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Getting ahead in the Cannabis Industry without Getting Indicted

Werner-Simon, Cannabis Business Times, Dec. 17, 2021

Entry into today’s cannabis space is rife with obstacles posed by states with opaque licensing awarding procedures, caps on entry, as well as other challenges set in motion by local governments (and local officials) seeking bounty of all sorts for the privilege of operating a business within the city, town or county’s physical boundaries.

In the last few years, we’ve seen lawmakers pass imperfect laws that intentionally or negligently include loopholes that undermine a law’s stated purpose and that can be contorted—for example, to benefit multi-state operators over social equity beneficiaries. Government officials (often behind closed doors) sometimes steer their associates, friends, or those to whom they have ties to the prizes of cannabis licenses, zoning allowances, and/or amenable community host agreement buy-ins. It feels to many that the deck is rigged. Grumbling does little because unless confronted by lawyers or litigation (of the criminal or civil litigation kind), those involved typically deny any impropriety.

As a result, civil lawsuits against states and localities are becoming commonplace. Consider the flurry of civil litigation in Illinois against the way it awards licenses, or the December 2021 lawsuit filed against the city of Gloucester, Mass., sued by a cannabis operator for charging almost $500,000 as a “community impact fee” above the state’s statutory limit for a cannabis company seeking to operate in that bucolic seaside city. The cannabis business operator’s lawyers there allege that the fees, excess taxes, and charitable giveaways are in no way reasonably related to the costs incurred by the municipality to permit the business to operate in the city. The cannabis company lawyers are also asking the court to bar the city from assessing such fees and have even asked the court to order the city to refund some of the money already paid.The lawsuit is indicative of those broader trends within the regulated cannabis space.

What’s a Cannabis Operator to Do?

What’s a cannabis entrepreneur or license applicant to do when encountering these situations that can range from ethically murky to downright illegal? One must resist the temptation to say, “Well, everyone is doing it to get in, so why not me?” That approach could get you criminally indicted.

Here are 7 steps cannabis operators can take when dealing with difficult, if not outright illegal, government situations.

  1. Vigilantly resist the temptation to pay-to-play. Participating in these schemes could easily lead to being charged in a federal corruption case. Decline all invitations to pay money or provide things of value to public officials. (Be careful of campaign contributions too, because in some cases when linked to getting political access, the making of contributions has been charged as a corrupt act.)

  2. Keep complete and accurate records of the business. This includes all communications with decisionmakers and their emissaries (all applications, correspondence, emails, and texts).

  3. Understand that everything said to anyone anywhere (on the phone or in the street) could be recorded. Anything created on or with a computer or said or typed into a phone screen can be subpoenaed or be the subject of a search warrant.

  4. Learn about local, state and federal ethics and conflict of interest rules for dealing with and interacting with all public officials. Also, be mindful that federal law can make state-legal behavior federally criminal (more on this later).

  5. Consult with a federal criminal cannabis corruption defense lawyer. It’s recommended to do this before you engage in business so you are apprised of what not to do (this could prevent you from ever being charged).

  6. Make the acquaintance, consult with, and ultimately hire an experienced civil cannabis litigator. This person or law firm should be savvy in making demands on states and localities (demand letters) and then can file lawsuits if the softer requests do not succeed.

  7. Take your time when planning your approach. Be prepared to hang on for a while and to pay money—not as a payoff, but for legal knowledge (and possibly civil litigation)—because change will not happen overnight.

Cannabis Corruption is a Federal Law Enforcement Priority

The FBI is on the case investigating cannabis political corruption across the country, making corruption in the cannabis industry an FBI investigative priority.

The FBI’s Criminal Division in Washington, D.C., on December 6, 2021 informed CBT that “the FBI continues to see a public corruption threat emerge in the expanding cannabis industry. It is our priority to combat all forms of public corruption, and we will continue to work alongside our state, local and tribal partners to investigate these threats.”

Four cases charged within the last three years are instructive to this federal dive into cannabis business practices. Every operator should know these four cases. All of them involve operators or license applicants either succumbing to pressure to give benefits to lawmakers or leading the dance themselves foolishly believing that paying for access only has an upside.

United States v. Richard Kerr

This first case happened in the city of Adelanto, Calif., a two-hour drive from Los Angeles on the edge of the Mojave Desert.

