SEC v. Robert Lee; Brian Pallas; J. Bernard Rice; APB; Urban Pharms; DJ&S, et al., No. 2:23-cv-05379 (June 26, 2025) — Judgment

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I. BACKGROUND
The following summarized facts are relevant to the instant Motion.  See
generally JAF, Dkt. No. 49-2.
1

APB is a Nevada corporation that previously was known as “The Grilled
Cheese Truck, Inc.”   and operated a food truck business. JAF 1-2. In 2016, APB
decided to enter the marijuana business. JAF 3. In September 2016, APB acquired
Urban Pharms and DJ&S. JAF 5. DJ&S owns   a 275-acre farm located near
Medford, Oregon (the “Oregon Farm”), at which Urban Pharms conducts
marijuana-related operations. JAF 6-8. In 2017, APB acquired TSL, which
distributed marijuana to Oregon dispensaries pursuant to an Oregon cannabis
distribution license. JAF 9-11.

Robert Lee has served as APB’s CEO and Chairman of the Board of
Directors since 2016, excluding a brief period in 2019, and has maintained ultimate
responsibility for APB, including approving investor slide decks, raising money
from investors, and controlling the finances of APB, Urban Pharms, DJ&S, and
TSL (collectively, “Corporate Defendants”). JAF 15, 93-96, 242, 268, 273. Brian
Pallas has served as APB’s Chief Operating Officer (“COO”) since at least 2017
and has been a member of APB’s Board of Directors since at least 2018. JAF 16.
Pallas is the managing member of Urban Pharms, DJ&S, and TSL. JAF 21. APB’s
only two corporate officers since 2021 have been Lee and Pallas. JAF 17. Pallas
and Lee jointly manage, exercise control over, and execute contracts on behalf of
APB’s subsidiaries including Urban Pharms, DJ&S, and TSL. JAF 15, 20-21, 93,
357, 402, 410, 412, 414.

J. Bernard Rice began consulting for APB around March 2017, obtained the
title of Executive Vice President of Corporate Development, and was added the
title of Chief Financial Officer in October 2017.
2
 JAF 22. Rice left APB around
July 2019 and never assumed traditional CFO responsibilities. JAF 23-24.

1
 The facts set forth below are taken from the Parties’ JAF and the submitted
evidence.  See generally JAF.  To the extent that any of the relevant facts were
allegedly disputed by the opposing party, the Court discusses those facts below or
concludes that no actual dispute exists or that the adopted language resolves the
dispute.
2
 Defendants dispute this fact and clarify that “Rice never served as CFO and had
no financial authority or responsibilities. The title was only on paper.” See JAF 22.

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From 2016 until this case was filed in 2016, Defendants raised over $50
million from investors. JAF 4. They did so through the four securities offerings
that are at issue in this case:

(1) “The Initial Offering”:  from 2017 to early 2019, Lee, Rice, and APB
solicited debt and stock investments from several individuals and
investor groups. JAF 238-247.

(2) “The Stonecrest Offering”:  from July 26, 2019 through November 15,
2019, APB engaged Stonecrest Capital Markets, Inc. (“Stonecrest”), a
securities broker-dealer, to sell secured convertible notes to residents of
Puerto Rico purporting to be secured by a first priority pledge of the
membership interests of Urban Pharms and DJ&S. JAF 289-314.

(3) “The $5 Million Raise”:  from approximately July 2021 through April
2022, Lee, Pallas and APB attempted to raise money through an offering
of a secured convertible debt involving membership interests in an entity
created by Lee, Pallas, and APB known as “APB Real Estate Holdings,
Inc.” JAF 353-377.

(4) “The Garden Unit Offering”:  from May 2022 through March 2023, Lee,
Pallas, APB and DJ&S sold membership units in two entities, Value
Properties I, LLC and Value Properties II, LLC, that leased the Oregon
Farm’s gardens. JAF 408-438.

Plaintiff brought a Complaint against Defendants on March 16, 2023
alleging violations of the following securities laws: Section 17(a) of the Securities
Act (“Section 17(a)”), 15 U.S.C. § 77q(a); Section 10(b) of the Exchange Act
(“Section 10(b)”), 15 U.S.C. § 78q(b), and Rule 10b-5 (“Rule 10b-5”), 17 C.F.R.
§   240.10b-5. Compl., Dkt. No. 1. Plaintiff now seeks partial summary judgment as
to liability but not remedies. J. Br. at 1, n.1. Plaintiff does not seek summary
judgment as to Count III, its unjust enrichment claim against the Relief
Defendants, nor all of Defendants’ fraudulent misstatements, omissions, and
deceptive conduct, which it reserves its rights with respect thereto. Id.

The Court does not find a genuine dispute here, but notes that pitch decks
circulated to potential investors listed Rice as CFO. See e.g. JAE 0685A; JAE
0705.

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II. LEGAL STANDARD
“A party may move for summary judgment, identifying each claim or
defense—or the part of each claim or defense—on which summary judgment is
sought.  The court shall grant summary judgment if the movant shows that there is
no genuine dispute as to any material fact and the movant is entitled to judgment as
a matter of law.”  Fed. R. Civ. P. 56(a).   An issue of fact is “genuine”   only if there
is sufficient evidence for a reasonable fact finder to find for the nonmoving party.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).  A fact is “material”   if it
may affect the outcome of the case, and the “substantive law [] identif[ies] which
facts are material.”  Id.  “  Only disputes over facts that might affect the outcome of
the suit under the governing law will properly preclude the entry of summary
judgment.”  Id.

A party seeking summary judgment bears the initial burden of informing the
court of the basis for its motion and identifying those portions of the pleadings,
discovery responses, and “affidavits, if any,”   that demonstrate the absence of a
genuine issue of material fact.  See Celotex Corp. v. Catrett, 477 U.S. 317, 323
(1986) (internal quotation marks omitted).  To carry its burden of production, the
moving party must either: (1) produce evidence negating an essential element of
the nonmoving party’s claim or defense; or (2) show that there is an absence of
evidence to support the nonmoving party’s case.  Nissan Fire & Marine Ins. Co. v.
Fritz Cos., 210 F.3d 1099, 1102 (9th Cir. 2000).  If the moving party meets its
initial burden, the nonmoving party must set forth, by affidavit or as otherwise
provided in Rule 56, “specific facts showing that there is a genuine issue for trial.”
Anderson, 477 U.S. at 248 (cleaned up).  The evidence presented by the parties
must be capable of being presented at trial in a form that would be admissible in
evidence.  See Fed. R. Civ. P. 56(c)(2).  “In judging evidence at the summary
judgment stage, the court does not make credibility determinations or weigh
conflicting evidence.”  Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th
Cir. 2007).  The court must draw all reasonable inferences in the nonmoving
party’s favor.  In re Oracle Corp. Sec. Litig., 627 F.3d 376, 387 (9th Cir. 2010)
(citing Anderson, 477 U.S. at 255).

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III. DISCUSSION
A. Anti-Fraud Provisions
“Section 17(a) of the 1933 Act, Section 10(b) of the 1934 Act, and Rule 10b-
5 ‘forbid making [1] a material misstatement or omission [2] in connection with
the offer or sale of a security [3] by means of interstate commerce.’”
3
  SEC v.
Phan, 500 F.3d 895, 907-08 (9th Cir. 2007) (quoting SEC v. Dain Rauscher, 254
F.3d 852, 856 (9th Cir. 2001)). These antifraud provisions prohibit both “schemes
to defraud[] and . . . ‘making a material misstatement or omission in connection
with the offer or sale of a security by means of interstate commerce.’” SEC v. Stein,
906 F.3d 823, 830 (9th Cir. 2018) (quoting Dain Rauscher, 254 F.3d at 855-56).
“[V]iolations of Section 17(a)(1), Section 10(b) and Rule 10-b5 require a showing
of scienter, while violations of Sections 17(a)(2) and (3) require a showing of
negligence.” Id. (citing Dain Rauscher, 254 F.3d at 856).
1. Material Misstatement or Omission
“The standard of materiality is an objective one.” United States v. Jenkins,
633 F.3d 788, 802 (9th Cir. 2011) (citing United States v. Reyes, 577 F.3d 1069,
1076 (9th Cir. 2009)). This standard will be “satisfied only if there is ‘a substantial
likelihood that the disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the ‘total mix’  of information
made available.’” Phan, 500 F.3d at 908 (quoting Basic v. Levinson, 485 U.S. 224,
231-32 (1988)). Although “[d]etermining materiality in securities fraud cases
‘should ordinarily be left to the trier of fact,’” materiality may appropriately be
resolved as a matter of law at summary judgment where “the established omissions
are ‘so obviously important to an investor,  that reasonable minds cannot differ on
the question of materiality.’” Id. ( citations omitted).
2. Scienter
“Violations of Section 17(a)(1), Section 10(b) and Rule 10b-5 require
scienter.... Violations of Sections 17(a)(2) and (3) require a showing of
negligence.” Phan, 500 F.3d at 908 (quoting Dain Rauscher, 254 F.3d at 856).

