`
`RICHARD R. BEST
`REGIONAL DIRECTOR
`Sanjay Wadhwa
`Thomas P. Smith, Jr.
`Lee A. Greenwood
`John C. Lehmann
`Attorneys for Plaintiff
`SECURITIES AND EXCHANGE COMMISSION
`New York Regional Office
`Brookfield Place
`200 Vesey Street, Suite 400
`New York, New York 10281-1022
`212-336-1060 (Greenwood)
`GreenwoodL@sec.gov
`
`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`SECURITIES AND EXCHANGE COMMISSION,
`
` Plaintiff,
`
` -against-
`
`CANAFARMA HEMP PRODUCTS CORP.,
`VITALY FARGESEN, and IGOR PALATNIK,
`
` Defendants.
`
`
`
`
`
`
`
`
`
`
`COMPLAINT
`
`21 Civ. 8211
`
`
`
`
`
`
`JURY TRIAL DEMANDED
`
`
`
`
`Plaintiff Securities and Exchange Commission (“Commission”), for its Complaint against
`
`Defendants CanaFarma Hemp Products Corp. (“CanaFarma” or the “Company”), Vitaly Fargesen
`
`(“Fargesen”), and Igor Palatnik (“Palatnik”) (collectively, “Defendants”), alleges as follows:
`
`SUMMARY
`
`1.
`
`Defendants perpetrated an investment offering fraud through which they raised
`
`millions of dollars from investors for a start-up hemp company called CanaFarma on the basis of
`
`misrepresentations about how investor money would be used as well as misrepresentations about
`
`the Company’s business prospects.
`
`
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 2 of 22
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`2.
`
`CanaFarma’s stated business plan was to grow hemp at farms in New York and to
`
`sell hemp-based products such as chewing gum that it would market directly to consumers.
`
`3.
`
`From March 2019 through at least October 2020 (the “Relevant Period”),
`
`Defendants raised approximately $15 million from more than 60 investors around the world,
`
`including investors in the United States and in this District.
`
`4.
`
`Though investors were told their money would be used to fund CanaFarma’s
`
`business operations, beginning in at least April 2019, Fargesen and Palatnik—“vice presidents” on
`
`paper but the controlling persons of the Company in reality—misappropriated at least $4 million of
`
`investor funds from these raises, either for personal use or for purposes unrelated to CanaFarma’s
`
`business. Defendants concealed this misappropriation from potential investors through the use of
`
`doctored financial projections backed up by phony agreements and invoices that were intended to
`
`make the payments appear as if they were for legitimate corporate expenses.
`
`5.
`
`Additionally, Defendants made or disseminated to investors numerous other material
`
`misrepresentations and omissions about the Company and its business prospects. For example,
`
`through both written materials and oral presentations, Fargesen and Palatnik told potential investors
`
`that CanaFarma was a “fully integrated” company that was processing the hemp from its farms and
`
`using the resulting hemp oil in its products when, in reality, it had not processed any of this hemp
`
`and its products used hemp oil from third parties. Defendants provided financial information to
`
`investors that misstated historical revenue numbers and included baseless projections about future
`
`revenue that were unsupported by the Company’s own internal forecasts. And, Defendants touted
`
`the quality of CanaFarma’s management team, which was purportedly led by its CEO, Executive-1,
`
`while failing to state that, in reality, Executive-1 was CEO in name only, making no substantive
`
`decisions and taking direction from Fargesen and Palatnik.
`
`
`
`2
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 3 of 22
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`6.
`
`Investors paid as much as $0.50 for each share of CanaFarma stock they bought
`
`through Defendants’ securities offerings. Today, those shares are worth a fraction of what these
`
`investors paid.
`
`VIOLATIONS
`
`7.
`
`By virtue of the foregoing conduct and as alleged further herein, Defendants have
`
`violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77q(a)] and
`
`Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and
`
`Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
`
`8.
`
`Unless Defendants are restrained and enjoined, they will engage in the acts, practices,
`
`transactions, and courses of business set forth in this Complaint or in acts, practices, transactions,
`
`and courses of business of similar type and object.
