The Great Medbox Marijuana Hustle

The Great Medbox Marijuana Hustle

Are you familiar with Medbox, arguably the most substantial marijuana hustle to date? If not, here’s how the hustle went down.

It is worth remembering now, with legal marijuana attracting serious interest from serious venture capitalists — all of whom, if they’re honest, want as much as they can get out of the billions of dollars the legal American marijuana market is worth — that the first “billionaire” to emerge from the sector sold no marijuana at all.

Instead, Vincent Mehidzadeh, the CEO of a California-based company called Medbox, was in the business of vending machines — vending machines designed to dispense marijuana. But he didn’t sell very many of these. Not nearly enough to become a paper billionaire. Instead, he sold stock in his company — and when nobody was buying that, he went into the “business” of buying his own stock.

The sales were enough to give his company the appearance of profitability. The marijuana industry’s first unicorn was a fraud.

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You could say the vending machines were an idea before its time. Older Millennials will still remember cigarette vending machines — some of us may even remember stuffing a few quarters in the slot, pulling the handle, and trying to sneak out of the Elks Hall with a pack of Camels.

So why not weed?

The simple answer — true way back in 2010, when Mehidzadeh founded the company, and true in 2017 — is that cannabis is not sold like cigarettes. Vending machines are built for convenience, and the way America has approached legalized marijuana, it will be a long, long time before an enterprising underage kid is able to pull an Elks Hall-esque cannabis caper — and when s/he does, it will cause a scandal.

You could also say it was a bad idea. Successful companies tend to build products people need now, rather than ones that might be useful later. The only place a Medbox unit could be placed was inside a medical-marijuana dispensary — and though the fast-food industry is playing around with fully automized restaurants, this isn’t marijuana’s model.

By Mehidzadeh’s own admission, Medbox had moved fewer than 100 units by the time Washington and Colorado legalized recreational marijuana in November 2012. Shortly after that, Medbox was a multi-billion-dollar company, America’s first weed unicorn. And as CEO and the chief shareholder, Mehidzadeh’s stake in the firm was $2 billion.

Demand for vending machines hadn’t materialized out of nowhere; by early 2014, Medbox had sold no more than 130 units. But in those wild, confused, and heady days when recreational marijuana was first legal, Medbox had an enormous competitive advantage: It was one of the few publicly traded cannabis-related companies. The company did exist, and it did have products — and at $3 a share, it was accessible to the general public. And since Medbox didn’t deal directly in the plant — which, conventional wisdom had it, was the danger zone — it would be seen as a “safe” harbor for capital.

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For the day-trader, for the institutional investor, for the person with money in the bank and the certainty that marijuana was the next big thing, Medbox checked all the boxes. Never mind that the company was traded on the “over-the-counter” market, the “pink sheets,” where companies’ financial statements are not subject to Securities and Exchange Commission scrutiny (and where “pump-and-dump” penny-stock schemes lurk). Before long, shares in the company spiked from $3, to $98, then to a dot-com 1.0-worth $242. It was an incredible success.

Many rags to riches stories like this follow a predictable arc. There’s the struggle, there’s the meteoric rise to glory, and then (unfortunately for many) the crash back down to earth. Lesson learned, humility earned, everybody goes home wiser. At first, Medbox obeyed the script.

Once the hype wore off, once Medbox had more shares on the market than anyone would buy, the bubble popped. Shares that traded for over $200 were by 2014 soon shuffling around for pennies. The company failed, but not before Mehidzadeh cashed out enough to buy prime real estate in a tony Los Angeles suburb. Around the same time, the federal Securities and Exchange Commission started warning investors about marijuana-related stocks. They were sketchy, the SEC said. They didn’t play by the rules. They made stuff up.

Throughout it all, Mehdizadeh maintained an impeccable facade, and demonstrated a level of hubris that would shame Johnny Hooker. He set up as a consultant with another publicly-traded firm. He self-published a book sharing what he’d learned during his wild ride, but he also self-edited out the good parts.

As the SEC alleged earlier this spring, from the very beginning, what revenue Medbox reported, including its stupendous growth in value post-legalization, was fueled by stock purchases made by a second company Mehdizadeh set up. Those sales were then reported as Medbox revenue. Apparently profitable, the company’s value went up — allowing stockholders, Mehdizadeh included, to sell shares and pocket real money.

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“[T]he only thing we are really good at is public company publicity and stock awareness,” Mehdizadeh texted an associate during the scheme, according to the SEC. “We get an A+ for creating revenue off sheer will but that won’t continue.” It didn’t. A few years into the scheme, Medbox published “new” financials for the period beginning in 2012. The reported revenue suddenly vanished. Medbox’s board members and shareholders turned on one another.

This was not Mehdizadeh’s first scheme. As a lengthy 2013 profile piece by the Southern Investigative Reporting Foundation revealed, prior to entering the marijuana sector, Mehdizadeh pleaded no contest to posing as an attorney, giving legal advice to immigrants, and agreed to pay authorities in Los Angeles $450,000.

In March, Mehdizadeh agreed to pay $12.3 million to settle the fraud allegations filed against him by the SEC for the Medbox scheme, by far the greatest hustle yet pulled in the American marijuana game. But he’s not done. On June 13, Mehdizadeh filed suit against his former lawyer, in an attempt to shift some of the blame for the ruse onto him. So, the saga of the Medbox marijuana hustle continues on.