In the spring of 2010, exasperated police detectives from all over Los Angeles began phoning the county’s consumer affairs department to complain that an outfit calling itself the Active Lawyers Referral Service had misled its working-class customers from 2005 to 2008 by referring them to a law firm that billed them for work—but never finished the job. Their tales got positively woolly: Several claimed that Pejman Vincent Mehdizadeh, the founder of the referral service and the manager of the law firm, had posed as a lawyer and his father, Parviz, had given them legal advice as they sought work visas. (Pejman and Parviz use the names Vincent and Paul, respectively, for business.)
Three years later the consumer affairs unit, along with the Los Angeles County district attorney’s office, sought to prosecute Vincent Mehdizadeh, who, after months of wrangling, pleaded no contest to various criminal charges. He consented to pay $450,000 in restitution to his victims, thereby avoiding a four-year sentence in a California state penitentiary. (His father, Parviz, pleaded no contest to one misdemeanor charge.)
Ordinarily the playbook for those who have narrowly avoided a hefty prison sentence is standard: Assume a lower profile, make amends and go about getting life in order. Not so for Mehdizadeh, however, who decided to go on the offensive, putting out a press release that openly mocked the prosecutors and consumer affairs inspectors.
Then again, the fact that Vincent Mehdizadeh has in a few short years pivoted from hustling legal contracts to being the control man of a publicly traded company called Medbox goes a long way to explaining why lying low isn’t in his vocabulary.
Never heard of Medbox? This $27-a-share company has a fully diluted market capitalization of slightly under $800 million dollars and just happens to be the highest-profile service provider in the booming new business of legally selling marijuana in the United States. The company sits at the intersection of two American passions—the stock market and getting high—and its shares hit $215 at one point last November. Worth more than $200 million, Mehdizadeh is the first multimillionaire (legally) connected to the pot trade, no mean feat in an industry where prior to the start of legalization those at its pinnacle were often rewarded with long jail terms or the occasional bullet to the head.
The Southern Investigative Reporting Foundation pored over Medbox’s public filings, examined the records of the people involved with the company and Mehdizadeh’s background. We uncovered a host of disclosure issues, baffling related-party transactions and substantial problems with the company’s accounting—and its accountants.
The heart of Medbox’s business is a freestanding vending machine that dispenses bags of marijuana to registered users in states where the substance is legal. The company’s sales pitch to owners of marijuana dispensaries is touting its cashless inventory control system whose biometric thumbprint scan and Medbox-issued debit card ensure that only those with prescriptions can access pot.
What Medbox is really trying to do is carve out an alternative apart from traditional dispensary culture—warm, concerned, very stoned but inefficient—to a more corporate model. In California, lighting up one’s “meds” inside a dispensary is just fine; and operating a dispensary might seem to some people a cool way to earn a living for a while. But those places tend to run into expensive legal problems from crusading cops. Marketing vending machines costing upwards of $25,000 a piece, Medbox is selling dispensaries insurance as much as efficiency.
Running his own dispensary business had proved to be a profound headache for Mehdizadeh: In 2007 the Drug Enforcement Agency raided Herbal Nutrition Center, his dispensary; and a lawsuit resulted from another dispensary transaction in which he was accused of posing as a lawyer and a real estate agent at different times. (Mehdizadeh told the Southern Investigative Reporting Foundation that he paid $350,000 to the plaintiffs to settle the matter and “make it go away.”)
But the dispensary drama inspired Mehdizadeh. He and Bruce Bednick, a chiropractor from Arizona who had also entered the dispensary business and who now is Medbox’s president, have set up 165 of these machines in dispensaries in four states with legalized marijuana sales: California, Arizona, Colorado and Massachusetts.
Lately Bednick and Mehdizadeh want Medbox to graduate from the over-the-counter market and become fully compliant with all Securities and Exchange Commission reporting rules so it can snag a listing on a national stock exchange. It’s not an easy hoop to jump through; there is an extensive list of accounting and legal standards to meet. But if the SEC approves the company’s registration, it will be able to raise capital from the public and its shares can attract bids from institutional money managers. More importantly, company insiders who bought the stock months back at the massive discount of $5 per share can begin to cash in on the market’s insatiable appetite for anything to do with legalized pot and sell as many as 346,000 Medbox shares potentially worth more than $9 million, based on current values. (Mehdizadeh says he won’t sell any of his stock.)
