Are bad actors on the decline in cannabis?
By Andrew Ward
Cases brought against cannabis companies appear to have increased recently. The lawsuits are of different types and could cause uncertainty in the industry. Despite the headline-grabbing cases, the number of illegal cannabis operators may actually be declining.
RICO fees target cannabis
One of the most common legal tactics used in recent years has been the Racketeer Influenced and Corrupt Organizations (RICO) Act. The RICO indictments, enacted by the Nixon administration as part of the Organized Crime Control Act of 1970, were designed to keep proceeds of illegal operations away from legal entities and primarily targeted organized crime and triple damages for attracting plaintiffs.
But more plaintiffs have turned to RICO charges for matters unrelated to organized crime.
Unlike federal RICO actions, civil lawsuits have not focused on illicit funds. In a 2017 Colorado case, Safe Streets Alliance v. Hickenlooper, the anti-cannabis organization claimed that nearby cannabis farms drove real estate values down. The lawsuit was eventually dismissed.
Cannabis operators have also filed RICO charges. In June 2022, the Cayuga Nation filed RICO violation and conspiracy charges against Pipekeepers Tobacco & Gas, saying the business was illegal and taking money from the nation. The case is ongoing, but two of RICO’s lawsuits were dismissed in September. The only remaining problem is the claim that the store building was bought with extortion money.
Photo by Olena Ruban/Getty Images
In Arkansas, four cannabis operators face RICO charges over allegedly inflated THC counts. The class action lawsuit, filed by three patients, alleges that the Steep Hill Arkansas laboratory and three growers, Bold Team, Natural State Medicinals and Osage Creek Cultivation, were involved in deceiving customers by inflating THC counts.
Rather than standing for bad actors in the industry, some insiders say the cases are being pushed by outsiders trying to stifle the industry.
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Steve DeAngelo, a Steep Hill co-founder who left the company in 2019, says the allegations against the company are irrelevant. Instead, he called the charges “shady” and claimed the plaintiffs in the case were “people who are essentially trying to invalidate a state medical cannabis law with a federal first-emption clause.”
Despite a lack of concern about the RICO charges in Arkansas, DeAngelo expressed concern about the legal tactics. “There is a real danger that federal laws, if they set a precedent, will preempt the state’s medical cannabis law,” he said.
David Feder, corporate and litigator and founding partner at Weed Law, believes the cannabis space continues to suffer from bad players in the public and private sectors, in part because they hide behind EBITDA numbers, not the bottom line.
“If cannabis companies weren’t allowed to use Adjusted EBITDA, we probably would have a lot more truth and transparency,” he said.
Feder is involved in his own RICO case against Acreage Holdings, in which he accuses Acreage of stealing his company EPMMNY’s New York license to sell to patients in the legal market.
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Additional Worrying Fees
While RICO cannabis lawsuits have generally proven ineffective in court, other approaches may be more successful.
In November, California brands Greenfield Organix and LPF JV Corporation were named in a class action lawsuit filed by Dovel & Luner. The indictments allege inflation in THC concentration in Kingroll branded pre-rolls.
The filing is the company’s second class action lawsuit against California THC brands. In October, they filed a customer class-action lawsuit against DreamFields Inc. and Med for America Inc., alleging that Jeeter-branded products contained lower THC percentages than advertised.
THC often makes headlines, but it’s far from the only potential fraud allegation in the industry. In October, the US Securities and Exchange Commission charged Canadian cannabis brand Cronos and former chief commercial officer William Hilson with fraud and aiding and abetting the company’s violations. The lawsuit stems from an accounting oversight of $2.3 million between 2019 and 2021 that Cronos self-reported after an internal audit.
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Cronos settled with the SEC, paid no fines and agreed to hire independent compliance consultants. Hilson paid a five-figure fine to the Ontario Securities Commission and is barred from practicing before the SEC for three years.
Despite ongoing concerns and the recent surge in reports, Metrc Chief Strategy Officer and former director of the Colorado Marijuana Enforcement Division, Lewis Koski, believes regulatory technology and market maturity help minimize intentionally inappropriate companies and players.
“My personal experience as a former regulator, the regulated framework and the companies that have operated within that framework really shines a light on those who don’t,” he said.
This article originally appeared in Green Market Report and has been republished with permission.