law Archives - Green Market Report

Caroline CahillCaroline CahillApril 26, 2019
shutterstock_322263122.jpg

4min6961

A Massachusetts cannabis investment scheme has resulted in charges for an investment adviser who allegedly swindled more than $8 million from investors.

On April 17, 2019, Massachusetts Sec. of State William F. Galvin announced charges against Frederick V. McDonald, Jr., CEO of US Advisory Group Inc. McDonald is accused of misleading more than 100 investors in a Massachusetts cannabis investment scheme, with one 78-year-old investor losing more than $3 million.

McDonald’s house of cards was built with three main ventures—US Advisory Group, Commonwealth Pain Management Connections LLC, and Kettle Black of MA LLC. Through these vehicles, McDonald used clients’ funds in a failed attempt to gain medical cannabis dispensary licenses in Massachusetts and violated state securities laws in the process.

According to the filing, McDonald acting as an investment advisor made recommendations to a high net worth client directing him to invest in marijuana projects without disclosing McDonald’s controlling interest in the investment vehicle or the fees he would receive in connection with the projects.

He originally met the investor at the World Presidents’ Organization Retreat in 2007 and got him to sign an advisory agreement. He got him to invest $1 million into Prime Wellness of MA. Instead of going after the medical marijuana license, McDonald took $200,000 and invested it in Dixie Highway Partners, a different entity owned by McDonald.

He never got a license for Prime Wellness and started a new investment vehicle called KBMA in which he raised $8 million. Ultimately, the venture never obtained a license and had a falling out with the property owner for the proposed dispensary. The whole deal fell through and the investors lost all their money. The original investor ended up losing $3 million and the other investors lost the $8 million for KBMA.

As documented by the state’s 35-page administrative complaint, “McDonald’s free-wheeling practices included cutting corners at every opportunity and lying to his own business partners and investors to cover his own mistakes.”

The complaint details McDonald’s failure to uphold his fiduciary duty, and how “[he] further failed to educate himself regarding the unique and complex licensing process in Massachusetts, which resulted in the distribution of offering documents that failed to adequately disclose to investors the risks or difficulties the investment could face.”

The Massachusetts Securities Division wants to bar McDonald from practicing as an investment adviser and require him to pay a fine to the state and restitution to investors, among other requested enforcement actions.

While McDonald has been accused of misusing investment funds, making material omissions, and other unethical conduct and practices, a representative from US Advisory Group has denied the state’s allegations.

“We have always acted with the highest level of ethics and in the best interests of our clients,” stated the USAG representative, as reported by the Boston Herald. “News reports do not accurately reflect US Advisory Group’s core, history and legacy of providing exceptional financial planning and advice.”


Debra BorchardtDebra BorchardtFebruary 9, 2018
shutterstock_693016693.jpg

3min18412

Congress shut down the government for a moment, but then our representatives in D.C. agreed on a 2-year framework for a budget and the government was back in business. Wrapped into this budget agreement was a vote to renew the Rohrabacher-Blumenauer amendment. This legislation protects states with legal medical marijuana from prosecution by the Department of Justice (DOJ) by denying them from spending money on enforcement.

The two years isn’t a done deal because for the next six weeks details in the budget will be hammered out with March 23 as another date to look towards voting on the budget. Yet, it keeps getting included and each time that happens, it becomes more and more secure

The federal budget decides how much money each department gets to spend and the Department of Justice gets lumped in with all the other departments. This particular amendment prevents the DOJ from spending any of the money it gets towards enforcing federal marijuana laws against businesses and individuals in states that have legalized medical marijuana.

Each time the budget has been up for a vote, the cannabis industry would begin biting its nails. Would they include it again? Would this be the year they kick it to the curb and open the money train back up to Attorney General Jeff Sessions? There was even a fear that if the government shut down and the amendment was technically no longer in effect, the DOJ could quickly begin raiding companies in Colorado, Washington, Oregon and more.

There are multiple pieces of legislation that have been written to address issues with the cannabis industry. From outright legalization to more cherry-picked items like banking or veterans access to medical marijuana. Yet, before a piece of legislation can be passed, it must be voted on and in order for it to be voted on the Rules Committee must allow the bill to go to the floor for a vote. The makeup of the committee is skewed towards the majority party – in the case, the Republicans.