Few would begrudge an entrepreneur his payday, but Medbox investors might be surprised to learn of Mehdizadeh’s past, including his many brushes with the law.
As Mehdizadeh tells it, he’s just a middle-class child of immigrants whose dreams for college got derailed when his parent divorced and then suffered a series of economic reverses. Towards the end of high school, the bottom fell out, forcing him to scrap school and hit the streets to drum up some revenue. He claims that against all odds he turned around a dormant legal referral business and earned a handsome living, all the while taking care of his two parents.
Despite there being a grain of truth to that narrative, the documents tell a very different story of the man behind Medbox.
A search of Los Angeles area criminal records databases shows that from 1997 to 2007, Mehdizadeh was arrested or pleaded no contest for breaking and entering, solicitation, trespassing and credit card fraud. He declared bankruptcy in July 2010, after landing up to his neck in back taxes owed to the Internal Revenue Service. Earlier this year, he wound up in the middle of the aforementioned consumer affairs investigation.
Mehdizadeh, now 34, insists he has explanations for all these troubles; mostly he attributes blame to the mistakes of others. While assuring the Southern Investigative Reporting Foundation he is an “open book,” he said he surmounted his problems five years ago and that dishonest message board critics who want to see Medbox fail have often overblown his past missteps and stumbles. The little he acknowledged of the legal headaches was offered with the caveat that he had been wrestling with anger over family troubles, as well as displaying poor youthful judgment about whom he associated with.
Consider Mehdizadeh’s tax problems. In his 2010 bankruptcy filing, he listed just under $2 million in back taxes owed the IRS for the 2003 to 2007 tax years. He attributed this situation mainly to a careless accountant who didn’t properly handle a series of allowable deductions. His lawyer negotiated the owed amount down to $1.2 million, Mehdizadeh said, claiming that his role in the mess was simply not having filed his federal income tax return in 2004 and 2005.
“I knew taxes had to be filed but I got careless,” Mehdizadeh said. “I actually enjoy writing a monthly check to the IRS now; it reminds me of how far I’ve come.”
The allegations that legal client cases were handled improperly did not arise because he scammed anyone, Mehdizadeh asserted; rather they resulted from the lawyer he worked for, Thomas Lee. For his part, Lee retired suddenly in 2008 and resigned from the California state bar with charges pending.
Attempts to reach Lee by publication time were unsuccessful.
Mehdizadeh similarly claimed a 2006 arrest for solicitation of a prostitute and criminal trespassing with intent to injure was nothing more than a coverup of police brutality writ large. His account of the matter has him merely driving around in his new Porsche and being randomly stopped by the Los Angeles police. After asking the officer the reason for the stop, “I was taken out of my car and beaten,” he said. Moreover, his car was impounded and he was arrested.
Despite his allegations of police brutality, Mehdizadeh did not press charges, sue or even file a complaint. Rather, he pleaded no contest to both charges, was given two years probation and paid thousands of dollars to retrieve his impounded car. (A spokeswoman for the Los Angeles Police Department said she could not discuss details about the arrest with the Southern Investigative Reporting Foundation, citing California privacy statutes.)
“If something like this happened today, I would be holding a press conference and sticking up for myself,” Mehdizadeh said. “I was a lot more green back then—still smart but much more green.”
As for the Los Angeles County district attorney’s case against him? Well, now Mehdizadeh is gearing up to fight back by suing the Los Angeles County department of consumer affairs, he said. “They need to be held accountable for their lies,” he harrumphed.
One area where there is little room for debate is Mehdizadeh’s penchant for posing as a lawyer. After the raid on his marijuana dispensary he wrote in a signed December 2007 post on Weedtracker.com, a dormant pro-marijuana legalization website, “I have a law degree and made managing partner in my firm before the age of 26.”
After Mehdizadeh initially strongly denied that he had posed as a lawyer, the Southern Investigative Reporting Foundation presented these two online claims to him and he acknowledged the fabrication: “I felt really insecure for many years not having gone to college, and it just came easily, occasionally telling people I was a lawyer,” he said. “That was a dark place and time for me. I don’t do anything like that anymore.”
