Initial Disclosure: After extensive research, we have taken a short position in shares of GrowGeneration. This report represents our opinion, and we encourage every reader to do their own due diligence. Please see our full disclaimer at the bottom of the report.
GrowGeneration Corp. is an operator of grow shops, which provide gardening supplies to both individuals and businesses focused largely on the cannabis niche.
The company was incorporated in Colorado in 2014 and subsequently acquired four existing hydroponic supply stores. [Pg. 1] It grew from there and now owns 28 locations with plans to continue acquiring and integrating new shops. The company uplisted to the NASDAQ in December 2019.
Starting with the good news, GrowGen reported an impressive quarter, showing year-over-year same-store-sales growth of 49% and strong revenue growth.
The gardening business has experienced a wave of renewed interest due to lockdown and isolation measures resulting from the global pandemic. We called all the stores in the locations where the company says it’s posting biggest growth in order to perform channel checks:
All the store managers and employees we spoke with provided similar positive feedback, confirming that business has increased substantially since COVID.
The tailwinds have fueled an already surging stock. GrowGen’s stock has surged almost 108% in a week, helped by the quarterly numbers coupled with media appearances by a management team that has been active about telling the company’s story.
We see 60% downside reflecting purely a rationalized valuation for the following reasons:
Management appears to agree with us. On June 30th, less than two months ago, the company issued stock at $5.60 per share, a 70% discount to current levels. The initial deal was announced on June 10th and shortly thereafter GrowGen requested an exemption from the SEC to accelerate its registration to complete the financing. (On June 26th)
We can also take guidance from insiders and key holders including the CEO, President & Co-Founder, and private equity backers whom have sold aggressively this year in the $4-8 range (56-78% discount to current levels) for total proceeds of ~$14 million and a meaningful portion of their holdings. (Source: FactSet)
We note some caution on their growth by acquisition strategy here as although the company is tucking in one ‘mom and pops’ after another, it appears that social media reviews of stores deteriorate after acquisition.
Nonetheless, bulls would likely argue that the business is positioned well to consolidate its industry niche and grow into its numbers with the backing of strong management.
And that brings us to what we view as the overriding problem with GrowGeneration.
In the remainder of the report, we examine GrowGeneration’s key management and board and show why we think that while the company has an interesting business model, the investment should be avoided at all costs.
Michael Salaman is credited on GrowGeneration’s website as being one of two company co-founders.
We did a thorough review of Salaman’s background and found that he has a storied career that includes, among other things:
The company started in 2000 and traded on the pink sheets, experiencing a rocky path to eventual bankruptcy in 2013. One harbinger of the company’s eventual ruin could have been Salaman’s selection of a CFO, an individual that had previously served 3 years in jail for bank fraud.
That CFO, Donald McDonald, had prior overlapping work experience with Salaman. They both worked at infomercial maker National Media Corp, another penny stock that failed following the fraud charges against Salaman and others brought by the FTC (detailed further below).
The overlapping work history indicates to us that Salaman was familiar with McDonald’s imprisonment, but hired him anyway. Below is an excerpt from a media article on the subject:
In addition to selecting a convicted felon as CFO, Skinny Nutritional made an unusual choice for its landlord. SEC filings show it leased office space from Hallinan Capital, run by Charles Hallinan. [Pg. F-36] Hallinan also owned a 5.3% stake in the firm, making him a key shareholder. [Pg. 46]
Hallinan was sentenced to 14 years in prison in 2018 and stripped of $64 million after a jury found he was the mastermind behind a major racketeering scheme to defraud borrowers through his payday loan empire. He was found guilty on 17 counts including fraud and international money laundering.
Local media dubbed him the “Godfather of payday lending”.
In case there is question of whether it was merely a relationship of landlord and tenant, Michael Salaman’s Facebook account (which we expect may soon become private) lists Hallinan as a friend:
In 2013, all board members except for Salaman resigned amidst securities fraud allegations and allegations that management had failed to provide board members with basic information to perform their oversight roles.
The three resignation letters were scathing. See one resignation letter below:
A second board member wrote the following in their resignation letter:
“Although it has been clear for some time that the Company has not been willing to freely provide to Board members (i) basic, essential, financial, production and sales information, and (ii) forecasting for internal and investor purposes, I had remained patient, hoping that these institutional problems would be addressed, due to the repeated assurances from management that the solutions being suggested by various Directors would be put into place. Ultimately, I have had to recognize that, for whatever the reasons, the Company will not correct these serious problems.”
