August 2, 2021

Volume XI, Number 214


August 02, 2021

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SEC Enforcement Victory in its Efforts to Police Cannabis Industry Investments

As the cannabis industry continues to evolve and generate capital raising and investment opportunities, the SEC Division of Enforcement will continue to closely keep watch and target the bad actors that new market opportunities such as this inevitably and unfortunately attract.  Along those lines, investors looking to purchase stock in supposed cannabis company, Covalent Collective, may have found vindication in the recent judgment against Geoffrey Thompson, of Frankfurt, Illinois. Thompson is now permanently barred from engaging in the issuance, purchase, offer, or sale of any security, except in connection with his own personal account.  On January 20, 2021, the United States District Court for the Northern District of Illinois (Case No. 1:20-cv-05205), ruled in favor of the United States Securities & Exchange Commission (SEC), in connection with its complaint targeting Thompson.  Although Thompson did not admit or deny the allegations, he consented to the entry of the final judgment against him, which also ordered him to pay over half a million dollars collectively in disgorgement, prejudgment interest and civil penalties.

The SEC had alleged Thompson diverted over $2.7 million of funds from approximately 500 investors while serving as CEO of Covalent, a Canadian corporation operating out of Longmont, Colorado.  The company, the SEC alleged, offered several different investments, each connected to Covalent common stock, which offering was never registered with the SEC.  Covalent also “never commenced revenue-generating” operations.  Investors were said to have been lured in by the company’s use of unregistered broker-dealers, audio updates that Thompson recorded himself, a call center maintained by another of Thompson’s companies, Fortress Legacy LLC, and other fraudulent investor-facing solicitations, including press releases, and a public website.  The complaint also detailed Covalent’s and Thompson’s failure to provide financial statements in connection with Covalent common stock or promissory notes sold by Covalent’s subsidiary Advantameds, or to require such noteholders to be accredited investors.

According to the complaint, Thompson moved promptly on to raise funds for a new cannabis-related venture after Covalent sought his resignation upon discovering his acts of misappropriation.  Not only had he directed the use of Covalent funds to pay himself, his wife, and other companies he owned, the complaint alleges he also failed to keep other Covalent officers informed as to the status of the company’s response to an SEC subpoena targeting Covalent and the same misconduct that ultimately formed the basis of the lawsuit against Thompson.

The SEC previously sued Thompson in September 2017, alleging he sold several million dollars in unregistered securities and overstated the financial performance and records for a health care services entity he owned, Accelera Innovations Inc.  He likewise paid over $500,000 to resolve that case and was subject to a five-year bar on serving as an officer or director of a public company or from offering penny stocks.

The case is a reminder that investors are often at a heightened risk for exploitation when opting to invest in ventures related to new “hot” markets, such as the growing marijuana-related market. With the cannabis marketplace’s continuing expansion, investment opportunities will abound for business ventures seeking capital.  While many of these opportunities may be legitimate, history teaches us that individuals with ulterior motives and checkered pasts also gravitate to these marketplaces.  Along those lines, this case also serves as a reminder about recidivists about whom information may have been available regarding previous troubles with the SEC at the time of the Covalent offering and the importance of conducting reasonable due diligence, such as public records searches about the principals and promoters of start-up ventures in new markets.  The SEC has and will continue to caution potential investors to beware of scam artists, promises of inflated (but likely unobtainable) returns, and price manipulation, as such unlawful conduct is always a priority for the SEC Division of Enforcement regardless of the agenda of a particular SEC Chair.

© 2021 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.National Law Review, Volume XI, Number 27

About this Author

James G. Lundy, Drinker Biddle, regulatory investigations lawyer, financial services compliance attorney

James G. Lundy represents clients in Securities and Exchange Commission (SEC), Commodities Futures Trading Commission (CFTC), self-regulatory organization, and other financial regulatory agency investigations and examinations, and compliance and governance counseling, white collar criminal investigations, and complex business litigation.

With 12 years of senior SEC experience and more than two years of in-house experience at a futures and securities brokerage firm, Jim has developed an in-depth working knowledge of the various...

David W. Porteous Corporate Attorney Faegre Drinker Biddle & Reath Chicago, IL

David Porteous routinely counsels clients in the investment management, broker-dealer and financial services industries on regulatory matters including examinations, investigations and enforcement proceedings as well as complex civil and securities-related litigation. In addition, he assists clients in developing and implementing compliance and regulatory risk management plans and represents clients in complex civil and securities litigation.

Regulatory Agency Background

Before entering private practice, David was a staff attorney in the Securities & Exchange Commission...

Emily L. Seymore Commercial Litigation Attorney Faegre Drinker Biddle & Reath Chicago, IL

Emily Seymore advises clients through a variety of commercial litigation matters. She also handles regulatory counseling and white-collar criminal defense, including individual officer/director representation and corporate internal investigations.

Emily has experience assisting clients through the various stages of commercial litigation in federal and state courts, including claims arising from breach of contract, fraud and misrepresentation, shareholder disputes, unfair and deceptive business practices, securities, and alleged violations of the Foreign Corrupt Practices Act. She...