3
 The parties do not dispute that the alleged misstatements and omissions were
made in connection with the offer or sale of a security or by means of interstate
commerce. As such, the Court need not analyze these factors.

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“[S]cienter refers to ‘a mental state embracing intent to deceive, manipulate, or
defraud.’” Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 648 (2010) (quoting Ernst
& Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976)). Analyzing scienter “is a
subjective inquiry,”   which “turns on the defendant’s actual state of mind.” Gebhart,
595 F.3d at 1042. As a result, “[p]roof of scienter is often based on inferences   from
circumstantial evidence.” SEC v. Burns, 816 F.2d 471, 474 (9th Cir. 1987).
“Scienter can be established by intent, knowledge, or in some cases
‘recklessness.’” SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1092 (9th
Cir. 2010) (citing Hollinger v. Titan Cap. Corp., 914 F.2d 1564, 1568-69 (9th Cir.
1990) (en banc)). The “deliberate recklessness”   standard entails “‘an extreme
departure from the standards of ordinary care,’  which ‘presents a danger of
misleading buyers or sellers that is either known to the defendant or is so obvious
that the actor must have been aware of it.’” In re Alphabet, Inc. Sec. Litig., 1 F.4th
687, 701 (9th Cir. 2021) (quoting Nguyen v. Endologix, Inc., 962 F.3d 405, 414
(9th Cir. 2020)). “[A] reckless omission of material facts satisfies the element of
scienter, provided that such recklessness reflects some degree of intentional or
conscious misconduct.” Id. (internal quotation marks and citations omitted).
B. Alleged Violations
The Joint Brief divides the alleged violations into five categories: (1)
misstatements and omissions concerning company assets; (2) misstatements and
omissions concerning security/collateral; (3) misstatements and omissions
concerning APB’s and Urban Pharms’s financial and business performance; (4)
misstatements and omissions concerning General Clark’s involvement with APB;
and (5) misstatements and omissions concerning the use of investors’ funds. See
generally J. Br. The Court will address each of these allegations in turn.

As a preliminary matter, Defendants do not dispute that the liability of Lee,
Rice, and Pallas is imputed to the Corporate Defendants APB, Urban Pharms,
DJ&S, and TSL. See J. Br. at 29, n. 10; In re ChinaCast Educ. Corp. Sec. Litig.,
809 F.3d 471, 476 (9th Cir. 2015) (“[W]e have adopted the general rule of
imputation and held that a corporation is responsible for a corporate officer’s fraud
committed ‘within the scope of his employment’ or ‘for a misleading statement
made by an employee or other agent who as actual or apparent authority.’”)
(citation omitted).

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1. Misstatements and Omissions Concerning Company Assets
First, Plaintiff argues that Defendants made misstatements and omissions
concerning company assets. The undisputed facts show that Lee, Pallas, and Rice
made several material misstatements concerning company assets, including the
following:

- Lee, Rice, and Pallas communicated to investors that APB had assets in
Puerto Rico and Colorado.  JAF 248-251, 253-254, 315-317, 378-381.  APB
has never operated nor obtained ownership interest in a cannabis-related
business in Puerto Rico or Colorado. JAF 1 42-143, 177-178, 180-181.

- Lee and Rice communicated to investors that APB was a “multi-state
operator” and “vertically integrated.” JAF 253, 321. APB’s sole marijuana
business consisted of the Oregon operations and APB has never operated a
dispensary. JAF 12, 13.

- Lee and Pallas communicated to investors that APB had cannabis-related
licenses in California and Puerto Rico. JAF 316-317, 323-324, 378, 381.
APB did not have any licenses in California and Puerto Rico. JAF 142-143,
145, 197.

- Lee and Rice communicated to investors that APB owned a second cannabis
farm in Oregon known as Sunfire Farms. JAF 250, 253, 318. APB never
closed on the Sunfire Farms acquisition. JAF 190.
4

These misstatements and omissions created a false impression that the
company was much larger than it actually was. Defendants do not dispute that APB
not possessing assets, or even licenses to operate, in these additional locations is
material. See, e.g., SEC v. AirTrac, 2008 WL 11334597, at *7 (C.D. Cal. Jan. 2,
2008) (“There is no serious dispute that a reasonable investor would not have
found information about upcoming public offerings, or contracts with major
telecommunications carriers, material in deciding to invest with [Defendant].”).

4
 Defendants indicate they dispute JAF 190, however, Defendants provide no
evidence or argument in support of their position. See JAF 190.

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Rice disputes that he made any material misstatements regarding APB’s
assets to any investor or prospective investor.
5
 J. Br. at 42. However, it is
undisputed that Rice was responsible for the investor pitch decks, “ drove the
creation”   of the November 26, 2017 pitch deck, and instructed Robert Mayer to
email a pitch deck that contained false information to investors. JAF 242, 248, 253.
Additionally, Rice was included on multiple emails to investors containing
misleading pitch decks and personally disseminated pitch decks to investors.
JAF 248-251.

Defendants also challenge that they acted with scienter regarding these
misstatements and omissions. Lee was the CEO of APB and Pallas was the CFO of
APB. Although the parties dispute what Rice’s job title was at APB, his job
responsibilities included preparing pitch decks to present to investors. JAF 248,
253. Defendants knew that APB never acquired an interest in the Puerto Rico
company. JAF 145-150. Defendants argue that they “ believed that because APB
had written agreements to acquire a controlling interest in Puerto Rico...that APB
could claim ownership of those assets.”   J. Br. at 44-45. However, Lee could not
have thought APB could own the Puerto Rico   company as he was working with
counsel in Puerto Rico “because the law did not allow an American company to
own a Puerto Rico company.”   J. Br. at 45; JAF 145-146. Moreover, John
Randolph’s email to Lee expressing concerns about representations in the
Stonecrest Offering Slide Deck further supports Lee’s scienter. JAF 382, 383. In
this email Randolph stated: “I do not see evidence that APB does currently own
any percentage of PR1. Can we clear this up? Make it official in some way that
matches the representations made to the investors? .... Important: The Investor
Deck talks a lot about Puerto Rico.” Id.; see also JAF 254.  As in Platforms
Wireless, 617 F.3d at 1095, the representations were “an absolute and unequivocal
falsehood” about an asset the company did not own.

With respect to the California licenses, Lee and Pallas claim that Element
Seven Company fraudulently told them that the licenses were received. J. Br. 45;
Lee Decl., Dkt. No. 115-7,   ¶ 5. However, Defendants provide no facts or evidence

5
 Defendants also claim that Rice had no knowledge about these matters. See J. Br.
at 42-44. However, it is undisputed that Rice knew that there were “significant
issues related to Puerto Rican law,” that APB would complete the PR1 acquisition
when the required capital had been injected and that not all the required capital had
been injected, and that APB did not have any ownership interest in PR1 as of
September 2018. JAF 147-149.

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in support of this assertion.  Furthermore, even if Defendants “based these
statements on representations by [a third party]” there is no evidence that they
“conducted [any] meaningful independent investigation to confirm the truth of
their representations”   which supports an inference that Defendants were
consciously aware that they lacked a sufficient basis for their statements. Gebhart,
595 F.3d at 1044.

