After the close on Friday, the SEC announced that it has filed suit against Michael Mona, Jr., CEO of CV Sciences (OTC: CVSI) and the company, which was formerly known as CannaVest. In the litigation release, the SEC asserts that the purchase of the PhytoSphere Systems assets in 2013 from Medical Marijuana, Inc. (OTC: MJNA) was followed by accounting fraud, with the assets reported at an inflated $35mm in the company’s financial statements. According to the SEC, the company received a third-party valuation of just $8mm later in 2013 but didn’t write down the asset value until 2014.
In the complaint, the SEC states that “Mona knew that CannaVEST was paying substantially less than $35 million to acquire the PhytoSphere business, that PhytoSphere was not worth $35 million, and that CannaVEST would have never agreed to the purported purchase price if CannaVEST were required to pay cash for PhytoSphere.” In what was one of my first cannabis stock articles in 2013, I came to this conclusion as well and also questioned how MJNA was able to book this as “revenue”.
The complaint also suggests that “Mona did not obtain any financial information on PhytoSphere, did not perform any valuation on PhytoSphere, and did not conduct due diligence on the acquisition.” The SEC is seeking payment of civil penalties from both CV Sciences and Mona, return of a $10,000 bonus for 2013 paid to Mona as well as other bonuses and equity-based compensation, and to bar Mona from acting as officer or director of a public company. The SEC still has an open fraud complaint against Bruce Perlowin of Hemp, Inc. (OTC: HEMP) that was filed a year ago.