The litigation, at its core, is a lawsuit for fraud and legal malpractice, but it offers a glimpse into the world of the big marijuana industry, which is usually kept closed.
By Hunter Field, Arkansas Advocate
It was a well-kept secret when Arkansas’ medical marijuana industry started five years ago that many of the Arkansans who claimed to be the owners of the first dispensaries, growing facilities and other businesses were actually fronts for cannabis companies from out of state.
If proven to be true, explosive new allegations made in two lawsuits will reveal how these arrangements benefited outside corporations and at the expense state investors.
The accused are calling many of the accusations “blatantly untrue” and intend to dismiss the lawsuit.
The suits are a prime example of people going to great lengths to make money from the new lucrative industry.
The lawsuit involves several dispensaries as well as some of the biggest power brokers in the industry, former legislators, lobbyists, and well-known lawyers.
The litigation, at its core, is a fraud lawsuit and a legal malpractice suit, but it offers a glimpse into the normally closed world of the big marijuana business.
The lawsuits accuse Little Rock firm Steel, Wright, Gray, of creating local ownership groups in order to obtain four out of the first 32 medical marijuana dispensaries licenses issued by Arkansas in 2019.
The local “owners” of two of those dispensaries–Enlightened Dispensary locations in Heber Springs and Morrilton–say they had little control over the businesses despite owning controlling stakes on paper. They also claim to have received little or no income from Enlightened, despite having hundreds of thousands in tax liabilities.
The plaintiffs allege that, while representing out-of-state businesses who would profit from and manage the dispensaries and run them, Alex Gray and Nate Steel represented the companies. This created an undisclosed conflict of interest.
The nearly identical lawsuits in Pope and St. Francis counties state that “In fact, because of the preposterous structures created by the Defendants for their other clients, more revenue brought in by the dispensary, the worse financial consequences for Plaintiffs.”
The suits were originally filed in late last year, with vague complaints. amended complaint with more detailed allegations have been filed in both cases in the last week.
Steel and Gray has not filed a response to the new allegations, but on Tuesday their lawyer said that they would be seeking to dismiss the lawsuit.
In an email, attorney Clifford Plunkett stated that the allegations contained numerous inaccuracies. Many of the allegations are outright false. We will aggressively respond to these baseless allegations and seek their dismissal.
Some of the claims made in the lawsuit may also violate state laws and regulations.
A spokesperson for the Alcoholic Beverage Control Division (ABCD) and Medical Marijuana Commission confirmed that both organizations were aware of the lawsuit. When asked if the allegations were being investigated, the spokesman replied that the agencies do not comment on details of investigations, or whether anything is under investigation.
The parties
Arkansas politics has been heavily influenced by both sides of the case.
Steel, Gray, and their legal group are among the defendants.
Steel is a Democratic former state legislator who ran for Attorney General.
Gray has been the public face of Arkansas’ medical marijuana industry ever since it was founded. He has also worked on several ballot initiatives including cannabis and gambling.
Jeremy Hutchinson, a former state senator who was not named as a plaintiff in the case, was a partner at Gray and Steel. In the complaints, he is often mentioned. Hutchinson, who pleaded guilty last year to his involvement in a separate public corruption and bribery plot, was sentenced to almost four years of federal prison.
Marshall Wright and Josh Landers are the two men who filed the lawsuit in the St. Francis County Case.
Wright is the namesake of Steel, Wright, Gray, and is listed on the website as one of its partners. He was also a state legislator.
The Pope County lawsuit is brought by Paige Fisher and Bryan Fisher. Scott Pace, Rick Don Angel, and Ronald Craig Smith.
Pace is both a pharmacist and a lawyer. He was previously the CEO of Arkansas Pharmacists Association. Now he’s a partner in the lobbying firm Impact Management Group.
Bryan Fisher is an associate vice president for development at Arkansas Tech University.
The claim
The plaintiffs’ claims begin in 2016, when Arkansans decided to legalize medical cannabis and began the complex and competitive process of obtaining one the few marijuana business licenses.
Steel, Gray and Hutchinson allegedly solicited both groups of plaintiffs to become owners of entities that applied for dispensary licensing.
The Medical Marijuana Commission favored applications from companies owned by Arkansas residents who were in the medical marijuana industry, such as doctors, pharmacists, other health care workers, law enforcement, and people working in similar regulated industries.
They claim that they were told they would not be required to pay any capital, or assume any liability in order to become an owner. Only their names and ownership stakes would be assigned.
The St. Francis lawsuit states that “These ‘ownership percentages’ created by Defendants weren’t based on capital contributions because there was none. Instead, they were created solely based on how, mainly, Steel and Gray believed the State would score the applications and to improve the chances of receiving a licence.”
The suits also allege that Steel, Gray and Hutchinson represented Eddie Garcia from Virginia and the Garcia Companies, who had retained them in order to obtain as many licenses for dispensaries as possible, to be managed and/or partially owned by Garcia.
According to the plaintiffs, this created a conflict that should have been disclosed.
The amended complaint states that “During the summer 2017, attorneys Steel, Gray and Hutchinson, through Steel, Gray and Hutchinson, worked feverishly to prepare medical marijuana license applications for a number of groups of ‘owners,’ who were nothing more than fictitious figures created by [Steel, Wright, Gray], and Steel, Gray and Hutchinson, and intended to put Garcia and the Garcia Companies, Defendants other clients, into the best possible position to win several medical dispensary licensing licenses
The plaintiffs also claim that the operating agreement for both dispensaries was drafted so that Garcia Companies, and Revolution Cannabis, the management company which eventually purchased Garcia, would have control over the operations and profits.
Wright and Landers suggest even that their signatures on the operating agreement of the dispensary were faked.
The Arkansas owners of the two dispensaries claim that they are the ones who have received the income, even though the tax liability of each retailer was passed to them.
Cannabis companies are subject to higher rates of taxation because marijuana is still illegal under federal law. This means that business expenses can’t be deducted as they would in a normal corporation.
According to the lawsuits filed, the result was that the plaintiffs owed hundreds of thousands of dollars in income taxes, even though they never received the income.
According to court documents, the owners of the dispensary in Pope County sold their shares last year for the amount they owed on taxes.
Wright and Landers are still the owners, and they claim that their business arrangement has left them in an impossible position to sell.
The lawsuit claims that “In reality, based on information and belief, Defendants were the true clients of Plaintiffs and that the Defendants had placed Plaintiffs in a ‘no-win’ structure, which was the only way to ensure Plaintiffs would be so deeply in debt with the ongoing Dispensary operation, they’d have no other choice than to give the Dispensary free of charge to the management firm,” the lawsuit says.
Both lawsuits demand a trial by jury and seek damages and attorney fees.
This article was originally published by The Arkansas Advocate.
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The article Arkansas lawsuits say law firm fraudulently obtained marijuana business licenses first appeared on Marijuana Moment.