A third board member wrote the following in their resignation letter:
“This has been a difficult decision for me, as I have been working hard for quite some time to improve the Company’s (i) ability and willingness to provide basic, essential, financial, production and sales information to the Board, and (ii) forecasting for internal and investor purposes. Among the various ways I tried to resolve these institutional problems, I brought in a former CFO at MBNA at my own expense to work with the Company, but ultimately was forced to recognize that, despite repeated assurances from management that the suggested solutions and inter-company communications were necessary, appropriate and would be implemented, the Company was unwilling to correct these serious problems.”
Unsurprisingly, Skinny Nutritional’s serious problems landed it in Chapter 11 bankruptcy shortly thereafter.
To reiterate, Salaman hired a CFO with a questionable background and the company failed after the company failed to provide financials to its own board– this is not a nuance to ignore given that Salaman has a key role at GrowGen both on the management team and the board.
The sins of a father aren’t always attributable to a son. But as we will show, Michael’s father has an extensive background in fraud, and Michael’s business dealings with his father have been deeply intertwined.
In the early 90’s, a company Abe Salaman worked for, National Media, had accused him of insider trading. In 1992, a jury found in Salaman’s favor in that case. Son Michael was working at the same company during this period, according to his SEC biography which placed him at National Media from 1985-1993. [Pg. 22]
Abe Salaman’s second conviction came as part of a wide-sweeping probe into organized crime on Wall Street around 2000. According to the New York Times, a pre-dawn raid involving nearly 100 federal agents arrested 11 people charged in the stock scheme.
Those arrested included the brother of famous mafia hitman Sammy Gravano, a captain in the Bonnano crime family, and two members of the Russian mafia. The scheme involved multiple pump and dump stock frauds, which collectively roped in thousands of victims.
According to Salaman’s biography filed with the SEC, he began his career as VP of business development for National Media Corp, an infomercial marketing company. [Pg. 22] His father Abraham Salaman had served as Vice Chairman of the board of the same company during part of Michael’s employment and was later accused of insider trading in stock of the company, as referenced above.
In 1996, Michael Salaman, along with others and the company, were charged by the FTC with victimizing 2,682 consumers across the nation as part of a telemarketing scheme in which the defendants allegedly trafficked consumers’ credit card numbers without their consent.Below are excerpts from the FTC release on the charges.
Later in 2001, National Media Corp filed for bankruptcy following a name change.
Salaman and father Abe went on a spree of deals throughout the 1990’s and 2000’s that regularly ended in ruin for shareholders.
American Interactive Media (“AIME”): A Company Run by Michael Salaman With the Quiet Backing of His Father, Which Cratered and Deregistered its Securities Following a Stock Promotion Run
According to Michael Salaman’s biography filed with the SEC, following his stint at National Media Corp, he then started a digital media company called American Interactive Media, Inc. (“AIME”). [Pg. 22] Michael’s name shows up on the company’s SEC filings, but father Abraham Salaman masked his ownership in the enterprise through an entity called Mountain Ranch Partners.
SEC filings show that the Mountain Ranch entity, with its unstated owners, received discounted shares and warrants in the company through a private offering. [Pg. 41]
According to New Jersey corporate records, Mountain Ranch Partners was controlled by Abe Salaman.
We saw no disclosure stating that Mountain Ranch was a related party. According to a New York Post article, now available in web archives, Abe hired a Florida penny stock promoter to hype shares in the company, which subsequently cratered.
Americas Shopping Mall: Michael and Abe Were Both Involved in this Near Total Investment Loss and a Scandal that Resulted in Connecticut’s State Treasurer Requesting a Federal Probe
In 1999 Abe Salaman also turned up alongside son Michael in a scandal that drew the scrutiny of the Treasurer of Connecticut. Approximately $9 million in state pension money was invested into a company called Americas Shopping Mall as both Michael and his father, along with other stockholders, registered to sell their stakes.
The investment ultimately went bust, resulting in Connecticut’s State Treasurer requesting a Federal probe into the suspicious connections.
Neurocorp: Another Salaman Shell Company Involving Michael and Abe That Later Collapsed
Around 1996, Abe Salaman took a company public called Neurocorp that eventually ran treatment centers for people with dementia, schizophrenia, depression, and other mental health disorders. [Pg. 38]
The entity appears to be defunct, as its last SEC filing is a notice that it’s annual report would be late, followed by nothing.
