Sweeping Weedmaps subpoena underscores US government’s continued scrutiny of marijuana industry

Marijuana Business Daily [April 27, 2020]

When the U.S. marijuana industry learned of a federal grand jury subpoena served to Weedmaps owner Ghost Management Group, the news was an eye-opener for many in the business.

The story, first reported by MarketWatch in early March, noted that a few high-profile cannabis companies also were identified in the Weedmaps subpoena.

But the original report about the subpoena didn’t disclose the identities of several other high-profile legal California companies named in the document, such as Connected Cannabis, Puffy Delivery and Urbn Leaf. Marijuana Business Daily obtained a copy of the subpoena.

The subpoena’s wide-ranging demand for information serves as a reminder that the U.S. Department of Justice will not allow the industry to operate unpoliced – even after years of largely unfettered growth at a time when MJ remains illegal at the federal level.

The industry will want to watch this case carefully because, like the forced closure of Sweet Leaf by Denver officials in 2018, the Weedmaps development might prove to be a milestone, whatever the outcome.

In all, nearly 100 cannabis businesses and individuals are identified in the Weedmaps subpoena, including company employees, officers, various investors and others in the industry.

“The bottom line is the feds are showing they’re not done investigating cannabis, not done prosecuting cannabis,” California attorney Matt Kumin said after reading the subpoena.

Among the revelations: The investigation is partially focused on Weedmaps’ relationships with both licensed and apparently illicit California cannabis companies.

Weedmaps, headquartered in Irvine, California, is a popular website among consumers looking to find marijuana retailers across the globe. It also facilitates cannabis deliveries.

The company came under fire from California officials in early 2018 for advertising illegal marijuana retailers, a practice Weedmaps changed as of January.

Asked for comment on the subpoena, a company spokesperson wrote in an email to MJBizDaily that, “from time to time, Weedmaps receives requests for information from government agencies. We cooperate with these requests as we do with all lawful inquiries.”

Weedmaps didn’t elaborate or confirm if it had submitted the requested documents to federal authorities.

The federal government’s probe, which apparently is ongoing, is being conducted by the U.S. attorney for the Eastern District of California, McGregor Scott. Scott’s office declined to comment to MJBizDaily.

The stakes are high given the federal government’s involvement and the dozens of companies named in the subpoena.

“You only present the case to the grand jury to determine whether or not there’s probable cause to return criminal charges. So this is a criminal investigation,” said San Francisco-based attorney Henry Wykowski, a former federal prosecutor who’s worked with California cannabis companies for more than a decade.

If the probe results in criminal charges, a trial or even a settlement, it could set a legal precedent for the rest of the industry to follow – perhaps for years to come.

But it’s also possible the probe ultimately could be dropped and no criminal charges filed.

What’s going on?

The only consensus among four different industry attorneys who viewed the subpoena is that it’s so broad that it’s impossible to tell what investigators are after.

“This could be a million things,” California cannabis attorney Jessica McElfresh said.

 “Just because you get a subpoena, it doesn’t mean you’re the target of the investigation. It’s impossible to know if those targets are within Weedmaps or if they are the other entities.”

The subpoena was sent to Ghost Management Group last September, and the company was given five weeks to turn over documents dating to Weedmaps’ founding in 2008.

The subpoena requests a wide range of company documents, including:

  • Annual financial statements, tax returns and bank account information.
  • All communications with “any person engaged in commercial cannabis activity.”
  • Details on how Weedmaps facilitates marijuana deliveries.
  • Weedmaps’ claim that it would cease carrying advertising for illegal cannabis retailers.
  • Any “transfer of anything of value” between Weedmaps and government officials or candidates for public office, as well as all communications between Weedmaps and government officials.
  • “Any and all documents” related to 40 marijuana companies identified in the subpoena.
  • All communications and agreements with nine specific investment firms as well as prospective investors.

That’s a small sample of the information the U.S. attorney requested.

But it’s an indicator that any company or individual that’s done business with Weedmaps could be under the microscope of federal prosecutors.

For those California marijuana executives who remember the marijuana-related legal actions brought by former California U.S. Attorney Melinda Haag, the notion of being targeted by federal prosecutors could be frightening.

