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Andy DeFrancesco's Canadian lawyer says DeFrancesco has not had a 'run in with any Canadian regulator.'

Andy DeFrancesco

The top U.S. securities regulator has settled civil fraud charges against Barry Honig, an investor who has held stakes in a number of companies alongside Canadian dealmaker Andy DeFrancesco.

Mr. Honig agreed to a lifetime ban from buying and selling penny stocks. The Securities and Exchange Commission, however, is continuing its queries.

The SEC has issued subpoenas to Cool Holdings Inc., a Miami-based electronics retailer where Mr. DeFrancesco served as chairman of the board. It’s now the third U.S. company connected to Mr. DeFrancesco, a long-time dealmaker and influential cannabis investor, to receive a subpoena from the SEC since the beginning of 2018.

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Mr. DeFrancesco’s roles in the three companies ranged from investor to insider. The companies are Cool Holdings, Polarity TE Inc. and Riot Blockchain Inc.

All three also counted Mr. Honig or some of his other fellow defendants in the SEC case as investors or insiders. The SEC alleged Mr. Honig and his associates conducted “pump and dump” operations – where stockholders promote a stock to new investors while quietly selling their own shares – at other companies.

Mr. DeFrancesco has been a big player in the early development of the legal cannabis industry, playing a key role in assembling Aphria Inc., one of Canada’s biggest pot companies. Mr. DeFrancesco, who currently serves as board chairman and chief investment officer for SOL Global Investments Corp., declined to comment for this story.

He has hired a white-collar criminal-defence lawyer, Alex Spiro of Quinn Emanuel Urquhart & Sullivan LLP in New York, who responded to queries from The Globe and Mail.

“Mr. DeFrancesco has had a storied and unblemished 25 plus years in the business world,” Mr. Spiro said via e-mail. “He has received no inquiry from the Canadian regulators and the limited inquiry from the American regulators we expect to soon be behind us.” Mr. Spiro did not directly answer a question about whether Mr. DeFrancesco himself received a subpoena.

Mr. DeFrancesco’s Canadian lawyer, Joseph Groia, added in a separate e-mail that “the public records show he has never had a run in with any Canadian regulator.” Mr. Groia said he has represented Mr. DeFrancesco for some time on regulatory compliance matters.

Ontario Securities Commission spokeswoman Kristen Rose declined to comment on whether the OSC had contacted Mr. DeFrancesco on any matter. An SEC spokesman declined to comment. The agency does not disclose its continuing enforcement activities; instead, companies that are the subject of inquiries or formal investigations and subpoenas decide whether to disclose that information to their investors.

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Securities filings show Mr. DeFrancesco played a key role in the development of Cool Holdings, as well as serving as the chairman of the board. At Colorado-based Riot Blockchain, another subpoena recipient, Mr. DeFrancesco’s wife was a major investor who helped affect a change in the company’s leadership. At PolarityTE, a Utah-based biotechnology company that also disclosed a subpoena, he and his wife had roughly 50,000 shares, just less than 1 per cent of the outstanding stock in the company, securities filings show.

While Mr. DeFrancesco was an insider at only Cool Holdings, the common element in the three cases is the involvement of one or more of Mr. Honig and other men who were sued by the SEC last September. The SEC alleged that Mr. Honig, John O’Rourke III and John Stetson grossed US$27-million in stock sales in pump-and-dump schemes from 2013 to 2018, leaving other shareholders “left holding virtually worthless stock.”

Mr. Stetson and Mr. O’Rourke have not settled and remain as defendants in the SEC case. Michael Osnato, a lawyer representing Mr. Honig, declined to comment. Lawyers for Mr. O’Rourke and Mr. Stetson did not respond to e-mails.

Cool Holdings, Riot Blockchain and PolarityTE are not the companies described in the September SEC complaint. Mr. DeFrancesco said in a December interview with The Globe that he did not own shares in the companies described in that complaint, and he had not been contacted by the SEC about them. Mr. DeFrancesco described the three men as business associates, saying he met Mr. Honig because their children went to the same Florida school. He met Mr. Stetson five to six years ago, he said, and Mr. O’Rourke two to three years ago.

