MedMen Inc. (CSE:MMEN) (OTCQX:MMNFF) released their preliminary revenue results for the second quarter of 2019 on Thursday amid a mess of legal accusations. Although the pot stock is boasting a forty percent quarter-over-quarter increase in revenue this quarter, MedMen could see these profits displaced between two pending lawsuits.
Former MedMen board member is suing the cannabis company for $19.8 million
Brent Cox and Omar Mangali, founders of The Inception Companies, a private investment firm that holds a significant stake in MedMen Inc. through one of their business entities, is suing the pot stock for $18 million in damages. The suit was filed under Cox and Mangali’s investment entity MMMG-MC, which owns about 3.7 percent of MedMen’s entities. Cox is suing for an additional $1.8 million for his ownership in MedMen’s business entities, which totals about 1.3 percent.
According to the press release, both Cox and Mangali feel “backed into a corner” by the company’s behavior. They are accusing MedMen CEO Adam Bierman, company President Andrew Modlin, and other MedMen affiliates of breaching fiduciary duties by withholding shares and “using conflicting corporate structuring” to benefit the company’s top executives rather than the shareholders. The court documents filed with a Los Angeles Superior Court on Jan. 8 officially declare that “each of them are co-conspirators in the acts and breaches of duty [and]...are so tightly intertwined and so diligently pursue the best interests of Bierman and Modlin to the exclusion of the best interests of [MedMen Inc.]”.
In retaliation, MedMen’s senior vice president of communications called the claims “frivolous” and accused both Cox and Mangali of seeking “special treatment” with their lawsuit. According to the company, Cox and Mangali were already paid an undisclosed cash amount that matched a complete return of their invested capital plus gains. Although the court dismissed the investors’ request for a restraining order and a preliminary injunction, Cox and Mangali are moving forward with the suit.
“MedMen touts itself as a torchbearer of best practices...If that is the case then they need to adopt mainstream corporate governance practices,” Omar Mangali said in the Jan. 8 press release. “This industry is exciting and rife with opportunity, but unless we engender a safe and accountable environment for individuals and institutions to invest their capital, the explosive growth will be stifled.”
MedMen is facing two lawsuits in the state of California
While MedMen continues to dismiss the claims of this particular lawsuit, the company’s reputation in the state of California is not working in their favor. It is the second lawsuit the pot stock is facing in less than two months.
On November 16 of last year, a lawyer representing two former dispensary employees filed suit against MedMen for allegedly failing to pay current and former employees for hours worked. The two West Hollywood employees named in the lawsuit claim that MedMen refused to pay them for overtime hours, forced employees to clock out and continue working, and failed to provide the thirty-minute lunch breaks that are legally required in the state of California for hours worked. This lawsuit came after MedMen was accused last summer of taking tips away from employees in their California dispensaries.
As of the writing of this article, no ruling has been made regarding the lawsuit. MedMen did not comment on the lawsuits but does stand by their claims that they value every team member on the company’s payroll. What makes this particular lawsuit interesting is that licensing review boards in California require companies to include compensation packages for employees. Per a report from local West Hollywood paper WeHoVille, it is unclear whether this or any of the other claims against the company have affected their ability to achieve proper licensing in the state.
If anything, these lawsuits are a prime example of the behavior pot stocks should be avoiding. Competition in this industry is getting tighter and tighter, and any negative marks on a company’s reputation could severely affect their bottom line. As MedMen reports exponential financial growth this quarter, investors are left wondering how long it will last should the company lose one or both of these lawsuits. Until then, MedMen and its executives are innocent until proven guilty.
*Editor's Note: An earlier version of this article incorrectly stated that MMMG-MC owns 10 percent of MedMen. They own 3.7 percent. Also, an earlier version of this article incorrectly stated that MedMen was facing a class-action lawsuit regarding their labor practices. While plaintiffs seek to make it a class-action lawsuit, it is not yet one as of this time.