Millions in Cannabis Gains for Partner Colorado CU Go Up in Smoke

Last September the 36,000 members of little Partner Colorado Credit Union stood to make $70 million in cash and $117 million in stock for a 51% stake in a public company it was spinning out from its cannabis CUSO.

Before the deal, Partner Colorado members had about $238 each based on the approximately $8.5 million value the credit union had placed on its investments in its 100% owned CUSO.

With the deal, they were to get $70 million cash, or $1,942 each, plus a 51% stake in the new company, which at $10.31 per share Sept. 28 was worth $117.4 million, or $3,256 per member.

But through a rapid series of moves, those gains went up in smoke. Now, they have the $13 million cash received in the fourth quarter, or $362 per member, and $14.5 million cash promised, or $406 per member. Plus they have stock, which at its July 20 price of 52 cents per share, was worth about $11.4 million, or $329 per member.

NCUA reports showed the credit union took a dent in its net worth ratio from the deal, but it remains well above average and well above the NCUA’s 7% threshold for “well-capitalized” credit unions.

Partner Colorado’s net worth ratio was 17.38% on Sept. 30, 2022, before it recorded gains from the CUSO spinoff. It rose to 20.91% by Dec. 31 with the $50 million gain from the sale, and then fell to 14.82% on March 31, 2023 with the $41 million loss on the sale.

Beyond the first-quarter loss, Partner Colorado President/CEO Doug Fagan said ROA will suffer over the next two or three years, in part because of revenue streams that used to come from cannabis business has been taken over by Safe Harbor.

Now the board wants to pursue “more traditional” credit union business. Fagan said one area might be to deepen its relationships with its large pool of “very small,” non-cannabis businesses.

“We’ve gone over our projections with our regulators, and they’re fine with it as long as we have the capital to support it for a couple years,” he said.

Credit unions aren’t known for getting involved in public spinoffs involving shell companies and “private investment in public equity” (PIPE) investments. But the $699.2 million Partner Colorado did.

Fagan, who serves on the board along with credit union CFO Jen Meyers, said the unusual public spinoff of its CUSO was made necessary by its success, and its subsequent losses were the result of a debt renegotiation made necessary to prevent the company from failing.

“Safe Harbor has a really good story. They’re making profits,” Fagan said. “It’s going to take longer to recoup than we thought, for sure. We don’t know if we’ll make the whole $185 million back out of the deal, but we’ll get a good bit. We still have 22 million shares of stock. If the share goes up $1, we make $22.5 million.”

Fagan said the credit union plans on selling its stock over time “in a way that allows us to recoup the most amount of money.”

The credit union got involved with developing a cannabis business shortly after Colorado became the first state to legalize recreational marijuana in 2014. Before the 2022 sale, the cannabis business was drawing deposits too large for the credit union to handle, and the board wanted to divest, Fagan said.

Partner Colorado started down the cannabis path in 2015 when Sundie Seefried, then the credit union’s president/CEO, established Safe Harbor Private Banking as a compliance-based banking program of the credit union serving the cannabis industry.

In July 2017, the credit union created a complementary CUSO called Safe Harbor Services LLC to guide credit unions and banks through the complicated processes of creating and maintaining a cannabis banking service within the bounds of laws and regulations.

In February 2021, Seefried announced she would be stepping down as CEO of the credit union in July to become CEO of a new CUSO, Safe Harbor Financial, combining the credit union’s cannabis banking division, Safe Harbor Private Banking, with its old CUSO, Safe Harbor Services. The credit union news release said the board formed the new CUSO to “increase efficiencies, position the company for future growth opportunities and potential investors, and create a unified brand to facilitate marketing efforts.”

About two weeks later, two young Denver men with experience in finance and the cannabis business incorporated a “blank check” company called Northern Lights Acquisition Corp. in Denver for the purpose of acquiring a $100 million to $200 million cannabis business.

They were John Darwin, then 32, and Joshua Mann, then 34 — both managing partners of Luminous Capital Inc., a venture capital and private equity firm, also based in Denver. Darwin was also vice president of corporate development for Item 9 Labs Corp., a cannabis company based in Phoenix. Mann was also chairman of INDVR Brands Inc., a cannabis holding company based in Calgary, Canada.