Mehdizadeh’s many legal problems have never been disclosed to Medbox investors—except for a 2007 incident when he failed to produce a clear title to a car he was selling yet accepted a credit card payment for the vehicle anyway. The consumer affairs investigation, which had been headed for trial with the possibility of prison time for Mehdizadeh before he pleaded no contest, was blithely waved away in a Medbox filing as “a private matter.”
When questioned about his past, Mehdizadeh endlessly repeated a simple mantra: “I made mistakes long ago and I want to show investors that I can build and run a good company.”
But whether investors would agree with Medizadeh’s definition of what’s “good” for their capital is another story.
At first glance, Medbox appears to be a growth stock on steroids, perched at the leading edge of an industry in which demand is effectively doubling every year.
But linger for a time with its filings and Medbox looks less like something in the vanguard of a revolution and more like a throwback to 1980s Wall Street bucket shop deals.
Medbox began life as an outfit called MindfulEye Inc., a collapsed penny stock that had tried to make a business from selling downloadable movies through a network of shopping mall kiosks. Mehdizadeh bought 50 percent of the shares in November 2011 with a man named Shannon Illingworth and the rest in August 2012.
For its audits and filing preparation, Medbox turned to Irvine, Calif.-based Q Accountancy. But Q Accountancy had a problematic history of its own with regulators and a legacy of troubled clients. In 2012, a congressionally appointed industry watchdog group—the Public Company Accounting Oversight Board—uncovered a sweeping array of deficiencies in Q Accountancy’s auditing practices. And last November the SEC sued Q’s founder, Timothy Quintanilla, for issuing misleading audits based on “reckless and deficient work.”
In June, Medbox dumped Q Accountancy and turned to Alexander Anguiano LLC, the two-man auditing outfit helping Mehdizadeh out of his IRS problems. This firm signed off on a six-page second quarter earnings release issued on Aug. 20; it lacked a cash flow statement and footnotes, was formatted in the manner a college student would track expenses and filed at the very last moment. (One day later the company released a 20-page document with standard disclosures.)
How does a company that’s trying to smarten its profile before selling more stock get into these jams? One way is to have no one in charge of financial oversight on a full-time basis. Until Sept. 1, the company’s finance chief, Leila Guieb, was moonlighting part-time at Medbox while she worked as an employee at Toyota Financial Services. (Thomas Iwanski, a full-time finance executive, has since assumed her duties.)
Another interesting hire in Medbox’s crucial first years of existence was that of William Smith III, a man the company’s fawning December press release framed as the Warren Buffett of the pet insurance industry. He was charged with launching a mergers and acquisitions department in a company with six full-time employees. Smith’s numerous academic degrees on the press statement suggested that he had more accounting experience than the legendary Abraham Briloff.
But what was not disclosed is telling: He was chairman of a pet insurance venture called Ensurapet Inc. when the SEC tossed it from the markets because it failed to file annual and quarterly reports. Moreover, what business the company did do appears to have been centered around the ancient practice of selling unregistered securities in the form of promissory notes to retail investors, as a 2009 claim from the Arkansas Securities Commission argued.
That’s not the only blot on Smith. During his tenure at the company, the general counsel was Joseph Emas, someone the SEC had barred for two years from advising publicly traded clients in 2010 for drafting misleading filings for another client.
Smith was terminated from Medbox within months of his hire, according to a disclosure in the prospectus and has filed an arbitration claim against Medbox. And that’s about par for the course for Medbox’s M&A effort, as two of the three companies it had sought to merge with are now litigating against the company, according to a footnote in the S-1.
The tangled tale of Medbox becomes somewhat clearer when the role of a veteran penny stock lawyer named Phillip Koehnke is understood.
Listed as the company’s primary legal adviser, Koehnke was supposed to be especially valuable because he knew MindfulEye “like the back of his hand,” according to Mehdizadeh, and for his suggesting the hiring of Tim Quintanilla and other moves. But the volume of disclosure issues indicate that he either did not press terribly hard to learn the truth about his client, did not ask or did not think investors needed to know these things.
