Industry warns Sisolak’s weed crackdown may be counterproductive

Gov. Steve Sisolak, who helped nurture Nevada’s budding cannabis boom, is backing away from the industry and offering little in the way of explanation for a crackdown some fear will stifle growth.  

Sisolak initiated a crackdown last month following news that foreign interests attempted to buy their way into the industry via campaign contributions to Sisolak’s 2018 foe, Republican Adam Laxalt, and unsuccessful GOP Attorney General candidate Wes Duncan.  

“Yesterday’s indictments and their connections to Nevada, in combination with ongoing issues in Nevada’s legalized marijuana industry – such as illegal sales to minors, serious allegations of manipulated lab results, and a licensing process mired in litigation – have led the Governor to expedite regulatory and enforcement measures,” Sisolak’s spokesman said in a statement at the time. 

Reflection on industry?

How do “the indictments and their connections to Nevada” reflect poorly on the state’s fledgling cannabis industry?  

“They don’t,” says Clark County Commissioner Tick Segerblom, the public official most responsible for the legalization of cannabis in Nevada. “There’s a Deputy Attorney General within the Taxation Department. Even if they (the foreign nationals) had the money and got someone to listen to them, to apply for a license you have to have a license (to buy.)”

Sisolak refused to be interviewed by the Current and declined to respond to a list of questions.  Instead, he issued a one-sentence statement.  

“To continue ignoring the problems would undermine the industry’s vast potential in our state and jeopardize the public health and safety of Nevadans,” Sisolak said.  

Attorney Michael Cristalli, whose firm represents marijuana license holders, says the governor’s criticism of the industry following the indictment is misplaced.

“There’s always room for improvement.  But the state went into this without enough resources, without the checks and balances to make this a fair process,” Cristalli says.

The governor issued a statement last month announcing the formation of a task force to root out “ongoing issues” including allegations of corruption and criminal activity.

“What are the issues?” Cristalli asks.  “The Department of Taxation was unprepared for the application process.  That was the problem, not the way the regulations are written.”

State health officials originally oversaw the marijuana programs. Oversight was later transferred to the Department of Taxation.  Regulation of the industry is slated to be shifted for the third time in five years to Sisolak’s creation, the Cannabis Compliance Board.

Cristalli says the governor’s edict last month failed to address what insiders consider the primary threat to the legal cannabis industry — the black market, which Cristalli says generates 70 percent of cannabis sales in Nevada.

Cristalli says local, state and federal law enforcement have “become indifferent to the black market” which he describes as boldly advertising on billboards, targeting tourists and even selling on-line, while licensees struggle to conform with regulations, pay taxes and deliver a safe product.

“The governor, the District Attorney, local and federal officials need to take a look at those operations,” says Cristalli.

“It is in the best interests of the community and legal cannabis market participants to streamline regulatory processes and increase funding for legal enforcement,” Tisha Black, president of the Nevada Dispensary Association and a regulatory attorney for the cannabis industry, told the Current. 

Sisolak’s moratorium on license transfers could open the door wider to the black market in Nevada, if Canada’s experience is illustrative.

The Motley Fool reported earlier this year that a study from Scotiabank indicates a backlog of applications and other logistical issues are expected to give the black market control of 71 percent of all Canadian cannabis sales in 2019.  That’s expected to drop to 37 percent by 2020, once regulatory issues are resolved.

The moratorium could also dissuade investment in legal weed, Cristalli says.  “You have $290 million, $275 million deals being held up,” he says.[

“These are serious companies, with boards, directors and shareholders,” he says. “These are serious deals. Now everything is shut down.”

“Mired in litigation”

Sisolak’s claim that “a licensing process mired in litigation,”  warrants expedited and increased regulatory scrutiny comes after Sisolak, as Clark County Commission chair, spearheaded the county’s 2014 licensing process for medical marijuana establishments, which fueled litigation.  

Unsuccessful applicants cried foul and filed lawsuits when the Commission granted special-use permits to applicants who had yet to be vetted by the state and rejected some approved by the state.   

The litigants alleged the county attempted to force the state to approve the applicants who held county permits.  Judge Kathleen Delaney ruled that state lawmakers did not intend for local authorities to “dictate to the Division whom it may consider for registration.”   

The county acquiesced by granting eight additional licenses to applicants whose applications had been approved by the state. 

