Often referred to as the “Green Rush,” the cannabis industry has seen enormous growth, attracting more than its fair share of charlatans and snake-oil salesmen seeking to defraud unsuspecting investors.
The cannabis sector's unique challenges—such as regulatory complexities, evolving legal frameworks, and intense market competition—make it particularly susceptible to securities litigation. Companies like Aurora Cannabis, Curaleaf, and iAnthus Capital have faced lawsuits alleging misleading disclosures or non-compliance with federal and state regulations. These cases often result in significant financial settlements, reputational damage, and lost investor confidence. Thus, protecting your business from securities fraud litigation is not just good business practice, but it’s fundamental to your company’s survival.
What Is a Securities Fraud Class Action Lawsuit?
A securities fraud class action lawsuit is generally filed by a large group of investors who believe they’ve suffered monetary damages due to a company’s misconduct or materially false statements or omissions affecting the financial health of the company. For publicly traded companies, such statements typically result in artificial inflation of the company’s stock.
Cautionary Tales for Cannabis Companies
Curaleaf’s Securities Fraud Class Action Lawsuit: The Case That Started It All
In August 2019, a securities fraud class action lawsuit in the market manipulation category was brought against Curaleaf (CURLF), a “medical and wellness” cannabis operator publicly trading on the Canadian Securities Exchange. The lawsuit was filed in the Eastern District of New York on behalf of investors who purchased shares of Curaleaf between November 21, 2018 and July 22, 2019.
The investors alleged that the company made false and/or misleading statements, as well as failed to disclose material adverse facts about the company’s business and prospects, to increase the value of its stock. Specifically, the class of investors alleged, among other things, that Curaleaf made false and misleading statements by:
- (i) promoting its CBD products as drugs and dietary supplements on its website and social media, which is against federal law;
- (ii) selling unapproved animal drugs through its platforms; and
- (iii) failing to disclose that these practices would lead to a warning letter from the U.S. Food and Drug Administration (FDA).
Before the lawsuit, Curaleaf had received a warning letter from the FDA to remove such offending statements from its marketing materials, the news for which caused its stock price to drop 7.27%.
Just a few months earlier, Curaleaf had been celebrated for having successfully completed the acquisition of Cura Partners Inc.’s Select Brand for nearly $1 billion in stock, resulting in the world’s largest cannabis company measured by sales at the time with approximately $205 million in annual revenue combined. Shortly thereafter, Curaleaf announced plans to acquire Chicago-based Grassroots, formerly the largest privately owned, vertically integrated multi-state operator. Following the Grassroots acquisition, Curaleaf gained a solid foothold in Illinois, the nation’s fifth-most populous state, and significantly expanded the company’s portfolio.
The lawsuit was ultimately dismissed in 2021 on the grounds that plaintiffs’ claims were based upon information that had already been disclosed, but it’s still a notable lawsuit because it was the first securities fraud class action against a consumer cannabis company. It underscores the importance of disclosing and accurately informing investors of all material company actions and decisions.
Other Securities Fraud Class Action Lawsuits Filed Against Cannabis Companies
Canopy Growth Corporation
Investors claimed Canopy made a series of financial misstatements and omissions including, but not limited to, overestimating the potential market for its soft gel and oil products, failing to disclose that the Company’s stated growth plans were incongruous with the revenue and demand it was realizing and would reasonably produce, and materially overstating the value of the Company’s aging biological assets. As a result, the Company’s securities traded at artificially inflated prices before dropping substantially, causing major losses for investors. The company settled the lawsuit in June 2022 for $13 million.
iAnthus
A group of investors filed a securities fraud class action lawsuit against Florida-based iAnthus, alleging that the company made false statements relating to its relationship with its financier, Gotham Green Partners (“GGP”), and that iAnthus’s CEO accepted undisclosed personal payments from GGP causing financial trouble for the company and substantial losses for investors. The case was settled for $2.9 million in 2023.
Aurora Cannabis
In June 2024, the Canadian cannabis company agreed to pay $8.05 million to a class of investors who acquired stock in the company between Oct. 23, 2018, and Feb. 28, 2020. The company was alleged to have misled investors through a series of transactions, omissions and misstatements including, among other things, a $21.7 million round-trip, “sham transaction” between Aurora and another Canadian cannabis company called Radient Technologies Inc. In addition, investors allege that:
- Defendants overstated the demand and potential market for Aurora’s consumer cannabis products
- That the Company failed to comply with licensing requirements in the German market, and
- That the Company was suffering from liquidity constraints and the over-extension of capital commitments.
Consequently, the Company’s securities traded at artificially inflated prices before ultimately plummeting when the truth about its finances was uncovered, causing investors massive losses. A final hearing for the court’s approval of the settlement amount is scheduled for January 28, 2025.