`
`NATURE OF THE PROCEEDINGS AND RELIEF SOUGHT
`
`9.
`
`The Commission brings this action pursuant to the authority conferred upon it by
`
`Securities Act Sections 20(b) and 20(d) [15 U.S.C. §§ 77t(b) and 77t(d)] and Exchange Act Section
`
`21(d) [15 U.S.C. § 78u(d)].
`
`10.
`
`The Commission seeks a final judgment: (a) permanently enjoining Defendants
`
`from violating the federal securities laws and rules this Complaint alleges they have violated;
`
`(b) ordering Defendants to disgorge the ill-gotten gains they received with prejudgment interest
`
`thereon pursuant to Exchange Act Sections 21(d)(3), 21(d)(5) and 21(d)(7) [15 U.S.C. §§ 78u(d)(3),
`
`78u(d)(5), and 78u(d)(7)]; (c) ordering Defendants to pay civil money penalties pursuant to Securities
`
`Act Section 20(d) [15 U.S.C. § 77t(d)] and Exchange Act Section 21(d)(3) [15 U.S.C. § 78u(d)(3)];
`
`(d) permanently prohibiting Defendants Fargesen and Palatnik from serving as an officer or director
`
`of any company that has a class of securities registered under Exchange Act Section 12 [15 U.S.C.
`
`§ 78l] or that is required to file reports under Exchange Act Section 15(d) [15 U.S.C. § 78o(d)],
`
`
`
`3
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 4 of 22
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`pursuant to Securities Act Section 20(e) [15 U.S.C. § 77t(e)] and Exchange Act Section 21(d)(2) [15
`
`U.S.C. § 78u(d)(2)]; (e) permanently prohibiting Defendants Fargesen and Palatnik from
`
`participating in any offering of a penny stock, pursuant to Securities Act Section 20(g) [15 U.S.C.
`
`§ 77t(g)] and Exchange Act Section 21(d)(6) [15 U.S.C. § 78u(d)(6)]; and (f) ordering any other and
`
`further relief the Court may deem just and proper.
`
`JURISDICTION AND VENUE
`
`11.
`
`This Court has jurisdiction over this action pursuant to Securities Act Section 22(a)
`
`[15 U.S.C. § 77v(a)] and Exchange Act Section 27 [15 U.S.C. § 78aa].
`
`12.
`
`Defendants, directly and indirectly, have made use of the means or instrumentalities
`
`of interstate commerce or of the mails in connection with the transactions, acts, practices, and
`
`courses of business alleged herein.
`
`13.
`
`Venue lies in this District under Securities Act Section 22(a) [15 U.S.C. § 77v(a)] and
`
`Exchange Act Section 27 [15 U.S.C. § 78aa]. During the Relevant Period, CanaFarma maintained
`
`offices in Manhattan that Fargesen and Palatnik used for CanaFarma business and investor
`
`meetings. Additionally, certain acts, practices, transactions, and courses of business alleged in this
`
`Complaint occurred within this District, including Defendants’ meetings with potential investors and
`
`their sales of CanaFarma securities to at least 11 investors located in Manhattan as part of the
`
`fraudulent offerings that are the subject of this Complaint.
`
`DEFENDANTS
`
`14.
`
`CanaFarma is a Canadian corporation with offices in Vancouver, Canada,
`
`Morganville, New Jersey, and, during the Relevant Period, Manhattan. CanaFarma incorporated in
`
`June 2017 under the name KYC Technology Inc. (“KYC”). In March 2020, as part of a reverse
`
`merger, KYC acquired CanaFarma Corp. (“CF Corp.”), a privately-held Delaware corporation, and
`
`thereafter changed its name to CanaFarma. Beginning in March 2020 and thereafter, CanaFarma
`
`
`
`4
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 5 of 22
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`became listed on the Canadian Stock Exchange (“CSE”) (ticker: CNFA.CN) and the Frankfurt
`
`Stock Exchange (“FSE”) (tickers: 4K9.F, 4K9.MU, and 4K9.BE), and is quoted on an unsolicited
`
`basis on OTC Markets (ticker: CNFHF).
