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A lawsuit filed Tuesday in Maryland federal court by LMS Wellness, Benefit LLC, owner of the Health for Life White Marsh dispensary in Baltimore County, accuses iAnthus Capital Holdings, Inc. (CSE: IAN) (OTCPK: ITHUF) of stealing over four million dollars from LMS in a pattern of theft dating back to 2019 and continuing to this day. In addition to the New York-based Canadian MSO, three other defendants are named, all subsidiaries of iAnthus, leading the plaintiff to include a RICO count in the complaint. They are Greenmart of Maryland, LLC, dba Health for Life Baltimore; Budding Rose, Inc., dba Health for Life Bethesda; and Rosebud Organics, Inc.
The 22-page complaint outlines a convoluted but essentially simple plan to defraud LMS and its owner, William Huber, an attorney who also was in-house counsel for iAnthus during a portion of this saga, and to take millions of dollars out of LMS accounts and give them to Greenmart, Budding Rose, and Rosebud for purposes wholly unrelated to LMS. “The linchpin of iAnthus’s plot is a subsidiary in its corporate family, S8 Management, LLC (S8), which entered into a Management Services Agreement (MSA) with LMS that gives S8 near total control over LMS’s finances,” the complaint states.
Several iAnthus subsidiaries – including MPX Bioceutical ULC (MPX) and CGX – play leading roles in a story that begins in late 2015, when “LMS, a small Maryland company, applied for a cannabis dispensary license with the Maryland Medical Cannabis Commission,” per the complaint. “After receiving Phase One approval to operate a dispensary in White Marsh, LMS began the process of securing funding to build out the dispensary and start operations.”
In October 2017, Huber signed a $1.46 million promissory note with a company that would later become MPX “to fund the construction of LMS’s dispensary and its early operations. Two months later, in December 2017, LMS signed the MSA with MPX’s subsidiary, S8. Under that management agreement (which has since been amended, but remains in place today), S8 is responsible for all of LMS’s day-to-day operations, including managing LMS’s finances and maintaining LMS’s financial records. Finally, LMS and Mr. Huber signed option agreements with another MPX subsidiary, CGX. The option agreements provided that CGX could acquire LMS (and its dispensary license) if certain conditions were met, but not before November 2021, pursuant to restrictions imposed by Maryland law. With help from MPX and S8, LMS began building out its new business. It opened to patients registered with the MMCC in October 2018.”
Less than six months later, iAnthus came into the picture. “In or around February 2019, iAnthus acquired MPX, CGX, and S8 in a hostile takeover,” states the complaint. “As a result, MPX, CGX, and S8 became iAnthus subsidiaries and iAnthus effectively purchased the Original Note, CGX’s options to purchase LMS, and the MSA pursuant to which S8 manages LMS’s finances.”
Despite iAnthus touting the deal as a pivotal moment in its U.S. fortunes, LMS portrays the company as troubled to the point of dysfunction during this period. “iAnthus was cash-strapped and plagued by mismanagement and escalating debt,” reads the complaint. “In the second half of 2019 and into the first quarter of 2020, iAnthus was unable to find enough money to fund its operations. In a little over one year, its stock price plummeted by approximately 97 percent. As of today, iAnthus’s stock is valued at less than 1 cent per share. iAnthus was so cash-strapped that, in March 2020, it defaulted on its obligation to pay $4.4 million in interest to Gotham Green Partners, its principal debt holder.”
Days later, per the complaint, the company formed “a special committee (composed of iAnthus directors) that would explore the renegotiation of existing financing arrangements and other contracts of both iAnthus and its subsidiaries.” Weeks later, CEO Hadley Ford resigned amidst an internal investigation over undisclosed personal loans, and, in 2020, as “stakeholders learned more about iAnthus’s questionable business practices, lawsuits concerning iAnthus’s financial mismanagement began to pile up.”
Employees were also “quitting in droves,” reducing staff by half, from 800 to 400 in just over a month, per the complaint, which notes that in its 2020 fiscal report, iAnthus admitted it did not have adequate internal financial controls in place. “Despite iAnthus’s abysmal performance,” continues the complaint, “Randy Maslow, iAnthus’s co-founder, received $675,000 in compensation in 2020 and $1 million in 2021. In 2022, when he left the company, Maslow received about $12 million, notwithstanding iAnthus’ ongoing failures. Other iAnthus executives continued to give themselves large raises year after year, despite iAnthus’s awful financial position and its plummeting stock price.”
That “cash-strapped” status is the motivating force behind iAnthis’s actions with respect to LMS, according to the plaintiff. “iAnthus stole from LMS because it is desperate for cash,” reads the complaint. “Like other cannabis businesses, iAnthus cannot sustain operations without ready access to capital. In 2022 alone, iAnthus’s net losses exceeded $449 million, and as of December 2022, iAnthus’s accumulated deficit topped $1.25 billion. Indeed, iAnthus’s subsidiaries are so strapped for cash that they stopped paying their taxes. As of December 2022, iAnthus’s subsidiaries owed $55 million in unpaid taxes (plus $6 million in interest and penalties). Over the past few years, iAnthus’s stock has lost almost all of its value. In light of these troubles, earlier this year iAnthus publicly reported there was ‘substantial doubt’ it would be able to continue as a going concern.”