WM Technology
In October 2024, this company was hit with a lawsuit by investors alleging they misrepresented key average monthly user metrics during and after their merger with Silver Spike Acquisition Corp., a special purpose acquisition company (“SPAC”). This led to the SEC’s issuance of a litigation release charging WM Technology with public misrepresentation of the key average monthly user metrics. The case is still pending.
Key Risk Areas for Cannabis Companies
As noted above, there are some common mistakes made by cannabis companies that have faced securities fraud lawsuits. Knowing what they are is the first step in avoiding them.
These include:
- Misleading financial statements: Inaccurate or overly optimistic financial projections can lead to fraud claims when reality falls short.
- Regulatory non-compliance: Missteps in navigating state and federal laws, such as promoting cannabis-derived products with unapproved medical claims, can attract regulatory scrutiny and investor lawsuits.
- Exaggerated market demand: Overstating market potential or demand for products can inflate stock prices, leading to investor claims when expectations are not met.
SEC Recommendations for Cannabis Investors
Deceptive investment practices have become so commonplace in the cannabis industry that the Securities and Exchange Commission issued an “investor alert” in September 2018, advising the investing public about how to identify and avoid investment scams and market manipulation. Similar warnings were subsequently issued by FINRA and the North American Securities Administrators Association, as well as larger brokerage houses such as TD Ameritrade.
The SEC warned the investing public to be on the lookout for, among other things:
- Unlicensed and unregistered sellers
- Guaranteed returns, especially when accompanied by minimal risk
- Unsolicited offers, such as opportunities presented via social media, email, text, or phone call
Other corporate actions for investors to look out for include, without limitation, market manipulation and artificially inflating or deflating stock prices through the spread of false information. Spotting such misconduct can be quite challenging, but simple diligence regarding trading history can help by paying attention to:
- Whether the SEC ever suspended trading activity
- Abrupt changes to corporate ownership or form
- Press releases that seem implausible
Tips for Protecting Your Cannabis Company against Securities Fraud Class Action Lawsuits
Defending a class action securities fraud lawsuit is no trivial matter and can cost your company hundreds of thousands of dollars, if not millions. To avoid having to defend your company against such time-consuming, costly, and exhausting lawsuits, implement proper corporate hygiene and internalize the following mantra: “prevention is the best strategy.”
Be proactive by:
Ensuring Transparent and Accurate Disclosures
- Regularly update investors on the company’s financial health, operational challenges, and regulatory compliance status.
- Avoid overly optimistic projections
- Ground statements in verifiable data and include appropriate disclaimers about risks.
Strengthening Internal Controls
- Implement comprehensive financial reporting and compliance systems to ensure accuracy.
- Conduct periodic audits to identify potential red flags before they escalate.
Understanding and Complying with Regulations
- Stay updated on federal and state cannabis laws, especially around advertising and product claims.
- Train employees on regulatory requirements to prevent accidental violations.
Engaging in Proactive Risk Management
- Identify potential vulnerabilities in your operations and address them promptly.
- Maintain open lines of communication with investors, highlighting both opportunities and risks.
Securing Directors and Officers (D&O) Insurance
- Protect your executives and board members from personal liability in the event of a lawsuit.
- Review insurance policies to ensure adequate coverage for potential securities claims.
Avoiding Unsubstantiated Health Claims
- Avoid making any unproven health claims about the medical efficacy of you products. This, according to the FDA, means claims that cannabis (including CBD) can effectively treat serious diseases and conditions — including those for which medical cannabis may properly be recommended under state law — such as epilepsy, anxiety, depression, and cancer.
- Be sure to scrutinize all marketing material to avoid reference to any relationship between a specific substance and a reduced risk of a disease or condition, including patient testimonials.
Seeking Advice from Cannabis Experienced Counsel
- Hire or consult legal counsel with cannabis expertise, like Rudick Law Group, to make sure that your corporate ducks are in a row, all cannabis regulations and laws are satisfied, and your company’s internal and public-facing statements and projections are accurate and avoid exaggeration.
Consult A Legal Team To Evaluate Your Risks
Navigating the complicated world of cannabis requires vigilance and a commitment to transparency. By implementing strong governance, maintaining regulatory compliance, and openly communicating with investors, cannabis companies can reduce their risk of facing securities fraud lawsuits.
The cannabis industry presents many opportunities for success, but success hinges on the ability to balance innovation with accountability. Protect your company and its stakeholders by prioritizing legal compliance and ethical practices. Rudick Law Group is here to help.
A version of this article originally appeared in Marijuana Venture magazine.