Cannabis stocks scandals
Although the cannabis stocks are in the early stages of a secular or long term trend, it is advanced in terms of the short term cycle. As a result, when I spoke to an investment conference in Frankfurt, Germany last October, I pointed out that one of the features I expected to see at this stage of the cannabis stock cycle was likely to be scandal in the cannabis group. Little did I know that within a few months, two of the presenting companies at the conference would be forced to show their founding managers the door: the presenters for Ascent Industries (CSE: ASNT) and Aphria (TSX: APHA) (NYSE: APHA) along with their respective co-founders would soon be gone under a cloud of allegations and suspicions. I have also reported to you about similar events at Bonify and Namaste (TSXV: N).
If you’re getting your investment advice over your backyard fence or from a stranger in line at the grocery store, be careful. The chances of your money being stolen by a crooked shark are increasing by the minute.
The mother of all stock scandals might have been uncovered and it is known on the street as BridgeMark which involves cannabis, cryptocurrency and mining stocks. From our perspective, it involves public cannabis companies listed by the British Columbia Securities Commission (BCSC) including: Abattis Bioceuticals (CSE: ATT), Affinor Growers (CSE: AFI), Beleave (CSE: BE), Liht Cannabis (CSE: LIHT), PreveCeutical Medical (CSE: PREV) and Speakeasy Cannabis Club (CSE: EASY). I have to disclose that everything else that follows in this report is my understanding of events as nothing has tested by a regulatory or legal process. Also there is no implication that the companies involved were perpetrators of the scheme. When more details are known, it will likely show the companies were victims of the scheme.
How did the scheme work?
ABC Company wants to raise $1 million.
ABC is told BridgeMark will get them $1 million they want provided ABC will accept $5 million and after hiring BridgeMark or a BridgeMark associate, pay them $4 million as a consultant.
The $5 million financing is done under the “consultant’s exemption.” This “exemption” enables BridgeMark to trade their private placement shares immediately.
ABC is told they can report the private placement was fully or over-subscribed creating excitement among their shareholders, such news will draw attention to ABC and create liquidity for ABC shareholders that will attract new investors for ABC.
Once BridgeMark subscribes for $5 million and gets paid $4 million as a consulting fee, ABC puts out a Press Release saying the $5 million offering was fully (or over) subscribed without telling shareholders that $4 million was paid back to BridgeMark netting ABC only $1 million.
At this point BridgeMark has only $1 million invested in ABC. So without a four month hold period and while there is some excitement surrounding ABC, BridgeMark starts selling stock. The price doesn’t matter because after they have sold $1 million worth of ABC stock, every additional share sold is money to the good for BridgeMark. That is why the shares of many of the cannabis companies on the BCSC list are trading for pennies a share.
The bottom line for four of the participating public companies as reported by deepdive.ca was that BridgeMark paid out a total of $17.9 million in private placements, the four participating companies paid $15.3 million back to the BridgeMark group that then sold shares of the participating companies worth $8.8 million for a “profit” of $6.2 million on the scheme. The price didn’t matter to the sellers. Each dollar went to the “bottom line” of the scheme. To access the deepdive.ca report (click here)
Who is involved in BridgeMark?
Scheme’s like this attract strange bedfellows. The names that have come to the surface in allegations include among others: (1) a person jailed in Germany for illegal market manipulation (2) a former stock broker turned stock promoter following the footsteps of his mother (3) a former NHL hockey player, his receptionist and his brother-in-law (4) a City of North Vancouver manager and CPA (5) his daughter and her husband who is named as a central figure in the whole scheme. Here is how that shakes out.
Aly Babu Husein Mawji and his wife Fufiza Babu Husein Mawji-Esmail appear to be among the central figures in this scheme. Mawji was found guilty of illegal market manipulation in Germany in 2012 and spent three years in jail. Although the BCSC is attempting to ban Mawji from trading, promoting, consulting and acting as a director or officer with any issuing company or registrant, it is a little like shutting the barn door after the horse has gone.
Justin Edgar Liu of Lukor Capital Corp. is also named. Liu lists a residential address in West Vancouver that is the same address as his mother, May Joan Liu who is a well-known penny stock promoter going back to the Vancouver Stock Exchange days. Both are involved in operating cannabis stores in B.C.
Cameron Paddock is a retired NHL hockey player who enjoyed a worthwhile ten year career with the St. Louis Blues. Also named are Paddock’s receptionist Danilen Villanueva and his brother-in-law Ryan Venier, a dentist in Abbotsford.
Then there is Kenneth Tollstam CPA, a full time, long time City of North Vancouver manager who moonlighted as a director and/or employee of ten companies headquartered at the same address as BridgeMark. Tollstam’s LinkedIn profile lists his position as Chief Administrative Officer of the City of North Vancouver but makes no mention his roles with small, public companies. Meanwhile, the records of the small public companies going back to 2014, don’t mention his pre-retirement job with the City of North Vancouver.
Tollstam’s daughter is a realtor with Macdonald Realty in West Vancouver and is married to Anthony Kevin Jackson CPA, who is the principal of BridgeMark. Ironically, the day Tollstam and his daughter closed the purchase of the oceanfront mansion was the same day the BCSC implicated Anthony Kevin Jackson as the main man in this massive scheme.
Conclusion: I think we are at the stage of the cannabis stock cycle when more scandals come to light. Also we have not heard the last of BridgeMark. This is probably just the tip of the iceberg and it could get worse. Much worse. So this is not a time to be less careful; it is a time to be most careful. What this means is you should be careful how you invest in cannabis and where you get your advice. Stick with professionals who work for major brokerage or financial planning firms and are properly registered as registered representatives or investment advisors.
In my days as an investment advisor and portfolio manager, we emphasized ‘trust.’ Only listen to people whose investment advice you trust. You might like your neighbour but can you really believe his or her investment advice? You might have all the confidence in the world in your dentist but should you take his or her investment advice? I don’t think so.
The low hanging investment advice in cannabis stocks has been picked. From now on, security selection is going to be critical to investment success. So you should even consider your professional registered investment advisor. Cannabis is a relatively new and specialized area. Does your advisor’s firm have the analytical and trading resources you need to invest in cannabis? Has your advisor had an interest in cannabis and does he or she know how to take advantage of the opportunities that are out there?
Things never stay the same in the markets. Looking ahead you need to be able to avoid the pitfalls like BridgeMark. We are entering a period in which the profit potential from investing in cannabis is still exceptional but it will be much harder to reap the rewards.