The Republicans consistently vote along party lines and refuse to allow any of the legislation get to the floor for a vote. So, the only recourse the legislators have is this amendment.


shutterstock_667419949-1.jpg

5min11242

The marijuana industry is still processing United States Attorney General Jeff Sessions’ recent decision to repeal the Cole Memo, which had directed federal prosecutors to refrain from prosecuting marijuana-related businesses that operated in accordance with a facilitative state law. The effect of Sessions’ policy change is presently unclear because, as of this date, the December 2014 Rohrabacher-Blumenauer amendment precludes the Department of Justice (DOJ) from spending any of its budget for the prosecution of entities that are lawfully participating in a state marijuana program. But, the Rohrabacher-Blumenauer amendment is part of continued, partisan, budgetary conflict, currently scheduled to resume in early February.

Under the recent policy change, United States Attorneys have been given additional discretion to prosecute marijuana businesses, even when they are operated in accordance with state law But no one knows what resources the DOJ will be permitted to direct to those prosecutions. Direct prosecution of state-legal cannabis businesses may be a cost-intensive endeavor. On January 4, 2018, Pennsylvania Governor Tom Wolf indicated that the Commonwealth will oppose efforts to prosecute businesses operating in accordance with the Pennsylvania Medical Marijuana Act. Pennsylvania is one of 29 states (and the District of Columbia) that have legalized medical or recreational cannabis, meaning there is as many as 30 state attorneys general who have an interest to opposing lawsuits that may directly impact legalized marijuana. Add to that the lawyers who may be hired to defend the estimated $10 billion legal marijuana industry, and prosecution becomes a potentially costly proposition.

But, what about less-expensive, indirect enforcement? There are several indirect or “sideways” avenues that the DOJ might explore to undermine medical and recreational marijuana:

  • Firearms. Under the Gun Control Act of 1968, persons who regularly use marijuana cannot legally own firearms. Pennsylvania has pledged not to release the names of patients holding medical marijuana ID Cards to federal authorities. But gun owners must disclose their marijuana use when reregistering their firearms or face charges for making misstatements to federal authorities. Historically, prosecution of firearm offenses has rarely occurred in the absence of another crime, but that could change.
  • Physician licensing. The federal Drug Enforcement Administration (DEA) issues prescribing licenses to physicians. Without a DEA license, a physician cannot prescribe prescription medicines. A physician who prescribes medical cannabis could potentially face difficulty renewing her federal license.Pennsylvania has sought to insulate doctors by having physicians certify that a patient suffers from one of 17 recognized conditions and allowing the dispensaries to counsel clients and suggest products. However, Pennsylvania’s law also allows certifying physicians to “recommend” cannabis products and amounts. Federal authorities may argue that “recommendations” by certifying physicians equates to “prescribing” cannabis. Although Pennsylvania does not permit a certifying physician to work for a dispensary, each dispensary must employ one physician to oversee counseling and dispensing. A physician employed by a licensed dispensary may face more difficulty in maintaining federal licensure based on their role in the actual delivery of medical marijuana directly to patients. A dispensing physician may retain a state-issued license to practice medicine, but be precluded under federal law from prescribing medications.
  • Real property forfeiture. Federal law allows the government to confiscate real estate that is used to advance drug sales and distribution. The Justice Department may seek to pressure landlords of state-legal cannabis businesses to terminate leases or face federal forfeiture actions.

We do not yet know how or if the federal government will seek to curtail state-legal marijuana businesses. There is no guarantee how government enforcement will proceed.


StaffStaffSeptember 27, 2017
dea-medical-marijuana-1280x640.jpg

3min12290

The acting chief of the U.S. Drug Enforcement Administration (DEA) Chuck Rosenberg is stepping down according to reports from The Associated Press. Rosenberg is said to have notified employees on Tuesday in an email that he was leaving and thanked them for their hard work.

Rosenberg has been in the position temporarily since 2015 and garnered attention when he distanced himself from President Trump after comments that the police shouldn’t be nice to suspects when putting them in squad cars. At that time he told employees that he did not condone police misconduct. The AP also said that New Jersey State Police Col. Rick Fuentes is a front-runner for the role.

Just last week, he named the President an honorary state trooper bestowing badge number 45 on him. “The New Jersey State Police ‘Roll Call’ roster will forever reflect badge number 45 being honorably issued to President Donald J. Trump,” Fuentes wrote in an order that authorized the ceremonial designation. Fuentes is known for taking a stance against racial profiling. He also holds masters and doctoral degrees in criminal justice from the City University of New York.