`
`15.
`
`Fargesen, age 52, resides in Englishtown, New Jersey. Fargesen is a co-founder of
`
`CanaFarma along with Palatnik, with whom Fargesen has worked on various business ventures for
`
`more than 20 years. During the Relevant Period, Fargesen was Senior Vice President of Strategic
`
`Planning at CanaFarma and, at various points, a member of the board of directors. In an indictment
`
`unsealed today, October 5, 2021, Fargesen was criminally charged by the U.S. Attorney’s Office for
`
`the Southern District of New York (“USAO SDNY”) with securities fraud, wire fraud, and
`
`conspiracies to commit both securities fraud and wire fraud in connection with the CanaFarma
`
`investment offering fraud described herein. See United States v. Vitaly Fargesen and Igor Palatnik, 21 Cr.
`
`602 (S.D.N.Y.) (the “Criminal Case”).
`
`16.
`
`Palatnik, age 47, resides in Marlboro, New Jersey. Palatnik is a co-founder of
`
`CanaFarma along with Fargesen, with whom Palatnik has worked on various business ventures for
`
`more than 20 years. During the Relevant Period, Palatnik was Senior Vice President of Product
`
`Acquisition at CanaFarma and, at various points, a member of the board of directors. Palatnik has
`
`also been charged in the indictment in the Criminal Case with securities fraud, wire fraud, and
`
`conspiracies to commit both securities fraud and wire fraud in connection with the CanaFarma
`
`investment offering fraud described herein.
`
`
`
`5
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 6 of 22
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`FACTS
`
`I.
`
`BACKGROUND ON CANAFARMA
`
`A.
`Founding of the Company
`
`17.
`
`Fargesen and Palatnik founded CanaFarma, which would be a “farm-to-table” hemp
`
`company that would grow its own hemp, process that hemp into hemp oil, and then sell products
`
`containing that hemp oil directly to consumers.
`
`18.
`
`Fargesen and Palatnik founded a private United States company first (CF Corp.) with
`
`the intention of then merging that private company into a Canadian shell company in order to
`
`enable the resulting company to be listed on stock exchanges both internationally and, ultimately, in
`
`the United States. This type of transaction is referred to as a “reverse merger.”
`
`19.
`
`Fargesen and Palatnik incorporated CF Corp. in March 2019. At that time, Fargesen
`
`was the president of CF Corp., while Fargesen and Palatnik were each 50% owners and directors.
`
`20.
`
`Using a strawman (a friend of Fargesen’s), in or about March 2019, Fargesen and
`
`Palatnik purchased a Canadian shell (KYC) from Canadian Bank-1.
`
`21.
`
`As of at least April 21, 2019, Fargesen and Palatnik each owned 10 million shares of
`
`CF Corp.
`
`B.
`
`22.
`
`Doctored Financial Projections
`
`In or about late 2018, Fargesen and Palatnik contacted Executive-2 and Executive-3
`
`to see if they would assist with the sales and marketing side of a hemp-based company, which
`
`became CanaFarma.
`
`23.
`
`Fargesen and Palatnik told Executive-2 and Executive-3 that they (Fargesen and
`
`Palatnik) had prior experience taking companies public, they had identified a public shell to be used
`
`for this process, and they had secured investor commitments.
`
`
`
`6
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 7 of 22
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`24.
`
`Executive-2 and Executive-3 used an existing company they controlled, Company-1,
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`to provide these sales and marketing services to CanaFarma.
`
`25.
`
`During the Relevant Period, Executive-2 and Executive-3 both served as Senior Vice
`
`Presidents of Sales and Marketing at CanaFarma.
`
`26.
`
`Company-1 provided sales and marketing services to CanaFarma pursuant to an
`
`agreement between Company-1 and CF Corp. dated as of April 22, 2019.
`
`27.
`
`The agreement between Company-1 and CF Corp. contained a financial model
`
`showing the projected revenue and expenses of CanaFarma over its first two years (the “Model”).
