On April 29, 2024, the U.S. District Court for the Western District of North Carolina entered final judgment against North Carolina resident Martin A. Sumichrast (“Sumichrast”).

On May 31, 2022, the Securities and Exchange Commission (SEC) charged Sumichrast with defrauding Stone Street Partners, LLC, a private fund he managed, and its investors by misappropriating fund assets and by engaging in several unauthorized transactions designed to benefit himself at Stone Street's expense.

Case Summary

Martin A. Sumichrast conducted a series of undisclosed and fraudulent conflict-of-interest transactions with Stone Street Partners, LLC (“Stone Street”), a private fund under his management, from March 2017 to March 2019.

Some of these transactions favored Sumichrast to the detriment of Stone Street and its investors.

Additionally, most of these transactions were principal transactions, for which Sumichrast failed to provide the necessary transaction-specific written notice or obtain the required consent.

Through these actions, Sumichrast violated, and unless restrained, will continue to violate, Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933 (“Securities Act”); Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”); Rules 10b-5(a) and (c) thereunder; Sections 206(1), 206(2), 206(3), and 206(4) of the Investment Advisers Act of 1940 (“Advisers Act”); and Rule 206(4)-8 thereunder.

Defendants And The Related Parties

I. MARTIN A. SUMICHRAST (“SUMICHRAST”)

Sumichrast, aged 55, resides in Charlotte, North Carolina. From 2013 to 2020, Sumichrast acted as a manager of Stone Street. In this capacity, he provided advisory services to Stone Street concerning the valuation and investment in securities for compensation. Additionally, Sumichrast holds positions as the Chairman of the Board of Directors and CEO of cbdMD, Inc., a publicly traded company specializing in cannabis products. He previously held the position of president at cbdMD.

Furthermore, Sumichrast serves as a board member and CEO of Adara Acquisition Corp., a Special Purpose Acquisition Company (SPAC) incorporated in Delaware, with cbdMD as one of its sponsors. Adara went public through a $100 million IPO in February 2021 and is listed on the NYSE American stock exchange. Throughout his career, Sumichrast has been associated with various publicly traded companies, particularly those dealing in penny stocks.

II. STONE STREET PARTNERS, LLC (“STONE STREET”)

Formerly known as Siskey Capital, LLC, Stone Street was a limited liability company based in North Carolina, with its main office in Charlotte. Initially established as Siskey Capital LLC in 2013, it rebranded as Stone Street in 2017.

Stone Street invested in public and private companies as a pooled investment vehicle. Stone Street officially dissolved by filing its Articles of Dissolution of Limited Liability Company on July 22, 2020. Sumichrast served as co-manager from 2013 until December 2016 and sole manager from December 2016 until its dissolution. Stone Street was never registered with the Commission in any capacity.

III. WASHINGTON CAPITAL, LLC (“WASHINGTON CAPITAL”)

Washington Capital is a Maryland limited liability company under the complete control of Sumichrast, owned either solely by him or jointly with his immediate family. According to Washington Capital, it primarily served as a vehicle for Sumichrast’s personal and family finances, without conducting business operations or employing staff. Sumichrast frequently utilized Washington Capital for personal transactions, including some relevant to this litigation.

IV. CBDMD, INC. (“CBDMD”)

cbdMD is a North Carolina corporation headquartered in Charlotte. Specializing in products containing cannabidiol, cbdMD has Sumichrast as its CEO or Co-CEO throughout the pertinent period. He has been Chairman of its Board of Directors since 2019, previously serving as its president from 2016 until July 2019. cbdMD’s common stock is registered with the Commission under Section 12(b) of the Exchange Act and is traded on the NYSE American Stock Exchange under the ticker YCBD.

Stone Street Background

In 2013, Martin A. Sumichrast and Richard Siskey, a prominent business figure in Charlotte, North Carolina, established Stone Street. Over the period from 2013 to 2014, Stone Street amassed $3 million through the sale of Class B Unit interests to 16 investors. Subsequently, in 2015, an additional offering by Stone Street yielded $8.73 million from around 52 investors. Following the second offering, all existing investors were converted to Class A members, consolidating Stone Street's equity into a single class.

