A pair of cannabis industry executives defrauded investors of at least $4 million, according to a federal grand jury indictment unsealed Tuesday, which claims the two trotted out a phony CEO who didn’t actually make any business decisions, manipulated the company’s stock price for their own benefit, fraudulently inflated the firm’s financials, and blew a six-figure sum on a luxury vehicle rather than the IPO roadshow for which it was originally intended.
Vitaly Fargesen and Igor Palatnik of CanaFarma Corp., a publicly traded New Jersey-based outfit that describes itself as a “fully integrated, multi-faceted Hemp products brand company,” are now facing multiple counts of securities fraud and wire fraud for their alleged misdeeds. Fargesen, 52, is listed on the company’s website as the firm’s senior vice president of strategic planning. Palatnik, 47, is listed as CanaFarma’s senior vice president of product acquisition. However, Fargesen and Palatnik in fact “exercise[d] secret control” of CanaFarma, the indictment states, accusing the two of hiding their real roles behind a “purported CEO” who was subservient to them.
In a statement released Tuesday, U.S. Attorney Audrey Strauss said, “Vitaly Fargesen and Igor Palatnik presented themselves as entrepreneurs developing a new business for an emerging industry. But, as alleged, Fargesen and Palatnik were just using the trappings of a start-up to run an old-time scam: lying to investors to take money for themselves.”
ADVERTISEMENT
The Securities and Exchange Commission on Tuesday also filed a complaint against CanaFarma, charging Fargesen and Palatnik with violating antifraud provisions of federal securities law.
The duo is accused of serious wrongdoing that echoes somewhat another case now making news. Last week, Ozy Media collapsed after the startup was exposed for, among other things, allegedly having a company co-founder impersonate a YouTube exec during a due diligence call with Goldman Sachs, lying about a pending deal with Google, and leading producers, guests, and others to believe that an Ozy television show being produced would air on A&E and not Ozy’s YouTube page, where it eventually appeared. On Tuesday, a fund management company that invested more than $2 million in Ozy’s business sued the company for what it called “fraudulent, deceptive and illegal conduct.”
CanaFarma’s alleged scheme began around October 2018, when Fargesen and Palatnik began the process of acquiring a dormant Canadian shell company through a straw purchaser, the indictment explains. A couple of months later, they approached two people identified in court filings as “Co-conspirator 1”(CC-1) and “Co-conspirator 2,” (CC-2), “with the idea of founding a company based on hemp-derived products,” the filing says. Fargesen and Palatnik told CC-1 and CC-2 that they had access to overseas investors who had agreed to provide “millions of dollars” to get the business up and running.
In March 2019, the team launched CanaFarma Corp. And although Fargesen and Palatnik held modest titles, they “maintained complete control over CanaFarma, including all investor fundraising, all company funds, and all corporate decisions,” according to the indictment. That same month, Fargesen and Palatnik “hired the Purported CEO,” who served “as the face of CanaFarma,” but “reported directly to” them, it says. The so-called CEO “did not have access to the company’s bank accounts or a seat on the Board of Directors,” and executed Fargesen and Palatnik’s wishes, according to the filing.
CanaFarma’s first product was a hemp-infused CBD chewing gum called Yooforic, followed by hemp-based CBD tinctures and skin creams. CanaFarma didn’t manufacture Yooforic, but marketed it under the CanaFarma label as part of a licensing deal, says the indictment. In April 2019, Fargesen and Palatnik started negotiations with a commercial partner to grow hemp and build a processing plant. The partner company leased a farm in Dutchess County, New York to make good on the deal, harvesting 128,000 lbs. of hemp. But CanaFarma allegedly stiffed the grower, funneling $2 million to another, unnamed hemp grower instead. (A package of Yooforic appeared in a music video for Jamaican rapper Sean Paul’s 2019 song, “When it Comes to You.”)
It was around this time that CanaFarma began to solicit investors in a private placement round, raising some $14 million through June 2020. Investor presentations were sent out by the “purported CEO,” at the direction of Fargesen and Palatnik, according to the indictment. But the materials were riddled with false and misleading statements, say prosecutors: That the company’s “strong management team” was instead led by a CEO who had no say in CanaFarma’s operations. That CanaFarma did not grow and produce its own products, as the company claimed, but relabeled goods made by others. And that CanaFarma misled investors about the size of its marketing budget, inflating the real figure by at least $1.4 million, “which was secretly misappropriated by Fargesen, Palatnik, CC-1, and CC-2,” states the indictment.
But they didn’t stop there, prosecutors claim. Fargesen and Palatnik allegedly used the marketing budget to pay overseas affiliates to prop up CanaFarma’s stock price. They then used false invoices to account for millions in nonexistent expenditures that instead went into their own bank accounts. In early 2020, Fargesen and Palatnik allegedly used funds they said would be financing pre-IPO meetings with various investment banks on personal expenses instead, including “an approximately $100,000 down payment on a luxury vehicle.”
In June 2020, CanaFarma announced plans to “use its expertise in Cannabinoids” to develop its own version of hydroxychloroquine, the drug pushed relentlessly by former President Donald Trump during the COVID pandemic that did not actually work against COVID.
As of Tuesday afternoon, Palatnik does not have a lawyer listed in court records. However, Fargesen’s attorney, Jeffrey Lichtman—whose client list has featured boldfaced names including notorious drug lord El Chapo, Mafia scion John Gotti Jr., and cult leader Keith Raniere—said he thinks prosecutors have missed the mark.
“This indictment comes at the end of a multi-year investigation and contains allegations from two rogue employees who, as soon as the investigation began, ran to the government and began cooperating solely to save their own skins,” Lichtman told The Daily Beast. “As we have told the government, we do not believe any crime was committed other than the plundering of the business by the two rogue employees.”
If convicted on all counts, Fargesen and Palatnik each face a maximum of up to 65 years in prison.
