GrowLife Shareholder Settlement Offers Reforms, Little Cash
By Ben Conarck
Law360, New York (April 22, 2015, 5:09 PM ET) -- Corporate governance reforms ranging from term limits to annual compliance training, but little in promised cash, are among the terms in a proposed settlement filed Tuesday in California federal court to soothe claims over an alleged stock manipulation scheme run by executives of medical marijuana equipment supplier GrowLife Inc.
The agreement would institute a number of governance reforms for at least five years but only allows for monetary compensation of up to $150,000 in legal fees, from which a $1,000 incentive might be drawn, according to the plaintiff's memo in support of a motion for preliminary approval.
It settles a shareholder derivative action accusing GrowLife CEO Sterling Scott, President Marco Hegyi and three board members of running a self-dealing scheme that spurred the U.S. Securities and Trade Commission in May to warn investors of a spike of complaints around marijuana investments and potentially illegal trading activities amid a trading halt of five pot-linked companies over two months.
Plaintiff Steve Roof, in his memo in support of the proposal, cited the benefit to the company achieved by reducing the risk and expense of further litigation.
“In addition to ensuring that the wrongdoing alleged will not occur again, the reforms in the settlement will significantly enhance shareholder value by improving GrowLife’s corporate governance and internal controls,” the memo said. “This will help to restore GrowLife’s credibility in capital markets, and to capture the premium investors pay for strong corporate governance.”
Roof accused GrowLife officials of quietly selling themselves hundreds of thousands of shares in the company, then dumping some in a flurry of sales, spurring the SEC trading halt.
After the halt, GrowLife’s business partners severed ties with the company. The events “slashed the value of its stock” once trading resumed and put into question the “long term viability of the company,” the complaint said.
The corporate governance measures include steps to strengthen board independence through new guidelines, employment restrictions, term limits and the addition of an independent director. The settlement also calls for improving board competence through training exercises, bonus and profit forfeitures following financial restatements, and other considerations.
Roof said in the memo the settlement will “provide value to GrowLife for years to come.”
“For example, a number of the corporate governance reforms directly address GrowLife’s oversight of its revenue recognition and financial risks and are designed to bring formality, accountability and legal oversight to the process and thus avoid a recurrence of the alleged misconduct,” the memo said.
Negotiations first sprang to life in October 2014 and soon proceeded to mediation, according to the memo. A memorandum of understanding to settle the action was signed in December 2014, it said.
Counsel for the parties did not immediately respond to requests for comment Wednesday.
Steve Roof is represented by Edward W. Miller of Lifshitz & Miller and Marc G. Reich and Adam T. Hoover of Reich Radcliffe & Hoover LLP.
Individual GrowLife defendants are represented by John R. Armstrong II of Horwitz & Armstrong LLP.
The case is Roof vs. Scott, et al. case number 2:14-cv-03777, in U.S. District Court for the Central District of California, Western Division.