“Haven’t you ever heard the joke that prosecutors tell? ‘I can get a grand jury to indict a ham sandwich if I wanted to?’ It’s stacked against the individual,” Wykowski said.

Of the four U.S. attorneys offices in California, the conservative-leaning Eastern District is the one Wykowski would most expect to mount a serious attack on the cannabis industry or on a company such as Weedmaps. 

But Scott, the U.S. attorney whose office issued the subpoena, has indicated that his priorities involving the cannabis sector are not state-licensed businesses that are following the law but, rather, illicit actors engaging in “interstate trafficking, organized crime and (marijuana cultivation on) federal public lands.”

Who was identified?

As originally reported, the subpoena requested information from Weedmaps on dozens of companies it’s dealt with over the years, including Santa Rosa-based CannaCraft and Irvine-based Terra Tech Corp. (The latter has been renamed Onyx Group Holdings after a February merger.)

The subpoena demands “any and all documents related to” at least 40 different business entities and 17 individuals with whom Weedmaps has apparently worked in some capacity.

Of the 40 companies, at least 27 possess a minimum of one valid state marijuana business license, according to government records. The majority of those are licensed retailers, as opposed to brands or other business types.

The other 13 companies apparently are illegal or unlicensed marijuana businesses, further complicating the picture for industry attorneys trying to decipher the subpoena’s intent.

Some of the legal and licensed companies identified include:

  • California Green Cross (delivery license in Sacramento).
  • Connected Cannabis (licenses for six retailers in Long Beach, Sacramento, San Francisco, Santa Ana and Stockton).
  • DEC Medical Group (retail and distribution licenses in Los Angeles).
  • Desert’s Finest (microbusiness license in Desert Hot Springs).
  • East Bay Therapeutics, (three licenses in Emeryville – storefront, delivery service and event).
  • Flav, formerly known as FlavRX, which currently operates as a hemp CBD company and does not hold any California state marijuana permits.
  • Green Valley Collective, Purple Heart Compassionate and the Wellness Earth Energy Dispensary, which together do business as “Project Cannabis” (retail licenses in Los Angeles, North Hollywood and Studio City).
  • Golden State Greens Point Loma (retail and distributor licenses in San Diego).
  • Horizon Collective (retail license in Sacramento).
  • Kushagram (delivery license in Oakland).
  • L.A. Cannabis Co. (three retail licenses in Los Angeles).
  • MMD Long Beach (retail license in Long Beach).
  • Puffy Delivery (retail licenses in Palm Springs, Santa Ana and Vista and a distribution permit in Santa Ana).
  • South Coast Safe Access (retail license in Santa Ana).
  • The L.B. Collective (retail license in Long Beach).
  • The OG Collective (retail license in Cathedral City).
  • Urbn Leaf (four retail licenses in Bay Park, Grover Beach, San Ysidro and Seaside).

The subpoena also requests information about DICA Distribution – a defunct venture in West Sacramento, California, started by Weedmaps executives Doug Francis and Chris Beals – and West Coast Cure, a state-licensed manufacturer that once planned to team with DICA.

Also named are several companies that might have operated at some point without a license, either as brands or illegal retailers. Some also might have been previously legal medical collectives that shut down after the collective model was phased out in January 2019 under California state law.

In the case of those companies, there is no record of any cannabis business permits in the state license databases of the Bureau of Cannabis Control, the Department of Public Health or the Department of Food and Agriculture.

Many, however, were registered with the California secretary of state as business entities or nonprofits.

A few of those companies include:

  • Green Mile Collective, which once was a registered nonprofit in North Hollywood but now is listed as suspended.
  • South Bay CRC, short for South Bay Compassionate Relief Collective, which was once a registered nonprofit medical marijuana collective in San Jose but currently is listed as suspended.
  • The Church of Modern Medicine, a Colfax-based registered nonprofit that appears to have at one point been an operating dispensary, based on multiple online reviews. No other information could be found.
  • The High Church, a Fallbrook-based registered nonprofit that advertises multiple locations in Southern California and apparently operates as a medical marijuana retailer.

