Stock Manipulation Claim in Marijuana Market

     LOS ANGELES (CN) - Executives at GrowLife manipulated the company's share price to issue below-market shares to insiders, then dumped millions of shares in the market just before the company was suspended from trading, a shareholder claims in a derivative complaint.
     Gary Rotenberg sued the Woodland Hills, Calif.-based company and CEO Sterling Scott and 11 GrowLife other executives in Federal Court.
     Rotenberg claims the company made several false and misleading statements in financial statements for the third quarter of 2013, in connection to the value of payments it had made in shares to company insiders.
     GrowLife specializes in products and services for legal marijuana cultivation. Marijuana has been legalized in Colorado and Washington and has been decriminalized in more than a dozen other states.
     This year, Rotenberg says, GrowLife's annual report revealed that Scott and other executives issued GrowLife stock worth $1.1 million to Scott and CFO John Genesi, and gave directors Anthony Ciabattoni, Jeff Giarraputo and Alan Hammer each 500,000 shares.
     In the fallout, Ciabattoni, Giarraputo, and Hammer were "caught with their hands in the company till," and rescinded their grants of shares, the complaint states.
     The company also paid president Marco Hegyi 25 million warrants for GrowLife stock, director Justin Manns 4,666,667 shares, Robert Hunt 12 million in stock options, and former GrowLife executives Craig Ellins and Bob Kurilko 500,000 and more than 1.6 million in shares, respectively, the complaint states.
     Rotenberg claims the executives were given the shares at the bargain basement price of $0.02 per share, when shares were trading at $0.58 per share.
     Though Scott's wife, Elisabeth Wedam Scott, was not given any stock the previous year, the complaint states that she and her husband offloaded more than 5.7 million shares on April 9.
     After the annual report was filed, SEC issued a trading suspension against the company on April 10. But that did not stop Elisabeth Wedam Scott from attempting to dump an additional 8 million stocks on the market a day later, the complaint states.
     Between April 4 and April 7 this year, Hunt sold 1.8 million shares at $0.50 for a haul of $900,000, according to Rotenberg.
     In an April 28 open letter to shareholders Scott conceded that he, his wife and Hunt had sold stock after the annual report was released and the trading suspension kicked in, the complaint states.
     Rotenberg claims that Scott resigned from GrowLife 38 days after publishing the letter to shareholders.
     "For 2013, GrowLife had posted a loss of approximately $21 million (nearly ten times the loss it reported in 2012), with total revenue of $49 million. Thus, these payments to company insiders, or all of the defendants, represented over half of the company's gross revenue for the past year," according to the 32-page lawsuit.
     Rotenberg says the inside payments were "highly unusual in their timing and amount."
     "Such stock sales allowed Sterling Scott, Elisabeth Wedam Scott, and Robert Hunt to profit personally from the artificial inflation in the price of the company's common stock," the complaint states.
     After the SEC lifted the trading suspension on April 25, stock plummeted from $0.29 per share to $0.21 per share, Rotenberg says.
     He seeks restitution, costs and damages for securities violations, breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement.
     He is represented by Richard Greenbaum of Torrance.
     In May, the SEC issued a warning to investors about investment in the marijuana industry after the trading suspension against GrowLife.
     "Recent changes in state laws concerning medical and recreational marijuana have created new opportunities for penny stock fraud," the SEC said in a statement.
     "Wherever we see incomplete or misleading disclosures, we act quickly to protect investors."