First defendant in $14 million CBD scam gets 6½ years in prison, fined $1.7 million

The founders of a Canadian hemp company who misappropriated funds and then threatened witnesses who testified against them have pled guilty in a New York federal court.

Igor Palatnik and Vitaly Fargesen of CanaFarma Hemp Products Corp., Vancouver, were accused of soliciting investments in the penny stock company, by using a fraudulent business plan and marketing budget. Prosecutors said the pair swindled investors out of about $14 million, “failing to invest investors’ funds as promised; and secretly misappropriating at least $4 million of CanaFarma funds for their own benefit.”

Palatnik, 49, is from Morganville, New Jersey; Fargesen, 54, is from Manalapan, New Jersey, according to a press release from the U.S. Attorney’s Office, Southern District of New York.

Palatnik, who received his sentence last week, pled guilty to securities fraud conspiracy and wire fraud conspiracy in October. He was sentenced to 6½ years in prison and three years of supervised release, and ordered to pay $1.7 million in restitution. Fargesen, who also entered a guilty plea, is scheduled to be sentenced Jan. 30.

Penny stock scam

Two other defendants, Frank Barone and Kirill Chumenko, senior vice presidents of sales and marketing at CanaFarma, were charged separately in 2021, and in an amended filing entered in November 2023. They have been barred from serving as an officer or director of a public company and from participating in penny stock offerings, but have not yet been sentenced.

CanaFarma, which also has offices in New York, sells CBD and other hemp-based products, such as chewing gum and tinctures, under the YOOFORIC brand. The company was on the Canadian Securities Exchange, a small-cap or penny stock market. Trading in the company’s shares appears to have been halted shortly after the company officials were arrested in Autumn 2021.

In sentencing Palatnik, prosecutors said he lied to investors to raise millions of dollars to start “the first farm-to-table CBD company,” but that he and co-conspirators used the money to manipulate CanaFarma’s stock price, and for personal purposes.

‘Greedy liars’

“Vitaly Fargesen and Igor Palatnik orchestrated a sophisticated scheme to obtain millions of dollars from investors with the promise that their money would be spent on building a legitimate company,” said U.S. Attorney Damian Williams said in the press release. “Instead, they lied about their business, lied to their auditors, and stole millions of dollars of investor funds. Today’s guilty pleas reflect my Office’s commitment to prosecuting those who greedily lie to investors to line their own pockets.”

Prosecutors further said: “Fargesen and Palatnik effectuated the scheme by, among other things, controlling CanaFarma through a nominal Chief Executive Officer who reported to Fargesen and Palatnik, lying to investors regarding CanaFarma’s actual and anticipated operations, attempting to artificially inflate CanaFarma’s reported revenue, making false statements to CanaFarma’s auditors, and misappropriating millions of dollars of investor funds.”

‘You’ll pay, rat!’

Prosecutors said that following their arrests, Palatnik and Fargesen twice confronted a confidential government source at a New Jersey Starbucks, using Russian slang to call him a “rat,” and telling him he was “going to pay for everything” and that they would “see him soon,” according to court papers.

“Palatnik attempted to obstruct this federal prosecution both by intimidating a witness and suborning perjury in one of the most brazen acts of obstruction to come before this court,” prosecutors said.

Palatnik claimed he was less culpable than co-defendants Barone and Chumenko, whom he said stole more than he did from CanaFarma investors, including Palatnik.

Truth in advertising

While raising the funds, the company executives misrepresented CanaFarma as a fully integrated company that was processing hemp from a company-held farm when in fact it had not processed any hemp and depended on third-party suppliers.

The complaint against Barone and Chumenko said the pair, at the direction of Fargesen, made changes to CanaFarma’s financial model to disguise an expected series of payments to Fargesen and Palatnik.

The cases grew out of investigations by the U.S. Securities & Exchange Commission.