Sumichrast and Siskey were appointed as co-managers of Stone Street, as outlined in the fund’s private placement memorandum (PPM) and operating agreement. Stone Street lacked a formal board, trustee, or independent governing committee, granting Sumichrast and Siskey broad discretion over its operations and investment strategies. However, the Operating Agreement imposed various duties on them, requiring approval from a majority of Stone Street’s Class A members for any related party transactions.

The Operating Agreement, particularly Section 5.5, stipulated:

"Related Party Transactions. Any contract or transaction involving the LLC and a Member, Manager, Officer, or Affiliate thereof, necessitates Approval of the Members."

"Approval of the Members" was defined as endorsement by vote or written consent of the majority holders of the issued and outstanding Class A Units. Additionally, the PPM specified that transactions involving Richard Siskey or Martin Sumichrast required approval from a majority of the Units' holders.

Apart from the explicit disclosure obligations under the Operating Agreement, Sumichrast and Siskey were bound by fiduciary duties to Stone Street as its investment advisers and managers. Following Siskey's death by suicide in December 2016, amid an investigation into an unrelated Ponzi scheme he operated, Sumichrast assumed sole management of Stone Street.

Sumichrast’s Conflicts Of Interest

Following Siskey’s passing, Sumichrast initiated numerous transactions that favored his personal interests, often to the detriment of Stone Street and its investors. Each of these transactions fell under the category of related party transactions as defined in the Operating Agreement and PPM.

Sumichrast failed to disclose, nor did he seek consent from Stone Street or its investors, regarding the details of these transactions or the inherent conflicts of interest between his actions and the interests of Stone Street and its investors.

A. INCREASE IN SUMICHRAST’S REMUNERATION

According to Stone Street’s PPM, both Sumichrast and Siskey were entitled to an annual salary of $100,000 from Stone Street. In January 2017, Sumichrast received his $100,000 salary for that year. However, in March 2017, following Siskey’s demise, Sumichrast allocated an additional $100,000 to himself from Stone Street’s funds. This pattern continued with Sumichrast granting himself a $200,000 annual salary in 2018 and 2019.

All payments were routed through Stone Street to Washington Capital. To cover the 2018 increment, Sumichrast directed Stone Street to sell securities valued at approximately $200,000. It’s important to note that Stone Street would have lacked the necessary funds to fulfill Sumichrast’s increased salary demands without this securities sale.

Thus, Sumichrast never disclosed these additional payments to himself nor sought approval from Stone Street or its investors for such actions.

B. SUMICHRAST UTILIZES STONE STREET FUNDS TO BOLSTER CBDMD’S FINANCIAL POSITION

Stone Street initially invested in cbdMD in 2015, acquiring approximately five million cbdMD shares by the time Siskey passed away in December 2016.

In October 2017, cbdMD successfully executed a Regulation A+ offering, leading to its shares being listed on the NYSE American Exchange thereafter.

Before this public stock offering, Sumichrast was informed by cbdMD’s underwriter that reducing certain debts would enhance the attractiveness of cbdMD’s shares.

Consequently, in preparation for this offering, Sumichrast orchestrated a series of transactions between Stone Street and cbdMD to enhance cbdMD’s financial position for bolstering the prospects of its eventual stock offering. However, many of these transactions favored cbdMD to the detriment of Stone Street.

Sumichrast personally benefited from cbdMD going public. As per his January 2017 employment agreement with cbdMD, Sumichrast was eligible for a discretionary bonus determined solely by cbdMD’s Board. In January 2018, cbdMD rewarded Sumichrast with a discretionary bonus of $240,000, citing his achievements in the previous year.

i. Sumichrast Directs Stone Street to Acquire cbdMD Shares

On July 18, 2017, Sumichrast orchestrated Stone Street’s purchase of 56,500 cbdMD shares from cbdMD for $223,175, equating to $3.95 per share. The proceeds from this transaction and sales to other investors were utilized by cbdMD to reduce its outstanding line of credit.

