Investors look likely to be left out of pocket amid a legal battle between former directors of a failed cannabis firm described as a "pump and dump" scheme in court.
The six-monthly liquidators' report for Tauranga-based cannabis company MediCann, released in December, shows that available funds have declined from $726,000 pre-liquidation to $221,600 by November 12, 2020.
The Herald understands that around $1.5 million was originally put into the business by 14 investors eager to capitalise on the opportunity presented by the fledgling medicinal cannabis space in New Zealand.
However, the company was placed into liquidation by shareholders on November 12, 2018.
Ballooning legal fees since then have accounted for $228,700, while the liquidators at BDO have billed $159,800.
The high legal costs are attributable to a long-running dispute between company founders Ross Smith and Brendon Ogilvy about the strategic direction of the business.
The differences between the pair could not be resolved, and investors eventually drove the decision to liquidate the business, largely in the hope of getting their money back.
The battle then spilled over to the High Court, which was called on to determine the facts of the dispute.
This matter was heard at the Tauranga High Court in June by Associate Judge PJ Andrew, who determined the shares previously held by Smith, his wife Kelly Desire and related entities be cancelled.
The constitution for the company provided that shares would automatically become void unless the recipient signed a shareholders' agreement within one month of the issue or transfer.
Smith was further ordered to pay costs of $32,815, which the liquidators say was made before the release of their latest report.
The liquidators' report noted that the matter had yet to be completed and remains subject to further considerations regarding the actions of management, directors, officers and advisers of the company.
Ogilvy, the former chief executive at the business, said it was unlikely that investors would get anything back once the dissolution of the business was complete.
"When put into voluntary liquidation, MediCann had around $700,000 in the bank, from the latest report you will see not much of that remains," Ogilvy told the Herald.
"Unfortunately, despite voting to voluntarily liquidate MediCann with substantial funds, its original cash investors will receive little of that."
Ogilvy has since gone on to start a new cannabis firm called Eqalis, which has successfully attracted new investment funds.
Ogilvy described the experience at MediCann as "a total nightmare", expressing relief that it was drawing to a conclusion.
"As it transpired the majority of investors sought to voluntarily liquidate MediCann because they, as I did, strongly objected to being party to an enterprise embodying what we considered unethical principles," he said.
"The majority of investors were not told they were investing in a 'pump-and-dump' scheme, they invested in what was purported to be a solid company in a new business field focused on bringing relief to people."
Ogilvy was referring to court documents highlighting evidence taken before Justice Andrew where Smith himself used the "pump and dump" phrase.
Smith is quoted saying before the court: "I list public companies and even [former MediCann chief operations officer Bastiaan] Kramer touched on it yesterday. He said, 'It was a pump-and-dump scheme'. Well, of course, it was."
Smith then continues: "How do you think I make my money, mate? Like, as an investment banker, we put together early-stage companies. We put a management team around it and then we list it on the stock exchange and then we sit out our escrow period and then chisel that stock out of the market."
Smith elaborated further on this point, outlining how the approach could have made him millions of dollars.
"Your Honour, the strategic objective was to go public, all right, and my plan was to, as Mr Kramer so eloquently put it, a pump and dump," Smith said.
"Absolutely, I would've chiselled this doc out because that's what I do. I mean, but the investors that wanna stay in the company, you can stay in but you've got – that's the advantage of a public company, you can buy in, you can move in and out of the register, all right, that's what it's all about so that's the number one point, because these guys have essentially stopped me from doing what I do. That's how I make my money. I don't work for a couple of hundred thousand dollars a year all right. I make millions, all right, tax-free, so can you see how."
In his judgment, Justice Andrew noted there was "little doubt Mr Smith was impatient and seeking a quick financial return".
Smith makes no secret of this and speculates that the company could have reached a market cap of up to $50 million if it had listed on the stock market, pocketing him $10m.
He said that Ogilvy also stood to make millions under the arrangement.
Asked for his views on the recent developments, Smith expressed frustration at both the process of the hearing and the final decision made by the High Court.
"The High Court determined that I wasn't a shareholder in the company I founded," he said.
"I have no further interest in this matter except watch the sideshow created by the management and advisers to MediCann."
Smith further sent the Herald a legal letter outlining numerous claims of mismanagement conducted at MediCann.
The High Court is yet to make a determination on any of these claims.
Further court proceedings could lead to legal and liquidator costs ballooning even further, draining the remaining investor money out of the firm.