SEC sues California cannabis investor over $38 million ‘Ponzi-like’ scheme

The U.S. Securities and Exchange Commission filed suit on Monday against California businessman Robert Newell and one of his former companies, Black Hawk Funding, alleging Newell masterminded a $38 million “Ponzi-like” scheme to defraud investors.

The suit, filed in U.S. District Court in the Central District of California, alleges that the 63-year-old Newell raised $37.7 million from about 200 investors nationwide between 2016 and 2019 to ostensibly put into legal marijuana businesses. Instead, he “engaged in various undisclosed and unauthorized uses of the funds, including making Ponzi-like payments to investors and paying for the expenses of unrelated entities.”

Newell founded Black Hawk Funding in 2011, originally with a focus on the real estate industry, but he pivoted to cannabis following recreational legalization in California in November 2016, according to the lawsuit. Newell acted as the principal financial adviser to three private funds: Verde Ventures Inc., Verde Holdings Inc., and Verde Partners Inc.

Another separate corporation, National Asset Valuation Services, was also created by Newell “as a conduit to misappropriate money” from two of the three funds, the SEC lawsuit alleges.

“Newell engaged in a scheme and deceptive course of business to defraud investors by creating a false impression that the Verde Funds were more successful than they were, which allowed Newell to continue raising funds from investors and to enrich himself at the expense of the investors,” the SEC alleged in the suit.

“By at least early 2016, Defendants’ businesses were struggling and Newell determined that investing in the cannabis industry could be profitable. Newell then shifted Black Hawk’s business to investing in the cannabis industry by raising money through three securities offerings,” the suit charged.

Newell, through Black Hawk and its related funds, promised investors a 10% annual return to be paid quarterly, the suit noted.

“But substantial portions of investor funds were not invested in the cannabis industry and were instead used to make Ponzi-like payments to investors; were used for undisclosed purposes such as for other Black Hawk affiliated/managed entities not in the cannabis industry or to pay salespersons’ commissions; and were misappropriated by Newell,” the suit asserted, adding that the cannabis investments actually made by the Verde Funds were “not profitable.”

“Nevertheless, from approximately April 2017 through June 2019, on a quarterly basis, Newell ordered Black Hawk employees to pay the ten percent purported returns to investors,” the SEC suit charged. “Newell made the ten percent payments to investors even though he knew that the money used to make payments was sourced from other investors’ money—money that Defendants represented to investors would be used to invest in the cannabis industry.”

The Ponzi scheme payments eventually caught up with Newell in September 2019, the SEC suit asserts, when “significant transfers” to Black Hawk from the Verde Funds “resulted in an outstanding balance owed by Black Hawk of at least $2.5 million.” That led to Newell being “forced out” of Black Hawk.

Newell also inappropriately paid broker commissions with investor money, the SEC alleged, to the tune of more than $400,000, and also misappropriated at least $668,000 for his own benefit and that of the Verde Funds.

The lawsuit charges Newell and Black Hawk with four counts of violating securities laws, and one charge specifically against Newell personally for securities fraud. The suit requests a federal court order preventing Newell and Black Hawk from selling securities in the future, forcing Newell to disgorge all his profits from the scheme, and issuing civil fines against both.