Overall, Defendants —at least, recklessly—made material misstatements
concerning company assets.
2. Misstatements and Omissi
ons Concerning Security and
Collateral
Second, Plaintiff argues that Defendants made misstatements and omissions
concerning security and collateral.
6

For the Stonecrest Offering, Lee and APB told investors that they would
obtain a first deed of trust and a senior secured lien on the membership interests of
Urban Pharms and DJ&S. JAF 326-329. Investors did not receive either. JAF 333-
334. Similarly, for the $5 Million Raise, Lee, Pallas, and APB advertised to
investors a “guaranteed” loan with “SECURITY of a 1st trust deed[.]” JAF 395. In
the promotional video for the $5 Million Raise, Lee says:

It’s just like a mortgage on your home or your real estate. We’re giving a
first trust deed for security, your collateral, on this farm. It’s a very low loan
to value ratio. So the safety of the, I’ll call it the investment, or the loan is
certainly there... If you’re investing $100,000 the investment goes into an
escrow account, and then once the trust deed, the security is delivered, then
the money flows to the company. So the investor has that absolute
confidence and peace of mind that it’s a collateralized, protected investment.
So we are pledging our most precious asset, this farm, as collateral. JAF 395.

However, investors in the $5 Million Raise never received a first deed of trust. JAF
397. In fact, no deed of trust at all has been recorded in favor of APB or any
investor in the $5 Million Raise. Id. Despite materials stating that APB was to issue
a two-year note and pay investors the 10% return on a quarterly basis, JAF 359, the

6
 Plaintiff does not allege Rice made misstatements and omissions concerning
security and collateral.

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documents executed by investors in the $5 Million Raise do not include any note
evidencing APB’s repayment obligation nor have any notes been produced in this
litigation. JAF 360-361. Furthermore, the escrow funds were released to APB.
7

JAF 376.

Plaintiff asserts, and Defendants do not dispute, that these misstatements
regarding security and collateral are material as a matter of law.  The Court agrees.
A reasonable investor would have obviously considered important that they would
not receive the type of security and collateral for their investments that were
promised to them. See, e.g., SEC v. Loomis, 969 F. Supp. 2d 1226, 1234 (E.D. Cal.
2013) (finding that “statements that the loans were secured by second mortgages
were material”).

 Lee’s knowing misrepresentations establish scienter.  JAF 332, 336, 400,
402, 376.  Lee argues that he did not act with scienter regarding the Stonecrest
offering because he “believed that the investors would receive a first deed of trust”
and “relied on the statements in the Stonecrest PPM that was prepared by the
offeror.”   J. Br. at 50. He provides   no evidence to support this claim. Furthermore,
even if Lee “based these statements on representations by [Stonecrest PPM]” he
“conducted no meaningful independent investigation to confirm the truth of their
representations.” Gebhart, 595 F.3d at 1044.

  Regarding the $5 Million Raise, Lee argues that he did not act with scienter
because he “based his statement that the investors would receive a first deed of
trust on his understanding that Knighted had agreed to permit the investors to share
Knighted’s interest in the Farm.”    J. Br. at 50; JAF 399. Additionally, Pallas argues
that he “believed the investors had obtained a first deed of trust because ABP RE
Holdings had that position through its financial participation in Knighted facility
and security interest.”    J. Br. at 50; JAF 400. However, it is undisputed that both
Lee and Pallas knew that Knighted had the first deed of trust of the Oregon Farm.
JAF 389-400. Lee and Pallas both signed an “Agreement Among Lenders” which
stated that APB RE Holdings will not “exercise or seek to exercise any rights or
remedies with respect to any Collateral”   until Knighted is paid in full and will not
“contest, protest, or object to any Exercise of Remedies” by Knighted. JAF 402.
Even if Knighted were to somehow share its first deed of trust with investors, Lee
and Pallas began promising this deed to investors in 2021, before the 2022

7
 Defendants clarify that the Escrow Agent, not AFB, released the escrow funds to
AFB. Plaintiff agrees with Defendants’ clarification. See JAF 376.

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agreement with Knighted was signed. JAF 353, 402. “The undisputed facts in this
case demonstrate that each [Defendant] either knew or was reckless in not
knowing, that these securities were not backed by the collateral they had promised
their investors, and therefore acted with the requisite scienter for fraud.” SEC v.
Radical Bunny LLC, 532 F. App’x 775, 777 (9th Cir. 2013) (internal quotations and
citation omitted). These facts establish scienter for Lee and Pallas that the first
deed of trust was not available for investors.

 Accordingly, Lee and Pallas acted at least recklessly in making
misstatements and omissions concerning security and collateral.
3. Misstatements and Omissi
ons Concerning APB And Urban
Pharms’s Financial and Business Performance
Third, Plaintiff argues that Defendants made misstatements and omissions
concerning APB and Urban Pharms’s    financial and business performance.

Lee and Pallas made misstatements and omissions during various investment
offerings.
8
 For example, Urban Pharms had a revenue of $942,7221 in 2022, with
an EBITDA loss of $2,531,353. JAF 82. However, an Urban Pharms Financial
Statement that was distributed to investors shows that Urban Pharms had revenue
of $10.1 million and income from operations of $6.3 million for calendar year
2022. JAF 476. Defendants dispute this fact and claim that the exhibit is
“incorrect”   and that APB’s Controller, Lee Patin,  corrects it. Id. However,
Defendants cite only to Patin’s deposition in which Patin admits that the
information included in the financial statement is false because Patin “recorded the
income in the revenue, and then later backed it out and put it into other income.”
JAE 0514, 10/23/24 Patin Tr. 98:1-2 . Defendants do not provide evidence that the
false and misleading financial statement that was circulated to investors was
corrected. In fact, Patin testified that she did not reach out to the investor who
received the financial statements to tell him that the information was false. Id. at
101:3-6. Accordingly, the Court finds no genuine dispute of material fact here.

Additionally, the investment summary for the $5 Million Raise stated that
APB’s “CURRENT BALANCE SHEET & PROFITABLE INCOME
STATEMENT AVAILABLE FOR REVIEW UPON REQUEST[.] ”   JAF 404.
However, APB was not profitable—the company had net losses every year from

8
 The Court declines to resolve issues regarding Rice in this section.

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2016 to 2023 that totaled over $50 million. JAF 80. Lee and Pallas in their roles
understood APB’s financial status, as evidenced by Pallas’  letter regarding APB’s
“financial challenges,”   JAF 107, and APB’s failure to make payroll that required
Lee’s mother to extend loans. JAF 127-129. Lee, Pallas, and APB did not tell
investors that APB had suffered these loses. JAF 405.

Misleading information relating to the profitability of APB is undoubtedly
material to investors. “The misstatements and omissions created the false
impression that [Defendant] was profitable, an impression that would have
assumed significance in the deliberations of any reasonable investor.” SEC v. Glob.
Express Cap. Real Est. Inv. Fund, I, LLC, 289 F. App’x 183, 187 (9th Cir. 2008);
see SEC v. Murphy, 626 F.2d 633, 653 (9th Cir. 1980) (“Surely the materiality of
information relating to financial condition, solvency and profitability is not subject
to serious challenge.”).

Lee and Pallas argue there is a dispute as to whether they acted with scienter.
Defendants argue that, regarding the “Profitable Income Statements” referred to in
the $5 Million Raise, “ neither Lee nor [Pallas]  know why this statement is on the
document or who wrote it.”   Pallas Decl., Dkt. No. 115-7, ¶ 3; J. Br. at 55. Even if
Lee and Pallas did not know who included this statement on the investment
summary, they knew that the financial statement would be sent to investors, JAF
478, and that the statement falsely portrayed to investors that the company was
profitable when it was not. See, e.g., SEC v. LFS Funding Ltd. P’ship, 2023 WL
6373859, at *8 (C.D. Cal. Aug. 25, 2023) (“[T]o the extent Defendant argues that
he was ignorant of these false statements, distributing materials regarding the []
securities offering without knowing the contents of the materials is evidence of
reckless conduct in itself”).

