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The pot licensing scandal

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After a hearing that opened a cannabis of worms and a judge’s order that exposed a regulatory road paved with bad intentions, Nevada’s marijuana industry oversight has been unmasked as a morass of abject incompetence and potential corruption.

Judge Elizabeth Gonzalez’s 24-page order is akin to an invitation to the federal government to do the job Nevada has botched.

Whether an upcoming trial will make matters worse and encourage the U.S. attorney to start sniffing around (even more than he has been) and whether Gov. Steve Sisolak’s administration can follow through on its commitment to fix this mess and avert a scandal will soon become clear. But after I spent some time reading the judge’s order and transcripts of the weeks-long hearing, I discerned ample evidence to overturn the entire licensing process – even though some winners already have cashed in by selling to transnational corporations – and reams of fodder for unending lawsuits.

The judge believed she was constrained by the law in what she could do, approving an injunction only on the clear violation of the 2016 ballot question’s language on background checks. She gave what she called “great deference” to the state’s regulatory discretion.

But the Department of Taxation’s behavior in this process last year was, as Gonzalez pointed out in her “Findings of Fact,” so obviously “arbitrary and capricious” across such a wide swath of issues that the entire process is suspect. Changing rules with no logic. Hiring temps with no evidence they were trained or evaluated for quality assurance or quality control. A key employee who thought it was kosher to be wined and dined by applicants, some of whom intimated they might hire him later.

For now, the tax department is allowing the applicants subjected to full background checks a green light to proceed, but what the “Findings of Fact” and the transcripts show is a shocking systemic failure. At almost every turn, the tax folks, especially Deputy Executive Director Jorge Pupo, violated established norms, licensing regulations and the Constitution.

Other than that, it was a clean process.

To wit:

— The judge found that the tax department had behaved quite bizarrely with respect to a key part of the regulation stipulating what must be submitted: “The physical address where the proposed marijuana establishment will be located and the physical address of any co-owned or otherwise affiliated marijuana establishments.”

Yet some applicants were allowed to simply use a P.O. Box or a corporate address after the department arbitrarily deleted the requirement during the process. The judge pointed out how insane that is:

“By selectively eliminating the requirement to disclose an actual physical address for each and every proposed retail recreational marijuana establishment, the DoT limited the ability of the Temporary Employees to adequately assess graded criteria such as prohibited proximity to schools and certain other public facilities, impact on the community, security, building plans, and other material considerations prescribed by the Regulations.”

So one of the critical elements of state oversight – how these facilities will affect the surrounding areas – was thrown out. That is: “We approve you even though we have no idea where your facility will be or what impact it will have.”

Gonzalez, showing a gift for understatement, called it “evidence of conduct that is a serious issue.” She said it was especially egregious “given the lack of a robust investigative process for applicants (that) impedes an important public safety goal in (the pot legalization ballot question).”

If this stands, the entire burden falls on local governments to address this issue during the zoning process – a process we can rest assured has never, ever been impervious to political influences.

— Gonzalez also noted the regulations mandated that an application is “complete and in compliance.” But that, she wrote, did not occur: In “evaluating whether an application was ‘complete and in compliance,’ the DoT made no effort to verify owners, officers or board members.” Nor, the judge found, did the state make any effort to see whether the businesses were previously in compliance with state regulations.

So you say Vito Corleone is on your board, and he is in the olive oil business? Good with us.

— Gonzalez wrote that the licensing process “was impacted by personal relationships in decisions related to the requirements of the application and the ownership structures of competing applicants.”

Although she said such favoritism was “insufficient to void the process,” the evidence was damning.

At the outset of the process, the tax department sent out an email saying the PIO was the point of contact and warning applicants not to “personally contact the DoT staff.” It was supposed to mirror the state’s Request for Proposal process, which has a single point of contact.

But applicants and lawyers regularly contacted Pupo, who also was taken to dinners and lunches. What in God’s name is a state regulator doing going out for meals with people asking him for approval of an incredibly lucrative license?

At one point during the hearing, according to the transcript, Pupo said an attorney who represented multiple applicants, Amanda Connor, “kept bugging me” about the physical location requirement, which the department later scrapped.

The department also allowed applicants to slightly alter a corporate name – adding a city or street to the overall entity’s name – to apply for more than one license in a jurisdiction. This after a clear rule existed: “No applicant may be awarded more than one retail store license in a jurisdiction/locality unless there are less applicants than licenses allowed in the jurisdiction.”

Pupo acknowledged under questioning that he allowed companies to be seen as separate entities if the parent simply created sister companies and even if they used the same address in the application. This defies all logic.

— Gonzalez also essentially found that a diversity requirement was a sham: “The DOTs inclusion of the diversity category was implemented in a way that created a process which was partial and subject to manipulation by applicants.”

That is, cosmetic diversity for the sake of the application.

This is just some of the more outrageous stuff that came out during the court proceedings – for instance, there also was evidence of sales to minors, which could have been disqualifying but was not. 

Gonzalez, through her findings of fact and conclusions of law, clearly was stunned by the – what’s the phrase? – preponderance of evidence. The judge believed she did all that she could within her power and left the rest for the trial.

But it’s possible a trial may never happen if the case is settled, which would leave this in the governor’s hands to fix before it’s too late. Ultimately, even if more comes out during a trial, the governor will have to do…something.

Sisolak saw some of this coming, calling for more openness by the tax department and announcing a Cannabis Compliance Board earlier this year. He knows what former Gov. Grant Sawyer knew about gaming: If he doesn’t act, the feds will.

As one insider told me, “Regardless of whether prosecutions come of all this, one thing is for sure: We can no longer call ourselves the ‘Gold Standard’ of marijuana oversight. There are many great things about marijuana laws in Nevada and some things that still need to evolve.  Unfortunately, part of that evolution now includes a corrupted licensing process.”

So here’s my finding of fact: The Sisolak administration has very little time to show the Department of Justice that Nevada can regulate an industry ripe for corruption by operators with a lot of money and political influence.

Jon Ralston is the founder and editor of The Nevada Independent. He has been covering politics for more than 30 years. Contact him at [email protected]

Follow him on Twitter: @ralstonreports 

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