Nevada has a long history of shepherding previously illegal industries through the growing pains of legitimacy, so it made sense when Gov. Steve Sisolak patterned oversight of cannabis on the regulation of gambling.
But Sisolak’s creation, the Cannabis Compliance Board, the third agency to regulate the industry in as many years, is poised in its infancy to become as pliant as its predecessors, critics contend.
The regulatory shift of Nevada’s marijuana industry from the Department of Taxation to the CCB, which assumed control July 1, was supposed to signify a reset for the state’s fledgling but troubled industry. Instead, the CCB’s improvised role in a slapdash effort to partially settle litigation that has pitted players in the cannabis industry against the state and each other, could compromise Sisolak’s stated goal of making Nevada’s regulatory scheme the “gold standard” of the nation.
The CCB, “to be modeled after the Nevada Gaming Control Board, which oversees Nevada’s highly-respected and well-regulated successful gaming industry,” according to Sisolak, is expected Friday to rubber stamp a settlement that, according to industry insiders, violates the voter-approved constitutional amendment legalizing marijuana and compromises the new board’s independence.
Former Assemblyman David Goldwater, an owner of Inyo Fine Cannabis, a plaintiff who was not extended an offer to take part in the settlement, likens the agreement to gaming regulators awarding a license to an unqualified operator just to dispense of a lawsuit.
“This would be outrageous. It would (hopefully) never happen,” Goldwater wrote in public comment to the CCB. “If it is outrageous and would not happen in gaming regulation, then it should be outrageous and never happen in cannabis regulation.”
Attorney Amy Sugden, who alleges her client was shut out of the settlement, says the CCB’s endorsement absent a hearing “evidences the lack of true independence that was much needed in this industry and that Governor Sisolak wanted.”
“The settlement agreement requires the state to commit to things that are factually false and/or violate state law,” says Goldwater, adding a settlement that gives an advantage to larger players is “a threat to the smaller companies, a threat to the cannabis market and to consumers as a whole.”
“The basis of the settlement is to reallocate the licenses obtained unjustly to some (not all) plaintiffs based not on merit, but as part of a litigation strategy,” Goldwater wrote to the Nevada Tax Commission. “It is akin to allowing bank robbers get out of their crime by paying a fine with the proceeds from the bank robbery.”
“This proposed settlement allows regulated parties to pick and choose who will benefit from the exchanges of licenses,” attorneys Dominic Gentile, Ross Miller and William Maupin, who represent a number of plaintiffs, wrote in public comment filed with the CCB, which is meeting remotely because of COVID-19.
Maupin’s former colleague on the Nevada Supreme Court, Justice Michael Douglas, is the chair of the CCB. Former Nevada Gaming Control Board chair Dennis Neilander is a member.
Until last week, the CCB was not a player in the lawsuit, in which applicants allege they were unfairly shut out by the Department of Taxation in 2018 when it granted more than 60 licenses to 17 applicants.
The Nevada Tax Commission, which oversees the DOT, was poised to approve the settlement last week until Commissioner George Kelesis pointed out the commission’s jurisdiction over the industry ended on July 1, when the CCB assumed control.
The Tax Commission voted to make its approval conditional on action from the CCB, which had already committed to upholding the provisions of the settlement.
In a letter to the Tax Commission, CCB Executive Director Tyler Klimas said the board has “reviewed the requirements set forth in the agreement, including those that bind the CCB, and are committed to executing those obligations stated therein.”
Klimas would not respond to questions about the propriety of injecting the CCB into the settlement process or whether he’s considered delaying approval of the settlement until the lawsuit has concluded.
Opponents say the settlement, which calls for the state to grant additional licenses, violates voter-approved caps laid out in the law and contravenes the merit-based nature of the state’s regulatory scheme.
“The law requires that applicants be evaluated based on financial, building and owner information. Applications are scored and ranked accordingly,” Taxation Director Melanie Young said in 2019, upon creation of the CCB. “There are no provisions in the law to issue licenses to low-scoring applicants. This structure has led to a strong cannabis industry in Nevada.”
