Medical marijuana executive withdraws suit vs Chicago law firm over bungled deal, tax liability

By Dan Churney | Aug 26, 2015

A lawsuit brought by a Prospect Heights developer and entrepreneur in Cook County Circuit Court, claiming his financial interest in a medical marijuana consulting company may go to pot because a Loop law firm allegedly bungled a merger between the marijuana company and two other corporations, has been dismissed.

Anthony J. Baroud filed a two-count malpractice suit Aug. 20 against Pedersen & Houpt. Baroud is a director and chief development officer for Denver-based American Cannabis Company, Inc. The company offers consulting and management services, as well as products, for regulated marijuana cultivators and retailers. Pedersen & Houpt, which was established in 1957, advertises itself as providing clients with “sophisticated and efficient legal commercial and litigation services.”

According to an order dated Dec. 14, Cook County Judge Eileen O'Neil Burke accepted Baroud's voluntary dismissal of the case, without prejudice. 

The judge's order does not explain why Baroud requested dismissal of his case.

In the original complaint, Baroud said he, Corey Hollister and three other men retained Pedersen & Houpt in March 2014 to represent them in a reverse merger, in which two private corporations – Hollister & Blacksmith and Cube Root – would merge with a publicly traded company, Brazilian International Media, Inc. The stock of the private companies was to be converted into Brazilian International shares, with Brazilian International changing its name to American Cannabis Corporation, which would then be a public company.

As part of the restructuring, Pedersen & Houpt drafted a Share Exchange Agreement in April 2014, in which Hollister & Blacksmith would issue shares of its common stock to Baroud and his two partners in Cube Root for their shares of Cube Root. In this way, the restructuring would qualify as a reorganization and tax-free exchange under the Internal Revenue Code.

However, on April 17, Pedersen & Houpt revised the terms of the proposed transaction to remove the Share Exchange Agreement, thus eliminating the tax-free exchange for Baroud. The new arrangement called for Hollister & Blacksmith to issue 1,500 shares of stock to Baroud, which would be deemed taxable income. Baroud said he believes the terms were revised at the suggestion of Corey Hollister, of Hollister & Blacksmith.

Baroud said he followed Pedersen’s legal advice and agreed to the new deal in May 2014, without Pedersen telling him he would, in consequence, be receiving an “enormous increase in stock-based compensation and substantially increasing his income tax liability, thus dramatically decreasing the value of the transaction” to him.

Baroud said the estimated tax liability is at least $500,000 on either his 2014 or 2015 tax return. He further said he was put in the unfavorable position of either taking a big hit on his income tax or surrendering his Hollister & Blacksmith shares. Further, the arrangement could decrease Baroud’s leverage in any dispute with American Cannabis Company over his employment.

Baroud said he is losing out, because, if the Share Exchange Agreement had been left in place, he would have been free to sell his shares on the open market.

Baroud is alleging Pedersen & Houpt failed him by not pointing out the possible conflict of interest between him and Corey Hollister, if not others involved in the deal, and for not suggesting he seek advice from an independent lawyer with greater expertise in income tax law.

If Pedersen was out of its depth, as Baroud’s complaint alleges, the firm should have told him the “legal work that it was performing had risen to a level of complexity that exceeded the skills and experience of the attorneys to whom Pedersen delegated this legal work.”

Baroud is maintaining Pedersen & Houpt did not comply with its ethical duties or adhere to the “required standard of care” for lawyers and breached its fiduciary duty.

Baroud had said the damages he suffered would be proven at trial, but would exceed $75,000. 

Baroud was represented by the Carmen D. Caruso Law Firm of Chicago. 

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