticut for allegedly reneging on a purchase agreement, claiming revenue losses of $4.8 million in a total $5.95 million deal. In the suit, filed in April 2020, Sage claims Earth Animal failed to live up to its commitment to buy a minimum of 400,000 units of its CBD gel and applicator after purchasing only 75,000 units.


Facing down the Sheriff

Licensed California hemp grower Apothio LLC filed a federal lawsuit against Kern County Sheriff Donny Youngblood, California Department of Fish and Wildlife Director Charles Bonham, their agencies and other county and state officials over the destruction of nearly 500 acres of hemp plants the grower says are worth $1 billion, according to the lawsuit. The federal suit, filed in April, called authorities’ actions “one the largest wholesale destruction of personal property by government entities in the history of the United States.” 


GenCanna

Troubles in Kentucky

Bankrupt hemp processor GenCanna faces a number of lawsuits after the Kentucky company collapsed late last year:

  • Integrity/Architecture, Lexington, Kentucky; general contractors Pinnacle Inc., Benton, Kentucky; and Crawford Sales, a door maker based in Evansville, Indiana, say GenCanna owes them a combined $50,000.. 
  • Lexington Certified Public Accounting firm Dean Dorton claims GenCanna owes it more than $500,000.
  • Agro firm Furnwood Farms is in arbitration with GenCanna after filing a lawsuit seeking $5 million last October due to losses resulting from the late delivery, and questionable quality, of cultivation seeds as well as changes in the wording of agreements made by GenCanna.
  • A group of construction and other contractors filed liens against property owned by the Industrial Authority of Mayfield-Graves County which is under lease to GenCanna. The contractors claim in their lawsuit, filed in October 2019, that GenCanna owes them $13 million related to a processing plant construction project in Mayfield, Kentucky.

Seed deal fails to sprout

Wisconsin hemp seed seller Legacy Hemp LLC is suing Canadian hemp firm Terramax after it tried to terminate a distribution deal for industrial hemp seed in the U.S., claiming Terramax is trying to move distribution rights to another hemp company. The conflict involves questions over which states Legacy was granted rights for distribution of Terramax’ X-59 hemp seeds. The suit was filed in March 2020.


Bluegrass BioExtracts

Organizational matter

In another case in Kentucky, a group of farmers in April filed a $69 million class action lawsuit in U.S. federal courts, alleging Bluegrass Bio-Extracts, Owensboro, Kentucky, and owners Gerald Edds and Bruce Peters, committed fraud and violated the U.S. Racketeer Influenced Corrupt Organizations (RICO) Act by breaching a contract to buy their 2019 hemp crops.


Prohibition Partners

Slanderous affair

American cannabis research firm New Frontier Data sued UK research group Prohibition Partners (PP Intelligence Ltd) and cannabis investor Andy Defrancesco in 2019 for “assault libel and slander” in a dispute involving rights to research and written analysis in a report on cannabis investments. The case is reported closed, but no details are publicly available.


Problem from the start

GX Farms of California sued H.E.M.P. Group of Colorado for $17 million in January 2020 over a batch of hemp seeds that failed to germinate as promised. GX said it paid $364,000 for 520,000 seeds in spring 2019. According to the suit, GX Farms paid another $25,000 to a broker who promised a germination rate of 99%. GX Farms alleges it lost $3.5 million to $17 million in potential income. 


And one at the end

Oregon agri-company Jefferson State Farms has sued a cooperative for $11 million, claiming the group failed to harvest its crops as promised. Jefferson State alleges unlawful trade practices and breach of contract against Palex Enterprises, Hemp Warehouse and Great Horizons LLC, and four individuals. The farm company said it paid the co-op $136,000 as a down payment to schedule its hemp harvest, which never happened. Jefferson State claims $86,000 of that down payment has yet to be returned.


Plow it under

CBD maker Elemental Processing of Kentucky filed a $44 million lawsuit against HP Farms of Oregon, claiming HP sold it a batch of 6 million seeds that were mostly male, causing a massive crop failure in 2019 as farmers to whom Elemental distributed the seeds had to plow their hemp fields under. Elemental says it paid about $352,000 in advance for the seeds and had agreed to pay $3.5 million more or 15% of its profits from the harvested flowers. (Filed September 2019). 


CBD American Shaman LLC

Heavy metal

A group of plaintiffs are seeking class action against American Shaman LLC of Missouri, claiming CBD they purchased from the company contained lead and other contaminants. The complaint accuses American Shaman of falsely advertising its CBD products as being free of heavy metals and insecticides. (Filed May 2020)


SOURCES: Goodwin Procter, Law 360, Reuters, Bloomberg Law


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