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United States Securities and Exchange Commission v. Friedland

United States District Court, D. Colorado

March 8, 2018

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
JEFFREY O. FRIEDLAND, GLOBAL CORPORATE STRATEGIES, LLC, and INTIVA PHARMA, LLC, Defendants, and LANE 6552 LLC, KATHY B. FRIEDLAND, ASPEN UPPER RANCH, LLC, ASSURANCE MANAGEMENT, LLC, and THE JEFFREY AND KATHY FRIEDLAND IRREVOCABLE TRUST, Relief Defendants.

          OPINION AND ORDER REGARDING MOTION FOR TEMPORARY RESTRAINING ORDER AND ASSET FREEZE

          Marcia S. Krieger, Chief United States District Judge.

         THIS MATTER comes before the Court pursuant to the Plaintiff's (“SEC”) exparte Emergency Motion for Temporary Restraining Order, Asset Freeze, and Other Relief (# 2).

         FACTS

         A. Substance

         Although the Complaint (# 1) and Motion (# 2) are lengthy, the pertinent alleged facts are fairly straightforward. Defendant Jeffrey Friedland is a businessman and influential figure in the medical marijuana community. As relevant here, he also owns or has substantial control over two businesses: Global Corporate Strategies (“Global”) and Intiva Pharma (“Intiva”).

         In 2014, Mr. Friedland became involved with a company now named OWC Pharmaceutical Research Corp. (“OWC”), which is active in the field of marijuana-based pharmaceutical products. In August 2014, Intiva (at Mr. Friedland's direction) purchased approximately 1.3 million shares of OWC.

         Then in January 2016, Mr. Friedland and OWC entered into a contract by which Mr. Friedland promised to provide public relations services to OWC, touting OWC to investors, journalists, and others. In exchange for his services, OWC transferred approximately 5.1 million shares of OWC stock to Global. The crux of the SEC's Complaint here is that neither Mr. Friedland, Global, OWC, or any other person, disclosed to the public the fact that Mr. Friedland or Global received OWC stock as compensation for promoting OWC.

         Between February 2016 and January 2017, Mr. Friedland made public appearances touting OWC. It is not necessary to quote, in detail, the representations that Mr. Friedland made during these appearances; it is sufficient to note generally that he indicated that he had made a personal investment in OWC (through Intiva), that he was bullish on the company and its prospects, and that investors should pay attention on OWC and buy its stock. The SEC does not allege that Mr. Friedland made any affirmative false representations during these appearances, but the SEC alleges that Mr. Friedland engaged in misleading omissions when he failed to disclose that he had been compensated for promoting OWC, with OWC stock.

         In January 2017, Mr. Friedland began to move the 5.1 million shares of OWC stock from Global to a new entity, Relief Defendant Lane 6552, LLC (“Lane”), an entity that Mr. Friedland's wife had recently formed. In order to allow restrictive legends on that stock to be removed, Mr. Friedland provided the Transfer Agent with a letter falsely stating that Global had paid OWC approximately $51, 000 for the shares, when, in fact, Global had paid nothing. The letter also falsely stated that Lane would be paying Global some $200, 000 as consideration for the stock, when, in fact, no such payment would occur. When the 5.1 million shares were transferred to Lane in February 2015, Mr. Friedland then directed Lane to sell OWC shares. Between March 2 and March 21, 2017, Lane liquidated most of the 5.1 million shares, with a rough return on the sales of $6.5 million.

         Beginning in April 2017, Mr. Friedland also directed that Intiva sell its OWC shares. Again, Mr. Friedland made certain false representations in an effort to remove the restrictive legends on Intiva's OWC shares, including asserting that no one associated with Intiva had sold OWC shares in the past 3 months and denying that Intiva was promoting OWC securities through third parties. The restrictive legend was eventually removed and between June and September 2017, Mr. Friedland sold most of Intiva's holdings of OWC stock, receiving nearly $500, 000 from those sales.

         Throughout this time, and continuing to September 2017, Mr. Friedland promoted OWC in public appearances and written statements encouraging investors to purchase it's stock. Once again, the SEC does not allege that Mr. Friedland made any false affirmative representations during these appearances, but the SEC does allege that Mr. Friedland engaged in material misrepresentations by omission, insofar as the failed to disclose that he had received OWC stock as compensation for his activities and that he was in the course of selling the OWC stock that owned.

         Based on these allegations, the SEC alleges three claims against Mr. Friedland, Global, and Intiva: (i) nondisclosure of compensation in violation of 15 U.S.C. § 77q(b); (ii) securities fraud in violation of 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; and (iii) securities fraud in violation of 15U.S.C. § 77q(a).

         B. Motion for Asset Freeze

         Simultaneously with the Complaint, the SEC filed the instant ex parte Motion (# 2) seeking a freeze on assets of Mr. Friedland, Intiva, Global, and various Relief Defendants. According to the affidavits supplied by the SEC, the funds received from the sale of the OWC stock -- roughly $7.5 million worth - can be traced as follows:

         • Lane received approximately $6.5 million from the sale of the OWC stock. Docket # 3-2. Nearly all of those funds were then wired from Lane's brokerage account into an account held by Lane at the First American State Bank (“the 426 account”). Docket # 2-2, ¶ 4. Between March 2017 and January 2018, the entire contents of the 426 account were disbursed through, the following traceable transactions[1]:

• $168, 000 was transferred to a bank account owned by Global at First American State Bank (“the 215 account”)
• $4.15 million was transferred to Lane's account at Fidelity (“the Fidelity 466 account”)
• $45, 500 was paid by check to Kuni Lexus and $32, 200 was paid to Groove Mazda. The SEC appears to assume that these payments are connected to the Friedlands' purchases of automobiles, but the SEC neither identifies the particular vehicles nor specifies how it associated particular automobiles with these payments.
• $25, 000 was transferred to Ms. Friedland's checking account (the account No. is not specified).
• $1.95 million was transferred to Stewart Title Company, apparently to purchase real property located at 466 Meadow Road in Snowmass, Colorado. The nominal purchaser appears ...

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