In August 2021, former mayor Richard Kerr was indicted by a federal grand jury for both depriving the town’s inhabitants of honest services of public officials and bribery in a pay-to-play scheme.

The indictment charged that Mayor Kerr, who also was a member of the city council and approved zoning ordinances, and who was a voting member of the city’s Cannabis Dispensary Permit Committee, voted on changing land use ordinances for friends in exchange for gifts and other things of value (including donations to his election campaign) in excess of $57,000. During the period from 2015 to 2018, he is accused of:

  1. corruptly passing ordinances authorizing various types of commercial marijuana activities, including marijuana cultivation, marijuana distribution and transportation, and retail dispensary sales of marijuana;

  2. drafting zoning areas for commercial marijuana activities to include locations used by his co-schemers and associates; and

  3. ensuring his supporters obtained the licenses or permits they sought; all in contravention of conflict-of-interest prohibitions applying public officials in California.

Shortly after Kerr’s arrest and arraignment in federal court, federal prosecutors filed a document requesting a “protective order” from the court barring the Mayor’s lawyers from disclosing to third parties, case sensitive information provided to the defendant from the government, including: investigative reports, bank records, phone records, digital and paper materials seized pursuant to search warrants, and audio and video recordings.

That the courts agreed to not make those items public is indicative of an ongoing criminal investigation. it is also a potential sign that more corruption charges will be filed against those in the cannabis industry.

United States v. Cheryl Glenn

The second case demonstrating federal finesse in fighting cannabis corruption played out recently in Maryland. There, lawmaker Cheryl Glenn of Baltimore, was the subject of an undercover FBI and IRS investigation focusing on the selling of access in the nascent Maryland medical program.

A federal criminal complaint filed against Glenn in July 2019 charged her with deprivation of honest services and a federal bribery-type offense (one in which state bribery occurring with an instrumentality of interstate commerce is a federal crime). Over the course of almost a year, the government’s undercover investigation established that Glenn, in her capacity as a state delegate, promised cannabis actions in exchange for cash.

The evidence against Glenn was replete with incriminating text messages. One of note is where Glenn, informed that someone would give her money in exchange for a written statement saying the entrepreneur would get a cannabis license, replied to the overture with: “If I put this in an email, [the applicant will] cough up the money . . . text me your email address.”

The Maryland lawmaker prepared a written message as requested and was paid cash for the political favor. She did the same after getting cash in exchange for voting in favor of a bill to increase the number of medical marijuana grower and processing licenses that were available to an out-of-state company. She was paid again for promising to lead the effort to change Maryland cannabis law to favor Maryland (in-state) residents for medical marijuana licenses.

For what amounted to slightly in excess of $37,000 in bribes, Glenn on July 29, 2020, was sentenced to two years in federal custody.

In a Department of Justice press release, FBI Special Agent in Charge Jennifer Boone of the Baltimore Field Office commented on what Delegate Glenn had done and what the FBI would do in response.

“Elected officials owe the taxpayers . . . their honest services and . . . there are serious consequences for violating that trust.

“The FBI is dedicated to rooting out corruption so that the citizens we serve can feel secure that their elected leaders are putting the public good over their own personal profits.”

The FBI’s continued efforts on investigating the misuse of political access in cannabis would work its way next some 400 miles up the eastern seaboard.

United States v. Jasiel Correia

The third case illustrative of the federal commitment to sniff out cannabis corruption went to trial in the spring of 2021 in federal district court in Massachusetts. The defendant? A wunderkind elected at 23 to be mayor in the former mill town of Fall River, an hour south of Boston. Mayor Jasiel Correia was charged with federal public corruption in cannabis and other fraud-type crimes in 2018.

The federal prosecutors proved that Correia, when he took office as mayor in January 2016, agreed to issue non-opposition letters and agreed to some community host agreements with cannabis vendors in return for cash bribes and other payments.

Because Massachusetts law requires cannabis license applicants provide non-opposition letters and community host agreements from local government officials before licenses can be awarded, Correia was swimming in money. Four separate cannabis business operators went into the deep-end for the mayor, often bringing him oodles of cash as he sat in his city-owned SUV. The benefits the mayor and pals received in exchange for access ranged from over $75,000 to $250,000 in cash, campaign contributions (dicey if given in exchange for access) and even mortgage discharges.

