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MARIJUANA MOMENT
JUSTICE DEPARTMENT IS INVESTIGATING MARIJUANA-RELATED BUSINESSES OVER COVID
RELIEF LOANS, INDUSTRY SOURCES SAY
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POLITICS
JUSTICE DEPARTMENT IS INVESTIGATING MARIJUANA-RELATED BUSINESSES OVER COVID
RELIEF LOANS, INDUSTRY SOURCES SAY
Published
4 seconds ago
on
April 12, 2024
By
Kyle Jaeger
The Justice Department is investigating marijuana-related businesses that
allegedly took coronavirus relief loans in violation of federal rules, with
third-party actors leveraging a whistleblower policy that allows them to take a
portion of settlement money if they report on the cannabis companies.
Multiple sources in the cannabis legal space confirmed the trend with Marijuana
Moment this week, though they declined to identify active clients involved in
the litigation. This evidently involves both direct cannabis businesses that are
involved in the production or sale of marijuana as well as ancillary companies
that are not plant-touching.
One public case that DOJ disclosed last month involved a holding company of the
Bob Marley namesake cannabis company Marley Natural.
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in 2024. Veuer’s Tony Spitz has the details.
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A company that specializes in facilitating whistleblower complaints for alleged
Paycheck Protection Program (PPP) violations, Sidesolve, successfully reported
the cannabis business Docklight Brands to DOJ for receiving the funds in
contravention of a federal Small Business Administration (SBA) policy
prohibiting companies from taking the loans if they work with cannabis or
indirectly service the industry.
“Because federal law prohibits the distribution and sale of marijuana, financial
transactions involving a marijuana-related business would generally involve
funds derived from illegal activity,” SBA said in 2020. “Therefore, businesses
that derive revenue from marijuana-related activities or that support the
end-use of marijuana may be ineligible for SBA financial assistance.”
Sources who requested anonymity say there are up to 100 active cases, with the
Justice Department sending letters notifying businesses that are directly or
indirectly associated with the state-legal marijuana industry that they are
being reviewed for possible violations under the False Claims Act (FCA).
Under DOJ policy, individuals who report on PPP loan violations under FCA may be
entitled to 15 percent of the proceeds from any settlement agreement. In the
Sidesolve-Docklight case that was submitted to the U.S. Attorney’s Office for
the Western District of Washington, that meant Sidesolve will receive $148,416
of the settlement funds, DOJ said in a press release last month.
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“Those seeking vital assistance from SBA’s pandemic response programs must
comply with the requirements,” SBA OIG’s Western Region Special Agent in Charge
Weston King said, adding that the “settlement sends a strong message of
accountability.”
But the situation is more widespread, industry insiders and legal experts
familiar with the trend say. And notably, it is affecting companies that are not
specifically involved in the production or distribution of cannabis itself; any
business that took the PPP loans that works with the state-legal marijuana
market (e.g. accountants and consultants) could be impacted.
To be clear, it doesn’t seem the DOJ is proactively investigating these cases. A
source in one federal prosecutor’s office told Marijuana Moment that they are
aware that marijuana-related businesses seem to be uniquely targeted by
third-party “relators” who could be using public databases to identify loan
recipients who are adjacently involved in the cannabis sectors in order to
receive the 15 percent payout.
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The Docklight case is a rare example of a FCA settlement related to marijuana
that’s been made public. Sources say this trend is relatively new, and legal
documents are generally sealed until the cases are finalized, which could take
months to years.
But as the Justice Department ramps up its efforts to reclaim fraudulent PPP
loan distributions, the cannabis industry is apparently in the sights of
companies hoping to cash in on possible settlement agreements they initiate.
“We looked at a number of different theories” about how to litigate under the
SBA rules, Jason Marcus, a partner at Bracker & Marcus LLC that represented
Sidesolve, told Marijuana Moment. “And one of the theories that came pretty
early was marijuana companies. So Docklight was really kind of our test case.”
“We did our research,” he said. “We found where the SBA said, ‘This is not
allowed. Whether you’re a direct or indirect marijuana related business, you’re
not supposed to be receiving PPP funds.'”
Marcus said that his sense of the scope of potential liability among ancillary
cannabis businesses is “pretty huge, frankly.” There are some more obvious
examples of federal violations—such as cannabis dispensaries receiving the
funds—but the SBA policy itself is broad enough to cover virtually anyone who
received the loans and who derived some income from cannabis businesses.
He advised that any direct or indirect cannabis businesses that might be
impacted self-report to DOJ to potentially avoid multiplied penalties. But the
blood is in the water, and Marcus suspects his firm’s successful litigation and
DOJ’s public disclosure of the case could be influencing other PPP data-miners
to follow suit.
It’s “unusual” to have outside parties report businesses over alleged FCA
violations, he said. “Not unheard of, but it’s unusual.”
The difference here is that there are public databases of PPP loans recipients
available to potential litigants interested in assisting DOJ and possibly
winning a 15 percent settlement cut. And cannabis-adjacent businesses are
relatively low-hanging fruit.
The exact number of cannabis businesses that DOJ is investigating or prosecuting
is unclear. But numerous sources confirmed at least one detail: There is a
recent surge in letters from federal prosecutors to cannabis-related businesses
about active investigations related to the PPP loans.
Aaron Smith, executive director of the National Cannabis Industry Association
(NCIA), told Marijuana Moment that he’s “heard from a handful of our ancillary
business members that have been contacted by the DOJ about their PPP loan.”
“These businesses do not handle cannabis directly nor violate any state or
federal laws and should absolutely have access to the Paycheck Protection
Program, just as any other legal business,” he said.
Hilary Bricken, a partner at the firm Husch Blackwell, told Marijuana Moment
that this “could set off a domino effect of reporting ancillary companies to the
feds where the majority or all of the revenue is derived from the cannabis
industry.
She added that this is “another technical nightmare” caused by the Schedule I
status of cannabis under the Controlled Substances Act (CSA).
The Justice Department and offices of individual U.S. attorneys did not respond
to multiple requests for comment.
As Bricken noted, the issue at hand underscores yet another policy complication
resulting from the federal-state marijuana disconnect. At the same time that the
Drug Enforcement Administration (DEA) under DOJ is exploring whether to
reschedule cannabis based on a U.S. Department of Health and Human Services
(HHS) recommendation, federal prosecutors in certain cases are evidently willing
to prosecute the industry over alleged FCA PPP loan violations that,
theoretically, might not apply if the recommended Schedule III reclassification
is ultimately accepted.
> FDA Head Says There’s ‘No Reason For DEA To Delay’ Rescheduling Marijuana
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