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PharmaCann To Close Denver Grow Facility, Cut 132 Jobs

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Ian Philip Miller / Getty Images 135 WITH 81 POSTERS PARTICIPATING SHARE ON FACEBOOK SHARE ON TWITTER On March 9, 2020, a German IT consultant named Ruben Weigand had a layover in Los Angeles as he traveled from Switzerland to Costa Rica. He never made it to his destination because US authorities arrested him as he was changing planes. The feds say Weigand and a co-conspirator, Hamid "Ray" Akhavan, were the masterminds behind a multimillion-dollar bank-fraud scheme. The supposed fraud? Tricking US banks into processing more than $100 million in marijuana transactions that went contrary to the banks' rules. According to a March indictment, the pair disguised marijuana transactions as purchases of dog toys, carbonated drinks, diving gear, and other products unrelated to cannabis. Lawyers for the two men say this is ludicrous because the alleged bank fraud had no victims. The customers knew exactly what they were paying for. The banks involved suffered no losses—in fact, they made money from transaction fees. Moreover, marijuana is legal under state law in California and Oregon, where the transactions occurred. Marijuana remains illegal under federal law, but since 2014, a rule called the Rohrabacher Amendment has prohibited the feds from interfering with state medical marijuana laws. In a recent motion seeking dismissal of the case, Akhavan's lawyers portray the prosecution as an attempted end-run around this restriction. Uncertainty over the legal status of marijuana has created unique problems for companies seeking to capitalize on the growing semi-legal weed market in states like California. Because most mainstream payment networks won't process marijuana transactions, pot dispensaries are often forced to deal in cash—creating increased risk of loss to embezzlement or burglary. If the prosecution of Akhavan and Weigand succeeds, it could further stigmatize marijuana transactions, making access to the conventional financial system even more difficult for marijuana businesses. Defendants allegedly created fake offshore merchants The prosecution of Weigand and Akhavan revolves around what the indictment describes as an "Online Marijuana Marketplace Company." It's an open secret in the industry that this refers to Eaze, an online platform for on-demand marijuana purchases. Until 2019, one of Eaze's selling points was that customers could pay for their purchases using a credit card. (The company has switched to only supporting cash payments and told Ars in a statement that "this matter does not impact the current customer experience.") Eaze has long insisted that it wasn't directly responsible for credit card payments on its platform. Rather, Eaze connected customers with state-licensed dispensaries that delivered weed directly to customers—much as Uber connects riders to drivers. Eaze argued that these dispensaries—not Eaze itself—were responsible for handling payments. Critics dispute that, claiming that Eaze played an active role in setting up the necessary infrastructure. Regardless, the government says that Weigand and Akhavan were the ones who actually set up the systems that allowed Eaze customers to pay for pot with a credit card. At least two banks are involved in any credit card transaction. There's a bank that works with the customer (known as an "issuing bank" because it issues credit cards), while a second bank works with the seller (known as a "merchant bank"). So a marijuana business wanting to accept credit card payment must overcome two separate hurdles. First, it must find a merchant bank willing to do business with it despite the legal risks. Second, it must avoid having customers' banks block transactions. According to the indictment, Akhavan, Weigand, and unnamed co-conspirators got around issuing banks' rules by routing payments through fake merchants nominally based outside the United States. When an Eaze customer ordered marijuana, the email receipt would say something like "You will see a charge from 'absolutsoda.com.'" The absolutsoda.com website showed carbonated beverages that were theoretically for sale. But the feds say this was a sham; in reality, absolutsoda.com was just a front for a marijuana dispensary. The government says that Akhavan and Weigand—or possibly unnamed co-conspirators—set up a number of businesses like this with names like diverkingdom.com and happypuppybox.com, purporting to sell diving equipment or dog toys. These stores were nominally based outside the United States but had American phone numbers. The indictment suggests that at least some of the overseas merchant banks knew what was happening: they "charged high fees" due to the "high risk associated with" marijuana transactions, the feds say. The government considers the issuing banks—American banks that issue cards to customers—to be the victims of Weigand and Akhavan's fraud. Phony merchant names and other metadata allegedly tricked these banks into approving payments they would not have approved if they had accurate information. A fraud with no victims? Lawyers for Akhavan and Weigand argue that there was simply no fraud here. "This appears to be the first indictment for economic fraud that lacks any economic victim—whether potential, actual, or intended," Akhavan's lawyers wrote in their June 26 motion to dismiss the case. In a classic case of bank fraud, someone uses deception to get money that rightfully belongs to someone else. Here, by contrast, the source of the funds—the customer—was an entirely willing participant. The supposed victim—the bank—was a mere conduit for the funds and didn't lose a penny. The fact that a bank might have preferred not to process a payment doesn't mean it got defrauded, the defendants argue. One way that Akhavan and Weigand allegedly misled banks was by using the wrong merchant category codes. These are four-digit codes that signal the type of business submitting a charge. They include categories for