The FBI’s (ongoing) investigation revealed that the cannabis operators who paid the mayor or even discussed paying (a federal conspiratorial act) were in hot water.

United States v. Helios Dayspring

The fourth case presented here is the most compelling for the cannabis cultivator because the cultivator-dispensary owner himself was the target of a federal cannabis corruption investigation.

Helios Dayspring was the owner of several cultivation sites in San Luis Obispo County, California. Dayspring also had ownership interests in businesses that sold cannabis to the public, including a dispensary. Over a three-year period from 2016 to 2019, he bribed with cash (or sometimes in money orders), paid for some fancy restaurant meals, and gave free cannabis product to a county supervisor in San Luis Obispo.

In exchange for the financial inducements and gifts, Dayspring got political cannabis preferences from the supervisor who voted favorably on matters close to Dayspring’s bottom line. This included the county supervisor voting multiple times in favor of legislation that permitted Dayspring’s cultivation sites to operate before obtaining final permitting approvals. Dayspring’s paid-for supervisor even stopped a colleague’s measure banning outdoor cannabis cultivation.

Dayspring also tried (unsuccessfully) to do the same thing with a mayor in a small town in the county where Dayspring was seeking two dispensary licenses. Even though the mayor there did not bite, Dayspring’s attempts were deemed part of the charged federal cannabis corruption scheme.

Dayspring struck a deal with prosecutors and agreed to plead to a single count of bribery and a single count of tax fraud (for all the cannabis income he neglected to report on his tax returns). He’s still looking at a 33 to 41 month prison sentence under the federal sentencing guidelines, but that’s years less than if he had not negotiated a plea (the statutory maximum sentence is 13 years). The sentence could be reduced further if he cooperates with the federal government and provides evidence of others involved in wrongdoing.

That’s not the only consequence for his actions. By signing the plea agreement, he publicly admitted his participation in federal criminal activity. As a result, even though he had previously transferred a controlling interest in his dispensary to a partner, San Luis Obispo recently terminated his dispensary application asserting that Dayspring had engaged in criminality and failed to disclose his criminal activity on his application.

Takeaways for Cannabis Operators

To navigate the sometimes-murky line between proper practices and corruption, as well as what’s illegal federally versus under state and local law, cannabis business operators need a federal criminal lawyer on retainer.

Los Angeles federal criminal defense attorney Kiana Sloan Hillier (who has represented federal defendants for over 20 years) noted to CBT, “Targets of federal investigations or defendants charged with federal crimes require experienced federal criminal defense counsel who know federal law, regulations, the federal sentencing guidelines, and who well understand appellate criteria and can explain as well to the client the wide array of collateral consequences of federal felony criminal conduct and federal criminal convictions.”

But criminal lawyers, even federal corruption defense attorneys, are typically unskilled in taking actions to help keep a cannabis business afloat or to help a business operator ward off unreasonable demands or bad or unfair practices of a state or municipality. That job falls to the civil impact litigator.

When confronted with unreasonable requests and demands by states and localities that just don’t feel right but which may not amount to corruption, cannabis operators need to consult with lawyers who have successfully civilly sued states and municipalities for unreasonable requests.

Reasonableness (and sometimes outrageousness) of municipality “asks” is getting much press these days, and now some university-level studies. The Massachusetts Cannabis Business Association hired a UMass Boston cannabis policy researcher to analyze 460 community host agreements from Massachusetts.

The 41-page report states that “many municipalities have inserted clauses into ... agreements that compel actions from cannabis operators in excess of their legal obligations and, in some cases, the limitations of the [state’s] statute.”

The report also notes that “other requests made of the licensee—such as providing employee time towards addiction training for local youth—are perhaps more closely connected with the potential impact of cannabis operators, though there is little cause to believe that the employees of cannabis dispensaries are currently best equipped to provide this sort of engagement. We also find that the oversight structure for these agreements, and for the money localities collect under them, to be weak and inadequate.”

The study’s recommendations include the passage of legislation to (clearly) authorize the Massachusetts Cannabis Control Commission to review host agreements and to make transparent what happens to funds paid by operators under these agreements. Further, the study recommends there should be limits on the types and amounts of fees and in-kind expenses a town can request.