At a minimum, Lee and Pallas acted recklessly in making material
misstatements concerning APB and Urban Pharms’s financial and business
performance.

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4. Misstatements and Omissions Concerning General Clark’s
Involvement with APB
Next, Plaintiff alleges that Lee and Rice made f alse statements regarding
General Clark’s involvement to investors.
9
 General Clark was a previous board
member of APB’s predecessor, the Grilled Cheese Truck, Inc., but resigned in April
2016 when the company shifted its focus because he did not want to “get painted
with the cannabis brush.”   JAF 280. In 2018, Lee gave presentations to investors
that claimed General Clark was part of “APB Leadership”   as its “Chief
Humanitarian and Global Economic Advisor.”   JAF 274-277. Rice also sent and
was copied on emails containing pitch decks that listed General Clark as part of
APB’s “Executive Team.”   JAF 276-278.
10

Defendants purport to dispute that after his resignation in April 2016,
General Clark was not involved with APB and not part of its “Leadership”   or
“Executive Team,”    nor was an “Advisor” or “Chief Humanitarian and Global
Economic Advisor.”   JAF 281. Defendants argue that General Clark “continued to
consult”   with Lee regarding APB. See id. However, the consultations   Lee refers to
concern “getting aid to Puerto Rico after the Maria Hurricane”   and “political
situations in Latin America,”   none of which purport to concern APB. Lee Decl.,
¶   3.

Considering General Clark’s background and reputation, his leadership
position was obviously important to a reasonable investor. See SEC v. Husain,
2017 WL 810269, at *8 (C.D. Cal. Mar. 1, 2017) (“Other than a corporation’s
financials, its leadership, the nature of its operations, and its plan for the future

9
 Plaintiff does not allege Pallas made misstatements and omissions concerning
General Clark’s involvement with APB.
10
 Rice disputes that he disseminated pitch decks to investors because the email he
sent to Zubin Mehta was not “to solicit him as an investor.”   Rice Decl., Dkt. No.
115-7, ¶ 14.  The Court agrees with Plaintiff that Rice’s claim that he thought
Mehta was a marketer, not an investor, “does not create a dispute as to whether
Rice disseminated misrepresentations in connection with an offer, purchase, or sale
of a security.”  Pl. Resp. to JAF 278 (citing JAE 1700).  Rice understood that
Mehta was working with Carl Peterson, who was involved in raising money from
investors, and he knew that the document would be used by Mehta to create a new
pitch deck.  Id. (citing JAE 0418).

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would seem to be the most important pieces of information available to an
investor.”    (emphasis in original)).

Furthermore, Defendants do not dispute that “General Clark never would
have agreed to have a management or advisory role with APB after APB became a
cannabis company,”    that “APB did not have any written or oral agreements with
General Clark after General Clark’s resignation in April 2016,” and that Rice
received an email from General Clark in December 2017 stating: “Bernie, please
correct this the right way. I’m not on the board, nor am I [an] advisor.”   JAF 282-
285. Despite knowing these facts, Lee and Rice continued to make
misrepresentations regarding General Clark’s involvement after his 2016
resignation and 2017 email. See JAF 274-279.

 Accordingly, Lee and Rice, at least recklessly, made false material
statements to investors concerning General Clark’s involvement with APB.
5. Misstatements and Omissions Concerning the Use of
Investors’ Funds
Finally, Plaintiff argues that Defendants made misstatements and omissions
concerning use of investors’ funds.
11

Plaintiff first argues that Lee and Pallas made a material misstatement by
circulating to investors that the Garden Unit Offering was “for expansion purposes
only” and that $10 million already had been raised “for expansion purposes.”   J. Br.
at 59; JAF 490. Defendants argue that the circulated memorandum does not say
“only.”   However, the exhibit that both parties cite to clearly states: “This
Syndication is for expansion purposes only”   and that “[i]n 2022 $10M was
successfully raised for expansion purposes[.] ”   JAE 0761, Ex. 15 at L&A 018674
(emphasis added). Additionally, it is undisputed that Lee knew that not all money
raised in the Garden Unit Offering was used for expansion, as he remarked in a
communication with an investor that APB planned to sell each garden interest for
$7.5 million, even though it only costs approximately $1.5 million to develop an
outdoor garden. JAF 492-493. Regardless of whether some of the money went to
the garden expansion, these misstatements are material when Lee knew the vast
majority of money raised for the purpose of expansion was actually to be used for

11
 Plaintiff does not allege Rice made misstatements and omissions concerning the
use of investors’ funds.

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different purposes. See, e.g., SEC v. Skinner, 2022 WL 2784811, at *5 (C.D. Cal.
June 17, 2022) (“Any reasonable investor would clearly have considered it
important to know that their funds were being used to pay [Defendant]’s personal
expenses, other investors, or unrelated business expenses, instead of funding for
the intended real estate projects.”); SEC v. Cap. Cove Bancorp LLC, 2015 WL
9704076, at *7 (C.D. Cal. Sept. 1, 2015) (“Committing to invest Fund proceeds in
real estate while channeling those investments to either personal use or Ponzi-like
payments is clearly a material representation.”). Defendants do not dispute that Lee
and Pallas acted with scienter in connection with these misstatements as the CEO
and COO of the company at the time.

Additionally, APB paid for Lee’s multiple condominiums in Puerto Rico, a
personal cook, and a cleaner. JAF 62-64.  APB also paid hundreds of thousands of
dollars for hotels, travel, spa visits, clothing stores, and more for Lee, his
girlfriend, and her family. JAF 74. Defendants provide no evidence that these
purchases were disclosed to investors or that investors were told funds would be
used for Lee’s personal expenses. Rather, Defendants argue that “APB did not pay
for a ‘lavish lifestyle’  for Lee but rather for necessary living and business operating
expenses.”    J. Br. at 61. The Court finds no genuine dispute of material fact here
regarding APB’s payments as the payments themselves are undisputed. JAF 62-64,
74. Knowledge of these expenses would be important to investors, especially when
the company was not profitable. See, e.g., SEC v. Chen, 2016 WL 7469683, at *9
(C.D. Cal. Dec. 8, 2016) (“Defendant used investor money to fund a lifestyle that
included multiple million-dollar mansions and luxury automobiles for him and his
family... Such misuse shows Defendant’s intent to defraud investors for his
personal gain.”). Lee knew, or was at least reckless in not knowing, that funds were
being misappropriated b y being spent on his personal lifestyle.

Accordingly, Lee and Pallas acted at least recklessly in making
misstatements and omissions concerning the use of investors’ funds.
C. Summary
In conclusion, the Court finds that Plaintiff met its initial burden “of
identifying the elements of the claim . . . on which summary judgment is sought
and evidence that it believes demonstrates the absence of an issue of material fact,”
with respect to its antifraud claims. Celotex Corp., 477 U.S. at 323. Defendants
have not met their shifted burden of “set[ting] forth specific facts showing that
there is a genuine issue for trial,” Anderson, 477 U.S. at 250. The Court thus

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concludes that there is no genuine dispute of material fact as to Plaintiff’s    claims 1
and 2. The Court grants Plaintiff’s Motion for Summary Judgment on the issue of
liability for its Section 17(a), Section 10(b) and Rule 10b-5 claims against Lee,
Rice, and Pallas, in addition to the Corporate Defendants. See In re ChinaCast
Educ. Corp. Sec. Litig., 809 F.3d at 476.
IV. CONCLUSION
For the foregoing reasons, Plaintiff’s Motion for Partial Summary Judgment
is GRANTED.

IT IS SO ORDERED.

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I. BACKGROUND 

The following summarized facts are relevant to the instant Motion.  See 
generally JAF, Dkt. No. 49-2.1 

 
APB is a Nevada corporation that previously was known as “The Grilled 

Cheese Truck, Inc.” and operated a food truck business. JAF 1-2. In 2016, APB 
decided to enter the marijuana business. JAF 3. In September 2016, APB acquired 
Urban Pharms and DJ&S. JAF 5. DJ&S owns a 275-acre farm located near 
Medford, Oregon (the “Oregon Farm”), at which Urban Pharms conducts 
marijuana-related operations. JAF 6-8. In 2017, APB acquired TSL, which 
distributed marijuana to Oregon dispensaries pursuant to an Oregon cannabis 
distribution license. JAF 9-11. 

