Marty Sumichrast, CEO of YCBD, Accused of Fraud and Self Dealing

A prominent Charlotte entrepreneur — and the former business partner of disgraced financier Rick Siskey — has been sued by the federal government, accused of making numerous unauthorized trades that hurt his investors but benefited himself. In its filing, the Atlanta office of the U.S. Securities and Exchange Commission claims that Martin Sumichrast, 55, repeatedly made investments that damaged the positions of […]

June 3, 2022

A prominent Charlotte entrepreneur — and the former business partner of disgraced financier Rick Siskey — has been sued by the federal government, accused of making numerous unauthorized trades that hurt his investors but benefited himself.

In its filing, the Atlanta office of the U.S. Securities and Exchange Commission claims that Martin Sumichrast, 55, repeatedly made investments that damaged the positions of shareholders in Stone Street Partners without getting the required go-ahead. In another instance cited in the complaint, Sumichrast unilaterally doubled his Stone Street salary.

The government accuses Sumichrast of three counts each of fraud and fraud by an investment adviser.

The SEC has asked U.S. District Judge Frank Whitney to ban or strictly limit Sumichrast’s handling of securities, and order him both to pay monetary penalties and to return all “ill-gotten gains or unjust enrichment.”

In a statement this week, Sumichrast’s lawyer said the businessman is being scapegoated by the SEC after the agency failed to stop Siskey’s Ponzi scheme, which operated from 2010 to 2016 and led to estimated losses of some $50 million.

Siskey killed himself in December 2016 shortly after being contacted by federal investigators, leaving Sumichrast, who was not involved in the scheme, as Stone Street’s sole manager until the damaged company’s dissolution in 2020.

Given the social, financial and charitable prominence of Siskey and his wife, Diane, the financial scandal rocked Charlotte for years. No criminal charges have ever been filed.

According to the SEC filing, Sumichrast’s wrongdoings occurred after Siskey’s death, from March 2017 to March 2019, and do not appear related to the Ponzi scheme.

Sumichrast changed the name of Siskey Capital to Stone Street following Siskey’s death, according to the SEC. Stone Street and several of its employees later sued the Siskey estate claiming fraud, while alleging that Diane Siskey was an active participant in the Ponzi scheme.

Los Angeles lawyer Ellyn Garafalo says the SEC, after not stopping Siskey or prosecuting anyone in connection with his scheme, is now coming after the wrong man.

“This is a case of no good deed goes unpunished,” Garafalo said.

“Perhaps to deflect from its own inaction on the (Siskey) Ponzi scheme, the SEC has chosen to pursue Mr. Sumichrast (for) the very transactions which benefited his investors and restored the bulk of their investments that would otherwise have been lost as a result of Mr. Siskey’s fraud.

“Mr. Sumichrast will vigorously defend these allegations and is confident that he will prevail.”

 

SEC: SUMICHRAST DOUBLED HIS SALARY

The SEC complaint paints Sumichrast in a different light. It claims that in the aftermath of Siskey’s death, Sumichrast played fast and loose with Stone Street’s capital by making unauthorized deals that either benefited him directly or improved his positions in another company he ran. Regulators say Sumichrast never reported the conflicts of interest to his shareholders.

In 2017, for example, Sumichrast doubled his Stone Street salary to $200,000 without notifying his investors, a salary he also paid himself in 2018 and 2019, according to the complaint.

During the period covered by the lawsuit, Sumichrast also served as CEO of cbdMD Inc., a Charlotte firm that manufactures and sells cannabis products and which has been traded on the New York Stock Exchange since its 2017 public offering of stock.

Siskey Capital became an investor in cbdMD in 2015 and owned some 5 million shares of the company at the time of Siskey’s death.

Prior to the initial 2017 stock sale — and at a time when Sumichrast ran both Stone Street and cbdMD — Sumichrast made a series of moves with Stone Street capital to reduce cbdMD’s debt and make cbdMD’s stock more attractive, the SEC claims. The cannabis company later paid Sumichrast a $240,000 bonus.

In another transaction cited by the SEC, Sumichrast initiated a Stone Street purchase of cbdMD stock at a price that was 16% higher than the closing price of the day before.

NO ‘REQUISITE CONSENT’

In July 2017, Sumichrast invested Stone Street money “to purchase near-worthless securities” from a cbdMD subsidiary to again improve the cannabis company’s stock sale prospects, the SEC alleges. In one case cited by the government, Stone Street spent $475,000 for stock in a company called NuGene that had a fair market, per-share value in 2017-18 of zero.

“In other words, at Sumichrast’s direction, Stone Street paid $475,000 and received essentially nothing of value in return,” the SEC alleges in its complaint.

In another alleged conflict of interest, Sumichrast, as head of Stone Street, made an unauthorized loan of $70,000 in July 2017 to Washington Capital, which was run by Sumichrast and paid his family expenses. According to the SEC, that brought Washington’s debt to Stone Street to more than $325,000.

He repaid the amount by transferring to Stone Street some 651,500 shares of a vaping company “of which Sumichrast, through Washington Capital, was the fifth largest shareholder.”

As before, “Sumichrast did not obtain the requisite consent from a majority of Stone Street’s shareholders prior to this related-party transaction or disclose his conflict of interest,” the lawsuit alleges.

Counter to Sumichrast’s claims that he was trying to salvage his client’s investments in the wake of the Siskey scandal, the SEC accuses the businessman of “acting … with the intent to deceive, manipulate or defraud or with a severe reckless disregard for the truth,” according to the complaint.

In her statement defending Sumichrast, Garofalo said he acted in his shareholders’ behalf to help them survive the Ponzi scheme and the chaos following Siskey’s death.

“As a result of his efforts, Mr. Sumichrast’s investors were made substantially whole,” she said. “The only person who suffered a loss was Mr. Sumichrast, who sacrificed approximately $1 million of his own profits to be shared by his investors.”

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