The marijuana vending machine startup Medbox Inc. got smoked last month by the U.S. Securities and Exchange Commission, which accused the company of filing sham earnings reports. It was the latest in a series of setbacks for the cannabis company, which last year changed its name to Notis Global Inc.

The SEC’s March 9 announcement that it had charged Medbox with falsely touting “record” revenues based on illegal stock sales was only the latest round of legal trouble for the embattled dispensary. Medbox founder Vincent Mehdizadeh, once touted as the legal weed industry’s first potential billionaire, agreed to pay $12 million to settle his part of the SEC case.

Mehdizadeh and other Medbox executives—including former CEO Bruce Bedrick—have faced multiple securities class actions and shareholder derivative suits alleging that they failed to fulfill their fiduciary duties. As part of a settlement agreement in one of those derivative suits, a judge in the Central District of California ordered on March 3 that Mehdizadeh and Bedrick transfer a combined 2.3 million shares of company stock into an account covering plaintiffs attorney fees. Any stock left in the account after the lawyers got paid would go to shareholders.

According to a case docket, the plaintiffs were represented by three lawyers from La Jolla, California-based Bottini & Bottini, a boutique that specializes in shareholder class action litigation and derivative claims, as well as James Noblin of Larkspur, California-based Green & Noblin and William Federman of Oklahoma City-based Federman & Sherwood.

 

Federman said this week that he didn’t accept any Medbox stock because he considered it a conflict of interest to do so.

“Shareholders are going to receive such a small, small payout in the securities class action,” Federman said. “It seems to be insult after injury in a class action where there’s such a small recovery for the lawyers to take the stock.”

As far as Federman knows, the other plaintiffs’ counsel involved in the derivative suit did take the shares as part of their fee agreement, he said. Bottini & Bottini name partner Francis Bottini Jr. and Green & Noblin’s Noblin did not respond to requests for comment on the settlement agreements. Noblin and Bottini would not be Medbox’s first lawyer-owners.

The American Lawyer reported in 2015 on two law firms—Manatt, Phelps & Phillips and New York-based boutique Sichenzia Ross Friedman Ference (now called Sichenzia Ross Ference Kesner)—accepting shares in Medbox as it coped with a range of litigation and regulatory issues. Though Medbox was once valued at $2 billion, the company’s 2016 financial report showed it had a net loss of $50.5 million for the previous year, and only $532,791 in revenue.

Manatt Phelps litigation partner Phillip Kaplan represented Medbox in the shareholder class action it settled in March. He declined to comment on whether his firm has held on to its stake in the company, which according to an annual report filed in 2014 had 46,352 shares being issued to Manatt Phelps at $5.11 per share. Another 6,540 shares were issued to Sichenzia Ross at $6.59 per share, putting the firm’s holdings at $43,098.60 and Manatt Phelps’ at $236,858.72.

A Manatt Phelps spokesman and corporate partner Blase Dillingham, who has also done work for Medbox and its successor Notis Global, did not return requests for comment. Nor did Sichenzia Ross corporate partner Darrin Ocasio, another lawyer for the company. A spokeswoman for Notis Global said she couldn’t discuss matters involving the company’s shareholders.

Federman said he hasn’t closely followed the SEC’s allegations against Notis Global, which include the claim that Mehdizadeh created a shell company to make illegal stock sales and used profits from those sales to purchase a luxury home in the Pacific Palisades, an affluent seaside neighborhood in Los Angeles. Federman did not that the company formerly known as Medbox is “in a difficult business segment.”

Mehdizadeh, who once faced charges of impersonating an attorney that he later pleaded no contest to, is not the first pot stock entrepreneur to run into trouble.

In a similar case last year, the SEC charged two brothers-in-law who allegedly schemed to funnel illegal stock sales to Fusion Pharm Inc., a company that makes containers for growing marijuana. Fusion Pharm and other defendants reached a settlement with the SEC, but not before the regulatory agency had suspended trading in the company.

GrowLife Inc., another cannabis company once headed by former Jenner & Block partner Sterling Scott, had trading in its shares halted by the SEC in 2014. GrowLife reached its own derivative settlement with shareholders the following year and Scott is no longer involved with the company.

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