Some 'nonprofit' pot shops making big money

Wednesday , June 20, 2012 - 9:59 AM

Joe Mozingo

LOS ANGELES - In the first raid, Orange County sheriff’s detectives hit a Dana Point marijuana storefront, the San Clemente home of its director and a "stash house" he allegedly maintained nearby.

In the two homes, they found cash stuffed everywhere: in buckets in the garage and attic, in an Igloo cooler in a bedroom, under a mattress, on an ironing board, in a dresser. According to a search warrant affidavit filed in November, they recovered more than $700,000.

At the shop, investigators found spreadsheets showing sales over 10 months totaled $3.17 million, according to the affidavit, with $2.47 million "cash on hand." Paperwork indicated that a silent partner, a convicted drug dealer named John M. Walker, controlled the shop and six others in Orange and Los Angeles counties.

In November, detectives raided the other storefronts and 16 connected properties. Inside a Long Beach duplex owned by Walker, detectives found 14 flat-screen televisions, according to a report from the search. Inside the garage of another Long Beach house, they found a Beretta handgun, a 12-gauge shotgun, a Chinese AK-47 with a bayonet, boxes of ammunition, Walker’s wedding album and grocery bags filled with four dozen rubber-banded bundles of cash; one of the bags contained a note with calculations totaling $99,324.

The discoveries and many others like them across California are starkly at odds with the image presented by medical marijuana providers, who portray themselves as "compassionate caregivers," taking great risk for patients who are asked only for "donations" for medicine they would otherwise have a tough time acquiring.

A review of court and law enforcement records, along with interviews of industry insiders, police and federal agents, shows that many marijuana dispensaries have been making big money, sometimes extraordinary money, even as they claim to be nonprofit. The Los Angeles Times found a cash-infused retail world bearing little resemblance to the one pitched to voters before they passed the Compassionate Use Act for "seriously ill Californians" in 1996.

To be sure, the huge stashes of cash do not represent the entire industry. Many dispensary operators work on slim margins, give away cannabis to the poor and try to comply with the law. Nor do the court cases capture the relief truly ill patients ascribe to high-quality marijuana they might have difficulty getting if these shops did not exist.

One reason for the vast disparities within the medical marijuana trade is that the regulations governing it are hazy. The 1996 initiative and a law the state Legislature approved in 2003 never made clear how patients were supposed to get marijuana, much less whether sales were legal. Attorney general guidelines issued in 2008 allow only for fees "that are reasonably calculated to cover overhead costs and operating expenses." Dispensaries decide to abide by that or not.

Records from a Granada Hills dispensary showed sales revenue topping $10,000 on many days.

Spreadsheets from a Long Beach operation indicated the owners bought $247,040 worth of marijuana and sold it in the next five months for $776,589. A state board of equalization investigator testified that the pair sold a total of $1,672,206 that year and reported only $206,980 to the tax agency.

A Venice-area dispensary’s bookkeeping revealed it did about $5.1 million in sales in just over a year. One month’s total was $468,331 - with $154,493 in "total profit." Another’s was $116,625, after a $25,382 payment to the owner.

In North Hollywood, the two partners behind NoHo Caregivers emailed encrypted messages estimating they would each make $194,000 a month in profit, according to a federal indictment.

The state Bureau of Equalization gives a very rough estimate that it collects up to $105 million a year in sales tax from stores that are doing up $1.3 billion a year in sales.

There is no way to know what the average dispensary earns because they are totally unregulated, aside from those in a few cities, including Oakland, Berkeley and West Hollywood. That void has allowed operators to sell huge amounts of pot at giant mark-ups, seeding public mistrust of the industry and giving law enforcement ample incentive to crack down.

"Some people are abusing the system and raking in profits," said Don Duncan, operator of a West Hollywood dispensary and director of the California chapter of Americans for Safe Access. "That draws the credibility of the field of medical cannabis into doubt."

He and fellow leaders of the movement are pushing for a bill to better regulate the business. But the legal challenges to growers and dispensaries are mounting.

The federal government, which considers all marijuana use illegal and has signaled it will target any commercial operations, has launched a multi-pronged campaign to put this all back in the bottle. And local authorities throughout California, led by the Los Angeles Police Department and Los Angeles County District Attorney Steve Cooley, are going after them too, based on the notion that nothing in the medical marijuana law permits sales or profits.

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On July 31, 2008, the DEA and Culver City police raided a dispensary called Organica, on the border of Venice and Culver City. After seizing about half a million dollars’ worth of weed and $16,379 in cash, the agents expected the shop to stay closed.

