A New Jersey federal judge has ruled in favor of cannabis real estate investment trust (REIT) Innovative Industrial Properties Inc. (IIP) (NYSE: IIPR) in the case filed by investors. Law360 reported that U.S. District Judge Evelyn Padin decided that investors Alejandro Handal and Stephen Forrester failed to show that IIP violated securities laws by recklessly ignoring information about its tenant, Kings Garden, which was accused of embezzling tens of millions of dollars from the REIT.
Green Market Report previously reported that IIP faced a complaint from investors for not doing proper due diligence in its Kings Garden investment. The case stemmed from an April 2022 report by the activist short-seller Blue Orca that wrote about IIP’s exposure to Kings Garden. The case claimed that instead of addressing the issues raised by Orca, IIP said that Orca didn’t understand commercial real estate or the cannabis industry.
Despite IIP’s insistence that the Blue Orca report was incorrect, a few weeks after the report was released, IIP acknowledged problems with its client. In July 2022, it told investors that Kings Garden had quit paying rent and in August filed a lawsuit against the company for fraud calling it a Ponzi scheme.
First dismissal
However, the stockholders’ suit was dismissed in September 2023 for its deficiencies. IIP noted in its securities filings that risks were attached to investing in the company. Since the risk warnings were in the IIP securities filings from the beginning, it covered the company as the events occurred after the warnings were stated.
Judge Padin agreed saying an event after a risk warning was stated “cannot retroactively demonstrate” that the statement itself was false or misleading. The judge noted that Kings Garden began to defraud IIP in July 2021 and the risk warning would have had to be stated after that date to be considered actionable.
Law360 noted that the investors came back again with the argument that IIP and its CEO Paul Smithers, acknowledged in another case that they did not properly investigate Kings Garden or its CEO, Michael King, before touting their strong reputations to shareholders of the REIT, which is also called IIPR in court filings.
Case is over
This time the judge said she wasn’t persuaded that IIP’s comments in the other case meant it hadn’t performed its due diligence.The judge also stated that the red flags around Michael King himself didn’t warrant the company’s due diligence as that was performed on the company alone, not its executives.
The investors also claimed that IIP said on its earnings call that it had spent time with management evaluating skills and expertise and had performed background checks. However, the judge found that IIP was referring to a different client on that call. The investors had agreed that those statements could also be applied to Kings Garden but the judge disagreed.
The judge wrote:
The Exposure of Kings Garden’s fraud surely impacted investors; however, the inference drawn from the Second Amended Complaint as a whole was not the Defendants recklessly lied about their faith in Kings Garden or that they monitored it – a misrepresentation that would suggest complicity in their own theft. Rather, the inference sounds closer to corporate mismanagement ‘and, at most, negligent misstatements.’
The case is now dismissed with prejudice, meaning the investors can’t bring the complaint to court again. IIP stock was rising by 1% in early trading and was listed by 1% on Thursday. The stock now sells at roughly $136.90, near its 52-week highs.
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