 
Robert Lee has served as APB’s CEO and Chairman of the Board of 

Directors since 2016, excluding a brief period in 2019, and has maintained ultimate 
responsibility for APB, including approving investor slide decks, raising money 
from investors, and controlling the finances of APB, Urban Pharms, DJ&S, and 
TSL (collectively, “Corporate Defendants”). JAF 15, 93-96, 242, 268, 273. Brian 
Pallas has served as APB’s Chief Operating Officer (“COO”) since at least 2017 
and has been a member of APB’s Board of Directors since at least 2018. JAF 16. 
Pallas is the managing member of Urban Pharms, DJ&S, and TSL. JAF 21. APB’s 
only two corporate officers since 2021 have been Lee and Pallas. JAF 17. Pallas 
and Lee jointly manage, exercise control over, and execute contracts on behalf of 
APB’s subsidiaries including Urban Pharms, DJ&S, and TSL. JAF 15, 20-21, 93, 
357, 402, 410, 412, 414. 

 
J. Bernard Rice began consulting for APB around March 2017, obtained the 

title of Executive Vice President of Corporate Development, and was added the 
title of Chief Financial Officer in October 2017.2 JAF 22. Rice left APB around 
July 2019 and never assumed traditional CFO responsibilities. JAF 23-24. 

 
1 The facts set forth below are taken from the Parties’ JAF and the submitted 
evidence.  See generally JAF.  To the extent that any of the relevant facts were 
allegedly disputed by the opposing party, the Court discusses those facts below or 
concludes that no actual dispute exists or that the adopted language resolves the 
dispute.  
2 Defendants dispute this fact and clarify that “Rice never served as CFO and had 
no financial authority or responsibilities. The title was only on paper.” See JAF 22. 

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From 2016 until this case was filed in 2016, Defendants raised over $50 

million from investors. JAF 4. They did so through the four securities offerings 
that are at issue in this case:  

 
(1) “The Initial Offering”: from 2017 to early 2019, Lee, Rice, and APB 

solicited debt and stock investments from several individuals and 
investor groups. JAF 238-247. 
 

(2) “The Stonecrest Offering”: from July 26, 2019 through November 15, 
2019, APB engaged Stonecrest Capital Markets, Inc. (“Stonecrest”), a 
securities broker-dealer, to sell secured convertible notes to residents of 
Puerto Rico purporting to be secured by a first priority pledge of the 
membership interests of Urban Pharms and DJ&S. JAF 289-314. 

 
(3) “The $5 Million Raise”: from approximately July 2021 through April 

2022, Lee, Pallas and APB attempted to raise money through an offering 
of a secured convertible debt involving membership interests in an entity 
created by Lee, Pallas, and APB known as “APB Real Estate Holdings, 
Inc.” JAF 353-377. 

 
(4) “The Garden Unit Offering”: from May 2022 through March 2023, Lee, 

Pallas, APB and DJ&S sold membership units in two entities, Value 
Properties I, LLC and Value Properties II, LLC, that leased the Oregon 
Farm’s gardens. JAF 408-438. 

 
Plaintiff brought a Complaint against Defendants on March 16, 2023 

alleging violations of the following securities laws: Section 17(a) of the Securities 
Act (“Section 17(a)”), 15 U.S.C. § 77q(a); Section 10(b) of the Exchange Act 
(“Section 10(b)”), 15 U.S.C. § 78q(b), and Rule 10b-5 (“Rule 10b-5”), 17 C.F.R. 
§ 240.10b-5. Compl., Dkt. No. 1. Plaintiff now seeks partial summary judgment as 
to liability but not remedies. J. Br. at 1, n.1. Plaintiff does not seek summary 
judgment as to Count III, its unjust enrichment claim against the Relief 
Defendants, nor all of Defendants’ fraudulent misstatements, omissions, and 
deceptive conduct, which it reserves its rights with respect thereto. Id.  

 
The Court does not find a genuine dispute here, but notes that pitch decks 
circulated to potential investors listed Rice as CFO. See e.g. JAE 0685A; JAE 
0705. 

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II. LEGAL STANDARD 

“A party may move for summary judgment, identifying each claim or 
defense—or the part of each claim or defense—on which summary judgment is 
sought.  The court shall grant summary judgment if the movant shows that there is 
no genuine dispute as to any material fact and the movant is entitled to judgment as 
a matter of law.”  Fed. R. Civ. P. 56(a).   An issue of fact is “genuine” only if there 
is sufficient evidence for a reasonable fact finder to find for the nonmoving party.  
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).  A fact is “material” if it 
may affect the outcome of the case, and the “substantive law [] identif[ies] which 
facts are material.”  Id.  “Only disputes over facts that might affect the outcome of 
the suit under the governing law will properly preclude the entry of summary 
judgment.”  Id. 

 
A party seeking summary judgment bears the initial burden of informing the 

court of the basis for its motion and identifying those portions of the pleadings, 
discovery responses, and “affidavits, if any,” that demonstrate the absence of a 
genuine issue of material fact.  See Celotex Corp. v. Catrett, 477 U.S. 317, 323 
(1986) (internal quotation marks omitted).  To carry its burden of production, the 
moving party must either: (1) produce evidence negating an essential element of 
the nonmoving party’s claim or defense; or (2) show that there is an absence of 
evidence to support the nonmoving party’s case.  Nissan Fire & Marine Ins. Co. v. 
Fritz Cos., 210 F.3d 1099, 1102 (9th Cir. 2000).  If the moving party meets its 
initial burden, the nonmoving party must set forth, by affidavit or as otherwise 
provided in Rule 56, “specific facts showing that there is a genuine issue for trial.”  
Anderson, 477 U.S. at 248 (cleaned up).  The evidence presented by the parties 
must be capable of being presented at trial in a form that would be admissible in 
evidence.  See Fed. R. Civ. P. 56(c)(2).  “In judging evidence at the summary 
judgment stage, the court does not make credibility determinations or weigh 
conflicting evidence.”  Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th 
Cir. 2007).  The court must draw all reasonable inferences in the nonmoving 
party’s favor.  In re Oracle Corp. Sec. Litig., 627 F.3d 376, 387 (9th Cir. 2010) 
(citing Anderson, 477 U.S. at 255). 

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III. DISCUSSION 

A. Anti-Fraud Provisions 

“Section 17(a) of the 1933 Act, Section 10(b) of the 1934 Act, and Rule 10b-
5 ‘forbid making [1] a material misstatement or omission [2] in connection with 
the offer or sale of a security [3] by means of interstate commerce.’”3  SEC v. 
Phan, 500 F.3d 895, 907-08 (9th Cir. 2007) (quoting SEC v. Dain Rauscher, 254 
F.3d 852, 856 (9th Cir. 2001)). These antifraud provisions prohibit both “schemes 
to defraud[] and . . . ‘making a material misstatement or omission in connection 
with the offer or sale of a security by means of interstate commerce.’” SEC v. Stein, 
906 F.3d 823, 830 (9th Cir. 2018) (quoting Dain Rauscher, 254 F.3d at 855-56). 
“[V]iolations of Section 17(a)(1), Section 10(b) and Rule 10-b5 require a showing 
of scienter, while violations of Sections 17(a)(2) and (3) require a showing of 
negligence.” Id. (citing Dain Rauscher, 254 F.3d at 856).  

1. Material Misstatement or Omission 

“The standard of materiality is an objective one.” United States v. Jenkins, 
633 F.3d 788, 802 (9th Cir. 2011) (citing United States v. Reyes, 577 F.3d 1069, 
1076 (9th Cir. 2009)). This standard will be “satisfied only if there is ‘a substantial 
likelihood that the disclosure of the omitted fact would have been viewed by the 
reasonable investor as having significantly altered the ‘total mix’ of information 
made available.’” Phan, 500 F.3d at 908 (quoting Basic v. Levinson, 485 U.S. 224, 
231-32 (1988)). Although “[d]etermining materiality in securities fraud cases 
‘should ordinarily be left to the trier of fact,’” materiality may appropriately be 
resolved as a matter of law at summary judgment where “the established omissions 
are ‘so obviously important to an investor, that reasonable minds cannot differ on 
the question of materiality.’” Id. (citations omitted). 