`
`Included in these expenses was a projected marketing budget for Company-1.
`
`28.
`
`Executive-2 and Executive-3 prepared initial drafts of the Model, which projected
`
`approximately $25 million in revenue for CanaFarma for its first year of operations.
`
`29.
`
`At the direction of Fargesen, however, the Model was changed to add approximately
`
`$1.35 million to the “set-up” and other near-term costs for the sales and marketing efforts of
`
`Company-1.
`
`30.
`
`Fargesen directed that these changes be made in order to disguise an expected series
`
`of payments to Fargesen and Palatnik and not for legitimate corporate expenses.
`
`31.
`
`Fargesen and Palatnik used the financial projections included in the Model to solicit
`
`potential investors in CanaFarma, including potential investors located in the United States, as is
`
`described more fully below.
`
`C.
`
`32.
`
`Fargesen and Palatnik Controlled CanaFarma
`
`Fargesen and Palatnik maintained complete control over CanaFarma during the
`
`Relevant Period. This meant, among other things, that Fargesen and Palatnik led and directed all
`
`fundraising from investors, all corporate decisions, and all disbursements of funds from Company
`
`bank accounts.
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`
`
`7
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 8 of 22
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`33.
`
`34.
`
`Fargesen and Palatnik hired Executive-1 as the Company’s CEO in March 2019.
`
`Fargesen and Palatnik told Executive-1 and others at CanaFarma that Executive-1
`
`would act as a mere figurehead CEO and would not make any actual decisions.
`
`35.
`
`CanaFarma maintained bank accounts at two banks during the Relevant Period—
`
`U.S. Bank-1 and U.S. Bank-2.
`
`36.
`
`Fargesen and Palatnik opened the CanaFarma bank account at U.S. Bank-1 in March
`
`2019 and were the only two people with signature authority on the account.
`
`37.
`
`38.
`
`Executive-1 opened the CanaFarma bank account at U.S. Bank-2 in April 2019.
`
`Though Executive-1 initially had signature authority on the CanaFarma bank account
`
`at U.S. Bank-2, Palatnik directed Executive-1 first to add Palatnik as a signer on the account on or
`
`about May 14, 2019, and then to remove Executive-1 as a signer on or about June 19, 2019.
`
`D.
`
`39.
`
`Products and Hemp Farms
`
`CanaFarma primarily sold a chewing gum containing hemp oil directly to customers
`
`during the Relevant Period.
`
`40.
`
`CanaFarma did not manufacture this product itself; rather, it obtained the product
`
`pursuant to a license agreement with a third party (Licensor-1), and then sold that product under its
`
`own brand name (“Yooforic”).
`
`41.
`
`42.
`
`CanaFarma leased two hemp farms during the Relevant Period.
`
`The first hemp farm, which CanaFarma leased from April to December 2019, was
`
`located in Dutchess County, New York.
`
`43.
`
`The second hemp farm, which CanaFarma leased from February 2020 through the
`
`end of the Relevant Period, was located near Syracuse, New York.
`
`44.
`
`Using investor funds, CanaFarma made a total of at least $3.5 million in combined
`
`payments for hemp “grows” at these two hemp farms in 2019 and 2020.
`
`
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`8
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 9 of 22
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`45.
`
`Though these farms grew and harvested hemp, CanaFarma did not process any of
`
`this hemp into hemp oil and, accordingly, did not use any of this hemp in any of its products during
`
`the Relevant Period.
`
`46.
`
`Instead, the hemp grown as part of the 2019 and 2020 grows that CanaFarma funded
`
`was kept in storage, unused.
`
`47.
`
`Licensor-1 used hemp oil purchased from a different source—that is, not the hemp
`
`grown at the farms licensed by CanaFarma—to produce Yooforic.
`
`48.
`
`On or about April 17, 2019, Fargesen told an individual with whom Fargesen and
`
`Palatnik were discussing CanaFarma’s business that CanaFarma was making payments to the first
`
`hemp farm “just for the story.” Palatnik was also present for this conversation.
