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Cases to Watch: Minnesota Prosecuting Two Employees of State-Licensed Medical Marijuana Supplier

Posted by on Thursday, February 15, 2018 in News, Updates.

Since it legalized medical marijuana back in 2014, Minnesota has licensed two firms to supply the drug to qualifying patients: Leafline and Minnesota Medical Solutions (MMS). MMS is owned by Vireo Health, which also owns a firm licensed by the state of New York to supply medical marijuana to that state’s qualifying patients: Vireo Health of New York (Vireo NY).

The relationship between MMS and Vireo NY is likely to play a key role in a criminal case Minnesota has recently filed against two employees of MMS. The state accuses the employees of unlawfully transferring medical marijuana produced by MMS in Minnesota to Vireo NY in order to help Vireo NY’s struggling production operations. Vireo NY’s struggles may have put its NY state license in jeopardy; as discussed on page 446, NY requires its licensees to meet certain production benchmarks.

The two employees have been charged with criminal violations of Minnesota’s medical marijuana law. The relevant law provides that,

“[A] manufacturer or an agent of a manufacturer who intentionally transfers medical cannabis to a person other than a patient, a registered designated caregiver or, if listed on the registry verification, a parent or legal guardian of a patient is guilty of a felony punishable by imprisonment for not more than two years or by payment of a fine of not more than $3,000, or both.”

Minn. Stat. Ann. § 152.33.1.

I offer some observations on the case below. To begin, however, it is useful to provide some additional information on the allegations against the employees, which were described by the court in a recent decision rejecting one defendant’s motion to dismiss:

“1. On April 21, 2016, Senior Special Agent Robert Nance and Special Agent Jake May of the Minnesota Bureau of Criminal Apprehension met with officials from the Minnesota Department of Health’s Office of Medical Cannabis. The officials told them that individuals at Minnesota Medical Solutions (MMS), a subsidiary of Vireo Health, were potentially involved in diverting a large amount of THC/CBD concentrated oil from the MMS grow facility located in Otsego, Wright County, to a “sister” Vireo Health organization in the State of New York in December 2015. MMS, as well as Vireo Health in New York, used a computer software system called BioTrack to track the marijuana production. Officials from the Office of Medical Cannabis acquired a screenshot of a BioTrack entry from Daniel Pell (former Chief Scientific Officer of MMS) showing 372.0 grams of “6060 concentrated oil mixed” entered as “outbound” to the Minneapolis Cannabis Patient Center associated with MMS. This entry was dated December 10, 2015 and was made by Dr. Lauran Lynn Bultman (hereinafter Defendant Bultman) who was MMS’ Chief Medical Officer. Officials of the Office of Medical Cannabis told SSA Nance and SA May that the Patient Center can only sell pills and liquid capsules and oil concentrates cannot be processed at the Patient Center, therefore there would be no reason to send the Patient Center 372.0 grams of oil concentrate.

2. SSA Nance and SA May interviewed Daniel Pella. Pella informed the agents that during the first week of December 2015 he was sent to Vireo Health’s New York facility to oversee the cultivation of medical marijuana plants. During that time, Pella concluded that three out of the five plant strains in New York could not produce the correct amount of THC and CBD for medical marijuana, which in turn may lead to a supply issue in New York. When Pella returned on December 5, 2015, Defendant Bultman and Robert Shimpa (Chief Operating Officer for MMS), requested a meeting with Pella in the secure vault of the Otsego grow facility. Defendant Bultman and Shimpa requested Pella to identify THC oils that would “rescue New York.” Pella identified four to five jars of concentrated oils. Defendant Bultman informed the group that she would drive the jars of THC to the New York facility using MMS’ armored vehicle, give the jars to Eric Greenbaum (lab manager in New York), and make the inventory disappear. Pella informed the agents that he believed the jars made it to New York as the THC solutions were converted to capsules and vaporizer cartridges by Mia Vang. Pella thought that the jars would have the combined weight of approximately three kilograms.

3. On May 4, 2016, the Minnesota Department of Health conducted an inspection of MMS’ facility. Megan Thompson (Operations Supervisor – Office of Medical Cannabis) requested an inventory transfer list covering the dates of December 1, 2015 to December 30, 2015. Defendant Bultman provided Thompson with a seven page inventory transfer list. In contrast, Brian Harvey, the lead pharmacist for MMS, provided Thompson with an eight page inventory transfer list. In comparing the inventory reports, Defendant Bultman’s list did not include outbound entries from December 15, 2015 to December 17, 2015. A BioTrack inventory report was conducted and revealed five “outbound” transfers on December 16, 2015 of 1,253.75 grams, 755 grams, 971 grams, 75 grams, and 953 grams of concentrated oils. These outbound transfers were made by Defendant Bultman. The outbound transfers from December 16, 2015 and the outbound transfer from December 10, 2015 had a combined weight of approximately 5.6 kilograms. The BioTrack did not reveal a destination or vendor listed for the transfers made by Defendant Bultman on December 6, 2015. According to Thompson, the 5.6 kilograms would be contained in six separate containers/vials and none of these vials were at the grow facility in Otsego.
. . .