Rosenberg is known for being a close associate of fired FBI Director James Comey. According to the New York Times, Rosenberg was asked whether he wanted to be a permanent administrator for the DEA and he said he did not. It was also said that he believed the President had little respect for the law.

This follows a report earlier this week from the FBI that stated that 653,249 arrests were made for marijuana in 2016. “Arresting and citing over half a million people a year for a substance that is objectively safer than alcohol is a travesty,” said Morgan Fox, director of communications for the Marijuana Policy Project. “Despite a steady shift in public opinion away from marijuana prohibition and the growing number of states that are regulating marijuana like alcohol, marijuana consumers continue to be treated like criminals throughout the country. This is a shameful waste of resources and can create lifelong consequences for the people arrested.”

Tom Angell of Marijuana Majority crunched the numbers and found that marijuana drug arrests were rising – up 5.6% from 2015. He said that it is an average of one drug arrest for every 20 seconds. While industry insiders have operated with an attitude of business as usual, it may be that some prefer the devil you know.


Paula CollinsPaula CollinsSeptember 19, 2017
Untitled-design-1-1280x1054.jpg

5min12620

You’ve experimented with watering, lights, nutrients, soil, and harvesting techniques. Your small, dedicated team has come together like a family, nurturing the development of your product like it is the king baby. You’re finally starting to realize a profit. Suddenly, a key employee hits you with notice of resignation. She has decided to go work for a cannabis producer that is closer to where she lives, and who, coincidentally, is willing to pay her $2 an hour more than you can afford and promise her four nights off a week.

As you begin to snap back from the shock of your close-knit team getting torn apart, you realize: that key employee is about to walk out with a goldmine of experience and training that you gave her. She has intimate knowledge of dozens of processes that are unique to your product line. Suppose she takes all of those thousands of dollars of training you invested in her, and she applies that to the competitor’s benefit?

That’s when you remember: you are covered in most states by local trade secrets statutes, and for the aspects of your business that are non-cannabis related, you have federal protection as of May 2016 with the Defense of Trade Secrets Act (DTSA). Through DTSA and the state-level statutes, a trade secret is anything that you consider to be a secret, and from which you derive profit. In other words – if you say an idea, a design, a process, a marketing plan, a billing process – almost anything — is a secret, and you make money from it, it is protected under trade secrets law!

Trade secrets are exposed at any time in the life cycle of your business, but critical hotspots occur when you tour your facilities with eager potential investors, when you discuss possible mergers and acquisitions with lateral partners, or when a key employee moves to work for a competitor. Cannabis business owners, especially those who are developing and producing products, can take three action steps to protect their trade secrets, but they must be done pre-emptively – long before you see trouble brewing.

 

  • Make clear to all who gain exposure to your business what you consider confidential. You don’t want to proudly display your timers, lights, and watering systems, lest someone spot them and try to duplicate them in their own production lab. Don’t assume that all who smile and shake your hand will play as good sports.
  • Err on the side of caution when you talk to investors. Early in discussions – even before they visit your retail or production operation, have them sign non-disclosure agreements (NDA). It won’t stop them from blabbing to their posse, but it will protect you if the matter gets turned over to the lawyers!
  • Once you have decided that something is considered by you to be a secret and you derive income from it, make sure you take regular efforts to keep it under wraps. If it is an oil extraction process, make sure that the area is kept locked, with limited access, and clear records of the comings and goings of all who gain access.
  • Make sure you have an employee manual that is written down. Outline the physical areas of your operation, and the concepts, ideas, and methods, that you consider to be unique to your operation. Have employees sign that they have read it and consent to it.
  • Some states, such as Colorado, permit non-compete agreements. Non-competes generally do not hold up in court in other states, such as New York.

 

Don’t let the unique features of your business waft into thin air when your key employees leave, or when your potential business suitor takes what he can use from your business and leaves the rest. Identify features of your cannabis operation that are unique, take steps to keep them secret, and make sure that people know what you value as a trade secret.

 

 



About Us

The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


READ MORE



Recent Tweets

@GreenMarketRpt – 18 hours

Our biggest fans this week: WallandBroad, buhlreports, RosieMattio. Thank you! via

@GreenMarketRpt – 19 hours

Green Market Report’s Marijuana Money December 6, 2019

@GreenMarketRpt – 1 day

My week on Twitter 🎉: 6 Mentions, 108 Mention Reach, 15 Likes, 6 Retweets, 26.8K Retweet Reach. See yours with…

Back to Top

You have Successfully Subscribed!