`
`49.
`
`50.
`
`CanaFarma began generating revenue from the sales of its product in June 2019.
`
`During its first six months of generating revenue—June 2019 through November
`
`2019—CanaFarma generated a total of approximately $3.1 million in revenue.
`
`51.
`
`In September 2019, CanaFarma generated approximately $832,000 in revenue, the
`
`most revenue it generated in a single month during the Relevant Period.
`
`52.
`
`By February 2020, however, CanaFarma’s monthly revenue dropped to
`
`approximately $68,000.
`
`53.
`
`Thereafter, CanaFarma’s monthly revenue continued to drop, to approximately
`
`$44,000 in March 2020 and only approximately $26,000 by June 2020.
`
`54.
`
`Fargesen and Palatnik were aware of CanaFarma’s monthly revenue numbers during
`
`the Relevant Period.
`
`II.
`
`CanaFarma’s Securities Offerings
`
`55.
`
`During the Relevant Period, CanaFarma raised approximately $15 million from
`
`investors around the world, including in the United States, through two securities offerings.
`
`
`
`9
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 10 of 22
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`56.
`
`First, between March and November 2019, CF Corp. raised approximately $11.3
`
`million from investors through private sales of shares of CF Corp. (the “First Offering”).
`
`57.
`
`Second, in June 2020, CanaFarma raised more than $3.7 million from investors
`
`through private sales of shares of CanaFarma (the “Second Offering”).
`
`58.
`
`Between the two offerings, in March 2020, KYC completed its reverse merger with
`
`CF Corp. and became listed on the CSE and the FSE.
`
`59.
`
`At the time of the reverse merger, Fargesen and Palatnik still owned 10 million
`
`shares of CF Corp.
`
`60.
`
`After the reverse merger, Fargesen and Palatnik each owned 8,727,749 shares of
`
`CanaFarma.
`
`61. More than 60 investors located in seven states and ten countries invested in either
`
`the First Offering or the Second Offering, including at least 11 investors located in Manhattan.
`
`62.
`
`Executive-1, Fargesen, or Palatnik typically sent prospective investors in both
`
`offerings a subscription agreement, a business plan or investor presentation, and a shorter summary
`
`of the Company’s business and the investment opportunity (the “Investment Materials”).
`
`63. When Executive-1 sent the Investment Materials by email to a potential investor,
`
`Executive-1 typically wrote that Executive-1 did so at the request of Fargesen or Palatnik.
`
`64.
`
`In communications with potential investors, including in emails sending the
`
`Investment Materials, Executive-1 represented that Executive-1 was the CEO of CanaFarma.
`
`65.
`
`Fargesen and Palatnik then met or spoke with potential investors to pitch the
`
`Company and the investment opportunity. Certain of these meetings took place in Manhattan,
`
`including at CanaFarma’s offices.
`
`
`
`10
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 11 of 22
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`66.
`
`Fargesen and Palatnik principally drafted the portions of the Investment Materials
`
`that described the offerings (which included setting the Company’s valuation and price per share)
`
`and CanaFarma’s structure and business.
`
`67.
`
`The Investment Materials provided to potential investors in both the First Offering
`
`and the Second Offering stated that CanaFarma had offices in Manhattan and listed a Manhattan
`
`office address as the address for Executive-1, to whom an investor was required to return a signed
`
`subscription agreement.
`
`68.
`
`69.
`
`Investors in the First Offering paid either $0.10 or $0.25 per share.
`
`Investors in the Second Offering paid approximately $0.50 per share (or $0.63 per
`
`share in Canadian dollars).
`
`III. Misappropriation of Investor Funds
`
`70.
`
`The Investment Materials provided to potential investors in both the First Offering
`
`and the Second Offering either state explicitly or imply that investor funds would be (and previously
`
`had been) used for CanaFarma business purposes.
`
`71.
`
`For example, one version of the summary document sent to investors in the First
`
`Offering stated that the money raised from investors “will be used primarily for the funding of
`
`additional grow facilities and as the marketing dollars to fuel our direct response marketing engine.”