Despite the inherent related party nature of this transaction due to Sumichrast's association with cbdMD, he failed to disclose the transaction or his conflict of interest, including his potential financial gain through a discretionary bonus from cbdMD, to Stone Street or its investors. Moreover, Sumichrast did not seek their consent regarding Stone Street’s acquisition of additional cbdMD shares.

ii. Sumichrast Strengthens cbdMD Further Through Stone Street’s Acquisition of NuGene International, Inc. Preferred Stock

In July 2017, to bolster cbdMD’s financial position before its public offering, Sumichrast prompted Stone Street to procure near-worthless securities from I’M1, LLC, a majority-owned subsidiary of cbdMD. Under cbdMD’s control and included in its consolidated financial statements, the subsidiary had previously engaged in a consulting agreement with NuGene International, Inc., an unrelated cosmetics company. Under this agreement, cbdMD had obtained 2.5 million NuGene common shares, valued at approximately $650,000.

At the time of the consulting agreement, NuGene was a publicly traded company listed on the pink sheets but was burdened with substantial debt and faced significant financial distress. NuGene’s Form 10-K filed in 2016 disclosed doubts about its ability to continue as a going concern. Additionally, it failed to submit its quarterly report on Form 10-Q within the stipulated timeframe, further indicating financial instability.

On June 30, 2017, cbdMD exchanged its NuGene common shares for 65 shares of NuGene’s Series B Convertible Preferred Stock, each with a stated value of $10,000. These preferred shares were convertible to common shares at a conversion rate of $0.26 per common share or the 30-day trading average, whichever was lower, potentially yielding 2.5 million NuGene common shares upon converting all 65 preferred shares.

On July 31, 2017, Sumichrast directed Stone Street to purchase the NuGene convertible shares from I’M1 for $475,000, comprising $200,000 in cash and a $275,000 promissory note, fully repaid in 2018. The purchase price was unilaterally determined by cbdMD without third-party valuation. This cash injection into I’M1 further fortified cbdMD’s financial position ahead of its public offering, as I’M1’s financials were part of cbdMD’s consolidated financial statements.

Sumichrast neglected to disclose this related party transaction to Stone Street and its investors or seek their consent. Instead, the transaction disadvantaged Stone Street while benefiting cbdMD and, ultimately, Sumichrast. Stone Street received 65 non-marketable convertible preferred shares of a failing company, convertible into millions of thinly traded common shares, but their conversion would have significantly diluted the market price for common shares. Notably, Stone Street’s audited financials for 2017 and 2018 valued the NuGene shares at $0, indicating that Sumichrast’s decision resulted in Stone Street paying $475,000 for essentially worthless assets.

C. STONE STREET’S DEALINGS WITH WASHINGTON CAPITAL, LLC

i. Sumichrast Initiates Stone Street’s Loan to Washington Capital

On July 1, 2017, Sumichrast directed Stone Street to extend a $70,000 loan to Washington Capital, an entity owned and controlled by Sumichrast's family. Following this transaction, Washington Capital’s indebtedness to Stone Street exceeded $300,000. Despite the related party nature of this transaction, Sumichrast neither sought the necessary consent from a majority of Stone Street’s shareholders for the $70,000 loan nor disclosed his conflict of interest.

By January 1, 2018, Washington Capital’s outstanding principal and interest owed to Stone Street reached $325,777. On the same date, Sumichrast arranged for Stone Street and Washington Capital to execute an agreement whereby Washington Capital repaid the entire loan balance by transferring 651,553 shares of Kure Corp. to Stone Street. Kure Corp., a private vaping company, counted Sumichrast as its fifth largest shareholder and former member of the board of directors. Sumichrast also maintained a financial relationship with Kure, assisting the company in its acquisition efforts. The valuation of Kure stock for loan repayment lacked third-party assessment or any attempt at accurate valuation.

Sumichrast failed to obtain the necessary consent from Stone Street’s shareholders or disclose his conflict of interest before executing this related party transaction.

ii. Sumichrast Facilitates Stone Street’s Acquisition of Restricted cbdMD Stock From Washington Capital

On July 1, 2018, Sumichrast orchestrated Stone Street’s purchase of 150,000 restricted shares of cbdMD stock from Washington Capital in a private placement, amounting to $645,000 or $4.30 per share. Stone Street remitted $45,000 in cash to Washington Capital, with the remaining $600,000 secured by a security agreement and to be repaid via a promissory note carrying a 5% per annum interest rate.