Sisolak has campaign contributors on both sides of the litigation, filed by unsuccessful dispensary applicants who allege state regulators are inept, at best, and engaged in corruption, at worst.

Illegal sales to minors

Sisolak’s allegation of illegal sales to minors appears to stem from testimony elicited in a recent lawsuit in which some dispensary applicants allege they were denied licenses in 2018.  

A dispensary that allowed a minor using a fake driver’s license to buy cannabis self-reported the mistake to authorities, in accordance with regulations.  

“You self-report, tell the state what happened, and make sure it’s not going to happen again,” says Segerblom. “The state comes back and inspects.”

Sisolak, by singling out the incident, could stifle self-reporting by other licensees, industry insiders say.

“If it’s an honest mistake, you want to encourage self-reporting,” says Segerblom. “It seems overly extreme and self-defeating to make an issue of a minor violation because it’s going to discourage self-reporting.” 

Manipulated lab results?  

Sisolak’s allegation that cannabis labs may be manipulating results casts doubt on one of the most popular reasons for users to eschew the cheaper black market in favor of legal, tested cannabis.  

While some discrepancies in test results have been attributed to fraud and collusion, disparity in equipment is more often the cause of inconsistent results, say the experts.  

Cannabis labs serve two masters — their clients and the public, raising questions about whether independent testing labs can be truly independent.  

“They are under pressure to provide us results we feel good about and they also function as a gatekeeper for us,” says Alex Ficken of Matrix, a cultivation and production facility.    

Revenue in the cannabis testing industry is expected to reach $850 million nationally by 2020, according to Greenwave Advisors.  

But the pool of clients for cannabis testing labs is limited. 

“They’re running a business and their primary goal should be public health and safety, so they don’t want to fudge results. At the same time, if they continually fail their clients, they won’t have any more,” Ficken says.  

The cannabis industry lacks consistent standards at the national or international level.  

“No one’s ever done this. We never know what exactly they are going to look at,” Ficken says of state inspectors.  “Fortunately, we are in Nevada which has a long history of privileged licensing. They know what they want — as close as they can get to medical-grade cannabis from a cleanliness and control aspect.”  

“I want people to have confidence that what they buy from this facility has been tested and approved and we take a lot of pride that that’s what happens,” says Ficken. 

Sisolak’s crackdown was preceded by state regulatory actions against MM Labs, which was under investigation for failing to detect offending levels of yeast and mold.  The state also announced it would begin investigating the integrity of THC levels reported by labs. While the governor has alleged manipulated lab results, the Nevada Department of Taxation, which regulates cannabis licensees, has not.  

“Everyone gets concerned when it gets over 30 percent (THC levels),” says James Whitley of NVCann Labs. “So they took a sample up to Carson City and it was confirmed.”  

Whitley admits the system, as configured, is largely dependent on the honor system.  

“When we go to pick up the sample from the grower, we are trusting they leave the same batch of product in there.” says Whitley, of the potential in the chain of custody for a bait and switch.  “It’s up to the grower’s integrity to ensure the batch that’s tested is the same product that’s sold under that label.” 

A software system called Metrc is supposed to guard against strains of lesser cannabis being passed off for another strain. 

“It requires that product be accompanied from seed all the way to sale by a unique identifier that is tied to the source,” says Eden Larson, public information officer for the Nevada Department of Taxation. “It tracks the chain of custody of the product. This ensures that product which did not originate with the system, does not enter the system.”

The state has employed the use of secret shoppers, says Whitley, who compare the product they purchase with the lab testing data provided to the state.  

In 2018, the state conducted 25 inspections of cannabis labs.  As of September, inspectors visited nine labs so far in 2019, according to Larson.   

The Marijuana Enforcement Division has three inspectors charged with focusing on laboratory inspections, according to Larson, who says their backgrounds include “medical laboratory management and supervision, pathology lab quality assurance, multiple years of experience in environmental, wastewater, arson and controlled substances laboratories.”

Wagging the dog?

The governor’s crackdown preceded by a week the state’s suspension of the cultivation license for Helios, a grow located in Sparks.

Neither the state nor the licensee will say whether the timing is related to Sisolak’s crackdown. 

“I can’t comment on what happened until there’s a resolution,” says Helios owner Kiera Sears.  “I don’t want to jeopardize anything.”