This is the third part of a three-part series. Click for Part I and Part II.
In a previous blog series, we looked at how prosecutors in Colorado use the Colorado Organized Crime Control Act (COCCA) to pile charges and penalties onto members of the recreational marijuana industry. Today we discuss how prosecutors use white collar criminal charges such as securities fraud to establish their COCCA predicate offenses.
In 2017 a mogul of the marijuana industry and his business partner were indicted on charges including securities fraud, money laundering, forgery, tax evasion, and attempting to influence a public servant. The indictment came after investors sued the mogul’s
company for misleading them about the legality of their organization and allegedly bilked them out of over $500,000. These charges were used as predicate offenses to charge the defendants with COCCA offenses and threaten them with significant prison time.
In the civil suit, the plaintiffs allege that the defendants made misrepresentations about whether out of state residents could invest in their business and whether the business was up and running. Colorado law, until recently, prohibited out of state residents from even applying for a recreational marijuana business license. Prior to the change in the law, there was seemingly no avenue for residents of other states to invest in the newly profitable Colorado marijuana businesses. So, out of state investors looking to enter the industry were told to invest in holding companies which themselves owned marijuana businesses. This however wasn’t legal. Any financial profit from ownership interests in a retail marijuana business requires the beneficiaries to have their backgrounds checked by the MED and have fingerprints on file.
The other allegation in the case is that the defendants oversold their business to investors. There is a fine line of legality for financial fraud cases. On one side of the line is mere business puffery, on the other side is material misrepresentations, i.e. fraud. The former is a common business practice necessary to get investors interested in a fledgling business, the latter however gets a person slapped with felony fraud charges, significant civil damages, and ultimately debarment from the marijuana industry. That line is generally crossed if a business executive is telling investors that they have been making a profit before their manufacturing is even off the ground.
This case is still being litigated both in criminal and civil courts, and every person is innocent until proven guilty. This is a wonderful case study though because the outcome will inevitably impact the way retail marijuana distributers are prosecuted when they are alleged to have violate securities laws. The importance of this case lies in the interplay between corporate structure and the marijuana industry. The lessen to learn from this case is that marijuana businesses need strict compliance programs to ensure that representations made to investors are accurate and that the underlying organization is legitimate. For the marijuana industry to be respected by law enforcement and to be taken seriously be big time investors, the industry itself needs to put resources towards internal compliance programs.