The U.S. Securities and Exchange Commission is going to take CV Sciences (OTCQB:CVSI) to court, alleging the company and its CEO Michael Mona Jr. are guilty of fraud.
According to the suit filed in the federal court of Nevada last Friday (June 16), Mona and the company’s reports for the first two quarters of 2013 overstated their actual assets.
The defendant “materially overstated the company’s total assets in quarterly reports for the first and second quarters of 2013,” according to a press release from the US commission.
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When the company completed the acquisition of PhytoSphere Systems and its rights under contracts with hemp production and processing facilities, the SEC claims Mona was aware of a “substantially inflated” purchase price of $35 million.
“CannaVEST agreed to the purported purchase price only because CannaVEST could pay for the acquisition primarily with CannaVEST shares which Mona believed had little value at the time,” the complaint documents from the SEC read.
According to JD Supra, CannaVEST paid 5,825,000 restricted shares and $950,000 in borrowed cash to acquire PhytoSphere in 2013.
Response from CV Sciences
The company released a letter from Mona addressing all shareholders in response to the SEC’s actions. In the letter, Mona said the company stands behind the PhytoSphere acquisition and their financial reporting in 2013. He added the company will “vigorously defend this matter.”
The SEC is charging Mona with a permanent injunction, civil money penalties, an officer and director bar, and reimbursement of a $10,000 cash bonus.
Alan Brochstein, a cannabis financial analyst with 420 Investor, originally seemed dubious of the very same deal that the SEC is challenging now– a statement he repeated in writing for New Cannabis Ventures.
Cannabis legal expert Hilary Bricken told the Investing News Network (INN), the criminal investigation could escalate “if the SEC determines it has grounds to bring criminal charges for investor fraud.” She said punishment could go anywhere from a freeze of trading to jail time even for securities fraud.
“[I]f the judge finds Mona and his company liable, they’re looking at civil injunctions and monetary penalties that could be pretty huge,” she said in an email.
CV Sciences issued a press release on Monday (June 19) regarding an investigational new drug meeting it held with the FDA on June 15, the same day the SEC placed its lawsuit in the federal court of Nevada.
Brochstein told INN in an email he spoke to the company’s CFO, Joseph Dowling and expects the company will “defend itself vigorously.”
Mona is still listed as the founder and CEO of the company at the time of publication. His bio indicates he is “a recognized industry leader in hemp farming operations and chemical extraction.”
CV Sciences is a specialty pharmaceutical company that operates in two businesses sections: pharmaceuticals and consumer products. It specializes in the research of cannabinoid candidates for research and health products like hemp oils.
The company’s pipeline currently includes only one product, a chewing gum with nicotine and synthetic cannabidiol (CBD) to “support cessation of smokeless tobacco use and addiction.”
As a result, shares of CV Sciences took an 18.75 percent hit, dropping it to a new low of $0.240 at closing time on Monday.
Update: This story was updated to include CV Science’s letter to shareholders. In its original form, the story incorrectly stated the legal action from the SEC was filed on June 16.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.