Then there is the share transfer incident. When Mehdizadeh and the Los Angeles district attorney’s office negotiated a plea in the legal advisory firm case, Mehdizadeh transferred Vincent Chase Inc., a holding company possessing more than 7 million shares of company stock, to Bedrick, Medbox’s chief executive. (Mehdizadeh had named the holding company after the lead character in the HBO series Entourage—an interesting choice, given the character’s drug habit and prodigious love life.)
In effect for only two months and disclosed only briefly in the S-1, the move appeared to have little precedent. Mehdizadeh denied there was a problem, saying the sale was performed “for the good of the shareholders.”
How shareholders were protected is not clear, though, and the Southern Investigative Reporting Foundation could find no instance of a corporate executive temporarily deeding his holdings to a colleague.
Mehdizadeh is firmly convinced that had he gone to prison, Bedrick’s control of Vincent Chase Inc. would have protected shareholders from harm. He is astounded that anyone would question the wisdom of the move: “Are you seriously asking me what impact a control person of a public company going to trial on 15 felony counts would have on investor confidence?” he said in reply to repeated requests from the Southern Investigative Reporting Foundation to clarify the reasons behind the move.
What the move did accomplish, however, was to keep the shares—potentially worth potentially hundreds of millions of dollars when they are registered—out of any settlement negotiations.
And questionable share transfers aren’t the only things standing out in the Medbox filings.
On March 8, a Medbox press release announced a $6 million equity cash infusion, with $1 million already paid and $5 million to arrive in May. Yet, there’s no sign of any of this in the company’s SEC filings.
In April, Medbox filed a Form 10 as part of its effort to register its shares; the only reference to stock sales was this line in a footnote at the very end: “During January 2013, the Company received a total of $71,520 as payment for the sale of 16,000 shares of common stock during that period.”
The S-1 filed in July offered no clues about the whereabouts of the promised millions.
Share sales did take place, but not along the lines promised by the press release. A note toward the back of the document stated, “From January 1 through July 11, 2013, the Company sold a total of 331,450 shares of common stock to accredited investors for $5 per share, or an aggregate of $1,407,250.”
One of the market’s longer standing measures of value is what investors will pay for shares even if they have to accept reduced liquidity or even none, for a period of time. The accredited investors who ponied up $5 a share from January to mid-July, when the share price ranged from $65 to $26, certainly locked in a discount. They also sent a clear signal of their view on whether the market was fairly valuing Medbox’s prospects.
One might expect that with marijuana legalization a near reality that Medbox would be, to use a phrase, “rolling in the green,” but that’s not the case. The company’s 2013 midyear revenues approached $3 million, according to a quarterly earnings release, putting it on track to eclipse last year’s $3.5 million. But the company lost almost $419,000 in the second quarter and accounts receivables amounted to more than 50 percent of its assets. Mehdizadeh said this is largely a function of the company’s having to fight an expensive (and successful) legal battle in Arizona on behalf of its dispensary clients—something that won’t be repeated. But there’s the possibility of unforeseen headaches emerging in other states and having to spend six figures in legal fees per state would be more than Medbox can bear.
And with receivables greater than last quarter’s revenues, if anything happens to Medbox’s clients and payments don’t emerge, a write-down of bad debt would prove devastating to Medbox’s balance sheet.
In preparing this article the Southern Investigative Reporting Foundation examined numerous legal briefs, public filings and interviewed many former clients of Vincent Mehdizadeh, who responded to many requests for comment on the record by both phone and email.
Worried greatly that Medbox would be harshly treated in a full-length investigative article, Mehdizadeh remarked via email, “I fully realize that your hard-hitting journalistic pieces don’t work if the company you are reporting on is beyond reproach. We make no illusions of being a mistake-free seasoned public company. However, no one can doubt our effort in becoming a solid company.”
Clarification: Neither Vincent Mehdizadeh nor Bruce Bedrick are selling shares in a proposed stock offering as the story earlier stated. The selling shareholders mentioned in the prospectus are not the management, but rather investors who had purchased shares months earlier during a private fund-raising effort.
Correction: Vincent Mehdizadeh’s initial IRS liability for back taxes was $1.99 million, not $2.2 million as the story earlier stated. The back taxes were accrued between 2003-2007, per his bankruptcy claim, not 2002-2007.