everything from commercial footwear to bakeries to electrical contractors. According to federal prosecutors, the defendants "directed others to apply incorrect MCCs" to the marijuana transactions, using obviously wrong categories such as "stenographic services, music stores/pianos, and cosmetic stores." Notably, there's no merchant category code specifically for marijuana. That's not necessarily because marijuana is illegal. Rather, merchant categories are broader than individual products. For example, there is a category for drug stores and pharmacies but not individual categories for aspirin or insulin. In their motion to dismiss the case, Akhavan's lawyers focused on this merchant category-code issue. Because there's no MCC for marijuana, they argued, the banks couldn't have used the code to automatically block marijuana purchases. In legal jargon, the misleading MCC's weren't material to the alleged fraud, since the transactions would have been approved regardless of what MCCs were used. Bank fraud doesn’t require harm to a bank But Julie Hill—a legal scholar at the University of Alabama and one of the nation's foremost experts on the law of cannabis markets—is skeptical of these arguments. In a phone interview with Ars, she pointed out that providing banking services to marijuana businesses requires extra legal work. To minimize the risk of eventual federal prosecution, banks have to steer clear of customers who could raise red flags for federal authorities. That includes making sure that none of the proceeds wind up financing drug cartels or terrorists and that sales don't occur in states where marijuana is illegal. Serving marijuana-related customers is "quite costly for the banks," Hill said. Banks are required to file "suspicious activity reports" for payments involving illegal drugs, including marijuana. Hill says that banks that offer accounts to marijuana businesses charge thousands of dollars a month for the service. So while Weigand and Akhavan didn't take money directly from banks, their antics may have created unwelcome legal risks and imposed unwanted legal costs for these banks. Moreover, Hill pointed out, "the bank fraud statute doesn't require that there be harm to a bank." She draws an analogy to a hypothetical mortgage fraud case in which someone obtains a mortgage by submitting false information about their income or other important details. "They could be prosecuted for bank fraud even if they fully paid off their mortgage," she said. "All that you have to show is that you made these false statements in order to get the bank to do something." In a late June phone interview, I pressed one of Akhavan's lawyers, Ira Rothken, about this issue: if the defendants weren't trying to mislead banks, why did they go to the trouble of creating fake merchants, complete with fake names, fake websites, and fake merchant category codes? Rothken didn't have a good answer. Akhavan didn't personally set up the fake websites, he said. "Right now, we're still investigating who is responsible," he added. Marijuana law is broken The larger problem, of course, is that federal policymakers have failed to craft a coherent regulatory system for cannabis. Some states have chosen to legalize cannabis under state law—either for medical purposes or in general. But states can't change federal law, which continues to classify marijuana in the same way as other illicit drugs. Rather than either continuing to enforce the federal prohibition on marijuana or repealing it outright, federal policymakers have placed marijuana in a legal twilight zone. The Rohrabacher Amendment gives people in the emerging cannabis economy confidence that they won't be prosecuted in the short run. But the amendment has to be renewed every year, and it only halts prosecutions—it doesn't grant anyone amnesty. This means that if the law were to lapse, people who participated in California's marijuana economy could be prosecuted for things they did while the Rohrabacher Amendment was in effect. Unsurprisingly, many banks and other established institutions aren't willing to take that kind of risk. Of course, there's plenty of demand for marijuana; someone is going to fill that demand, especially if there's no immediate danger of prosecution. But the lack of legal clarity at the federal level makes everything more complex, expensive, and legally risky than it needs to be. If marijuana is going to be legal in states like California—and many Americans believe it should be—then customers should have the option to buy their weed using conventional financial networks. Akhavan and Weigan were trying to help marijuana businesses create a better experience for their customers—something that's considered laudable in any other industry. But federal law may have made it effectively impossible to do it for marijuana without breaking the law. And even if the federal government has a solid legal case, it's worth asking whether the prosecution is a good use of federal resources. There's reason to believe that Attorney General William Barr, the top US law enforcement officer, is a strong opponent of the marijuana industry. One federal prosecutor testified last month that Barr ordered what he described as "politically motivated" investigations of several relatively small mergers involving marijuana businesses.

PharmaCann Inc. filed a letter to the Colorado labor officials Friday

PharmaCann Inc. is laying off 132 employees from a North Denver marijuana grow facility this spring, six months after the business was acquired by an expanding Minneapolis cannabis company.

The company filed a letter to the Colorado labor officials Friday saying the business will close its 5131 Franklin St. site on May 20 and cut the 132 positions there.

Late last year, PharmaCann Inc.’s assets in Colorado were acquired by a Minneapolis-based company, Vireo Health Inc., in an all-stock transaction. Vireo valued the shares used in the deal at $49 million.

Vireo has grown to have 41 active Colorado dispensaries, the company says.

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