Isotex executives charged with running Ponzi scheme, fraud

Jerry Bennett, then a county commissioner, said in an Oct. 5, 2019 story in The Western News, "It's a big positive for Libby," Bennett said. "We think it's great, getting people back to work."

Isotex Health touted itself as a company that specialized in making cannabidiol oil, a non-intoxicating hemp plant extract, and industrial hemp.

Today, four of the men involved in Isotex Health, including two practicing attorneys, stand accused of running a Ponzi scheme and defrauding investors, farmers and the State of Montana of more than $6 million.

According to a press release from the state, the Commissioner of Securities Insurance and Gallatin County Attorney charged Michael Rabb and Byron Gruber (both Gallatin County residents), Jason Bradley Cross (a resident of Texas) and Eugene Elfrank (a resident of Washington) May 28 with defrauding investors through their Texas-based company Isotex Health, LLC.

The charging documents allege that the fraud involved more than $6 million over several years.

"As the Gallatin County Attorney, I want to thank Commissioner Downing for his diligent efforts investigating fraud within our County and across Montana," said Audrey Cromwell. "His team's dedication ensures the integrity of our financial systems and the safety of our community. We stand by ready to assist the CSI as they work to hold people accountable for their actions."

Each of the defendants is charged with operating a pyramid promotional scheme, securities fraud, operating as a commodities dealer without a license, forgery, false claims to a public agency, theft and conspiracy to commit these crimes.

"The CSI will vigorously pursue fraudsters who operate in Montana," said Commissioner Troy Downing. "I would also like to thank the Gallatin County Attorney, Audrey Cromwell and her staff for working with the CSI to charge the case in Gallatin County."

The charging documents alleging the crimes was filed by special Gallatin County prosecutor William Adam Duerk. In the 67 pages are included details of how the men orchestrated their alleged fraud against Montana farmers and attempts to conceal information from investors, including the Lincoln County Port Authority and a Texas poker player of some note.

Gruber is accused of using a bank account utilized by attorneys to, "responsibly hold client funds" to route money into an Isotex account despite the fact that he was not licensed to practice law in Montana or Texas.

According to the investigation by state Securities examiner Ryan Sullivan, the offenses occurred between April 10, 2019, and July 1, 2020, in seven Montana counties, including Lincoln, Daniels, Roosevelt, Richland, McCone, Gallatin and Teton, as well against other investors.

Rabb is accused of acting as "lead counsel" for Isotex before he was licensed to practice law in Montana.

The four men are accused of using Isotex funds and assets for personal benefits, including personal credit card charges, travel expenses, entertainment and other improper use of company funds.

They are also accused of threatening company employees, investors, vendors and contractors with "RICO" (Racketeer Influenced and Corrupt Organizations) litigation and other lawsuits as a tactic to quell dissent, propagate untruths and improperly advance their goals.

In addition, they are accused of forging and altering documents, records, financial statements, crop insurance information, hemp lab test results and other documents to present Isotex in a more favorable financial position than what was true.

More than 100 people interviewed for jobs with Isotex in Libby. The startup company nearly received a $307,500 grant from the state via the Kootenai River Economic Development Council. But after legal woes came to light, Port Authority officials held off on administering the grant to Isotex.

Prosecutors allege that Isotex made false statements to help secure the grant.

According to the charging document, Texas poker player James Mattingly was an early investor after the accused fraudsters told him and other initial investors that they would receive up to a 120% return on their investment.

On Nov. 15, 2018, Mattingly made a $300,000 wire transfer to a personal bank account which was then transferred to an isotex bank account on Nov. 16. Part of the deal, prosecutors say, was that Mattingly receive payments under a "consulting agreement" signed on Nov. 18, 2018. In May 2019, the poker player contacted the quartet about their default on promises to pay him.