They were wrong. Organica’s owner Jeffrey K. Joseph said he had an obligation to his "collective of patients."

"Those patients still need their medicine," he said in Web interview recorded after the raid, even though two other dispensaries were still operating within 1,000 feet of his.

Left unsaid: The shop was making a fortune.

On April 17, 2009, the California Highway Patrol stopped Joseph on his way to the Coachella music festival and found $92,352 in his car. Federal and local agents executed a second search warrant on the shop four months later and seized about a million dollars’ worth of weed and accounting records for seven months.

Those spreadsheets revealed how quickly business sprang back after the first raid. In December 2008, the dispensary made $468,331 in revenue and $154,493 in "total profit," they said. The next month’s profit was $129,620. Over the six months documented, the dispensary made $610,301 in profit - in addition to $82,066 in payments directly to Joseph.

And the marijuana vendors selling to Organica (growers or their brokers) were making even more. One of them, "Vendor S," made $524,776 in two months.

With that much money flowing, the second raid failed to shut the shop down as well. In February, after a third raid, prosecutors charged Joseph with 24 felony counts of drug sales and money laundering - to which he would ultimately plead no contest to four counts and serve 41 days in jail - and the city attorney sought a preliminary injunction to close Organica.

Joseph fought the closure, arguing that Organica was a fully compliant, nonprofit collective, despite having repeatedly used the word "profits" in its own bookkeeping. Los Angeles County Superior Court Judge James Chalfant didn’t buy it. "There is no evidence that Organica is a nonprofit entity," he wrote in granting the injunction, and called it a "multimillion-dollar retail operation."

Joseph appealed that decision and lost again this April, when appellate judges ruled that the medical marijuana law "does not cover dispensing or selling marijuana."

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What California’s medical marijuana law does allow is "qualified patients" and their "designated primary caregivers" to associate "collectively or cooperatively to cultivate marijuana for medical purposes."

What that means has been debated since it was written, spawning a side boom for attorneys and consulting firms.

In particular, prosecutors and defense attorneys spar over one section of the law that notes: "Nothing in this section shall authorize . any individual or group to cultivate or distribute marijuana for profit." Prosecutors say that clearly bans any profit. Defense lawyers say the language is neutral, neither allowing nor prohibiting it.

To be safe, dispensaries largely call themselves "collectives" and "nonprofit," and they label sales as "donations."

Many operators privately concede the language is a stretch. "There’s people making lots of nonprofits," quipped the owner of several Orange County dispensaries, past and present. "It’s the American way."

William Panzer, who helped write the state’s medical marijuana initiative, said there is no hard figure on how much someone in the business should make.

"What I tell my clients is this: I got a guy on the jury, 45 years old, busting his butt, moonlighting to pay his mortgage and put his kid through school. My client is a 23-year-old, running a dispensary and making $200,000 a year. How do you think that’s going to go?"

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Many times, it’s not clear who is getting the money. The Orange County Sheriff’s Department launched the investigation of Dana Point Safe Harbor Collective when it got an anonymous letter saying John Walker, 56, silently controlled that shop, Belmont Shores Natural Care in Long Beach and others. He was not listed on any of the incorporation papers.

Walker, who lives in a sprawling Tuscan-style home on a hillside in San Clemente, had criminal convictions going back to 1976 for marijuana possession and sales, selling and transporting a controlled substance and carrying a loaded firearm in a public place. Paperwork seized at the Dana Point store suggested he was to get 60 percent of the profit from the shop.

The affidavit alleges that Walker used a prominent Long Beach attorney, Richard Brizendine, "to give the dispensaries the cover of legitimacy." Brizendine incorporated all seven shops. Records show that six days after the raid of Walker’s home, the attorney was briefly granted trust deed to it as security for a loan.

The case is still open and no one has been charged. Brizendine would not discuss the allegations, citing attorney-client privilege. Walker could not be reached.

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Tax may be the biggest cudgel the feds have against medical pot. Increasingly, the IRS is applying an obscure provision of the tax code, 280E, which prohibits drug traffickers from making deductions in tax cases. Already dispensaries were in a quandary: Pay the IRS and literally document your federal crime to the federal government, or don’t report it and risk going down for tax evasion. Now they face 280E.

At the same time, city authorities and the U.S. Justice Department are besieging pot shops with civil litigation and threats of asset forfeiture.

This is pushing the big money seekers underground, many in the business say. "They run sort of hit-and-run operations, make as much money as they can for six months and close down before they get caught," said Damian Nassiri of the Cannabis Law Group in Orange.

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)2012 Los Angeles Times

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