A B.C.-registered shell company listed on the Canadian Securities Exchange was used to orchestrate a fraud scheme that bilked millions of dollars from investors, according to the U.S. Attorney for the Southern District of New York and U.S. Securities and Exchange Commission.
American authorities have charged Vitaly Fargesen and Igor Palatnik with securities fraud, wire fraud and related offenses in connection with their alleged scheme to defraud investors in CanaFarma Corp. and later CanaFarma Hemp Products Corp.
It was an “old-time scam,” said authorities.
“The defendants, as alleged, lured investors to CanaFarma by falsely representing the company’s financials, manipulating their stock price and misappropriating millions for their personal benefit,” stated F.B.I. assistant director-in-charge Michael J. Driscoll in a statement Wednesday.
The commission has also filed a parallel complaint against Fargesen and Palatnik as well as the company.
Fargesen and Palatnik conducted a reverse takeover of Delaware hemp company Canafarma by first purchasing B.C. shell company KYC Technology Inc. in October 2018, via a straw purchaser, and subsequently listing it on the Canadian Securities Exchange and Frankfurt Stock Exchange by March 2020.
Using offices in both New York and Vancouver, the duo from New Jersey raised $14 million in an allegedly fraudulent manner by, for example, making misrepresentations to investors, including guaranteed revenues of $25 million and as much as $100 million in the first year of sales, according to the commission.
The stock more than quadrupled from 30 cents a share in March 2020 to $1.23 in May 2020.
Fargesen and Palatnik also had the company create fraudulent consulting agreements and used a CEO to act as the frontman while they controlled the operations behind the scenes, the indictment alleges.
There are no wrongdoings alleged against company CEO David Martin Lonsdale, a Texas-based investor. Lonsdale has directed over a dozen junior public companies, many of which are registered in B.C., including at least three that were handed over to Anthony Jackson, who faces insider trading charges from the B.C. Securities Commission in a case involving alleged fake consulting contracts.
Among other allegations, Fargesen allegedly instructed two unnamed co-conspirators to cook the books with a phony $1.4 million marketing budget for CanaFarma. The duo also created fake revenue using third-party companies, in order to inflate the stock price, allege the authorities.
Ultimately, the duo used $4 million from the company for personal use and for purposes unrelated to CanaFarma, according to the claims.
The company never ended up growing or selling their own hemp and cannabis products and accumulated a $20.2 million deficit, according to the January 2021 annual audited financial statement.
The stock now sits at six cents per share.
Authorities in New York honed in on CanaFarma since the company solicited investments there, however the indictment indicates the alleged fraud took place against investors in other jurisdictions.
Fargesen released a statement from the company Wednesday, saying, “The charges levied today have not been proven in a court of law and the defendants vehemently deny these charges and have indicated their intentions to vigorously defend both CanaFarma and themselves individually.”