MJBizDaily attempted to reach all 40 companies identified in the subpoena but succeeded in contacting only 17.

Most of the 17 that were reached declined to comment.

The other 23 did not respond to phone calls and emails or did not have contact information available.

Many that were reached – even if they declined to comment – said they were unaware until contacted by MJBizDaily that their communications with Weedmaps might have been turned over to federal investigators.

“This was the first I’d heard of it at all,” said Adam Knopf, an executive with Golden State Greens Point Loma, one of the legal retailers identified in the subpoena.

Learning that his company was listed in the subpoena was “gut-wrenching,” Knopf said, considering all the trouble his business and others have gone through to obtain – and retain – their legal licenses in California.

Knopf said he has not heard anything directly from the U.S. attorney’s office, nor have any of the other companies reached by MJBizDaily.

Sam Shtockmaster, a partner at Desert’s Finest, said the news that his company was identified in the subpoena came as “a shock.”

“Nobody even let us know that,” Shtockmaster said.

He confirmed that Desert’s Finest has regularly paid Weedmaps for advertising services at a current rate of $20,000 per month but said that’s his company’s only connection to Weedmaps.

“There are operations that pay way more than $20,000 to Weedmaps a month in cash, so I don’t understand” why Desert’s Finest would be named in the subpoena, Shtockmaster said.

“Whatever it is, we’ll soon find out, I guess.”

Fishing expedition or white-collar crime? 

Wykowski called the subpoena a “fishing expedition” and said if he were representing Weedmaps he would have pushed back to at least narrow the subpoena’s demands.

“They’re casting a very wide net here, and we’ll just have to see how it plays out,” Wykowski said. “(The subpoena) seems to be focused on recordkeeping and financial affairs, so that would gravitate toward some type of tax or financial misreporting type of offense.

“But at this stage of the game, that’s really just speculation,” he emphasized.

Kumin and other attorneys don’t see the subpoena pointing to an over-arching, industrywide attack by the federal government, given that the Justice Department has taken a hands-off approach to state-legal companies in recent years.

But, Kumin said, it’s possible the DOJ might want to make an example of some person or company.

All attorneys consulted for this story agreed that any attempt to guess at what might be coming from the DOJ would be just that – guesswork.

Following the money

There are signs from the subpoena that the investigation is possibly focused on white-collar crime:

  • The prosecutor who signed the subpoena, Matthew Segal, is the chief of the Special Prosecutions Unit, which targets – among other crimes – money laundering, public corruption, tax evasion and federal computer crimes.
  • The subpoena identifies several individuals who routinely dropped off monthly cash payments to Weedmaps in exchange for advertising services, according to at least four of the companies identified in the document. Those individuals also filled out invoicing paperwork and signed their names, several companies said.

That suggests the U.S. attorney’s office is scrutinizing Weedmaps’ financial paper trail beyond what’s requested in the subpoena.

For example, Joshua Plummer – who is identified next to Flav in the subpoena – was a “delivery driver that would bring the monthly invoice payments to Weedmaps,” according to the company’s attorney.

And Golden State Greens’ Knopf said two names listed next to his company in the subpoena – Alex Leon and Heidi Rising – were midlevel workers who occasionally dropped off monthly payments at Weedmaps headquarters.

After Leon and Rising delivered the payments, Knopf said, Weedmaps asked them to fill out paperwork that sounds similar to forms required by banks when a cash deposit of more than $10,000 is made.

Knopf said Golden State Greens’ current monthly payment to Weedmaps is $12,000, and that invoicing paperwork is the only reason he can think of for Leon and Rising being identified in the subpoena.

Uncertain times

Though murkiness surrounds the Weedmaps subpoena, Denver-based attorney Sean McAllister believes one thing is clear: Weedmaps put a target on its back for its past refusal to remove unlicensed marijuana retailers from its site.

The company changed its policy in January and now requires all retailers that advertise on the site to submit a state license number.

But will that prove to be too little, too late?

McAllister, who said he represents two investors identified in the subpoena, pointed out “there are a lot of potential (criminal) charges” that could stem from a subpoena like the one Weedmaps received.

“This could just be the tip of the iceberg,” he said.

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