`
`72.
`
`Similarly, in a later version of the subscription agreement used in the First Offering,
`
`investors were told that CanaFarma would use their money for “general working capital purposes
`
`and for expenses incurred in connection with listing the Company’s common stock on the [CSE.]”
`
`73.
`
`Investment Materials provided to certain investors in the First Offering stated that
`
`CanaFarma had already raised $6 million or $7 million for the Company.
`
`74.
`
`Investment Materials provided to investors in the Second Offering stated that
`
`CanaFarma had already raised $12 million for the Company.
`
`
`
`11
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 12 of 22
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`75.
`
`In reality, however, Fargesen and Palatnik misappropriated at least $4 million from
`
`CanaFarma bank accounts during the Relevant Period.
`
`76.
`
`In each of the following four examples, Fargesen and Palatnik either transferred the
`
`funds themselves or directed others to transfer the funds out of CanaFarma bank accounts (which
`
`were funded primarily with money from investors) to another entity, Direkt Finance, LLC
`
`(“Direkt”), or to CanaFarma’s largest shareholder, Shareholder-1.
`
`77.
`
`78.
`
`Palatnik was and is the sole owner and member of Direkt.
`
`Not only did Defendants not disclose any of these payments to subsequent investors
`
`(including in the Investment Materials), but they either disguised the payments in the budgets and
`
`projections provided to investors or reversed the payments months later.
`
`A.
`
`79.
`
`Example 1
`
`Between April 25, 2019, and July 19, 2019, Fargesen and Palatnik misappropriated
`
`more than $1.35 million invested in the First Offering through a series of transfers that ended with
`
`transfers to Direkt.
`
`80.
`
`Fargesen and Palatnik transferred these funds out of CanaFarma’s bank account at
`
`U.S. Bank-1 using a combination of wire transfers and checks (which were signed by Fargesen).
`
`81.
`
`In order to disguise the payments as part of the marketing budget for Company-1,
`
`Fargesen directed that the Model include approximately $1.35 million in additional set-up and
`
`marketing costs for Company-1.
`
`82.
`
`Fargesen and Palatnik then directed others at CanaFarma to prepare false invoices
`
`that broke the payments into multiple tranches and indicated that the initial payments by CanaFarma
`
`(to Company-1) were for legitimate marketing services.
`
`83.
`
`Fargesen and Palatnik also instructed that the payments be routed through multiple
`
`bank accounts—including the bank account for Company-1—before reaching Direkt.
`
`
`
`12
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 13 of 22
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`84.
`
`Bank records for Direkt show that Fargesen and Palatnik used these funds not for
`
`legitimate marketing expenses but instead for personal expenses, for checks written to themselves,
`
`or to fund their personal bank accounts.
`
`B.
`
`85.
`
`Example 2
`
`Between September 26, 2019, and October 31, 2019, Fargesen and Palatnik
`
`transferred a total of $2 million from CanaFarma’s bank account at U.S. Bank-1 (which primarily
`
`held funds from investors in the First Offering) to Shareholder-1’s company.
`
`86.
`
`Fargesen and Palatnik caused CanaFarma to make these payments to Shareholder-1’s
`
`company because Shareholder-1 requested that the Company return a portion of Shareholder-1’s
`
`family’s multimillion dollar investment in the Company.
`
`87.
`
`Shareholder-1 did not, however, return the CanaFarma shares that CanaFarma had
`
`issued in exchange for this investment.
`
`88.
`
`At the direction of Palatnik, Executive-1 signed a sham consulting agreement on
`
`behalf of CanaFarma with Shareholder-1’s company, which purported to serve as the basis for the
`
`$2 million in payments made by CanaFarma to Shareholder-1’s company.
`
`89.
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`Executive-1 signed this agreement on or about October 19, 2019, which was after
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`CanaFarma had already transferred $1.5 million of the $2 million to Shareholder-1’s company. The
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`agreement was dated as of September 23, 2019, three days before the first payment.
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`90.
