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The $650 Million Cannabis Ponzi Scheme: What Happened and How to Avoid One

Scammers will try to take advantage of excitement around legal cannabis, too.

By
This story originally appeared on Cannabis.net

Last May, the US Department of Justice charged Reva Joyce Stachniw of Illinois, as well as Ron Throgmartin of Georgia, with operating a Ponzi scheme that earned them $650 million sourced from investors they tricked all over the country.

Based on the grand jury indictment in Colorado, it was going on from late 2017 through early 2019, resulting in investors suffering from millions of dollars in losses. Court documents say that Reva and Ron, together with a conspirator named Mark Ray, committed fraud by falsely showing their victims that their financial investments were backed up by legitimate businesses in the cattle industry. To solicit money, they used fake documents for their Colorado-based marijuana business, Universal Herbs LLC.

The investor victims were promised gains of around 10-20% in as little as several weeks. However, neither Ray, Throgmartin, nor Stachniw disclosed to their victims that they were actually using their money to pay other investors using a classic Ponzi investment scheme and earn money themselves, says the Department of Justice. Particularly Throgmartin and Stachniw apparently earned millions of dollars from it, even if they put little to no money of their own towards their business.

Throgmartin and Stachniw were both charged with a count of conspiracy for committing bank fraud and wire fraud, a count of conspiracy for engaging in financial transactions in property coming from unknown illegal activities, and five counts of wire fraud. Should they be convicted, they both face a maximum of 30 years in prison on top of a $1 million fine for conspirating to commit bank and wire fraud, as well as a $250,000 fine for wire fraud and 20 years in prison. A court judge from the federal district will conclude the sentence after they have considered the US Sentencing Guidelines and other statutory aspects.

RELATED: Smoked! FBI Sting Catches Cannabis Stock Manipulators

Not the first cannabis Ponzi scheme

Engaging in Ponzi schemes linked to the cannabis industry is not a new occurrence.

In February 2020, a cannabis farm owner in Seattle was charged for running a Ponzi scheme that earned him $4.85 million from at least 2 dozen investors located in California, Arizona, Washington, and Texas.

Sixty-year-old Robert Russell from Duvall was charged by the US Securities and Exchange commission with violations of federal securities law, reports the Seattle Times. There was also an SEC complained, filed January 21, in a California federal court which states that investors were attracted to the offer because of Russell’s generous profits from his cannabis farm, Green Acre Pharms. Russell worked with a co-conspirator, Guy Scott Griffithe of California, who exhausted $3.5 million of the investors’ cash on “extravagant luxuries, inappropriate personal expenditures, and unrelated business ventures,” says the SEC complaint. Among these were a yacht and luxury vehicles.

Authorities say that the cannabis farm which shut down in December the previous year never saw any profits.

So what is a Ponzi scheme, exactly?

A Ponzi scheme is a type of scam, involving fraudulent investments that promise high returns. Operators try to lure victims by showing there is little risk involved, when the returns are usually generated for earlier investors while later investors take the hit. It’s similar to pyramid schemes wherein both scams are based on using the funds of later investors to pay back the initial investors.

In addition, both scams eventually are discovered when there are no longer new investors, and there is a clear lack of cash to go around. By this time, the scams unravel themselves. Companies that join Ponzi schemes end up using all their time and effort to look for new clients whom they lure into making investments. The money then goes to paying the original investors for their returns.

And how do you avoid one?

Whether you’re in the cannabis industry or have another business in another industry, anyone can be lured into a Ponzi scheme. Since the cannabis industry is considered “hot”, scammers know that it’s a lucrative opportunity for their victims.

Here are signs to look out for:

  1. Unusually high returns: Extraordinarily high investment returns are a big red flag for any scam. Though there are many ways a Ponzi scheme can take place, they follow the same principles: all investors are promised abnormally high returns when you compare it to normal investment opportunities. In other words, it sounds too good to be true.

  2. Steady high performances: Anyone who has ever studied investments will know that the markets will always rise and fall as time goes on. For this reason, your investment in any legitimate business will reflect these changes. Ponzi schemes and scams will try to attract victims with consistent steady returns no matter what the market conditions are like.

  3. Guaranteed returns: Another major red flag is guaranteed returns, because any investor worth their salt will know that this is impossible. Even if you invest a small amount, there is always some kind of risk involved. Always be suspicious of anyone who offers guaranteed returns on your investment.

  4. Unregistered investments: Each time you invest, always ask for an SEC registration copy or documentation that the business is registered with state regulators. Don’t take the word of anyone who promises they are a legitimate, registered business without seeing proof.

  5. Complicated, mysterious features: Many Ponzi schemes have mysterious strategies involved. This is because they’re fraudulent. Don’t listen to people who tell you that the incredible high returns are because of a secret in their investing strategy; they might also use cryptic language that is hard to understand. If you are too trusting, this could get you in trouble.

Keep these in mind to steer clear of Ponzi and pyramid schemes in the future.