The Shady Side of Weed Inc.

Dec 16, 2014 at 7:35 AM ET

A few months ago, an article in an advertising trade publication caught my eye: “Meet Legal Weed’s First Billionaire.

I pictured a stoner-looking guy rolling around mountains of marijuana, juggling briefcases filled with cash. Basically, I imagined someone like Snoop Dogg. I was very wrong.

The story was a flattering Q&A with Vincent Mehdizadeh, who founded a company called Medbox, which was once valued at over $2 billion. Medbox sells what are essentially weed lockboxes to medical marijuana dispensaries. Boring, right? I thought so, too.

“We put the machines behind the counter in dispensaries and they’re marketed as secure safes,” the entrepreneur said. “They hook into a point-of-sale system and spit out exact quantities in grams.”

From mid-2012 until the beginning of 2014, the company sold 158 Medbox machines, which retail at $25,000 each, according to a recent financial statement. The company also makes money from providing consulting to dispensaries in a number of different states, including California, Arizona, Connecticut, Washington, Colorado, Nevada, Oregon and Illinois.

Clearly, the weed business is booming—one estimate says the market will grow to $5 billion by 2018—and lots of entrepreneurs are cashing in. But the idea that one guy, Mehdizadeh, was already a billionaire in such a nascent industry was kind of mind-boggling.

And it was a little too good to be true. I dug around a bit more, and there happened to be a much juicier story around Mehdizadeh and Medbox. Mehdizadeh is a convicted felon. Before he started Medbox, he was apparently caught pretending “to be a law firm” and “defrauded dozens of victims seeking immigration help.” He was forced to pay out $450,000 in restitution to victims.

Mehdizadeh and Medbox declined to talk with us, despite a number of requests for an interview. But in his company bio, Mehdizadeh claims his innocence in the above matter, and writes that he pled guilty only to avoid a trial and the bad publicity that would come with it.

Medbox’s problems are bigger than Mehdizadeh’s rap sheet, though. The Securities and Exchange Commission notified the company last month that it is under investigation for possible fraud. It’s also no longer valued at anywhere close to a billion dollars.

Medbox’s story is becoming alarmingly common. With medical marijuana now legal in 20 states and recreational use approved in two, weed businesses are attracting thousands of entrepreneurs—and some of them have a pretty sketchy past. For instance, there’s Michael Llamas, once the CEO of Medical Marijuana Inc. (MJNA), which bills itself as the “first publicly held company vested in the legal cannabis and industrial hemp industries.” Llamas, 27 at the time, was forced to step down as the company’s CEO in 2012 days after he was the FBI indicted him for mortgage fraud that caused more than $10 million in losses.

Then there’s Bruce Perlowin, the so-called “King of Pot.” Perlowin spent nine years in prison as a convicted drug smuggler. Today he runs Hemp Inc.

If you’ve been following the so-called “green rush,” you probably won’t be too surprised by all of this drama. In some respects, Weed Inc. is the Wild West. Think of the North Dakota oil boom, or the gold rush in the mid-1800s. Unfortunately, these sudden opportunities to make a ton of money don’t always attract the most savory characters.

Penny stocks–or stocks that trade for less than a dollar–are notoriously volatile. They’re also the types of stocks notoriously prone to fraud, because moving the stock price just a few cents can double an investors money literally overnight.

Even the Financial Industry Regulatory Authority (FINRA) is putting out warnings to investors: “The cannabis business has been getting a lot of attention—including the attention of scammers,” they noted earlier this year.  

So what’s the scam? Some companies seem to be running “pump-and-dump” schemes. The idea is to launch a company, take it public, get “investors,” then dump the stock. Meanwhile, the principals of the company—who own vast amounts of the company stock—cash out right before they stop promoting it.

In August, the U.S. Securities and Exchange Commission made its first big bust on a weed boiler room. The four men indicted allegedly promoted the hell out of two marijuana stocks by sending out mass email blasts. They’d goad small-time investors to plunk down money, then dump their own shares right before the inevitable crash. The men reaped in $2.5 million in “illegal profits,” the SEC alleges.

Just a few months earlier, the SEC suspended trading on five other marijuana stocks amid questions “about the accuracy and adequacy of publicly disseminated information” the companies were putting out.

“Marijuana is in the news,” Peter Leeds, author of Penny Stocks For Dummies, told Business Insider recently. “People are very quick to take 500 bucks and throw it at a stock and say, ‘OK, I hope this turns into $3,000.’ But they don’t realize they’re throwing 500 bucks at a black hole.”

Some analysts are saying Medbox—one of the biggest companies in the weed industry—may be the next big black hole in the weed business. In 2012, just a couple of months after Medbox went public, the company received a favorable mention in an article in MarketWatch, the popular financial news blog. Its shares surged in less than a week by 3,000 percent—from roughly $4 to $215. The market cap of the company was a “staggering” $2.3 billion. Mehdizadeh became a billionaire overnight.

The stock has since fallen all the way to around $6 a share—and Medbox’s market cap is now around $200 million, making Mehdizadeh’s shares worth about $130 million. According to SEC filings, he owns about 65 percent of the company—meaning his still plenty wealthy on paper, though not a billionaire, exactly.

Just because the SEC is investigating Medbox doesn’t mean the company is guilty of anything just yet. Medbox notes in recent filing that the “SEC said it is trying to determine whether there have been any violations of the Federal Securities Law.”

But one analyst I spoke with, Andrew Left, who runs Citron Research, says he’s been tracking Medbox for a while, and is convinced they intentionally juice their financial numbers to paint a rosier picture of their performance. “Medbox is the most scammy, fraudulent company that gets any form of airtime that I’ve seen in a long while,” he told me.

Left went on CNBC in February 2014 and openly called Medbox a fraud. “I invited the company to sue me,” he says. “They didn’t sue me. Of course not.” The Southern Investigative Reporting Foundation (SIRF), a nonprofit entity that does investigative financial reporting, has also peered into the company, reporting an entire series on Medbox, beginning in September 2013.

It all gets pretty weird. In April 2014, for instance, SIRF investigated claims that Mehdizadeh was using an alternate name just so that a potential client wouldn’t be able to run a background check on him. SIRF presented plenty of evidence to Mehdizadeh  (including screenshots of e-mails from the source) but Mehdizadeh denied the whole ordeal and the source then recanted his initial claims.

Then, on April 11, Mehdizadeh resigned from his position of Medbox and became a consultant to the company.

Vincent Mehdizadeh is 35 years old and lives in Los Angeles. His online profiles don’t reveal too much about him–it’s unclear if or where he went to college, or what kind of work he did earlier on in his life. But we may know more soon.

In a few months, Mehdizadeh plans to release an autobiography. The title? Self-Made: How I Became a Billionaire in the Legalized Marijuana Industry Without Selling a Gram.