A pair of investors in U.S. cannabis retailer MedMen Enterprises Inc. have launched a multi-million dollar lawsuit against the company and its executives alleging breach of fiduciary duty.
Brent Cox and Omar Mangalji, early investors in MMMG, LLC, a precursor to the Canadian Securities Exchange-traded MedMen Enterprises Inc., filed the suit on Tuesday in the Los Angeles Superior Court. The suit alleges that MedMen and its executives Adam Bierman and Andrew Modlin are unfairly preventing Mr. Cox and his firm MMMG-MC, Inc. from cashing out of their positions, while allowing other investors do so.
Mr. Cox is seeking more than US$1.8-million in damages for himself, and more than US$18-million in damages for his and Mangalji’s firm. The suit, which also alleges Mr. Bierman and Mr. Modlin have enriched themselves with bonuses contrary to MedMen’s corporate interests, is also bringing an action on behalf of MMMG against Mr. Bierman and Mr. Modlin, seeking US$178-million in damages.
When MedMen went public last spring, early investors in the entities that combined to form MedMen Enterprises, agreed to six month lock-up period for their shares. The lock-up period was meant to end in November, but was extended. The suit claims that other investors that were part of the lock-up will be allowed to begin trading their shares on Jan. 10, 2019. Investors in MMMG, by contrast, won’t be allowed to freely trade their shares for another 12 months, the suit alleges.
“In other words, MMMG and its investors, including Plaintiffs, will receive their shares, but must sit on the sidelines for a year while Fund I and Fund II’s investors enjoy the freedom to partially liquidate their positions and thereby earn a return on their investments,” the plaintiffs write.
“MMMG and its investors are being used as a barrier to fluctuations in share price for the benefit of … [other early] investors. That is indisputably unlawful, and a breach of fiduciary duty to MMMG and its investors,” the plaintiffs add.
In a release sent out Wednesday afternoon, Daniel Yi, MedMen’s senior vice president of corporate communications, called the allegations “frivolous.”
The lock-up rules condemned in the lawsuit are part of an agreement reached by an independent committee “to safeguard the best interests of our shareholders, including MMMG and the funds, the plaintiffs,” Mr. Yi said.
“Mr. Mangalji and Mr. Cox have already received cash distributions representing a complete return of their capital plus a substantial gain. It’s unfortunate that Mr. Mangalji and Mr. Cox have chosen this path,” he added. On Wednesday, a Los Angeles Superior Court denied a request from the plaintiffs for a temporary restraining order and a preliminary injunction, the MedMen press release said.
MedMen shares dropped 6.74 per cent on Wednesday.