SEC sues cannabis co. that sold $3.2M in fraudulent securities in Puerto Rico
The Securities and Exchange Commission charged American Patriot Brands Inc. (APB), a cannabis cultivation and distribution company, its CEO, and five other entities and individuals for their participation in a long-running scheme in which they raised more than $30 million from more than 100 investors across the country and siphoned off millions of those funds to enrich themselves.
Starting in approximately July 2019 through March 2020, APB offered $30 million worth of convertible promissory notes to investors located in Puerto Rico. Ultimately, the offering raised more than $3.2 million from 47 individual investors, according to the case filed in the United States District Court for the District of Puerto Rico.
The offering was promoted by a broker-dealer through a “private placement,” a type of securities offering that can only be promoted to “accredited” investors, those who are sophisticated and have a high net worth, according to the court document.
According to the SEC’s complaint, since at least mid-2016, APB, its CEO Robert Y. Lee, and current and former executives Brian L. Pallas and J. Bernard Rice made a series of false and misleading statements to investors about various aspects of the company, including its financial condition, the scope of its operations, the value of its Oregon cannabis farm, and the safety and security of investing in APB.
The complaint alleges that APB funneled millions in investor proceeds to the APB executives’ personal accounts and spent tens of thousands of dollars on the executives’ personal expenses.
To convince investors that APB was a large cannabis company with expanding operations, the company falsely told investors that it had dispensaries, farms, and customers in other states and countries and would be operating a cannabis business in Puerto Rico through a company called PR-One.
The local chain of events
In April 2018, APB claimed that PR-One would be operating retail cannabis stores in Puerto Rico, had already completed four asset acquisitions, and was projected to generate revenue in the third quarter (July – September) of 2018. PR-One reported to the Puerto Rican government in both 2018 and 2019 that it did not own any property.
In addition, more than a year after PR-One was supposed to be generating revenue from cannabis sales, APB conceded that PR-One had not grown any cannabis or opened any cannabis dispensaries, according to the court claim.
On March 9, 2019, Lee emailed “Investor 5” claiming that, in Puerto Rico, APB had 2,700 acres of cannabis under “Cultivation and Export now” and that, in Curaçao, APB had a “300 acre export cultivation ready to go, Aruba right behind,” according to the document.
“Lee further claimed that APB had a million-pound purchase order from a Canadian buyer. Because the United States classifies cannabis as a Schedule I controlled substance, it would have been illegal for APB to import or export cannabis to or from Canada, Curaçao, or Aruba. Moreover, APB had not directly, or through PR-One, grown cannabis in Puerto Rico,” the SEC’s claim stated.
APB had also paid Castro Business Enterprises LLC (CBE) more than $2 million for costs and expenses associated with CBE’s purchase of real property in Puerto Rico, none of which was titled in the name of APB or PR-One, the entity through which APB was purportedly conducting a Puerto Rican cannabis business.
In the offering, APB claimed it would use investor funds to purchase 40% of PR-One and failed to disclose that it had already paid more than double the cash component of the purchase price for a 40% interest in PR-One. APB continued to claim that PR-One owned property that would be operated as cannabis dispensaries, but PR-One reported to the Puerto Rican government in 2019 that it owned no property.
Of the millions that APB paid to PR-One or on its behalf, at least $1.1 million was taken by Lee in petty cash, more than $140,000 went for apartment rentals in Puerto Rico (at least one of which was an apartment for Lee), and additional amounts went to pay Lee’s living expenses.
Despite the millions in payments to PR-One, as of late 2021, APB claimed that it had no ownership interest in PR-One and APB has received little to nothing in exchange for its millions.
In late 2017 and early 2018, Lee and Pallas caused APB to pay more than $2 million to CBE, which CBE used to purchase real property in Puerto Rico. The property CBE purchased was not titled in the name of APB or PR-One, the entity APB claimed it was using to develop real property in Puerto Rico into cannabis dispensaries.
“As the SEC complaint alleges, American Patriot Brands Inc. and some of its senior executives fabricated business profits and prospects to entice investors with falsehoods that in the end left investors with essentially worthless securities,” said Carolyn M. Welshhans, associate director of the SEC’s Enforcement Division.
“This action reflects the SEC’s ongoing commitment to holding accountable those who seek to profit through lies and deception,” said Welshhans.
The complaint charges APB, Lee, Pallas, Rice, and APB subsidiaries DJ&S Property #1 LLC, TSL Distribution LLC, and Urban Pharms LLC with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief, disgorgement with prejudgment interest, civil penalties, and officer and director bars against Lee, Pallas and Rice.
The complaint names as relief defendants, and seeks disgorgement with prejudgment interest from, three affiliated entities (Legion Accounting Services, Inc., Puerto Rico One Corp., and Castro Business Enterprises LLC.) that allegedly received millions in investor proceeds, according to the SEC release.
