Risk & Compliance

Marijuana Firm Charged With $12M Stock Scam

The SEC says the CEO of Fusion Pharm and his brother-in-law recorded the proceeds of illegal stock sales as revenue for the company.
Matthew HellerSeptember 19, 2016

The CEO of Fusion Pharm and his brother-in-law have been charged with using about $1.3 million they obtained through illegal stock sales to create phony revenue for the marijuana container company.

The U.S. Securities and Exchange Commission said Scott Dittman, a former CPA, and his brother-in-law William Sears engaged in a $12.2 million microcap fraud that involved issuing restricted Fusion Pharm common stock to companies controlled by Sears, illegally selling the shares into the public market and then transferring some of the proceeds to Fusion Pharm so they could be recorded as revenue.

Fusion Pharm sells PharmPods, containers that have been refurbished to grow cannabis. According to an SEC civil complaint, it was funded from 2011 through 2013 “almost entirely through illegal sales” of stock.

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In addition to the civil case, Dittman and Sears, who allegedly acted as an undisclosed Fusion Pharm executive officer, are facing related criminal charges of securities fraud. They have agreed to settle the civil charges, with monetary sanctions to be determined at a later date.

“Sears and Dittman misled investors by recording and trumpeting revenues for purported sales of PharmPods when they were really just round-tripping money from illegal stock sales by hidden affiliates,” Julie K. Lutz, director of the SEC’s Denver regional office, said in a news release.

Sears was previously convicted in 2007 of conspiracy to commit securities fraud and commercial bribery. According to the SEC, he and Dittman took over an existing public company in late 2010, changing its name to Fusion Pharm in March 2011.

According to the SEC, Fusion Pharm used backdated convertible notes and preferred stock to issue common stock to three companies controlled by Sears. The shares were allegedly sold illegally into the public market for $12.2 million, with the companies’ connection to Fusion Pharm not being disclosed to investors.

By falsely reporting about $1.3 million in proceeds from the stock sales as revenue, the SEC said, Dittman and Sears were able to boost Fusion Pharm’s stock price and make the alleged fraud “even more profitable.”