Lawsuit accuses Arkansas law firm of misconduct in early days of Medical Marijuana
Allegations of Fraud in Arkansas Medical Marijuana Industry.
When Arkansas’ medical marijuana industry began five years ago, it was somewhat of an open secret that some of the Arkansans said to own the first dispensaries and growing facilities were fronts for out-of-state cannabis firms.
Explosive new allegations in a pair of lawsuits, if proven true, lay bare how these arrangements worked to benefit outside corporations at the expense of state investors.
That’s a big if, and the accused have called many of the allegations “blatantly false” and plan to seek dismissal of the suit.
If the suits’ claims are shown to be false, it would be the latest example of the lengths people have been willing to go to profit off the lucrative new industry.
The litigation involves several dispensaries, some of the industry’s largest power brokers, former state lawmakers, lobbyists and well-known attorneys.
At its core, the litigation is a fraud and legal malpractice lawsuit, but it also offers a window into the usually closed world of big marijuana business.
The suits accuse Little Rock law firm Steel, Wright, Gray of manufacturing local ownership groups to obtain four of the state’s first 32 medical cannabis dispensary licenses 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. Further, they say they received little to no income from Enlightened while taking on hundreds of thousands of dollars in tax liability.
All the while, the plaintiffs claim, attorneys Alex Gray and Nate Steel were representing the out-of-state companies that would manage and profit from the dispensaries, creating undisclosed conflicts of interest.
“Indeed, because of the preposterous structure created by Defendants to benefit their other clients, the more revenue the dispensary brought in, the worse the financial consequences for the Plaintiffs,” the nearly identical suits in Pope and St. Francis county state.
The suits were initially filed late last year with vague complaints. Amended complaints with detailed allegations were filed in the past week in both cases.
Steel and Gray haven’t filed responses to the new claims, but their attorney on Tuesday said they would seek to have the suit dismissed.
“The allegations contain numerous factual inaccuracies and errors,” attorney Clifford Plunkett said in an email. “Many are blatantly false. We plan to aggressively respond and seek dismissal of these baseless claims.”
Some of the claims in the lawsuit could also be violations of state laws and regulations.
A spokesman for the Alcoholic Beverage Control Division and Medical Marijuana Commission said both entities were aware of the lawsuit. Asked if any of the claims were under investigation, the spokesman said the agencies, by policy, do not speak to details of investigations or whether something is under investigation.
The parties
Individuals on both sides of the cases have been heavily involved in Arkansas politics.
The defendants include Steel, Gray and their law group.
Steel is a former Democratic state legislator and candidate for attorney general.
Gray has been a public face of the medical marijuana industry since its inception in Arkansas, and he has worked on a number of ballot initiatives, including cannabis and casino gaming.
While not named as a defendant, former state Sen. Jeremy Hutchinson was a partner of Gray and Steel. He is mentioned often in the complaints. Hutchinson was sentenced to nearly four years in federal prison last year after pleading guilty to his role in an unrelated public corruption and bribery scheme.
In the St. Francis County case, the two men bringing the suit are Marshall Wright and Josh Landers.
Wright is a namesake of the Steel, Wright, Gray firm, and he is still listed as one of the firm’s partners on its website. He is also a former state legislator.
The Pope County lawsuit was brought by Paige and Bryan Fisher, Scott Pace, Rick Don Angel and Ronald Craig Smith.
Pace, who is a lawyer and pharmacist, was the CEO of the Arkansas Pharmacists Association and he is now a partner at the lobbying and consulting firm Impact Management Group.
Bryan Fisher is the associate vice president of development at Arkansas Tech University.
The claims
The plaintiffs’ allegations start in 2016 when Arkansans voted to legalize medical marijuana and the competitive and convoluted process for obtaining one of the limited marijuana business licenses began.
Both groups of plaintiffs said they were solicited by Steel, Gray or Hutchinson to be owners of entities applying for dispensary licenses.
Companies applying for a license were required to be owned at least 60% by Arkansas residents, and the Medical Marijuana Commission looked more favorably on applications with owners in fields related to medical marijuana, like doctors, pharmacists and other health care workers as well as law enforcement and those working in similarly regulated industries.
The individuals claim they were told that they wouldn’t be required to put up any capital or take on any liability to become owners, only that their names would be used and assigned an ownership stake.
“These ‘ownership’ percentages created by Defendants were not based upon capital contributions, because there were none, but instead were created solely based upon how, mostly, Steel and Gray thought the State would score the application and to better the chance of receiving a license,” the St. Francis lawsuit reads.
At the same time, the suits allege that Steel, Gray and Hutchinson were also representing Eddie Garcia of Virginia and the Garcia Companies, which had retained them to obtain as many dispensary licenses as possible to be managed and/or partly owned by Garcia.
This created a conflict of interest that should’ve been disclosed, according to the plaintiffs.
“During the summer of 2017, attorneys Steel, Gray and Hutchinson worked feverishly on behalf of Garcia and [the Garcia Companies] to prepare medical marijuana dispensary license applications for several groups of ‘owners’ that were truly nothing more than figureheads put together by [Steel, Wright, Gray], through Steel, Gray and Hutchinson, and designed to place Garcia and [the Garcia Companies], Defendants’ other clients, in the best position possible to be awarded several medical dispensary licenses,” the amended complaint reads.
Further, the plaintiffs allege that the operating agreements for both dispensaries were drafted to give the Garcia Companies and the management company that eventually bought out Garcia, Revolution Cannabis, control over operations and profits.
Wright and Landers even suggest that their signatures were forged on the dispensary company’s operating agreement.
In the case of both dispensaries, the Arkansas owners claim that the tax liability for each retailer has been passed on to them, even though they haven’t received any of the income.
Marijuana companies have especially high rates of taxable income because the drug remains illegal under federal law, so business expenses cannot be written off as with normal corporations.
The result, according to the lawsuits, has been hundreds of thousands in income tax liability for the plaintiffs, who never actually received the income being taxed.
The Pope County owners last year sold their stakes in the dispensary company for the amount of the tax liabilities they took on, according to court records.
Wright and Landers remain owners and argue that the business arrangement has put them in a position where they’re unable to sell.
“In fact, upon information and belief, the ‘end game’ of Defendants’ true clients, and the only possible outcome of the ‘no win’ structure into which Defendants placed Plaintiffs, was to put Plaintiffs so deep into tax debt from the ongoing Dispensary operations that they would have no choice but to ultimately freely give the Dispensary to the management company,” their lawsuit states.
Both suits demand a jury trial and ask for damages and attorneys fees.
