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A New Jersey federal court judge ruled in favor Innovative Industrial Properties Inc., (IIP) NYSE: IIPR in a case filed by investors. Law360 Reports stated that U.S. district judge Evelyn Padin ruled that investors Alejandro Handal, Stephen Forrester, and others failed to prove that IIP violated the securities laws by ignoring information regarding its tenant, Kings Garden. Kings Garden was accused of embezzling millions of dollars of REIT funds.

Green Market Report Previously reported IIP was the subject of a complaint Investors who do not perform due diligence on a company’s finances Kings Garden investment. The case was brought about by an Report for April 2022 Short-sellers who are activists Blue Orca That wrote about IIP’s exposure to Kings Garden. The case claimed that IIP, instead of addressing Orca’s concerns, said that Orca did not understand commercial real estate and the cannabis industry.

IIP insisted that the Blue Orca Report was incorrect. However, a few days after the report’s release, IIP admitted problems with its client. In July 2022 it informed investors that Kings Garden stopped paying rent. In August, it filed a lawsuit for fraud and called it a Ponzi Scheme.

First dismissal

The stockholders’ Suit dismissed In September 2023, for its deficiencies. IIP stated in its securities filings the risks of investing in the company. The risk warnings in the IIP filings covered the company even though the events happened after the warnings.

Judge Padin agreed, saying that an event occurring after a warning about risk was issued “cannot retroactively prove” that the statement was false or misleading. The judge noted that Kings Garden started to defraud IIP on July 20, 2021, and that the risk warning had to have been stated after that date in order to be considered actionable.

Law360 noted that investors returned with the argument that IIP, and its CEO Paul Smithers admitted in another case they did not investigate Kings Garden, or its CEO Michael King, before praising their strong reputations in court filings to shareholders of REIT.

The case is closed

The judge stated that she was not convinced that IIP’s comments from the other case meant that it had not performed its due diligence. She also stated that red flags surrounding Michael King himself did warrant the company’s diligence, as that was only performed on the company and not its executives.

Investors also claimed that IIP stated on its earnings call it had spent time evaluating skills and expertise with management and had conducted background checks. The judge, however, found that IIP had been referring to another client during that call. The investors agreed that these statements could be applied to Kings Garden, but the judge disagreed.

The judge wrote:

The Exposure of Kings Garden’s fraud certainly impacted investors. However, the inference that can be drawn from the Second Amended Complaint is that the Defendants did not lie about their faith in Kings Garden. The inference is more likely to be corporate mismanagement, or at best, negligent misstatements.

The case has been dismissed with prejudice. This means that the investors cannot bring the complaint before the court again. IIP stock rose by 1% during early trading, and was listed up by 1% Thursday. The stock is now trading at around $136.90 – near its 52 week highs.