The mechanics of the theft were achieved via the aforementioned subsidiaries. “iAnthus was able to steal from LMS (and continues to steal from LMS to this day) because S8 has virtually unfettered access to LMS’s bank account and iAnthus controls and directs S8, “states the lawsuit. “Under the guise of fulfilling S8’s obligations pursuant to the MSA, iAnthus directed S8 to funnel millions of dollars from LMS’s bank account to three other, less profitable, cannabis businesses that iAnthus now owns: Defendants Greenmart of Maryland, LLC, Budding Rose, Inc., and Rosebud Organics, Inc.”
Per the complaint, the alleged skullduggery only continued: “iAnthus then tried to cover its tracks by directing S8 to falsely claim the transfers were legitimate LMS expenses and to manipulate LMS’s financial records to falsely show that LMS owed iAnthus money pursuant to a promissory note that iAnthus, S8, and LMS signed in 2020. In fact, LMS does not owe iAnthus and S8 any money on that note—just the opposite. Not only has any debt that LMS owed to iAnthus and S8 been fully repaid, but through August 2022, in light of all the money it has stolen, iAnthus owes LMS more than $4 million. LMS brings this lawsuit to recover those stolen funds.”
Much of the complaint is taken up with the allegedly fraudulent measures iAnthus took to inflate LMS’s promissory note balance and to deny Huber – who was employed as iAnthus in-house counsel at the time – access to detailed financial data about LMS. A resulting dispute over an alleged threat to terminate Huber if he did not “sign a document certifying that he had received all relevant financial information, or else his employment would be terminated,” resulted in Huber being fired in December 2020.
The complaint describes efforts by iAnthis and S8 to block a request by Huber for an audit of LMS finances. Despite those attempts, an arbitrator ordered LMS’s audit to go forward in August 2022, and directed that it be concluded by January 5, 2023. That deadline was met by LMS, per the complaint, and the results of the audit supported Huber’s suspicions regarding the unauthorized transfer of funds by iAnthus. “The report confirmed LMS’s suspicion that iAnthus was using S8 as a vehicle to steal from LMS’s accounts to support its own need for cash,” states the complaint. “The auditors found that since 2019, S8 has transferred more than $5.6 million from LMS’s bank account to Greenmart, Budding Rose, and Rosebud—the three other cannabis businesses in Maryland that iAnthus now owns. The transfers were not for LMS’s benefit and were not for the purchase of goods or services that LMS needed for its operations.”
The audit also revealed a pattern of misconduct, including, per the complaint, “that iAnthus has used S8 to hide its embezzlement from LMS,” and that “S8 (at iAnthus’s direction) significantly inflated the Management Fee that S8 claims LMS owes under the Amended Note as compensation for the management services S8 provides.”
The alleged fraud has come with a real cost to LMS, which claims, “The phony financial documents that S8 provided to LMS and inflated fees that it assessed were intended to reinforce the lie that LMS for years has been, and today remains, deeply in debt under the Amended Note. In reality, because iAnthus used S8 to funnel LMS’s excess cash to iAnthus’s other interests (Greenmart, Rosebud and Budding Rose), LMS was deprived of the opportunity to pay down the Amended Note. Had LMS been given full credit for the transfers against the balance of the Amended Note, it would have repaid its debt in August 2020 and enjoyed its profits from that point forward. LMS’s accountants determined that as of August 2022, LMS had overpaid on the Amended Note by at least $4.5 million.”
Further alleging that the internal financial mismanagement at iAnthus continues, LMS is seeking relief on the first charge of Conversion in the form of “compensatory damages against iAnthus, in an amount yet to be precisely determined but reasonably believed to be in excess of $4.5 million, as well as “punitive damages for iAnthus’s intentional and malicious conduct.”
On the RICO charge, LMS is asking the court to “Declare that iAnthus violated 18 U.S.C. § 1962(c) by conducting or participating in the affairs of S8 through a pattern of racketeering activity; award Plaintiff compensatory damages in an amount yet to be precisely determined but reasonably believed to be in excess of $4.5 million, treble damages, and its reasonable attorney’s fees and costs pursuant to 18 U.S.C. § 1964(c).”
On a third Unjust Enrichment charge, LMS wants “iAnthus, Greenmart, Budding Rose, and Rosebud [to] repay the funds they received as a result of the unlawful transfers they received from LMS’s account—an amount yet to be precisely determined, but reasonably believed to be in excess of $4.5 million, and award such other and further relief as the court deems necessary, just and proper.”
The case is 1:23-cv-01644, LMS Wellness, Benefit LLC v. iAnthus Capital Holdings, Inc. et al.
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