The U.S. Securities and Exchange Commission filed suit against a Texas-based maker of hemp CBD inhalers, charging that the company founder lied about everything from scientific accreditation for the inhalers to a potential uplisting to the Nasdaq, all in a bid to continually defraud investors to the tune of millions of dollars.
In the suit, filed on Sept. 18 in U.S. District Court for the Northern District of Texas, the SEC charges that both Rapid Therapeutic Science Laboratories Inc. and its founder and CEO, Donal Schmidt Jr., were guilty of various securities violations and fraud.
The complaint alleges that the company and Schmidt sold at least $2.1 million in unregistered securities to 51 investors in 15 states, and Schmidt sold $1.15 million in personal Rapid stock in late 2020, all of which were “ill-gotten gains.”
Specifically, the SEC claims that Schmidt lied for more than three years, from April 2020 to May 2023, in various different ways so as to promote Rapid’s products and stock, which trades on the over-the-counter markets under the ticker symbol RTSL.
According to the suit, Schmidt lied about:
Obtaining what turned out to be a made-up industrywide certification for Rapid’s CBD inhalers.
Obtaining major sales contracts for Rapid’s inhalers.
Having a laboratory that met international standards.
Employing a chief science officer who held bachelor’s and doctoral degrees.
Rapid’s inhalers being considered safe for public consumption.
Obtaining permission from the Nasdaq to list on the exchange.
The scheme dates back to 2019, when Schmidt orchestrated a reverse-merger transaction in which Rapid was founded as a new hemp CBD manufacturer. Since then, Schmidt has controlled the entire company, according to the suit.
The lies began immediately, the SEC charged. Less than five months after founding the new venture, Schmidt issued a press release claiming that Rapid was “certified by the Cannabinoid MDI Certification Board (CMDICB),” an organization that the SEC said was “simply invented” by a business associate of Schmidt’s, who “unilaterally conferred the so-called certification upon Rapid.”
“According to Schmidt, this individual, who claimed to be a physician holding a Ph.D. degree, never attended college,” the SEC lawsuit states. “Despite these red flags, Rapid and Schmidt repeatedly touted the CMDICB certification to investors.”
Schmidt then proceeded to lie through 2020 about hundreds of thousands of units in sales orders for Rapid, as he watched the penny stock climb based on the false news, from 40 cents to 69 cents to $1.25, the SEC charged.
After that, Schmidt lied in August 2020 about obtaining ISO certification for a lab that the company purportedly owned. But Schmidt then later told the SEC in sworn testimony that “Rapid never had an ISO 13485 laboratory and that the press release’s claim was ‘an untrue statement, straight up.’”
“Schmidt stated that he must have had a ‘brain fart’ when he drafted the press release,” the suit states.
Schmidt also never informed investors or issued a press release or reported to the SEC when the U.S. Food and Drug Administration sent Rapid a formal warning letter in December 2020 about the company’s CBD inhalers, the lawsuit claims.
The FDA warning letter asserted that Rapid’s inhalers were in violation of federal law and were, in the agency’s view, “particularly concerning” because the products “may be toxic to the tissues in the upper or lower airways.”
But Schmidt ignored the warning, and instead put out a corporate overview nine months later, in September 2021, which completely omitted the FDA notice, the SEC suit charges.
That same month, in September 2021, Schmidt submitted an application to get Rapid’s stock listed on the Nasdaq. Although “Nasdaq never approved, even conditionally, the listing of Rapid’s shares,” Schmidt claimed the opposite in a March 2022 email to investors, in which he claimed that the uplisting had been given the thumbs up.
The SEC suit requests that Schmidt be barred for life from selling securities, requests an order for the company and Schmidt to disgorge all profits from the scheme, and asks for unspecified civil penalties.
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