Sumichrast neglected to provide prior written disclosure of this transaction to Stone Street or its investors, nor did he secure their consent. The transaction price of $4.30 per share lacked independent valuation and appeared disproportionately high. Notably, it constituted a 16% premium over the preceding day’s $3.70 closing price for freely traded cbdMD common shares. Considering that Stone Street acquired a non-controlling block of restricted shares, an illiquidity discount should have been applied, resulting in a lower, more appropriate price for the restricted shares.

D. SUMICHRAST INITIATES STONE STREET’S LOANS TO KURE

In April 2018, Sumichrast directed Stone Street to extend an $80,000 loan to Kure, which was duly repaid later the same month. Notably, at the time of this loan, Sumichrast held shares in Kure, represented Kure in merger negotiations with Isodiol International Inc. (from whom he received warrants), and had recently received $100,000 in compensation for his services to Kure.

Subsequently, in March 2019, Stone Street provided Kure with a $50,000 bridge loan. By October 2019, this loan was converted into Kure stock at a rate of $0.10 per share. Sumichrast failed to obtain the necessary consent from a majority of Stone Street’s shareholders prior to these related party transactions and did not disclose his conflict of interest.

SEC Claims

A. COUNT I - FRAUD INVOLVING VIOLATIONS OF SECTION 17(A)(1) OF THE SECURITIES ACT

Between March 2017 and March 2019, Sumichrast utilized various means of interstate commerce and postal services to perpetrate fraudulent acts in connection with the offer and sale of the securities outlined above. These acts included the use of deceptive devices, schemes, and strategies designed to deceive purchasers of said securities, as elaborated upon earlier.

Defendant Sumichrast knowingly, intentionally, and/or recklessly employed the aforementioned fraudulent devices, schemes, and strategies.

In executing such actions, the defendant acted with the scienter, demonstrating an intent to deceive, manipulate, or defraud, or exhibiting a blatant disregard for the truth.

Consequently, defendant Sumichrast has directly and indirectly contravened Section 17(a)(1) of the Securities Act and absent intervention, is likely to persist in such violations.

B. COUNT II - FRAUD INVOLVING VIOLATIONS OF SECTIONS 17(A)(2) AND 17(A)(3) OF THE SECURITIES ACT

Between March 2017 and March 2019, Sumichrast utilized various means of interstate commerce, including postal services, in connection with the offer and sale of the securities detailed above. Through these means, Sumichrast directly and indirectly:

• Obtained money and property through the use of false statements of material fact and the omission of material facts necessary to prevent the statements made from being misleading, considering the circumstances under which they were made; and
• Engaged in transactions, practices, and business behaviors that constituted and operated as acts of fraud and deceit upon the purchasers of said securities, as previously delineated.
• As a result of the aforementioned actions, Sumichrast has directly and indirectly contravened Sections 17(a)(2) and 17(a)(3) of the Securities Act and in the absence of intervention, is likely to persist in such violations.

C. COUNT III - FRAUD INVOLVING VIOLATIONS OF SECTION 10(B) OF THE EXCHANGE ACT AND RULE 10B-5(A) AND (C) THEREUNDER

Between March 2017 and March 2019, Sumichrast, in relation to the purchase and sale of the securities detailed above, utilized interstate commerce and postal services. Through these channels, Sumichrast directly and indirectly:

• Employed deceptive devices, schemes, and tactics to defraud; and
• Undertook actions, practices, and business patterns that constituted and functioned as fraudulent activities and deception upon the purchasers of said securities, as previously outlined.

Sumichrast knowingly, intentionally, and/or recklessly participated in the aforementioned deceptive devices, schemes, and tactics, as well as fraudulent actions, practices, and business patterns. In conducting such behavior, Sumichrast acted with the scienter, demonstrating an intent to deceive, manipulate, or defraud, or displaying a significant reckless disregard for the truth.