Collectively, the extensive ties between Michael Salaman and numerous penny stock failures and individuals associated with fraud should be alarming, given his role in GrowGen’s management and the board.
Darren Lampert has been GrowGen’s Chief Executive Officer and a Director of the company since its founding in 2014.
Lampert is an attorney by trade. According to the company’s most recent 10-K, Lampert “began his career in 1986 as a founding member of the law firm of Lampert and Lampert (1986-1999), where he concentrated on securities litigation, NASD [now FINRA] compliance and arbitration and corporate finance matters.”
His bio in the annual report also discloses that he “has represented clients in actions and investigations brought before government agencies and self-regulatory bodies.”
What his bio doesn’t note, however, is that as an attorney and as a broker, he has a long history of involvement with individuals associated with organized crime and penny stock boiler rooms.
GrowGen’s bio for Lampert details his time before 2005 and after 2007, stating:
“…15 years working as a portfolio manager and proprietary trader at Schonfeld Securities (1999-2005), Schottenfeld Group (2007) and Incremental Capital (2008-2010).” [Pg. 22]
Absent from Lampert’s bio in GrowGen’s annual report (but visible on his FINRA Broker Check record) is his time working at Hold Brothers Online Investment Services between 2005 and 2007.
Lampert’s LinkedIn also fails to mention his time at Hold Brothers and conflicts with his official bio, stating that he was at Schonfeld Securities through January 2007. His FINRA Broker Check file says he was only at Schonfeld Securities through 2004 – a three-year difference.
FINRA now lists Hold Brothers as having been “expelled” in November 2012.
Prior to that, Hold Brothers was a firm that was “censured and fined…$3.4 million for manipulative trading activities, anti-money laundering (AML), and other violations,” according to a September 2012 FINRA press release:
The press release notes that:
“Between Jan. 1, 2009 through Dec. 31, 2011, Hold Brothers’ largest account and an affiliate were day-trading firms wholly owned and funded by Hold Brothers’ principals” and that these entities “engaged traders and trading groups in various foreign countries, primarily China, to trade its capital.”
These foreign entities “used sponsored access relationships with Hold Brothers to connect to U.S. securities exchanges to manipulate the prices of multiple securities” including “hundreds of instances where the foreign day traders used spoofing and layering activities to induce the trading algorithms of unwitting market participants to provide the traders with favorable execution pricing that would not otherwise have been available to them in the absence of the day traders’ illicit spoofing and layering activities.”
Hold Brothers is not the only portion of Lampert’s work history that appears to have been omitted from his GrowGen and Linkedin biographies. Both also fail to mention his time at Hanover & Company.
A bankruptcy case filed in March 2002 revealed that Lampert was an attorney for Hanover & Company, a brokerage firm that had extensive ties to the mob.
The defendant in the case, Anthony Siclari, “testified that Darren Lampert, attorney for Hanover, prepared the loan documentation” for a transaction highlighted in the lawsuit.
Siclari was a former account holder at Hanover and “profited from Hanover fraudulent activity,” the case reads, “and then engaged in transactions to take those gains out of his Hanover account, both for his own benefit and to pass them on to Hanover personnel or Hanover itself.”
Siclari’s account was alleged to have been the “beneficiary of violations of securities laws perpetrated by Hanover officials — most significantly, Robert Catoggio, (“Catoggio”), the trader for Mr. Siclari’s account and Mr. Siclari’s friend since boyhood, who pleaded guilty to securities fraud.”
In 1997, Catoggio had been arrested for conspiring to manipulate the market alongside two other individuals, one of whom, Louis Malpeso was alleged to be an associate of the Colombo Crime Family.
Then, in 1999, Catoggio was charged as part of a group of 85 individuals for a “Mob Connected” $100 million stock scam. He was, at the time, already serving 18 months in prison for another stock fraud scheme.
Alongside Catoggio, Hanover was run by Roy Ageloff, who was “already infamous on Wall Street for running high-pressure boiler rooms that touted obscure stock offerings,” according to a 2017 Variety article:
“In July 1996, Fortune called Hanover a ‘lowlife brokerage firm,’ and noted that the FBI was looking into questionable IPOs,” the article reads.