2. Scienter 

“Violations of Section 17(a)(1), Section 10(b) and Rule 10b-5 require 
scienter…. Violations of Sections 17(a)(2) and (3) require a showing of 
negligence.” Phan, 500 F.3d at 908 (quoting Dain Rauscher, 254 F.3d at 856). 

 
3 The parties do not dispute that the alleged misstatements and omissions were 
made in connection with the offer or sale of a security or by means of interstate 
commerce. As such, the Court need not analyze these factors. 

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“[S]cienter refers to ‘a mental state embracing intent to deceive, manipulate, or 
defraud.’” Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 648 (2010) (quoting Ernst 
& Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976)). Analyzing scienter “is a 
subjective inquiry,” which “turns on the defendant’s actual state of mind.” Gebhart, 
595 F.3d at 1042. As a result, “[p]roof of scienter is often based on inferences from 
circumstantial evidence.” SEC v. Burns, 816 F.2d 471, 474 (9th Cir. 1987). 
“Scienter can be established by intent, knowledge, or in some cases 
‘recklessness.’” SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1092 (9th 
Cir. 2010) (citing Hollinger v. Titan Cap. Corp., 914 F.2d 1564, 1568-69 (9th Cir. 
1990) (en banc)). The “deliberate recklessness” standard entails “‘an extreme 
departure from the standards of ordinary care,’ which ‘presents a danger of 
misleading buyers or sellers that is either known to the defendant or is so obvious 
that the actor must have been aware of it.’” In re Alphabet, Inc. Sec. Litig., 1 F.4th 
687, 701 (9th Cir. 2021) (quoting Nguyen v. Endologix, Inc., 962 F.3d 405, 414 
(9th Cir. 2020)). “[A] reckless omission of material facts satisfies the element of 
scienter, provided that such recklessness reflects some degree of intentional or 
conscious misconduct.” Id. (internal quotation marks and citations omitted). 

B. Alleged Violations 

The Joint Brief divides the alleged violations into five categories: (1) 
misstatements and omissions concerning company assets; (2) misstatements and 
omissions concerning security/collateral; (3) misstatements and omissions 
concerning APB’s and Urban Pharms’s financial and business performance; (4) 
misstatements and omissions concerning General Clark’s involvement with APB; 
and (5) misstatements and omissions concerning the use of investors’ funds. See 
generally J. Br. The Court will address each of these allegations in turn. 

 
As a preliminary matter, Defendants do not dispute that the liability of Lee, 

Rice, and Pallas is imputed to the Corporate Defendants APB, Urban Pharms, 
DJ&S, and TSL. See J. Br. at 29, n. 10; In re ChinaCast Educ. Corp. Sec. Litig., 
809 F.3d 471, 476 (9th Cir. 2015) (“[W]e have adopted the general rule of 
imputation and held that a corporation is responsible for a corporate officer’s fraud 
committed ‘within the scope of his employment’ or ‘for a misleading statement 
made by an employee or other agent who as actual or apparent authority.’”) 
(citation omitted). 

 
 

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1. Misstatements and Omissions Concerning Company Assets  

First, Plaintiff argues that Defendants made misstatements and omissions 
concerning company assets. The undisputed facts show that Lee, Pallas, and Rice 
made several material misstatements concerning company assets, including the 
following: 

 
- Lee, Rice, and Pallas communicated to investors that APB had assets in 

Puerto Rico and Colorado.  JAF 248-251, 253-254, 315-317, 378-381. APB 
has never operated nor obtained ownership interest in a cannabis-related 
business in Puerto Rico or Colorado. JAF 142-143, 177-178, 180-181. 

 
- Lee and Rice communicated to investors that APB was a “multi-state 

operator” and “vertically integrated.” JAF 253, 321. APB’s sole marijuana 
business consisted of the Oregon operations and APB has never operated a 
dispensary. JAF 12, 13. 

 
- Lee and Pallas communicated to investors that APB had cannabis-related 

licenses in California and Puerto Rico. JAF 316-317, 323-324, 378, 381. 
APB did not have any licenses in California and Puerto Rico. JAF 142-143, 
145, 197. 

 
- Lee and Rice communicated to investors that APB owned a second cannabis 

farm in Oregon known as Sunfire Farms. JAF 250, 253, 318. APB never 
closed on the Sunfire Farms acquisition. JAF 190.4 

 
These misstatements and omissions created a false impression that the 

company was much larger than it actually was. Defendants do not dispute that APB 
not possessing assets, or even licenses to operate, in these additional locations is 
material. See, e.g., SEC v. AirTrac, 2008 WL 11334597, at *7 (C.D. Cal. Jan. 2, 
2008) (“There is no serious dispute that a reasonable investor would not have 
found information about upcoming public offerings, or contracts with major 
telecommunications carriers, material in deciding to invest with [Defendant].”). 
 

 
4 Defendants indicate they dispute JAF 190, however, Defendants provide no 
evidence or argument in support of their position. See JAF 190. 

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Rice disputes that he made any material misstatements regarding APB’s 
assets to any investor or prospective investor.5 J. Br. at 42. However, it is 
undisputed that Rice was responsible for the investor pitch decks, “drove the 
creation” of the November 26, 2017 pitch deck, and instructed Robert Mayer to 
email a pitch deck that contained false information to investors. JAF 242, 248, 253. 
Additionally, Rice was included on multiple emails to investors containing 
misleading pitch decks and personally disseminated pitch decks to investors. 
JAF 248-251.  

 
Defendants also challenge that they acted with scienter regarding these 

misstatements and omissions. Lee was the CEO of APB and Pallas was the CFO of 
APB. Although the parties dispute what Rice’s job title was at APB, his job 
responsibilities included preparing pitch decks to present to investors. JAF 248, 
253. Defendants knew that APB never acquired an interest in the Puerto Rico 
company. JAF 145-150. Defendants argue that they “believed that because APB 
had written agreements to acquire a controlling interest in Puerto Rico…that APB 
could claim ownership of those assets.” J. Br. at 44-45. However, Lee could not 
have thought APB could own the Puerto Rico company as he was working with 
counsel in Puerto Rico “because the law did not allow an American company to 
own a Puerto Rico company.” J. Br. at 45; JAF 145-146. Moreover, John 
Randolph’s email to Lee expressing concerns about representations in the 
Stonecrest Offering Slide Deck further supports Lee’s scienter. JAF 382, 383. In 
this email Randolph stated: “I do not see evidence that APB does currently own 
any percentage of PR1. Can we clear this up? Make it official in some way that 
matches the representations made to the investors? …. Important: The Investor 
Deck talks a lot about Puerto Rico.” Id.; see also JAF 254.  As in Platforms 
Wireless, 617 F.3d at 1095, the representations were “an absolute and unequivocal 
falsehood” about an asset the company did not own. 

 
With respect to the California licenses, Lee and Pallas claim that Element 

Seven Company fraudulently told them that the licenses were received. J. Br. 45; 
Lee Decl., Dkt. No. 115-7, ¶ 5. However, Defendants provide no facts or evidence 

 
5 Defendants also claim that Rice had no knowledge about these matters. See J. Br. 
at 42-44. However, it is undisputed that Rice knew that there were “significant 
issues related to Puerto Rican law,” that APB would complete the PR1 acquisition 
when the required capital had been injected and that not all the required capital had 
been injected, and that APB did not have any ownership interest in PR1 as of 
September 2018. JAF 147-149. 

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in support of this assertion. Furthermore, even if Defendants “based these 
statements on representations by [a third party]” there is no evidence that they 
“conducted [any] meaningful independent investigation to confirm the truth of 
their representations” which supports an inference that Defendants were 
consciously aware that they lacked a sufficient basis for their statements. Gebhart, 
595 F.3d at 1044. 