`
`In or about May 2020, Fargesen and Palatnik admitted to others at CanaFarma that
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`true purpose of the $2 million in payments to Shareholder-1’s company was to return a portion of
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`Shareholder-1’s family’s investment. Fargesen and Palatnik also admitted to others at CanaFarma
`
`that they (Fargesen and Palatnik) knew that Shareholder-1’s company submitted documents to the
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`Company concerning services that were never provided in order to substantiate the payments.
`
`
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`13
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 14 of 22
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`91.
`
`After CanaFarma’s auditors and others at CanaFarma raised questions about these
`
`payments, on June 15, 2020, Shareholder-1’s company sent $1,665,000 back to CanaFarma.
`
`92.
`
`Shareholder-1’s company retained the balance of these funds—$335,000—as
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`payment for purported social media marketing work that Shareholder-1’s company did not actually
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`perform.
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`C.
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`93.
`
`Example 3
`
`Between January 24, 2020, and February 28, 2020, Fargesen and Palatnik
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`misappropriated an additional $374,000 from CanaFarma bank accounts, which were primarily
`
`funded with investor money from the First Offering.
`
`94.
`
`Fargesen and Palatnik transferred these funds out of CanaFarma’s bank account at
`
`U.S. Bank-1 by wire transfer. The wire transfers themselves state that the payments were for a
`
`“roadshow.”
`
`95.
`
`Fargesen and Palatnik stated to others at CanaFarma that these payments
`
`represented prepayments for a CanaFarma investor roadshow to take place in Europe.
`
`96.
`
`In reality, bank records for Direkt show Fargesen and Palatnik used these funds for
`
`personal expenses (including the purchase of a luxury car) or to fund their personal bank accounts.
`
`97.
`
`D.
`
`98.
`
`99.
`
`No roadshow, let alone one in Europe, ever took place.
`
`Example 4
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`In July 2020, CanaFarma’s monthly sales revenue was approximately $33,000.
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`In August 2020, Fargesen, Palatnik, and Shareholder-1 agreed to a “revenue
`
`recycling” scheme to inflate CanaFarma’s sales revenues that were reported to investors.
`
`100.
`
`Specifically, Fargesen, Palatnik, and Shareholder-1 agreed that (a) Fargesen and
`
`Palatnik would transfer funds out of CanaFarma’s bank accounts to companies controlled by
`
`Shareholder-1 overseas, as payment for fictitious services, and (b) other companies controlled by
`
`
`
`14
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 15 of 22
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`Shareholder-1 would then send the funds back to CanaFarma at a later date as purported sales
`
`revenue from product sales that did not in fact occur.
`
`101. On or about September 17, 2020, at the direction of Palatnik, CanaFarma transferred
`
`a total of $350,000 out of its bank account at U.S. Bank-2 through two separate wire transfers to two
`
`companies controlled by Shareholder-1. These transfers were primarily funded with investor funds
`
`from the Second Offering.
`
`102.
`
`In October 2020, CanaFarma received a total of $376,250 back from a third
`
`company controlled by Shareholder-1.
`
`103. CanaFarma did not disclose in any of the Investment Materials that it would use
`
`investor funds for phantom transactions intended to create the appearance of higher sales revenues.
`
`IV.
`
`Additional Material Misrepresentations and Omissions to Investors
`
`104. The Investment Materials provided to investors falsely stated that CanaFarma had an
`
`“integrated” business that included the processing of hemp into hemp oil that was then used in the
`
`Company’s products (i.e., Yooforic-branded products such as chewing gum).
`
`105. For example, in the business plan provided to potential investors in the First
`
`Offering, CanaFarma stated that it was “the only producer in the CBD market with its own . . .
`
`Processing facility.” In the summary provided along with that business plan, CanaFarma stated that
`
`it was a “fully integrated cannabis company addressing the entire cannabis spectrum from seed to
`
`delivery of consumer products.”
`
`106.
`
`In another investor presentation provided to potential investors in the First Offering,
`
`CanaFarma described its business as “vertically integrated – cultivation, processing and sales of
`
`hemp oil infused products.” Fargesen was listed as the CanaFarma contact person in this investor
`
`presentation.
