An investor group is suing innovative industrial property (IIP) (NYSE: IIPR) for failing to exercise proper due diligence in its investment in Kings Garden.
Investor Michael Mallozzi sued IIP in April 2022 when Blue Orca Capital’s report was released. It was later joined by investors Alejandro Handal and Stephen Forrester.
They allege that IIP misled investors, was incompetent and violated securities laws.
In December, the IIP asked the court to dismiss the lawsuit, but the most recent brief was that the IIP was aware that Kings Garden was a Ponzi scheme and had told investors all was well. We are asking the court to deny the request.
King’s Garden Deal
In April 2019, IIP entered into a sale-leaseback transaction with California-based Kings Garden, led by CEO and Chairman Michael King. Between 2019 and his 2021, IIPR purchased six of his properties from Kingsgarden at prices significantly higher than Kingsgarden paid for the properties.
In total, IIP invested approximately $150 million in Kings Garden cannabis farms, which accounted for up to 10% of IIP’s rental income. The company also spent money to build the Kings Garden facility.
At the heart of the lawsuit is the investor’s allegation that it did not perform as much due diligence as IIP claimed. Specifically, a brief background check revealed that one of Kings Garden’s investors, the Swiss American Investment Corporation, sued Kings Garden for failing to pay its promised quarterly dividends. said he did.
Also, “irregular” transactions involving multi-million dollars between King’s Garden and its managing directors, and multiple related party transactions between King’s Garden and entities owned or controlled by its managing members. , and also points out that “there was self-dealing.” Financial transparency. ”
The court summary also said, “By January 2019, King had already been involved in 32 lawsuits, had already been charged with felonies, and had already changed his name. The information that IIPR ultimately concluded was a Ponzi scheme was available in early 2019 with just a few keystrokes.”
Instead, IIP continued to tell investors that Kings Garden was in good standing until IIP sued for underpayment. At that point, the company said it actually suspected Kings Garden was being honest.
Investors argued that IIP could not do it both ways, claiming in one lawsuit that King’s Garden lied to them, while in another lawsuit, they doubt King’s Garden lied to them. He said it didn’t work.
The lawsuit uses IIP’s own language, stating that it will send due diligence teams to check construction projects and verify invoices. But the lawsuit claims it did nothing.
“Two of these projects, the San Bernardino and 19th Street properties, had allowances totaling up to $76.4 million in ‘draw requests,'” the lawsuit states. “At the end of the class period, IIPR said he paid King’s Garden a $49 million draw request for work that was never performed due to forged draw requests and invoices. ”
For example, the e-invoice looked mixed with mismatched fonts and text boxes added to the old invoice. The document was from a power company previously owned by Kings Garden’s vice president of operations.
The lawsuit also brought up an April 2022 report by activist short seller Blue Orca, writing about IIP’s exposure to Kings Garden. Instead of addressing the issues raised by Orca, the lawsuit says IIP said Orca didn’t understand commercial real estate and the cannabis industry.
In the company’s May 2022 earnings call, IIP continued to praise King’s Garden, stating, “Michael King and his team have built a reputation for excellence in product quality and consistency, and perhaps the world’s largest single cannabis market. I am getting.”
But just weeks later, court filings claim the IIP has become aware of the problem. In July 2022, Kings Garden told investors it had stopped paying rent, and in August filed a lawsuit against the company for a fraud known as a Ponzi scheme.
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