In June 2021, Northern Lights raised $115 million in its initial public offering.

In July, Partner Colorado completed its CUSO formation, and seven months later, in February 2022, it signed a deal to be acquired by Northern Lights for a public spinoff.

Northern Lights shareholders approved the deal June 28, 2022, and the CUSO was spun off Sept. 28, 2022 for $185 million. Northern Lights became SHF Holdings (NASDAQ: SHFS). Fagan said the credit union received $13 million in cash.

The company has had “going concern” notes in its SEC filings since Northern Lights’ first filing in April 2021. Its filing as SHF Holdings for 2022’s third quarter showed it had $7.3 million in cash and a net working capital deficit of $28.2 million on Sept. 30.

SHF Holdings said the “driver of the deficit “was the cash it owed to the credit union. PCCU had agreed to an unsecured future payment obligation of $64.7 million, but had also agreed to a six-month deferral while SHF Holdings and PCCU “negotiate a solution regarding the Company’s payment obligation to PCCU.”

Yet, just a month after the closing, Safe Harbor agreed to buy Abaca, a cannabis company, for $30 million. The deal closed Nov. 15, with Abaca getting $9 million cash up front, stock and promises of payments of $3 million cash in November 2023 and $3 million in November 2024.

Dan Roda, who had co-founded Abaca in 2017 and was its CEO, became EVP and COO for Safe Harbor. Roda was about 40 at the time. He had been a corporate lawyer in Little Rock, Ark., and had co-written cash management standards about 2020 to 2022 for the National Association of Cannabis Businesses.

A Safe Harbor news release said Abaca was “an industry-leading cannabis financial technology platform” that had facilitated more than $3.4 billion in gross transactions.

Seefried, the Safe Harbor CEO, said the acquisition was “a critical first step in Safe Harbor’s ongoing strategy to identify companies that can expand our market share and deposit base for our financial institution clients, increase lending capacity, and complement our existing technology platform to be first in class in cannabis financial technology.”

Although the CUSO spinoff was completed Sept. 28, Partner Colorado didn’t record the approximately $50 million gain until the fourth quarter. Partner Colorado’s fourth-quarter net income was $52.2 million, or an astounding 32% return on $665.8 million in average assets.

But most of the credit union’s gains were wiped out in the first quarter, when it lost $41.5 million — the biggest net loss reported last quarter among the 4,814 credit unions tracked by the NCUA. The loss on average assets was -23.83%.

The credit union still had its stock, but its value had fallen from $10.31 per share on Sept. 28 to $2.61 when the Abaca deal was reached to 51 cents per share by March 31. The price was 52 cents per share as of Thursday, July 20.

In a July 18 interview, Donnie Emmi, chief legal officer of Safe Harbor Financial, said the stock’s drop was a surprise.

“It’s fair to say that nobody expected the stock to take as much of a hit as it did. I mean, I don’t think in any transaction that you do,” he said.

Asked if there was any manipulation or short-selling involved, Emmi said he was unable to discuss any actions not in the public record.

“You would be asking questions that might relate to an investigation,” he said. “We can’t discuss that investigation if there is one even beginning.”

The credit union started negotiating down its cash return from the CUSO spinoff before the Sept. 28 closing. The credit union had agreed on Sept. 19, 2022 to defer $30 million of its $70 million in cash. The credit union agreed to defer $50 million on Sept. 22 and $56.9 million on closing day, Sept. 28.

But the credit union was soon agreeing to rethink those terms.

On Oct. 26, the credit union signed a forbearance agreement, agreeing to defer for six months $64.7 million in cash, “which amount represented all amounts owed to PCCU pursuant to the business combination.” During that six months, the credit union and Safe Harbor agreed to engage in “good faith efforts to renegotiate the payment terms” for the cash owed to the credit union.

In the deal reached March 29, the credit union agreed to forgo its $64.7 million in deferred cash in exchange for $14.5 million in senior secured notes at 4.25% for five years and another 11 million shares of common stock. So far, the company has made its first three payments on schedule.

