Weedmaps, We Have a Problem (And So Does the Rest of the Cannabis Industry)

Weedmaps, We Have a Problem (And So Does the Whole Cannabis Industry)

Weedmaps federal subpoena

How the Federal subpoena could have major implications for the cannabis industry

In case you missed this week’s Weed Talk News LIVE, we discussed the Weedmaps subpoena and how it could have long reaching implications for the cannabis industry going forward. The good news, the size and scope of this general “reach” of a subpoena will take at least 2 years for the Federal government to get through, and that was pre-COVID-19 timing. The bad news, it is broad, far-reaching, and encompasses over 40 companies and individuals. (Click the video bellow to watch the 13 minute show)

There has been a lot written on how Weedmaps got into this mess, maybe it was unavoidable at some point being the largest cannabis site in the world and mapping legal and illegal marijuana dealers for the world to call and go get their weed from, but the timing of the subpoena sure looks related to their rebuking of the California Cannabis Association and their request to remove unlicensed cannabis suppliers from their mapping and advertising platform. We wrote here that when Weedmaps decided to invoke their “internet platforms are not responsible for the content posted by users” defenses to the California Cannabis Association, they were taking a very big gamble. One, the defense was flimsy because they were taking massive amounts of money from those users for advertising and map placement, hence, not a traditional Facebook or Instagram type situation. Two, those users were selling a schedule 1 felony drug under Federal law. Three, the CCA could just walk down the hallway and up the ante and hand over all their legal work to the Federal prosecutors and say, “Here you go, have at them”.

Why is this such a big problem?

First, lets start with the obvious, the Federal government still considers and classifies cannabis as a schedule 1 felony offense drug according to the Controlled Substance Act, just like heroin and cocaine. Two, in almost all cases, Federal law trumps state law when push comes to shove.

Weedmaps

For Weedmaps, this is a life threating problem. There will be no Weedmaps IPO, which they have been desperately trying to get done for over 18 months now. The subpoena is very broad-based and asked for all paper and electronic records related to basically their whole business. Bank records, emails, texts, you name it. What if Weedmaps doesn’t comply? The Federal government can subpoena all the banks and financial institutions involved for the records and those companies will immediately give over all said records as to comply with Federal law. Google, Hotmail, Yahoo, server companies, yep, they will all get subpoenaed and all will give the records requested. Phone companies and service providers who handle unencrypted texts, yep, they will get one to if need be and turn over all communication for the government to review. Basically, the US government already has many of the records they are requesting or could get them easily, they are just seeing how honest and cooperative Weedmaps is going to be during the process.

The legal fees for this type of back-and-forth with the government can be astronomical. Federal defense attorney can run from $400 to $2,500 an hour, and Weedmaps will have a team of them to start, plus a few junior partners at whatever firm they use to handle the paperwork upload and file transfers to the government. The legal bill will most likely exceed $2 million if not more, and that is not even counting going to a trial, which this never will get to trail. The US government isn’t done yet, whatever finding they come up with on things such as cash payments, pre-paid cards, illegal transfers of assets such as cash, cars, houses, etc gets forwarded over to the IRS for another year or two of IRS audits. You can expect at least 20 people on that list to get IRS audits when the Federal government ends their investigation. There is also the decision at the end of the first investigation by the Federal government to decide if any criminal or civil penalties should be attached to Weedmaps and the others named in the subpoenas. If there are criminal acts, the Federal government can charge Weedmaps and the individuals with Federal criminal charges, if no criminal charges are filed, there can still be massive civil fines and settlements. Banks around the world get caught every year breaking US anti-money laundering charges and the Federal government or SEC fines them hundreds of millions of dollars and makes them revamp their KYC, or Know Your Client, rules. Generally, white collar crimes don’t face a criminal charge, hence we don’t see the CEO of Deutsche Bank or Barclays Bank going to jail in the US for his bank being caught moving money around for Iran or North Korea. They hit the company with a huge fine, and the C-suite apologizes and gets reshuffled.

Weedmaps could be looking at millions of dollars in legal fees, a staunch civil fine, possible criminal charges, and then it all gets turned over to the IRS to decide if their was income tax evasion through use of undeclared cash payments, pre-paid cards, giving of substantial gifts like cars or house, etc.

This problem will last 2 to 4 years and will only get worse with each billable hour for Weedmaps.

The Industry

We mentioned on the show that the elephant in the room is that Weedmaps, as well as the other players named on the subpoena, are all dealing in a schedule 1 felony drug. The Federal government makes no distinction between cannabis, cocaine, and heroin at this time, unfortunately. All the other companies and individuals named in the subpoena will have to submit similar records, what other things and items will be on those bank statements and cashed checks? Did a company listed on that subpoena pay other companies in the cannabis industry to pump their stock or support their stock prices on the open market? Did they pay them by check or credit card for this service? Is there a written contract in someone’s email about it? You can see how this can spider on for years and pull in many more cannabis companies and industry people as the tentacles find new things in the bank accounts, emails, and such. Did Mr. Smith write an email explaining how Mr. John and his wife can use their condo in St. Barts in lieu of payment on the last part of the contract? The IRS would like to know about that as undeclared income and the list goes on and on.

The other bigger elephant is that charges related to felony 1 drugs carry mandatory fines and a jail time. Basically, the government sees no difference between a big cocaine ring and Weedmaps, both drugs are classified as the same and “aiding and abetting illegal drug trade” now puts you in Rico Act and money laundering statues. Those are no jokes with the Federal government. As we mentioned on the news show, it would have been 10,000x better if Weedmaps was running an illegal popcorn business or a massive multi-state used-car business that didn’t have the proper state and federal licensing. There would be some wiggle room and settlement room if what Weedmaps was dealing in, no pun intended, was not a schedule 1 drug. Mandatory rules with Rico Act violations, wire act violations, money laundering violations include asset forfeiture (think houses, cars, bank accounts) and 3-strikes-you-are-out drug laws.

Did you use a pre-paid debit card as payment from an advertiser and then give it to an employee as payment? Did you declare both transactions on your financial statements, or did you just take the pre-paid cards and hand them out and keep it off the books? The government agencies will be lining up to take a crack at that all the way from money laundering, tax evasions, and oh yeah, you were aiding and abetting the sale of a schedule 1 Federal drug. Did you take actual cash payments, reported to be as high as $30,000 a month for the #1 dispensary listing in Los Angeles on the map, and declare it all? Did that cash make it into the bank? Bad news, this could be seen as a money laundering charges. Did you receive any of this money through the US wire system or US post office? Now you are really facing some Al Capone like stuff around using the US post office to transmit what could be seen as Federal crimes.

And is there any doubt that some people and companies on that subpoena list don’t have some skeletons that they don’t want the US Federal government to know about considering they have all been in the “Federally illegal marijuana trade” for a few years?

Buckle up, folks. Check that subpoena which is now public record and see if there are any names you recognize or have had dealings with in the past. And remember, whatever you do, get an attorney first before you respond or answer any questions from a subpoena or government letter.