Now that there is data, there is a financial incentive for lawyers to “take the case” and engage in robust litigation against state and local governments on behalf of cannabis operators. And although it should not be surprising, sometimes filing a lawsuit changes regulations and practices much faster than waiting for a legislative body to come up with those changes on their own.

One of those civil litigators who knows this well is Judith Cassel, head of Cannabis Law PA and a partner at the Harrisburg, Pennsylvania firm of Hawke, McKeon & Sniscak, LLP. She represents cannabis operators from Pennsylvania, New York, New Jersey, and Ohio.

Cassel, who is also co-chair of the Pennsylvania State Bar’s Committee on medical marijuana and hemp, notes the difficulties faced by those in the industry to some of the actions taken by state and local officials. “The hypocrisy is there on state and local levels - all wanting a piece of the marijuana industry and wanting to take a pound of flesh but not truly helping businesses succeed,” she told CBT.

Cassel’s group did a study of its own to determine if there is a downside to cannabis operators filing lawsuits against governmental entities when faced with arbitrary regulatory decisions. Her group compared applicants in Pennsylvania who had been denied licenses in Phase 1 and who hired lawyers who have either contacted the state and/or filed lawsuits against the state.

Invariably, and perhaps not coincidentally, those who have retained counsel familiar with challenging licensing decisions and whose lawyers have taken legal or pre-litigation action, have been awarded licenses in Phase 2 review.

According to Cassel, in the current business political climate, “the marijuana business operator who uses the law and is not afraid to be persistent with the state or local authorities, can (in certain cases) ultimately succeed.” For Cassel, it’s a long game approach involving knowing the law and regulations, understanding the political landscape, and being experienced in high stakes multi-party civil litigation.

Daniel Shapiro, name partner in his own firm outside Chicago, Illinois, is a land use, licensing, and marijuana business attorney. This fall, Shapiro filed eight civil lawsuits against the Illinois Department of Professional Regulations and Agriculture (the entity that awards cannabis operator licenses) including lawsuits for administrative review, due process, and equal protection violations.

Shapiro (who has represented clients seeking licenses or conditional use permits from local municipalities) states “there is a spectrum of what is permissible for localities to ask of applicants for licensure or permission to operate in a locality.

“Many municipalities have codes of conduct for public officials and that a city cannot play favorites in the awarding of licenses, contracts and / or zoning decisions. Many cities and towns, follow state statutes and require that criteria for licenses, contracts and zoning decisions be available to the public, often posted on the city or town's website.” As a result, says Shapiro, “cities and towns must ask all applicants for the same information (such as that contained in the town's zoning ordinance and licensing applications) and must seek the same set of filing, licensing fees and/or permit fees for the actions requested of the town. To do otherwise would suggest a corrupt motive or favoritism.”

The same (unfairness) would be present if the city offered up licensure or a conditional use permit/zoning for an applicant funding “a special charity” or program for the city. Shapiro advises that anyone filing for a marijuana license or land use approvals have a lawyer experienced in licensing and real estate requirements.

He warned that “If the town's officials or the state’s officials play favorites, the marijuana operator lawyer (before filing a lawsuit) could contact state officials, federal officials, and/or make a complaint on a state or town’s cannabis corruption hotline.”

Shapiro added, “given the ubiquity of the Internet with even the tiniest of localities having websites, there is no reason that every applicant not be apprised by the city or town of all of the criteria needed for consideration in the awarding of a license, permit, variance or other city benefit. And if the city (or state) does not use the same criteria for each applicant—the city or state has legal exposure.”

So long as some legalized states are stymied by the local Frankenstein’s monsters they have created with power to extract money without oversight and transparency, there will be issues for the cultivator to navigate. This is especially true in states without lottery systems and ones that have licensing quotas and application processes where humans “judge” and score for petitions for cannabis licenses. In these states and localities, the cannabis operator will need to spend money on lawyers. And depending on the caliber of the lawyers, it is money well spent.

The author, Julie A. Werner-Simon, is a law professor who teaches Marijuana Cannabis Law: History, the Constitution, and Best Cannabis Business Practices at Drexel University’s Kline School of Law in Philadelphia and at University of Southern California’s Gould School of Law. She is also a legal analyst in Cannabis as an Emerging Industry at LeBow’s School of Business at Drexel and was a federal prosecutor in Alaska and Los Angeles.


Authored by Werner-Simon

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