Fagan said with the credit union’s large stake in Safe Harbor stock, its interest was the company’s success, and renegotiating the cash it owed was necessary to the company’s success.

At Safe Harbor, Seefried said, “we are pleased to have reached an agreement with Partner Colorado Credit Union to restructure our payment obligations to them, which removes a considerable financial constraint and further enhances our ability to execute on our growth strategy.”

SEC documents showed Partner Colorado had a 51% stake in SHF Holdings after the Sept. 28 deal, then 54.9% by April 24 in its proxy. However, Fagan said in a June 15 interview that Partner Colorado’s stake had fallen to 48%, but that it remains the company’s largest shareholder.

“The PIPE investors had options to increase their number of shares. Once they converted their preferred shares to common shares, that process dropped our percentage to under 50%,” Fagan said.

The largest PIPE investor emerged in an Oct. 7, 2022 SEC filing: Sabby Volatility Warrant Master Fund, Ltd., which at the time owned 4.25 million common shares, or 4.99% of the company’s stock. The April 2023 proxy lists the stake as four million shares, or 9.36% of the voting shares, based on common stock issued from Dec. 11, 2022 to Feb. 6, 2023.

The Oct. 7, 2022 registration statement said, “Sabby Management, LLC is the investment manager of Sabby Volatility Warrant Master Fund, Ltd. (‘Sabby’) and holds voting and investment power with respect to these securities in this capacity. As manager of Sabby Management, LLC, Hal Mintz also shares voting and investment power on behalf of Sabby.”

And who is Sabby and Mintz? The SEC provided one description June 12, when it sued Sabby Management and Mintz for fraud alleging illegal short-selling activities from 2017 through 2019.

The suit did not involve Safe Harbor or Northern Lights; however it did paint a picture of Sabby and Mintz.

The SEC said Sabby Management generated more than $2 million in illegal profits through a long-running scheme involving misrepresentations and violations of rules for short selling, order making and other trading rules. The SEC’s complaint also alleged Sabby and Mintz occasionally used their naked short selling to artificially deflate the price of securities, allowing them to obtain more shares at a cheaper price.

“From at least March 2017 through May 2019, Mintz, a highly experienced trader, through Sabby, used his knowledge to game the markets and carry out Defendants’ fraudulent scheme by repeatedly circumventing trading rules involving at least 10 issuers on behalf of two private funds managed by Defendants,” the SEC complaint read.

The SEC described Sabby Management as “recidivist,” saying “Sabby has previously been sanctioned by the Commission in connection with improper short sales. On October 14, 2015, the Commissioned instituted a settled cease-and-desist proceeding finding that Sabby violated Rule 105 of Regulation M of the Exchange Act on two occasions. The Commission imposed a cease-and-desist order, disgorgement of $184,747.10 plus prejudgment interest, and a civil penalty of $91,669.95.”

The SEC’s suit filed in the U.S. District Court for the District of New Jersey seeked disgorgement, penalties and permanent injunctions. “Without an injunction, Defendants are likely to continue to violate the federal securities laws.”

The SEC lists Sabby Management’s headquarters in Spicewood, Texas, 35 miles northeast of Austin, and Mintz as Miami Beach, Fla.

It said Sabby Warrants is a master private equity fund set up in 2011 in the Cayman Islands and managed by Sabby. It has three feeder funds: Two in the Cayman Islands and one onshore. Its assets have grown from about $60 million in 2017 to about $182 million “in its most recent public disclosure,” which also showed it has 73 owners.

Lawyer Jay S. Auslander of Wilk Auslander LLP in New York is representing Mintz and Sabby Management in the SEC suit. “We will be asserting a fulsome and appropriate defense based on both the facts and the law. In particular, we are confident that there is no merit to the fraud-based claims,” Auslander said Thursday.

Emmi, Safe Harbor’s chief legal officer, said July 18 he learned of the suit “probably within an hour of its filing.” He declined to comment on it.

Sabby Management also was mentioned by The New York Times in January 2022 and May 2022 as among the larger hedge funds that were involved as investors in a $1 billion PIPE deal to fund former President Donald Trump’s social media company, Truth Social.