According to the article, Catoggio allegedly funnelled money to the Genovese crime family and that Ageloff was sent to prison in 2001:
“Ageloff and his associates were indicted in June 1999, and accused of swindling investors out of $150 million in a series of ‘pump and dump’ schemes” and “prosecutors alleged that Catoggio funneled millions of dollars in proceeds to a captain in the Genovese crime family, whose stepson was one of the brokers who pleaded guilty. Ageloff pleaded guilty in 2000 and was sent to a medium-security prison in Florida in 2001.”
We wondered exactly how deep Lampert’s ties with Catoggio run. We figured that if they had a purely business relationship as peers at Hanover, both would have likely moved on once the brokerage firm imploded.
After examining Darren Lampert’s social media posts, it appears their relationship is still relatively close.
For starters, on his Facebook profile, Lampert is friends with Robert Catoggio.
Robert Catoggio has also engaged with Darren over the years (Darren’s profile is private so his posts are sparse). The last post we could find where Robert engaged with Darren is from November 2018. It is a picture of the GrowGeneration team.
Robert Catoggio is also connected with Mitchell Lampert, Darren’s brother and GrowGen’s legal counsel, on Facebook.
Lastly, Darren is connected to Ronald Catoggio, also named as a defendant alongside Roy Ageloff and Robert, who is believed to be a relative.
As of April 11, 2020 of this year, Darren Lampert liked that Ronald Catoggio was making some fresh pasta for dinner:
Lampert’s bio also notes that between 2008 and 2010, he worked at Incremental Capital in an unspecified role. Incremental Capital was a company founded in 2008 by the Goffer Brothers, who were part of a group arrested in 2009 as part of the infamous Raj Rajaratnam insider trading probe:
“The men were arrested and charged in November 2009, weeks after Rajaratnam’s arrest in an investigation that extensively used FBI phone taps for the first time in an insider trading probe. Up to 60 recordings could be played at the trial.”
The Goffer brothers were also “accused of bribing two lawyers at the prominent law firm Ropes & Gray with tens of thousands of dollars for secret information on takeover targets.”
Zvi Goffer went on to be a trader at Galleon Group, the firm founded in 1997 by Raj Rajartnam that was closed in October 2009 after an insider trading scandal that led to Rajaratnam being sentenced to 11 years in prison.
During Lampert’s time as an attorney, he took on multiple cases involving boiler rooms and mob-associated individuals, which raises troubling questions in light of the above.
In Bondi v. Blinder-Robinson, et al, filed 5/3/1989 in New York Western District Court (6:1989cv00530), Lampert represented Blinder-Robinson and Co.
Blinder-Robinson was a penny stock brokerage firm that was charged by the SEC for overcharging its investors by more than $20 million over the course of 21 months. The company “marked up prices as high as 140 percent on penny stocks when selling them to investors.”
Ultimately, the SEC “suspended Blinder Robinson from trading in penny stocks for 45 days and from underwriting such offerings for two years”.
Lampert’s father, Irwin Lampert – who was also former CFO of GrowGen, also appears to have been involved in Blinder Robinson.
He was originally named on the SEC’s complaint against the company:
“In addition to Blinder-Robinson and Blinder, the SEC originally named the following corporations and individuals as defendants in this action: American Leisure, Cavanagh Communities Corp., Scope, Inc., Nathan S. Jacobson, Irwin S. Lampert, Joseph Klein, and Leon Joseph. These defendants all have entered into consent decrees with the SEC, and no longer are active parties in this litigation”
His father was described as being close to the firm’s founder and worked as counsel for the firm:
“Irwin Lampert, an attorney, has had a close personal relationship with Meyer Blinder since they met in Florida in 1972. Mr. Lampert was counsel for Blinder and Blinder-Robinson in an earlier securities case.”
Blinder, who was dubbed by media as the “Penny Stock King”, had been sentenced to 46 months in prison in a fraud case.
Darren Lampert’s brother, Mitchell, with whom he worked with at Lampert and Lampert, also has a history of defending companies alleged to be penny stock boiler rooms.
Mitchell Lampert now works at Robinson+Cole, is listed as GrowGeneration Corp’s counsel of record on the company website:
Interestingly, Mitchell’s biography also doesn’t mention his former firm “Lampert and Lampert” by name. Rather, it vaguely says “prior to joining Robinson+Cole, he was a partner in a mid-sized New York City-based law firm.”
Previously, Mitchell Lampert was listed as defense counsel for Wellshire Securities when it was sued by the Securities and Exchange Commission in March of 1990.
