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SEC Charges Marijuana Stock Investors With Fraud

By Bill Alpert

April 17, 2020 11:52 am ET

A Massachusetts financier arranged to bring public a cannabis social-media company and then manipulated trading in its stock so he could unload his shares, a complaint by the Securities and Exchange Commission alleged last week. Douglas H. Leighton and a group of friends made more than $3 million when they later sold their shares of the stock, MassRoots, alleged the commission, with the group accounting for more than 60% of MassRoots trading in the week it came public in 2015.

The 51-year-old Leighton and his six co-defendants agreed to settle the SEC fraud charges, without admitting or denying them, by paying about $1.5 million in disgorgement and penalties. Subject to approval by the federal court in Boston, the agreement calls for Leighton to be barred from the securities industry, from holding office at a public company, or from trading in penny stocks.

“Over the past year, we have fully cooperated with the SEC’s civil inquiry into the trading of MassRoots’ securities,” Leighton’s lawyer Alan Rose Jr. told Barron’s in an email.

MassRoots (ticker: MSRT) described itself as “a semi-anonymous mobile network” where people could discuss cannabis use. While it said it had one million users for its software app, its securities filings showed that its business model of selling ads has never yielded more than a few hundred thousand dollars in cumulative revenue while producing tens of millions in losses. In its first month of trading in April 2015, MassRoots stock price briefly topped $7, giving the company a market value of $350 million. At that point, its cumulative revenue had totaled $1,465.

Today, MassRoots shares go for 0.14 cent each in over-the-counter trading, and the company‘s last securities filing in March 2020 said it lacked the funds needed to complete its accounting for the 2019 year. Barron’s queries to the company went unanswered.

Starting in the mid-1990s, Leighton had been a prolific penny-stock financier who found tiny companies, became their consultant, and got millions of shares in their stock before helping them come public. His firm Dutchess Capital claimed it had helped more than 400 companies raise $1 billion in all.

As more states began to legalize marijuana under their own laws in the past decade, penny-stock promoters sensed a new story to pitch retail investors. The major U.S. exchanges wouldn’t list cannabis stocks because of the weed’s federal illegality, but micro-cap stock names began trading over-the-counter in the U.S. and Canada several years before the marijuana stock bubble that accompanied Canada’s 2018 legalization.

The SEC’s complaint said that MassRoots came to Leighton’s attention in 2013. He invested $50,000 in the business and became its consultant for coming public, said the SEC. In return, Leighton and his firms received the rights to 23% of MassRoots stock, the complaint said. He instructed the company to hire certain brokers, lawyers, auditors, and stock promoters, while putting additional shares in the hands of associates through a private offering, the SEC added.

The complaint alleges that Leighton orchestrated his associates’ trading to artificially boost the stock’s price before unloading his own shares. The SEC alleged that Leighton and his confederates should have made Form 13-D filings that showed they were acting as a group.

According to the SEC’s suit, Leighton’s trading group made most of its money in the year after MassRoots’ public listing in April 2015, but it continued to profit from its alleged scheme through 2018, By then, the company had come to the attention of better-known investors in the accelerating marijuana industry.

A July 2018 securities filing by MassRoots registered 51 million shares the company had sold in the previous year to a number of investors.

Write to Bill Alpert at [e-mail]

https://www.barrons.com/articles/sec-charges-marijuana-stock-investors-with-fraud-51587138778