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Anti-cannabis coalition accuses N.Y. of 'money laundering'

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ALBANY — An anti-cannabis coalition has filed a federal lawsuit against New York and the state Office of Cannabis Management, challenging the legality of a $200 million Cannabis Social Equity Fund that was established to help open more marijuana retail shops.

It’s the second lawsuit that the Cannabis Impact Prevention Coalition has filed challenging New York’s legalized marijuana market. In June, the coalition filed a case in state Supreme Court in Albany that seeks to overturn the 2021 law that legalized marijuana. The civil complaint compares the state’s assertions about the industry, including its prescribed medical uses, to tobacco companies that made fraudulent claims about their products.

In the more recent case filed in U.S. District Court in Albany, the coalition likens the state’s marijuana shops to drug trafficking operations and notes the Dormitory Authority of the State of New York, which is overseeing the equity fund and the financing and siting of dozens of retail shops, is essentially facilitating the opening of mariujana outlets that “remain subject to federal prosecution for violating the federal Controlled Substance Act.”

“It is unlawful to knowingly open, lease, rent, maintain, or use property for the manufacturing, storing, or distribution of controlled substances,” the lawsuit states. “DASNY normally finances, designs, and builds health and education infrastructure. Ironically, DASNY would instead become the biggest marijuana trafficking landlord in New York.”

The lawsuit is among numerous court cases that have challenged the legality and constitutionality of the state’s legalized marijuana marketplace, including the licensing and “social equity” funding systems that have prioritized individuals with past marijuana convictions.

The social equity fund plan was established last year but had been months behind its deadlines and at one point appeared to be falling apart.

But in July, a Chicago firm pledged to invest up to $150 million in the fund, breathing life into the rollout of an industry that has been plagued with delays and setbacks. State officials said the investment by Chicago Atlantic Admin LLC will augment $50 million in state funding to help finance “turnkey” retail shops that are being set up for individuals with past marijuana convictions. The state has issued more than 170 “conditional adult-use retail dispensary” licenses, or “CAURDs,” from the 300 that are allocated. But only 16 retail shops have opened across New York, far short of the 100 or so that state officials had hoped would open by this summer.

The fund is intended to be used to build the retail shops that are being offered to licensees who will sublease them with what state officials have said will be low-interest loans. The build-out of those shops has been handled by the Dormitory Authority, which has faced fierce criticism from industry stakeholders, including for previously withholding information from licensees about the costs associated with the turnkey shops.

Social Equity Impact Ventures, which was selected to be the fund’s partner more than 15 months ago, missed its Sept. 1 target to secure the $150 million investment without publicly announcing any change in its timeline.

It’s unclear whether the legal theory outlined in the coalition’s federal lawsuit will survive judicial scrutiny. The group contends federal statutes that prohibit marijuana use or trafficking remain in place — an assertion being made as 23 states, two U.S. territories and the District of Columbia have legalized marijuana consumption and possession for those 21 and older. The lawsuit, which names Gov. Kathy Hochul, various top Office of Cannabis Management officials and state tax Commissioner Amanda Hiller as defendants, claims they “are attempting to orchestrate a marijuana trafficking operation sponsored by the state of New York utilizing taxpayer funds and public employees and resources.”

“Their blatant disregard of every major objective embodied in federal controlled substances law directly conflicts with, and otherwise stands as an obstacle to, Congress’s mandate that production, possession and distribution of Schedule I drugs, including marijuana, be prohibited,” the lawsuit continues. “Congress has repeatedly refused to repeal or amend the federal Controlled Substances Act that makes marijuana illegal.”

Federal statutes outlaw financial transactions that are made in furtherance of drug trafficking; the coalition’s lawsuit notes that the U.S. Justice Department of Justice is continuing to investigate and prosecute marijuana offenses. Last year, a federal court in Florida ruled that individuals who use prescribed medical marijuana products cannot legally possess firearms due to what the Justice Department argued are physical and mental impairments caused by the drug.

“The taxes that the state collects from marijuana sales are the proceeds of marijuana trafficking,” the coalition’s lawsuit states. “The fact that the state collects these proceeds as taxes does not magically cleanse them of their illegality.” Dave Evans, a New Jersey attorney who serves as the coalition's spokesman, noted that the funding they receive to support their litigation comes from individual donors and that no donations are taken from corporations or pharmaceutical companies.

Reuben R. McDaniel, a former investment banker who has been president and chief executive officer of DASNY since 2019, recently told members of a new Public Policy Committee established in connection with the rollout that they have been pursuing many prime real estate properties for the shops, especially in New York City, to give the operators locations where they would have high levels of foot traffic.

The state’s $50 million allocation in the equity fund is expected to be funded by revenues from the cannabis industry.

Chicago Atlantic’s flagship investment platform is the publicly traded Chicago Atlantic Real Estate Finance, Inc., which the governor’s office described as “a mortgage real estate investment trust utilizing significant real estate, credit and cannabis expertise to originate senior secured loans primarily to state-licensed cannabis operators in limited-license jurisdictions in the United States.” “Social equity is the cornerstone of New York’s cannabis industry, and here we aim to pair progressive licensing with progressive and innovative capital solutions,” Chicago Atlantic founding partner John Mazarakis and Managing Director Peter Sack said in a statement. “The success of New York’s social equity initiatives and its (conditional) licensees will benefit all industry participants and further support the development of the legal cannabis industry nationwide.” The Dormitory Authority and cannabis officials also have proposed making low-interest loans of up to $100,000 quickly available to retail license holders to help them begin the process of securing and opening storefronts. In addition, the Dormitory Authority proposed an online tracking tool that would help retail licensees select locations that would not be in close proximity to other stores.

The earlier lawsuit filed by the coalition in state Supreme Court asserts that marijuana consumption, sale and possession remains illegal under federal law and that the state Legislature usurped Congress when it passed the Marijuana Regulation and Taxation Act in 2021, legalizing marijuana for those 21 and older and setting up a framework to rollout a retail industry that includes growers, processors and licensed shops.

The groups in that case cite information they contend shows that marijuana consumption is harmful and that claims made about its medicinal benefits are unfounded and dangerous. “False advertising may mislead vulnerable patients and the public,” the complaint states. “'Medical' use may inadvertently result in addiction, increased risk of psychosis, mental or psychosocial impairment, lung damage when smoked, and complications for unborn children when used during pregnancy. The presence of 'medical marijuana' dispensaries may increase access to recreational marijuana for minors.” The state has faced a wave of litigation over its legalization of marijuana. Last week, a state Supreme Court justice reversed an earlier order that had exempted more than two dozen retail cannabis store applicants from an injunction that has frozen the program pending the outcome of litigation challenging the constitutionality of New York’s licensing processes.

The injunction was issued last month in a case in which state Supreme Court Justice Kevin R. Bryant found that marijuana regulators had “failed to follow the clear language of the applicable legislation” that legalized cannabis when they veered from the plain language of the 2021 statute and created a program to award conditional retail licenses exclusively to applicants with past marijuana convictions.


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