As a result of the aforementioned actions, Sumichrast has contravened and, in the absence of intervention, is likely to continue to contravene Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

D. COUNT IV - FRAUD BY AN INVESTMENT ADVISER INVOLVING VIOLATIONS OF SECTIONS 206(1) AND 206(2) OF THE ADVISERS ACT

Throughout the relevant period, Defendant Sumichrast operated as an investment adviser as defined in Section 202(a)(11) of the Advisers Act.

Directly or indirectly, utilizing the mails or any means of interstate commerce, Defendant Sumichrast: (a) knowingly or recklessly employed deceptive devices, schemes, or strategies to defraud; or (b) engaged in transactions, practices, or business patterns that functioned as acts of fraud or deceit upon a client or potential client.

As a result of the aforementioned actions, Sumichrast has contravened and, absent intervention, is likely to continue to contravene Sections 206(1) and 206(2) of the Advisers Act.

E. COUNT V - FRAUD BY AN INVESTMENT ADVISER INVOLVING VIOLATIONS OF SECTION 206(3) OF THE ADVISERS ACT

Throughout the relevant period, Defendant Sumichrast functioned as an investment adviser as defined in Section 202(a)(11) of the Advisers Act [15 U.S.C. § 80b-2(a)(11)].

Directly or indirectly, utilizing the mails or any means of interstate commerce, Defendant Sumichrast, while acting as principal for his own account, knowingly executed transactions involving the sale or purchase of securities with a client. However, he failed to provide written disclosure to the client prior to the completion of such transactions regarding his role and obtain consent from the client for such transactions

As a result of the aforementioned actions, Sumichrast has contravened and, in the absence of intervention, is likely to continue to contravene Section 206(3) of the Advisers Act.

F. COUNT VI - FRAUD BY AN INVESTMENT ADVISER INVOLVING VIOLATIONS OF SECTION 206(4) OF THE ADVISERS ACT AND RULE 206(4)-8 THEREUNDER

Throughout the relevant period, Defendant Sumichrast served as an investment adviser to a pooled investment vehicle as defined by Rule 206(4)-8 of the Advisers Act.

Directly or indirectly, utilizing the mail or any means of interstate commerce, Defendant Sumichrast:

• Made statements of fact that were untrue and/or omitted material facts necessary to prevent the statements made, under the circumstances, from being misleading, to investors and potential investors in a pooled investment vehicle; and
• Engaged in other actions, practices, and business patterns that were fraudulent, deceptive, or manipulative concerning investors and potential investors in a pooled investment vehicle.

As a result of the aforementioned actions, Sumichrast has contravened and, in the absence of intervention, is likely to continue to contravene, Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.

Final Judgment

The defendant is enjoined and restrained from violating Sections 206(2) and (3) of the Investment Advisers Act of 1940, and orders him to pay disgorgement of $225,000, prejudgment interest of $50,000, and a civil penalty of $75,000.

Key Takeaways For Investors

Here are some key takeaways for investors from the case:

1. TRANSPARENCY AND DISCLOSURE

The case underscores the importance of transparency and full disclosure in investment transactions. Investors should be wary of any lack of transparency or undisclosed conflicts of interest.

2. DUE DILIGENCE

Investors should conduct thorough due diligence before investing, especially in situations involving related-party transactions or where conflicts of interest may exist. Understanding the background and affiliations of individuals and entities involved in the investment is crucial.

3. REGULATORY COMPLIANCE

Compliance with securities laws and regulations is essential. Investors should ensure that investments and transactions are conducted in accordance with applicable laws and regulations to protect their interests.

4. RISK ASSESSMENT

Investors should carefully assess the risks associated with their investments, including the potential for fraud or misconduct. Vigilance and skepticism can help investors identify red flags and avoid fraudulent schemes.

5. LEGAL RECOURSE

In cases of suspected fraud or misconduct, investors have legal recourse through regulatory authorities and the judicial system. Seeking legal advice and assistance can help investors pursue remedies and recover losses resulting from fraudulent activities.

6. DIVERSIFICATION

Diversifying investment portfolios can help mitigate risks associated with individual investments or fraudulent activities. Spreading investments across different asset classes and securities can help minimize the impact of losses from any single investment.

MAY 1, 2024