Source: Forbes March 26, 2014

This story appears in the April 14, 2014 issue of Forbes.

When Michael Mona Jr. went before the Nevada Gaming Control Board seeking a license for his Mediterranean-style Sunrise Suites hotel and casino in Las Vegas, it didn’t go well. The board, reportedly wary of his ties to shady telemarketers, including one who spent time in jail, told Mona his application would be rejected. He in turn withdrew his application and subsequently filed for personal bankruptcy when the casino could not open.

Mona might not be fit for the gambling business, but 16 years later he has found a lucrative field that’s not as choosy: the pot penny stock business. Mona now runs CannaVest, the highest-flying stock in one of the year’s biggest market frenzies. With Colorado and Washington now permitting the sale of marijuana for recreational use, and 20 states allowing it medically, some 60 publicly traded outfits, many snarled in a tangled, difficult-to-track web of interconnections, have popped up, claiming to be pot and hemp stocks. Almost none, mind you, emerged via an IPO and all the pesky disclosure and scrutiny that come with that path. Instead, real estate, marketing and oil outfits have miraculously morphed into medical marijuana and hemp companies, either through reverse mergers or simply changing their declared line of business. And just about every single one is thinly traded on the over-the-counter bulletin board, or Pink Sheets, where promoters can push them with the enthusiasm of a campus dealer.

CannaVest CEO Michael Mona Jr. Credit: Lara Tomlin

In terms of a bonanza, all of them trail Mona’s CannaVest, which has surged 1,260% since the start of 2013. Its financials aren’t pretty: $28.4 million of losses for the first nine months of 2013, on revenues of just $1.35 million, or about what a single McDonald’s franchise might gross. But its thinly traded stock? In February, when it was trading at $160 a share, CannaVest hit a market capitalization of more than $3 billion. At a recent $68 a share, it’s still high enough to make its largest shareholder, a Las Vegas lawyer named Bart Mackay, the first pot stock billionaire. Ostensibly. “In my view it’s a paper valuation and certainly not something I can take to the bank,” Mackay tells FORBES.

But Mona, the CEO, is trying to take it to the bank: He’s been quietly working to sell on behalf of the company a private placement of 10 million shares that can’t trade publicly for six months, according to an internal e-mail from Mona obtained by FORBES. The price: $1.50 a share, or between 2 cents and 3 cents on the dollar of the public value.

That should tell you everything you need to know about CannaVest’s prospects. Who needs the heavily regulated casino industry when there’s far more cash on the table in the penny stock market, with nary a protection for investors, save a warning from the Financial Industry Regulatory Authority last August to be on guard for “con artists behind marijuana stock scams”? Plus, some of the people Mona still gets to do business with have a criminal record or are under federal indictment.

Mona refused to be interviewed by FORBES. But he did respond with an e-mail: “We have not promoted our stock and have no investor relations firm. Our sole focus is to source and supply the highest-quality industrial hemp available on the market.”

Perhaps. But CannaVest also serves another purpose. The perfect window on a huge, emerging red flag for mom-and-pop investors looking for a way to cash in on the legalization of marijuana. A multibillion-dollar industry run for decades by criminals and now traded on the vehicle of choice for financially savvy swindlers and hucksters! What could possibly go wrong?

The genesis of CannaVest–and the pot-stock frenzy overall–can be traced to Bruce Perlowin. He knows the business well: He spent nine years in prison for drug smuggling. With another ex-con, Don Steinberg (who also went to jail for drug smuggling), Perlowin started the first publicly traded medical marijuana company in 2009. He got the idea after a CNBC documentary called Marijuana Inc. featured Perlowin’s drug-smuggling past. After it aired Perlowin was bombarded with calls and investment proposals.

Perlowin and Steinberg already controlled a company that sold debit cards and traded on the Pink Sheets, Club Vivanet. “Is there any sizzle in debit cards?” Perlowin asks FORBES rhetorically. “There was so much sizzle in medical marijuana.” To remove any nuance he renamed his company Medical Marijuana and was issued 40 million shares by the board.

What followed has been a textbook example of how to create buzz through wheeling and dealing with related vehicles. When Perlowin oversaw it, Medical Marijuana didn’t actually do much, offering educational seminars and consulting services. Then, in 2011, Medical Marijuana sold a huge stake by issuing 260 million shares to a privately held investment vehicle, Hemp Deposit & Distribution Corp., run by Michael Llamas, then 26.

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