But the settlement calls for applicants who won multiple licenses based on their scores to share the wealth with applicants who scored lower and received no licenses in the 2018 round.
“For example, in unincorporated Clark County, where the top 10 applicants were awarded a license in the original process, the 69th ranked application and the 14th ranked application are ‘awarded’ a license in this settlement,” Goldwater wrote in public comment to the CCB. “Further, in Henderson, where the top 6 applications were supposed to receive licenses, the 30th ranked application is ‘awarded’ a license in this settlement.”
“Nevada chose a merit based system. The settling plaintiffs are not selected on merit,” Goldwater said of those who will receive additional licenses if the settlement is approved.
Plaintiffs in the suit allege the 2018 licensing process was fraught with ineptitude, if not fraud, on the part of the Department of Taxation.
“Of prime importance is that regulators also provided discrete access to some applicants, thus giving them a significant competitive advantage over all of the plaintiffs in the lawsuits,” Gentile, Maupin and Miller wrote to the CCB.
Testimony in the lawsuit revealed Taxation official Jorge Pupo enjoyed dining out with attorney Amanda Connor, who represented a number of ultimately successful applicants.
Emails obtained by the Current indicate Connor’s clients received accommodations not afforded to other applicants.
When Essence (Integral Associates) and the Source (Nevada Organic Remedies) self-reported sales of cannabis to minors, the reports of the incidents, which could have been considered in an upcoming round of licensing, were purged from the state Department of Taxation’s log of violations at the request of then-Taxation official Pupo.
“Please remove the investigation SODs (Statements of Deficiencies) regarding self-reported incidents of sales to a minor from the following: Integral, Nevada Organic Remedies, Henderson Organic Remedies,” marijuana program administrator Karalin Cronkhite wrote on behalf of Pupo in an email.
“It turns out there are three separate incidents on three separate dates,” Chief Investigator Damon Hernadez responded to Cronkhite’s email regarding Essence dispensaries. “In addition it appears the manager lied about the number of incidents of sales to minors stating that there was only one when there were three.”
Essence, which applied for eight licenses, won all eight. The Source won seven of eight licenses for which it applied.
Nevada law prohibits licensees with four violations for selling to minors from applying for additional licenses. Compliance records were not among the scoring criteria considered by the state in granting the 2018 licenses.
“…at the behest of these applicants, their attorneys and/or agents, the DOT deliberately caused these disqualifying offenses to be sealed or suppressed,” Gentile, Maupin and Miller wrote to the CCB.
The settlement also requires the state to attest that it has received information from the settling plaintiffs to proceed with background checks of owners. Goldwater, Gentile, Miller and Maupin allege the state has not done so.
Future of regulation compromised?
“If we believe the 2018 process to be fair—I do not, but that is before Judge Gonzalez—then there is no reason for the random distribution of licenses in this proposed settlement,” Goldwater wrote in public comment filed with the CCB.
Brandon Wiegand of the Source says he feels the state’s ranking in 2018 was fair but says he’s willing to compromise in order to open additional locations and create jobs.
Critics of the settlement say it gives unsuccessful applicants an incentive to sue the state for satisfaction.
Nevada regulators have a long history of deferring action until the completion of related litigation, but there is no indication the CCB intends to delay approval of the partial settlement pending resolution of the trial, which is expected to conclude by mid-month.
“Let Judge (Elizabeth) Gonzalez decide the issue of fairness without a settlement that divides the plaintiffs with a payoff from ill-gotten gains,” Goldwater wrote to the Tax Commission.
Gentile, Maupin and Miller say the settlement renders the litigation “a simple discrete re-allocation of licenses to the detriment of non-parties to the accord. If the litigation continues and the TGIG plaintiffs are successful, it is possible that this settlement will be eviscerated.”