SEC Charges Cannabis Company and CEO with Fraud

The U.S. Securities and Exchange Commission (SEC) on Thursday charged cannabis cultivation and distribution company American Patriot Brands (APB), its chief executive officer Robert Y. Lee, and five other entities and individuals with fraud. The agency also charged current and former executives Brian L. Pallas and J. Bernard Rice and APB subsidiaries DJ&S Property #1 LLC, TSL Distribution LLC, and Urban Pharms LLC.

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The SEC alleges in the complaint that the defendants raised more than $30 million from more than 100 investors and enriched themselves by funneling the money into their personal accounts and spending tens of thousands of dollars on executives’ personal expenses.

The SEC claims Lee, Pallas, and Rice, since at least mid-2016, made false and misleading statements to investors about various aspects of APB, including its financial condition, the scope of its operations, the value of its Oregon cannabis farm, and the safety and security of investing in the company.

In a statement, Carolyn M. Welshhans, associate director of the SEC’s Enforcement Division, said “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.”

The complaint charges APB, Lee, Pallas, Rice, DJ&S Property #1 LLC, TSL Distribution LLC, and Urban Pharms LLC with violating the antifraud provisions of the federal securities laws. The lawsuit 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.

The complaint was filed in the United States District Court for the District of Puerto Rico.