 
Overall, Defendants —at least, recklessly—made material misstatements 

concerning company assets. 

2. Misstatements and Omissions Concerning Security and 
Collateral 

Second, Plaintiff argues that Defendants made misstatements and omissions 
concerning security and collateral.6  

 
For the Stonecrest Offering, Lee and APB told investors that they would 

obtain a first deed of trust and a senior secured lien on the membership interests of 
Urban Pharms and DJ&S. JAF 326-329. Investors did not receive either. JAF 333-
334. Similarly, for the $5 Million Raise, Lee, Pallas, and APB advertised to 
investors a “guaranteed” loan with “SECURITY of a 1st trust deed[.]” JAF 395. In 
the promotional video for the $5 Million Raise, Lee says:  
 

It’s just like a mortgage on your home or your real estate. We’re giving a 
first trust deed for security, your collateral, on this farm. It’s a very low loan 
to value ratio. So the safety of the, I’ll call it the investment, or the loan is 
certainly there… If you’re investing $100,000 the investment goes into an 
escrow account, and then once the trust deed, the security is delivered, then 
the money flows to the company. So the investor has that absolute 
confidence and peace of mind that it’s a collateralized, protected investment. 
So we are pledging our most precious asset, this farm, as collateral. JAF 395. 

 
However, investors in the $5 Million Raise never received a first deed of trust. JAF 
397. In fact, no deed of trust at all has been recorded in favor of APB or any 
investor in the $5 Million Raise. Id. Despite materials stating that APB was to issue 
a two-year note and pay investors the 10% return on a quarterly basis, JAF 359, the 

 
6 Plaintiff does not allege Rice made misstatements and omissions concerning 
security and collateral. 

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documents executed by investors in the $5 Million Raise do not include any note 
evidencing APB’s repayment obligation nor have any notes been produced in this 
litigation. JAF 360-361. Furthermore, the escrow funds were released to APB.7 
JAF 376. 
 

Plaintiff asserts, and Defendants do not dispute, that these misstatements 
regarding security and collateral are material as a matter of law. The Court agrees.  
A reasonable investor would have obviously considered important that they would 
not receive the type of security and collateral for their investments that were 
promised to them. See, e.g., SEC v. Loomis, 969 F. Supp. 2d 1226, 1234 (E.D. Cal. 
2013) (finding that “statements that the loans were secured by second mortgages 
were material”). 
 
 Lee’s knowing misrepresentations establish scienter.  JAF 332, 336, 400, 
402, 376.  Lee argues that he did not act with scienter regarding the Stonecrest 
offering because he “believed that the investors would receive a first deed of trust” 
and “relied on the statements in the Stonecrest PPM that was prepared by the 
offeror.” J. Br. at 50. He provides no evidence to support this claim. Furthermore, 
even if Lee “based these statements on representations by [Stonecrest PPM]” he 
“conducted no meaningful independent investigation to confirm the truth of their 
representations.” Gebhart, 595 F.3d at 1044. 
 
  Regarding the $5 Million Raise, Lee argues that he did not act with scienter 
because he “based his statement that the investors would receive a first deed of 
trust on his understanding that Knighted had agreed to permit the investors to share 
Knighted’s interest in the Farm.” J. Br. at 50; JAF 399. Additionally, Pallas argues 
that he “believed the investors had obtained a first deed of trust because ABP RE 
Holdings had that position through its financial participation in Knighted facility 
and security interest.” J. Br. at 50; JAF 400. However, it is undisputed that both 
Lee and Pallas knew that Knighted had the first deed of trust of the Oregon Farm. 
JAF 389-400. Lee and Pallas both signed an “Agreement Among Lenders” which 
stated that APB RE Holdings will not “exercise or seek to exercise any rights or 
remedies with respect to any Collateral” until Knighted is paid in full and will not 
“contest, protest, or object to any Exercise of Remedies” by Knighted. JAF 402. 
Even if Knighted were to somehow share its first deed of trust with investors, Lee 
and Pallas began promising this deed to investors in 2021, before the 2022 

 
7 Defendants clarify that the Escrow Agent, not AFB, released the escrow funds to 
AFB. Plaintiff agrees with Defendants’ clarification. See JAF 376. 

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agreement with Knighted was signed. JAF 353, 402. “The undisputed facts in this 
case demonstrate that each [Defendant] either knew or was reckless in not 
knowing, that these securities were not backed by the collateral they had promised 
their investors, and therefore acted with the requisite scienter for fraud.” SEC v. 
Radical Bunny LLC, 532 F. App’x 775, 777 (9th Cir. 2013) (internal quotations and 
citation omitted). These facts establish scienter for Lee and Pallas that the first 
deed of trust was not available for investors. 
 
 Accordingly, Lee and Pallas acted at least recklessly in making 
misstatements and omissions concerning security and collateral. 

3. Misstatements and Omissions Concerning APB And Urban 
Pharms’s Financial and Business Performance 

Third, Plaintiff argues that Defendants made misstatements and omissions 
concerning APB and Urban Pharms’s financial and business performance. 
 

Lee and Pallas made misstatements and omissions during various investment 
offerings.8 For example, Urban Pharms had a revenue of $942,7221 in 2022, with 
an EBITDA loss of $2,531,353. JAF 82. However, an Urban Pharms Financial 
Statement that was distributed to investors shows that Urban Pharms had revenue 
of $10.1 million and income from operations of $6.3 million for calendar year 
2022. JAF 476. Defendants dispute this fact and claim that the exhibit is 
“incorrect” and that APB’s Controller, Lee Patin, corrects it. Id. However, 
Defendants cite only to Patin’s deposition in which Patin admits that the 
information included in the financial statement is false because Patin “recorded the 
income in the revenue, and then later backed it out and put it into other income.” 
JAE 0514, 10/23/24 Patin Tr. 98:1-2. Defendants do not provide evidence that the 
false and misleading financial statement that was circulated to investors was 
corrected. In fact, Patin testified that she did not reach out to the investor who 
received the financial statements to tell him that the information was false. Id. at 
101:3-6. Accordingly, the Court finds no genuine dispute of material fact here.  
 

Additionally, the investment summary for the $5 Million Raise stated that 
APB’s “CURRENT BALANCE SHEET & PROFITABLE INCOME 
STATEMENT AVAILABLE FOR REVIEW UPON REQUEST[.]” JAF 404. 
However, APB was not profitable—the company had net losses every year from 

 
8 The Court declines to resolve issues regarding Rice in this section.  

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2016 to 2023 that totaled over $50 million. JAF 80. Lee and Pallas in their roles 
understood APB’s financial status, as evidenced by Pallas’ letter regarding APB’s 
“financial challenges,” JAF 107, and APB’s failure to make payroll that required 
Lee’s mother to extend loans. JAF 127-129. Lee, Pallas, and APB did not tell 
investors that APB had suffered these loses. JAF 405. 

 
Misleading information relating to the profitability of APB is undoubtedly 

material to investors. “The misstatements and omissions created the false 
impression that [Defendant] was profitable, an impression that would have 
assumed significance in the deliberations of any reasonable investor.” SEC v. Glob. 
Express Cap. Real Est. Inv. Fund, I, LLC, 289 F. App’x 183, 187 (9th Cir. 2008); 
see SEC v. Murphy, 626 F.2d 633, 653 (9th Cir. 1980) (“Surely the materiality of 
information relating to financial condition, solvency and profitability is not subject 
to serious challenge.”). 
 

Lee and Pallas argue there is a dispute as to whether they acted with scienter. 
Defendants argue that, regarding the “Profitable Income Statements” referred to in 
the $5 Million Raise, “neither Lee nor [Pallas] know why this statement is on the 
document or who wrote it.” Pallas Decl., Dkt. No. 115-7, ¶ 3; J. Br. at 55. Even if 
Lee and Pallas did not know who included this statement on the investment 
summary, they knew that the financial statement would be sent to investors, JAF 
478, and that the statement falsely portrayed to investors that the company was 
profitable when it was not. See, e.g., SEC v. LFS Funding Ltd. P’ship, 2023 WL 
6373859, at *8 (C.D. Cal. Aug. 25, 2023) (“[T]o the extent Defendant argues that 
he was ignorant of these false statements, distributing materials regarding the [] 
securities offering without knowing the contents of the materials is evidence of 
reckless conduct in itself”).  

