On Friday, May 23rd, the SEC suspended the 8th company in the cannabis sector since early March. The company, Fortitude Group (OTCPK:FRTD), was the third "Pink Sheet" in the group to suffer this type of action this month, with CannaBusiness Group (OTC:CBGI) suspended on May 7th and Fusion Pharm (OTC:FSPM) suspended on May 16th. The SEC lists all of the suspensions going back to 1995 here. In the case of FRTD, the order suggested:
there is a lack of current and accurate information concerning the securities of Fortitude Group, Inc. because of questions regarding the accuracy of publicly available information about the company's operations.
The SEC actions have taken a tremendous toll on the sector, with the Benzinga 420 Marijuana Index declining from a peak closing value of 1010 on 3/18 to a recent low of 367 on 5/21, a decline of 64%:
During the downturn, Fridays have typically been weak days for the sector, so it was somewhat surprising to see the index jump almost 3% despite the FRTD's suspension. One contributor to the better sentiment may have been the reaction by investors to news out after the close on Thursday on GrowLife (OTC:PHOT), with the CEO resigning for "personal reasons" and the President assuming his duties. PHOT traded in line early Friday with Thursday's prices before moving significantly higher later in the day, a potential signal that the recent decline following its April suspension has played out.
More likely, the market bounced from very oversold levels because the suspension of FRTD wasn't as surprising as some of the more recent ones have been. While I have never studied the company in depth, there were several yellow flags, including being listed on the Pink-Sheets, being late with its Q1 disclosure, and a barrage of press releases (19 in two months, including one just before the suspension on Friday):
The most disturbing one, regarding the potential acquisition, caught my attention when it was released:
Fortitude Group, Inc. announced today that they received a Letter of Intent (LOI) to be purchased by a fully reporting OTCQB company. The name of the proposed acquirer has been withheld due to the LOI having a confidentiality clause. The LOI also includes a 10-day due-diligence period with an estimated closing date for the transaction of May 30, 2014. Upon completion of the due-diligence period, both companies intend to make a joint announcement to the public as well as file the required 8-k.
The LOI proposes an "in-Kind" share-exchange between both companies whereby upon completion of the merger, the OTCQB Company would be the surviving entity. The acquiring company has valued Fortitudes shares at $.12 per share
I warned 420 investors to be cautious because it was just a letter of intent and was with an unnamed party and at an outrageously higher price than the last trade (FRTD had closed near $0.01).
In an environment where FINRA (warning) and the SEC (warning) are warning investors, this type of announcement by FRTD seems highly irresponsible. While Pink-Sheet companies aren't legally required to file disclosures on a timely basis, FRTD indicated on 5/15 that it would release Q1 disclosure by 5/20, but it failed to do so. Another issue is that the company had to admit to improperly describing a transaction in its annual disclosure in April, suggesting it had closed when it had not.
As I said, this isn't a company I know very well, but a cursory review of that annual report points to another problem, a deal in February with "eViteXCHANGE.com", which purportedly is headquartered out of the Flatiron Building in New York City:
A quick call to the number listed certainly makes it clear that there is no business here. The physical address is the same as for several other businesses, including publicly traded Gemini Group Global (OTCPK:GMNI), Little Yoga Bubbles and Global Karma, which owns Wall Street Market Wire. It appears that this is ProCap (described above). In other words, eViteXCHANGE offices the company that FRTD was supposed to purchase (along with GMNI), though this was never disclosed in the press release or on OTC Markets. The website makes it appear that the company has something to do with either penny stocks or hat sales.
The eViteXCHANGE deal, described in the annual report and in a press release, allows FRTD to offer private-label debit cards to facilitate marijuana purchases. The company suggested in the press release that it would use 420banc.com and 420cashcard.com by 3/17, but the former is currently parked, while the latter points to affinityelitecard.com. This website offers shareholders a "FRTD offer" that gives them $25 for filling out an application:
It's hard to say what might have triggered the SEC, but it seems that there is plenty here or at least enough so that investors in the marijuana-related stocks didn't think that the suspension was totally undeserved.
FINRA and the SEC are clearly on a mission to weed out the bad players that sadly run rampant in the cannabis sector. Most investors appreciate the need for this activity, but are frustrated on a number of fronts. First, the rationales for suspension provided by the SEC tend to be vague. Second, there tends to be no follow-up by FINRA or the SEC so that the public can understand the issues at hand. Third, the stocks tend to collapse by 80% or more as they are relegated to the Grey Sheets. Theoretically, a suspension that results in an "all clear" (I haven't seen one of those!) still inflicts the illiquidity penalty, as the company banished to the Grey Sheets has to find a market-maker to fill out a 211 and then have FINRA accept the application, as described here. The cost of suspension is substantial, so investors would like to feel as though the SEC is acting correctly. In the case of FRTD, this appears to be a reasonable assumption.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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