Bloomberg News

U.S. Takes Aim at California’s $1 Billion Marijuana Dispensaries

October 08, 2011

Oct. 8 (Bloomberg) -- Federal prosecutors say they’re using property seizures and criminal charges to crack down on California’s commercial medical-marijuana dispensaries, threatening a billion-dollar industry.

The top U.S. prosecutors in California said they’re responding to “explosive” growth in the state’s marijuana trade, which feeds national distribution by people with criminal backgrounds. The industry corrupted the intent of a 1996 referendum that made California the first state to permit marijuana use for medical purposes, the U.S. Attorneys in Los Angeles, Sacramento, San Diego and San Francisco said yesterday.

About 400,000 Californians use pot on a daily basis, according to the Board of Equalization, the state’s tax administrator. The clinics have annual revenue of as much as $1.3 billion and produce sales taxes of as much as $105 million, said Anita Gore, a spokeswoman.

“While California law permits collective cultivation of marijuana in limited circumstances, it does not allow commercial distribution through the store-front model we see across California,” Andre Birotte, the U.S. Attorney in Los Angeles, said at a press conference in Sacramento.

Last year, when California voters were asked to approve a ballot measure to legalize marijuana for personal use, U.S. Attorney General Eric Holder threatened to “vigorously” prosecute possession and distribution if the referendum won.

The proposition failed even in Humboldt, Trinity and Mendocino counties in northern California, identified in a 2010 Rand Corp. report as the center of the state’s pot production.

Sixteen states and the District of Columbia have legalized its use, according to the National Organization for Reform of Marijuana Laws.

‘Legal Remedies’

Rhode Island U.S. Attorney Peter Neronha warned of possible “civil and criminal legal remedies” against growers and dispensary operators as well as “property owners, landlords and financiers” in an April letter to Governor Lincoln Chafee, who was considering issuing licenses to three medical-marijuana dispensaries.

Chafee cited the warnings when he announced he wouldn’t proceed with the licensing in a Sept. 29 statement.

Prosecutors yesterday said the crackdown involves civil forfeiture lawsuits against properties allegedly used in drug trafficking, letters of warning to clinic operators and landlords, and criminal indictments that charge six people with marijuana trafficking in Southern California.

Lynnette Shaw, owner of Marin Alliance for Medical Marijuana, a dispensary north of San Francisco she claims is the oldest licensed in the U.S., said her landlord received a letter from federal prosecutors on Sept. 29.

‘Very Ominous’

“It was very ominous,” Shaw said in a telephone interview Oct. 6. “It informed him there was medical-marijuana dispensing on his site, and that he had 45 days to evict us, or possibly face 40 years in jail, forfeiture of the property and any money we had given him.”

In Los Angeles alone, there were 638 dispensaries last year before a city restriction forced many to close, according to a Sept. 21 Rand study. The state health department has issued medical-marijuana identification cards to almost 57,000 people since 2004, though the cards aren’t required in order to buy pot.

“Large, commercial operations cloak their money-making activities in the guise of helping sick people when in fact they are helping themselves,” said Benjamin Wagner, the U.S. attorney in Sacramento. “Our interest is in enforcing federal criminal law, not prosecuting seriously sick people and those who are caring for them.”

Trade Show

Dispensaries regularly advertise in newspapers such as L.A. Weekly. Hempcon, a trade show for the marijuana industry, is scheduled for the San Jose Convention Center in mid-November, with seminars on hydroponics and defending crops against pests.

Marijuana sales remain illegal under federal law and many dispensaries in California violate even state rules that forbid making money from distribution, according to Mark Kleiman, a professor of public policy at the University of California, Los Angeles.

“Most are private, for-profit entities,” he said in a telephone interview.

Cities including Los Angeles and Berkeley have taken steps to license and regulate dispensaries, although those efforts may be endangered by a state appeals court ruling Oct. 4.

City Regulation

The court decided that Long Beach couldn’t proceed with a dispensary-permitting plan because cities “are preempted by federal law from doing anything that would facilitate the distribution of marijuana,” according to Michael Mais, assistant city attorney.

The City Council will discuss the ruling next week, Mais said, and may decide to appeal to the state Supreme Court. Permitting is on hold, he said, as is a similar registration effort in Los Angeles, according to Frank Mateljan, a spokesman for City Attorney Carmen Trutanich.

Kris Hermes, a spokesman for Oakland-based Americans for Safe Access, which advocates policies to make it easier for patients to get pot, said closing dispensaries may boost crime.

“We’re quite alarmed by this renewed federal effort to crack down on facilities that in most cases, are either licensed, or at the very least, complying with local and state laws,” Hermes said in a telephone interview. “You’re talking about hundreds of thousands of patients being without medication, with really nowhere to turn except the illicit market.”

--With assistance from Edvard Pettersson in Los Angeles and Ryan Flinn in San Francisco. Editors: Pete Young, Ted Bunker

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Mark Tannenbaum at mtannen@bloomberg.net


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