According to the New York Times, “The S.E.C. charged that since July 1988, the ‘normal business’ of Wellshire has been to operate ‘as a penny-stock ‘boiler room,’’ selling speculative over-the-counter securities of unseasoned companies to the investing public through the use of various abusive sales practices.”
The article continued:
“Mitchell Lampert, the lawyer for the brokerage firm and its two top executives, said, ‘Our position is that nothing has been done wrong by Wellshire or Mr. Cohen and Ms. Martino.’”
On Sunday, September 23, 1990, the New York Times published a follow up piece on Wellshire called “The Scam Goes On”.
The article notes that Wellshire was offering quotes for stocks where they “constituted virtually the only market” and they “often failed to execute its customers’ sell orders”.
“During its brief, wild run on Wall Street, Wellshire Securities had promoted stock in Environmental Landfills, a tiny company it portrayed as poised to cash in on the New York-area garbage crisis. It also touted an assortment of other penny stocks such as Greenleaf Capital, Nightwing Group, Diversified Foods and Treats Enterprises. But Wellshire’s ride was cut short by regulators acting on evidence from Dr. Mango and other investors. The penny stock brokerage went out of business this spring after its license was revoked by the National Association of Securities Dealers, the industry’s self-regulatory agency.”
While we believe everyone deserves to be represented by adequate counsel, the sheer number of associations with penny stock fraud cases, boiler rooms, and mob-related individuals is quite startling.
GrowGen appointed Monty Lamirato as CFO in mid-2017 when he replaced Irwin Lampert, the father of CEO Darren Lampert.
While a partner at auditing firm Mitchell Finley & Company, the SEC alleged that Lamirato had engaged in improper conduct on an audit over a 3-year period. The order stated that Lamirato issued unqualified opinions for financial statements violating GAAP standards by failing to exercise due professional care.
He ended up settling the allegations in 1994:
In the following years, according to his official bio and Linkedin profile, Lamirato appears to have worked in consulting roles, as well as serving as CFO to various penny stocks such as Strategic Environmental & Energy Resources and Arc Group Worldwide.
Strategic Environmental trades on the pink sheets with a market cap of about $8 million as of this writing.
Arc Group went into freefall during Lamirato’s tenure and later voluntarily delisted itself from NASDAQ.
Given the questionable background of GrowGen’s CFO, the role of auditor should play an even more important role than otherwise. Rather than working with a well-known firm, the company instead has chosen a firm not widely known for its public company accounting.
In early 2019, GrowGen transitioned from small auditor Connolly Grady & Cha, P.C. to Plante & Moran, PLLC.
Plante & Moran has been involved with an accounting malpractice case called “modern day grave robbery”, when it was sued for failing to detect a $60 million theft during an audit.
Plante & Moran’s most recent inspection by the Public Company Accounting Oversight Board (“PCAOB”) was issued in 2018. The PCAOB found a laundry list of audit failures, including among many others:
Here is a list of several of Plante & Moran’s clients on the OTC and their outcomes:
All told, no auditor is perfect, but we view the selection of a lesser-known firm as another warning sign.
Beyond management, we examined a company director and found a pretty clear red flag.
Paul Ciasullo joined GrowGeneration’s board in the first half of 2020. Ciasullo’s biography filed by GrowGen in a proxy statement, says that in 2000, he founded and was President of a company called CreditSight Inc. [Pg. 10]
Ciasullo left on highly contentious terms, with the company filing a lawsuit alleging fraud, breach of contract, and violating fiduciary obligations. The claim stated as follows:
The company also accused Ciasullo of pledging his shares for personal loans in violation of his written and verbal confirmations to the contrary.
The claim also stated that he sent confidential business documents in order to get lenders to agree to pledges without the company’s knowledge or permission.
The allegations in the complaint were highly specific, but the case was later settled quietly.
We live in extraordinary times, where a company like GrowGen can spike to almost a billion-dollar market cap largely on hype and pure retail momentum while major warning signs go largely unnoticed.
In our view, GrowGen has an interesting business model, and it got a solid boost from COVID. That’s great. It’s the type of business that could be a decent model under the right management team.
The stock has to run to levels that render it obviously overvalued, but the clear elephant in the room is a management team that has a storied history of destroying shareholder value under extremely questionable circumstances.
We view this as a major buyer beware situation. Best of luck to all.
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