 
At a minimum, Lee and Pallas acted recklessly in making material 

misstatements concerning APB and Urban Pharms’s financial and business 
performance. 

 
 
 
 
 

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4. Misstatements and Omissions Concerning General Clark’s 
Involvement with APB 

Next, Plaintiff alleges that Lee and Rice made false statements regarding 
General Clark’s involvement to investors.9 General Clark was a previous board 
member of APB’s predecessor, the Grilled Cheese Truck, Inc., but resigned in April 
2016 when the company shifted its focus because he did not want to “get painted 
with the cannabis brush.” JAF 280. In 2018, Lee gave presentations to investors 
that claimed General Clark was part of “APB Leadership” as its “Chief 
Humanitarian and Global Economic Advisor.” JAF 274-277. Rice also sent and 
was copied on emails containing pitch decks that listed General Clark as part of 
APB’s “Executive Team.” JAF 276-278.10 

 
Defendants purport to dispute that after his resignation in April 2016, 

General Clark was not involved with APB and not part of its “Leadership” or 
“Executive Team,” nor was an “Advisor” or “Chief Humanitarian and Global 
Economic Advisor.” JAF 281. Defendants argue that General Clark “continued to 
consult” with Lee regarding APB. See id. However, the consultations Lee refers to 
concern “getting aid to Puerto Rico after the Maria Hurricane” and “political 
situations in Latin America,” none of which purport to concern APB. Lee Decl., 
¶ 3.  

 
Considering General Clark’s background and reputation, his leadership 

position was obviously important to a reasonable investor. See SEC v. Husain, 
2017 WL 810269, at *8 (C.D. Cal. Mar. 1, 2017) (“Other than a corporation’s 
financials, its leadership, the nature of its operations, and its plan for the future 

 
9 Plaintiff does not allege Pallas made misstatements and omissions concerning 
General Clark’s involvement with APB. 
10 Rice disputes that he disseminated pitch decks to investors because the email he 
sent to Zubin Mehta was not “to solicit him as an investor.” Rice Decl., Dkt. No. 
115-7, ¶ 14.  The Court agrees with Plaintiff that Rice’s claim that he thought 
Mehta was a marketer, not an investor, “does not create a dispute as to whether 
Rice disseminated misrepresentations in connection with an offer, purchase, or sale 
of a security.”  Pl. Resp. to JAF 278 (citing JAE 1700).  Rice understood that 
Mehta was working with Carl Peterson, who was involved in raising money from 
investors, and he knew that the document would be used by Mehta to create a new 
pitch deck.  Id. (citing JAE 0418). 

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would seem to be the most important pieces of information available to an 
investor.” (emphasis in original)). 
 

Furthermore, Defendants do not dispute that “General Clark never would 
have agreed to have a management or advisory role with APB after APB became a 
cannabis company,” that “APB did not have any written or oral agreements with 
General Clark after General Clark’s resignation in April 2016,” and that Rice 
received an email from General Clark in December 2017 stating: “Bernie, please 
correct this the right way. I’m not on the board, nor am I [an] advisor.” JAF 282-
285. Despite knowing these facts, Lee and Rice continued to make 
misrepresentations regarding General Clark’s involvement after his 2016 
resignation and 2017 email. See JAF 274-279. 
 
 Accordingly, Lee and Rice, at least recklessly, made false material 
statements to investors concerning General Clark’s involvement with APB.  

5. Misstatements and Omissions Concerning the Use of 
Investors’ Funds 

Finally, Plaintiff argues that Defendants made misstatements and omissions 
concerning use of investors’ funds.11  

 
Plaintiff first argues that Lee and Pallas made a material misstatement by 

circulating to investors that the Garden Unit Offering was “for expansion purposes 
only” and that $10 million already had been raised “for expansion purposes.” J. Br. 
at 59; JAF 490. Defendants argue that the circulated memorandum does not say 
“only.” However, the exhibit that both parties cite to clearly states: “This 
Syndication is for expansion purposes only” and that “[i]n 2022 $10M was 
successfully raised for expansion purposes[.]” JAE 0761, Ex. 15 at L&A 018674 
(emphasis added). Additionally, it is undisputed that Lee knew that not all money 
raised in the Garden Unit Offering was used for expansion, as he remarked in a 
communication with an investor that APB planned to sell each garden interest for 
$7.5 million, even though it only costs approximately $1.5 million to develop an 
outdoor garden. JAF 492-493. Regardless of whether some of the money went to 
the garden expansion, these misstatements are material when Lee knew the vast 
majority of money raised for the purpose of expansion was actually to be used for 

 
11 Plaintiff does not allege Rice made misstatements and omissions concerning the 
use of investors’ funds. 

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different purposes. See, e.g., SEC v. Skinner, 2022 WL 2784811, at *5 (C.D. Cal. 
June 17, 2022) (“Any reasonable investor would clearly have considered it 
important to know that their funds were being used to pay [Defendant]’s personal 
expenses, other investors, or unrelated business expenses, instead of funding for 
the intended real estate projects.”); SEC v. Cap. Cove Bancorp LLC, 2015 WL 
9704076, at *7 (C.D. Cal. Sept. 1, 2015) (“Committing to invest Fund proceeds in 
real estate while channeling those investments to either personal use or Ponzi-like 
payments is clearly a material representation.”). Defendants do not dispute that Lee 
and Pallas acted with scienter in connection with these misstatements as the CEO 
and COO of the company at the time. 
 

Additionally, APB paid for Lee’s multiple condominiums in Puerto Rico, a 
personal cook, and a cleaner. JAF 62-64.  APB also paid hundreds of thousands of 
dollars for hotels, travel, spa visits, clothing stores, and more for Lee, his 
girlfriend, and her family. JAF 74. Defendants provide no evidence that these 
purchases were disclosed to investors or that investors were told funds would be 
used for Lee’s personal expenses. Rather, Defendants argue that “APB did not pay 
for a ‘lavish lifestyle’ for Lee but rather for necessary living and business operating 
expenses.” J. Br. at 61. The Court finds no genuine dispute of material fact here 
regarding APB’s payments as the payments themselves are undisputed. JAF 62-64, 
74. Knowledge of these expenses would be important to investors, especially when 
the company was not profitable. See, e.g., SEC v. Chen, 2016 WL 7469683, at *9 
(C.D. Cal. Dec. 8, 2016) (“Defendant used investor money to fund a lifestyle that 
included multiple million-dollar mansions and luxury automobiles for him and his 
family… Such misuse shows Defendant’s intent to defraud investors for his 
personal gain.”). Lee knew, or was at least reckless in not knowing, that funds were 
being misappropriated by being spent on his personal lifestyle. 

 
Accordingly, Lee and Pallas acted at least recklessly in making 

misstatements and omissions concerning the use of investors’ funds. 

C. Summary 

In conclusion, the Court finds that Plaintiff met its initial burden “of 
identifying the elements of the claim . . . on which summary judgment is sought 
and evidence that it believes demonstrates the absence of an issue of material fact,” 
with respect to its antifraud claims. Celotex Corp., 477 U.S. at 323. Defendants 
have not met their shifted burden of “set[ting] forth specific facts showing that 
there is a genuine issue for trial,” Anderson, 477 U.S. at 250. The Court thus 

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concludes that there is no genuine dispute of material fact as to Plaintiff’s claims 1 
and 2. The Court grants Plaintiff’s Motion for Summary Judgment on the issue of 
liability for its Section 17(a), Section 10(b) and Rule 10b-5 claims against Lee, 
Rice, and Pallas, in addition to the Corporate Defendants. See In re ChinaCast 
Educ. Corp. Sec. Litig., 809 F.3d at 476. 

IV. CONCLUSION 

For the foregoing reasons, Plaintiff’s Motion for Partial Summary Judgment 
is GRANTED. 
 
IT IS SO ORDERED. 

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