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has not been contemplated. Vice cites the case of FusionPharm Inc., a Colorado company


that “promoted a triple green play — profits from the conversion of old shipping containers into greenhouses, primarily to culti- vate cannabis, which has struggled with a shortage of indoor space available for commercial-scale grow facilities,” theDenver Post reported. According to the US Securities and Exchange Commission (SEC), in September 2016, the company’s two owners “illegally sold restricted FusionPharm shares issued to three companies that [one of the owners] controlled, misleading brokers and raising US$12.2 million. Some of that money was funneled back to FusionPharm and reported as revenue from the sale of the company’s PharmPods containers. Investors, duped into thinking the company’s financial condition was stronger than it actually was, pushed up the share price, which got as high as US$8.70 on March 5, 2014, the SEC said.” The disputed stock sales and transfers occurred from April 2011 to May 2014. The accused all agreed to settle civil charges in return for


monetary sanctions, the SEC said. They also agreed to a ban on participating in any future penny-stock offerings and are perma- nently barred from serving as an officer or director of any public company. However, the criminal case against them for using about US$1.3 million they obtained through illegal stock sales to create phoney revenue for the marijuana container company is still pending. In addition to corporate fraud involving marijuana, another


potential problem Canada’s provinces — and their consumers — could face involves a central question: is the pot as potent as the sellers claim it to be? As California approached the January 1, 2018, date when pot


became legal in the state, NBC ran a report that shared what it described as “one of the marijuana industry’s dirty secrets.” Like most states that have legalized marijuana, NBC said,


California would require pot products to be tested for purity and potency. It interviewed an expert who said he could get some labs to give him more favourable results. “Industry insiders say lab fraud is an ongoing problem in states that already have rec- reational weed markets, and some warn it’s happening in California as growers and sellers search for testing companies that will give them the most favorable results,” NBC reported. Although California released rules requiring labs to show


they have the proper equipment, expertise and quality controls to accurately test pot products, “labs can’t all come into compli- ance with those rules overnight, and some in the industry say bad actors will still cheat unless the state comes up with a robust enforcement plan,” NBC said. Because the amount consumers pay for cannabis is, in part, determined by the percentage of THC in the product, many labs are willing to inflate the potency of their clients’ products to


keep their business, the expert NBC interviewed said. Vice also found that, despite tests requiring labs to reveal


potency and purity so consumers know what they’re buying, “the labs that conduct these tests are governed by rules that vary widely from state to state, and there are concerns within the industry that unscrupulous labs are operating without adequate oversight and colluding with growers to falsify results.” Vice had visited a testing lab in Washington state where it


uncovered inaccurate labelling on a package of legal marijuana. “We talked to a grower who says some labs have offered to inflate his marijuana’s THC content in order to make it more valuable — a practice he believes jeopardizes the future of the industry.”


While legit profit can be made from investing in marijuana, “most of the stocks you can buy today are complete dogs” Why is the marijuana industry likely to entice fraudsters? The


answer is the oldest in the book: the potential for enormous profits. High Times, a magazine that covers the pot industry, noted in an August 2017 article that in 2016 “sales from the North American cannabis industry came in around US$6.7 billion. By 2021, they are expected to exceed US$20 billion. That’s a compound annual growth rate of about 25%. That’s bigger and faster than what we saw back in the dot-com days. And it’s bigger than anything else you can get into today. But with this tremendous growth and opportunity comes the inevi- table conga line of hustlers and shady stock promoters.” Although it agreed that legitimate profit can be made from


investing in marijuana stocks, High Times concluded that “most of the cannabis stocks you can buy today are complete dogs.” For every legitimate player, “there are dozens of others that are nothing more than empty promises and pump & dumps.” Those who remember the heady days of the dot-coms, when promises fell short of results, will likely approach this booming industry with a degree of caution. But those who believe they failed to jump on the dot-com bandwagon might think they have to capitalize on every opportunity the marijuana hoopla offers. Just as caution should be used with marijuana, it should also be the buzzword before becoming involved in what is being touted as the next big financial thing.


DAVID MALAMED, CPA, CA•IFA, CPA (ILL.), CCF, CFE, CFI, is a partner in forensic accounting at Grant Thornton LLP in Toronto (linkedin.com/in/forensicaccountant)


FEBRUARY/MARCH 2018 | CPA MAGAZINE | 49


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