A federal judge in New Jersey ruled in favor of a cannabis real estate investment trust after investors failed to show that the company violated securities law.

San Diego-based Innovative Industrial Properties beat accusations that the REIT violated the law by ignoring information about one of its tenants, Kings Garden. The tenant was accused of embezzling tens of millions of dollars from IIP, according to Green Market Report.

The judge in the case, Evelyn Padin, said that she wasn't persuaded by the claims that the REIT failed to perform its due diligence in the matter.

"The Exposure of Kings Garden’s fraud surely impacted investors; however, the inference drawn from the Second Amended Complaint as a whole was not the Defendants recklessly lied about their faith in Kings Garden or that they monitored it – a misrepresentation that would suggest complicity in their own theft," Padin wrote in the ruling.

"Rather, the inference sounds closer to corporate mismanagement and, at most, negligent misstatements," she added.

The lawsuit came after Blue Orca Capital released a short seller report in April 2022 about IIP, claiming Kings Garden, the REIT's second-largest tenant, participated in fraudulent behavior in 2021 by falsifying books and records and selling illegal cannabis on the black market.

Although IIP said the claims were wrong, the report was released to investors, and in July 2022 they were told the tenant stopped paying rent. Kings Garden's default had added up to $2.2M at the time, including $1.8M in base rent and property management payments.

IIP says it is the first and only cannabis real estate company trading on the New York Stock Exchange. It owned 108 properties totaling 9M SF across 19 states as of June 30, with 92% of those being industrial cultivation and distribution facilities.

In the second quarter, the REIT recorded $79.8M in total revenue and $41.7M in net income, according to its Q2 earnings report. The company's stock price is up 76% over the last 12 months.