`
`
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`15
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 16 of 22
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`107.
`
`Similarly, in an investor presentation provided to potential investors in the Second
`
`Offering, CanaFarma described its “Vertical Integrated Hemp Business” as follows: “From seed to
`
`counter, our fully integrated hemp business helps us promote in-demand hemp oil infused products
`
`that continue to fuel the direct response marketing engine.” The investor presentation then includes
`
`“processing” as one of the ways CanaFarma’s business was “integrated.”
`
`108. This investor presentation also stated that CanaFarma “independently grows,
`
`produces, promotes, sells, and ships our own products,” and that the Company had as a “notable
`
`resource” its own “Fully Certified, Clean Processing Facility.”
`
`109.
`
`In addition to written materials, during investor presentations, Fargesen orally gave
`
`potential investors in at least the First Offering the impression that CanaFarma grew and processed
`
`its own hemp and then used the resulting hemp oil in its products.
`
`110.
`
`In reality, CanaFarma did not process any of the hemp that was grown at the farms it
`
`leased during the Relevant Period, and none of the products it sold contained hemp oil from the
`
`hemp grown at these farms.
`
`111. By the time of the Second Offering, CanaFarma’s first hemp grow remained
`
`unprocessed and was sitting unused in storage.
`
`112. The business plan sent to potential investors in the First Offering contained a
`
`section with purported “Testimonials” given by some of the “first users” of “the Company’s
`
`superior differentiated product.”
`
`113.
`
`In reality, these testimonials were not related to CanaFarma’s product (Yooforic
`
`chewing gum) at all; rather, they were testimonials for another hemp-based product that CanaFarma
`
`never sold.
`
`114. Fargesen and Palatnik included these misleading testimonials in the business plan.
`
`
`
`16
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 17 of 22
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`115. The Investment Materials provided to potential investors contained
`
`misrepresentations and omissions about past and projected sales revenues.
`
`116. For example, Investment Materials for the First Offering “guaranteed” $25 million
`
`and projected as much as $100 million in first-year revenue for CanaFarma.
`
`117.
`
`In reality, the CanaFarma employees directly responsible for the product
`
`development and marketing work that drove these revenue projections had projected (but did not
`
`guarantee) $25 million in first-year revenue.
`
`118. Additionally, as described in the Investment Materials for the First Offering, the
`
`revenue projections were based on a marketing budget of $3 million that would be used “to pay the
`
`affiliate networks for the sales that they generate.”
`
`119. As described above, however, this $3 million marketing budget included $1.35
`
`million that Fargesen and Palatnik misappropriated from the Company, which was not used for
`
`marketing work.
`
`120. Not only was this misappropriation not disclosed to potential investors, but the
`
`Investment Materials for the First Offering stated that the Company used a “pay for performance”
`
`marketing model where it “does not incur a marketing expense unless actual sales are made.”
`
`121.
`
`In the Second Offering, an investor presentation stated that CanaFarma had
`
`surpassed $4 million in revenue in either its first six months of sales or its “first quarter,” and that in
`
`March 2020, the Company was “[n]ow achieving nearly $1,000,000 per month revenue.”
`
`122. None of these statements were true. In reality, CanaFarma achieved approximately
`
`$3.1 million in revenue in its first six months of sales and only approximately $44,000 in revenue in
`
`March 2020. CanaFarma never reached $1 million in monthly revenue during the Relevant Period.
`
`
`
`17
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`Case 1:21-cv-08211 Document 1 Filed 10/05/21 Page 18 of 22
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`123. Because Fargesen and Palatnik were aware of CanaFarma’s monthly revenue
`
`numbers during the Relevant Period, they knew or were reckless in not knowing that these
`
`statements to potential investors in the Second Offering were false and misleading.
`
`124. The Investment Materials provided to potential investors in both offerings touted
`
`the high quality of CanaFarma’s management team, suggesting it was headed by Executive-1 as CEO
`
`and that Fargesen and Palatnik were mere officers wh