Some of the companies’ disclosures say the SEC is interested in details surrounding sharp rises and falls in their share price. All three companies describe themselves as “fully co-operating" with the SEC.

Cool Holdings received the subpoena March 25, disclosing it May 9 in an SEC filing. Cool Holdings said the SEC has “request[ed] certain documents and information relating to the company and to volatility in the Company’s share price and volume during September 2018.” Three company executives also received a subpoena, Cool Holdings said, but the disclosure did not specify if any former insiders received subpoenas.

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Separately, PolarityTE said in its March 18 annual report that it had received a subpoena March 1 and a formal order of investigation March 4, with the SEC inquiring about possible violations of anti-fraud provisions of federal securities laws governing public disclosures, the reporting of beneficial share ownership and stock price manipulation.

PolarityTE fired Mr. Stetson as an executive after the SEC sued him in September, 2018. “The company, management, and Board of Directors do not tolerate the behavior outlined in the complaint,” PolarityTE said in a statement. A spokeswoman for the company told The Globe that the subpoena came after PolarityTE contacted regulators about what it saw as unusual trading in its shares.

Riot Blockchain said it received its subpoena on April 9, 2018. In a filing May 10 of this year, it said “the SEC has continued to request information from the company.” The company did not respond to a request for comment.

At Riot Blockchain, Mr. DeFrancesco and his wife, Catherine, partnered with Mr. Honig, Mr. Stetson and Mr. O’Rourke in the 2016 takeover of a Colorado company called Venaxis Inc. Mr. Honig took a position in Venaxis and urged that Mr. Stetson and Mr. O’Rourke be placed on the company’s board. Catherine DeFrancesco wrote a letter to Venaxis’s board supporting Mr. Honig’s nominees.

That company then became Riot Blockchain, with Mr. O’Rourke serving as CEO. (Mr. O’Rourke resigned from the CEO job in September, after the SEC filed its civil fraud case.)

Cool Holdings, the subject of a February Globe article, was once a struggling San Diego-based Latin American smartphones seller called InfoSonics Corp., before it merged in 2017 with an asset-less “shell company” company called Cooltech Holding Corp., chaired by Mr. DeFrancesco. Mr. O’Rourke, a Cooltech shareholder, took a major role in the negotiations, according to a narrative included in InfoSonics’ SEC filings.

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The merged company became Cool Holdings. Its stock generally languished until a series of articles that described themselves as paid advertisements highlighted the company’s status as a reseller of Apple computer products and suggested an expansion plan with "a projected revenue stream worth [US]$900-million in Phase 1 alone.”

The shares went from a Nasdaq closing price on Sept. 14 of US$5.18 to trade as high as US$22.61 on Sept. 21. The next trading day, they closed at US$12.09. That was the beginning of a nearly uninterrupted decline. The stock closed last week at US$1.68 and at US$1.63 on Monday. On Dec. 31, Mr. DeFrancesco resigned as chairman and as a board member, citing a need to focus on SOL Global.

The company and Mr. DeFrancesco both told The Globe in February that the investor-relations firm that wrote the articles was not paid for the articles.

Mr. DeFrancesco and brothers Michael and Aaron Serruya, founders of the Yogen Fruz chain, were early backers of Leamington, Ont.-based Aphria.

Mr. DeFrancesco’s role there, however, created greater scrutiny of his business methods when short-sellers noted his central role in a series of transactions that ultimately saw Aphria agree to pay nearly $200-million in stock for cannabis assets in Colombia, Argentina and Jamaica that the short-sellers alleged were "nearly worthless.” Mr. DeFrancesco defended the deal. Aphria’s board said it had concluded the price it paid for the assets was “acceptable,” but took a partial writedown of the assets earlier this year.

Aaron Serruya resigned from the Cool Holdings board Dec. 16, two days after his re-election as director. Michael Serruya was a PolarityTE shareholder alongside Mr. DeFrancesco’s family companies, the company’s filings show. Aaron and Michael did not respond to voicemails left at Yogen Fruz, or to a message sent via the website of Markham, Ont.-based Serruya Private Equity.

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