Cross allegedly told Mattingly that Isotex was growing hemp in greenhouses in Eureka and had a processing facility in Libby. Mattingly and a former Isotex owner, Nick Book, drove from Texas to Libby to see the state of operations. They soon learned the processing plant was an empty building and no greenhouses existed, court documents allege.

Mattingly emailed the defendants that he planned to notify other investors that they were being defrauded. According to the charging documents, Gruber spoke to Mattingly on the phone in a recorded call on a June 28, 2019. Gruber allegedly threatened Mattingly personally and with litigation if he did not "shut up."

The following year, Greg Walker's SMGB LLC loaned Isotex more than $6 million through Gruber's Interest on Lawyers' Trust Account (IOLTA). The account is used by attorneys to responsibly hold client funds.

Walker, in an email to Cross and Elfrank on April 10, 2019, said the deal must include insurance for Isotex's hemp crop. Investigators allege that the four men falsely claimed that the company's hemp crops were insured.

On April 19, 2019, Walker formed SMGB, LLC, for the specific purpose of loaning money to Isotex. It is alleged that Gruber and Rabb drafted loan documents that included promissory notes, "security agreements" and other representations about collateral.

According to Isotex's general ledger, Walker's LLC paid the company $6 million in 19 installments between April 24, 2019, and Sept. 9, 2019.

Despite alleged claims by the four men, investigators say the crops were never insured. Then, on July 29, 2019, a hailstorm damaged a hemp crop growing in Poplar, Roosevelt Co. On Sept. 23, 2019, the National Weather Service announced the possibility of a 100-year snow storm across various parts of Montana on Sept. 28.

In the charging document, Isotex employee Carson Byers recommended to the defendants to harvest the hemp before the snow arrived to save the crop. Cross allegedly directed Byers to leave the crop alone so CBD levels would increase. Weather, largely hail, from the storm mostly destroyed Isotex's hemp crop in Montana.

Cross, aided by Elfrank, Rabb and Gruber, allegedly told Isotex employees not to discuss the storm with investors before and after it happened or they would be terminated.

The third round of investors bought into Isotex from September through Nov. 8, 2019. The primaries included a man named Daniel B. Brown, Kootenai Tec LLC and Real Estate Investment 2019 LLC.

According to the charging document, Brown told the defendants on Oct. 8 that he would wire $1.8 million to the company through Gruber's IOLTA account. Brown also invested millions of dollars in Isotex through the purchase of the Stinger Building in Libby and various payments to vendors, contractors and manufacturers of hemp processing equipment.

Investigators say that Isotex used money from early round investors to pay those who invested later and not from any profits or income from the sale of CBD oil. They also allege the company did not sell any significant quantities of the product at any time.

They also said Cross told investors Isotex had secured a $25 million loan from a recognized hedge fund, which they allege was false.

Prosecutors also allege that while Isotex worked to secure new investors they failed to advise them of breached deals, the bankruptcy filing of one Isotex shareholder and that the company failed to complete deals for sales and lease agreements for equipment and hemp processing facilities or secured necessary licenses to grow hemp.

They also allege that when the state Department of Agriculture became aware in the spring of 2019 of Isotex contracts with farmers to grow hemp, it contacted Cross and told him the company was required to be a licensed state commodity dealer. They allege that despite multiple written and oral warnings by the state in 2019 and 2020, isotex failed to acquire a state Commodities Dealer License.

Prosecutors also alleged that while Isotex was receiving money from investors there were three pending cases involving company heads, including bankruptcy in Oregon, breach of contract suits in Kentucky and Texas.

Another investor, Real Estate Investment, LLC sent an agent to visit Montana to see the crops at the Isotex grow operation in Poplar. Elfrank allegedly told Byers to get the man drunk so he would not visit the hemp fields or see crop damage. But Byers refused to participate in the scheme to keep the damage a secret.

Byers was later fired by Isotex.

State prosecutors have requested that the cases be joined and assigned to the same judge. State law permits it if two or more defendants are alleged to have participated in the same offenses.