5. On May 19, 2016 SSA Nance and SSA May conducted a search pursuant to a warrant of the grow facility in Otsego. The agents interviewed John Purdes during their search. Mr. Purdes is a manufacturing technician who converted oil solutions to finished products. Purdes stated that he was at the New York facility the week before Christmas 2015 to assist converting the oil into final products. He believed that the oils had been produced in the lab in New York, but observed that the jars containing the concentrated oils were labeled in the same manner as the jars in Minnesota are labeled. Defendant Bultman, Shimpa, and Carter (horticulturist/Head Grower for MMS) were at the New York facility at this time.

6. On May 25, 2016, SSA Nance and SA May interviewed Ronald Dale Owens (hereinafter “Defendant Owens”). Defendant Owens was the Chief Security Officer for MMS. Defendant Owens gave the special agents a pack of documents purporting to show that the 5.6 kilograms of concentrated oil was transported and destroyed at the Pope/Douglas Solid Waste Management facility in Alexandria, Minnesota. The paperwork indicated that five boxes of “waste capsules with residue, waste pipettes with residue, and miscellaneous plastic ampules with residue” were transported on April 26, 2016 by Defendant Owens and Duane Archie Lindenfelser to the Pope/Douglas facility. The paperwork did no list any concentrated oils. Defendant Owens stated that he observed 5.6 kilograms of oils in multiple jars be delivered to the Pope/Douglas facility. On the paperwork, the total weight to be incinerated was .01. Defendant Owens stated that he and Defendant Bultman drove MMS’ armored car to New York in December 2015 to deliver the vehicle, information technology equipment, and set up the New York dispensaries.
. . .

8. On June 6, 2016, SSA Nance and SA May interviewed Lindenfelser. Lindenfelser confirmed that he was with Defendant Owens on the day the boxes were incinerated at the Pope/Douglas facility. He stated that five or six little boxes were incinerated. Lindenfelser told the agents that he saw little glass or plastic tubes in the boxes. He stated that the total weight of the boxes were less than two pounds. 5.6 kilograms equal 12.3 pounds. When the agents asked if someone said there were twelve to thirteen pounds in the boxes, Lindenfelser replied that “they’re full of shit.” He stated that the boxes did not weigh that much and the Pope/Douglas facility employees could not weigh them because they were so light.

9. SSA Nance extracted data from Kyle Kingsley’s computer and Shimpa’s computer. The Logs show that Bultman, Shimpa and Owens were at the grow facility together on December 5, 2015 and shows that Defendant Bultman and Defendant Owens left one minute apart from each other on that day. The computer data also revealed a laboratory report from Wadsworth Center in New York. The report indicated five oil samples were for “Vireo Red”, which is the type of product that Pella identified as what the New York facility needing, that was submitted by Defendant Bultman on December 17, 2015.
. . .

12. SSA Nance compared a BioTrack spreadsheet generated by Vang on December 8, 2015. The first four digits associated with the six outbound oil solutions listed by Defendant Bultman in BioTrack matched the first four digits of each oil on Vang’s spreadsheet. They also had similar names. . . .

13. MMS must abide by a “Medical Cannabis Manufacturer Registration Agreement”. This agreement is between the State of Minnesota and MMS. The registration agreement prohibited MMS from assigning or transferring any rights or obligations under the agreement without prior consent from the State of Minnesota. The agreement states that MMS must give notice in writing of any change to MMS’s management team or ownership structure. Furthermore, the agreement required MMS to operate only at the physical address (Otsego facility) disclosed in the registration packet.

14. The Medical Cannabis Manufacturer Registration Agreement does not mention Vireo or Vireo Health of New York facility as potential parent/sister corporations. It does not mention that MMS is a subsidiary of Vireo. MMS did not reach an agreement with the State of Minnesota to assign or transfer any rights to Vireo, or operate in anywhere other than the Otsego facility. Under this agreement, MMS is the sole entity registered and permitted to be a manufacturer in the State of Minnesota.”

The case is ongoing. It is interesting for at least three reasons:

First, the case highlights the peculiarly local nature of the current marijuana industry. States do not (yet) allow licensed marijuana suppliers to import or export marijuana across state lines, even when such transactions are between two licensed suppliers owned by the same parent firm (like Vireo). While it is easy to see why a state would seek to ban imports of marijuana (protectionism), it’s harder to see why it would likewise ban exports to other states. After all, such exports would presumably bolster the local industry.

I suspect two reasons are behind state bans on exports. For one thing, states might fear that licensees will be unable to satisfy local demand if they can ship their goods out-of-state. In the last century, some states banned shipment of milk out-of-state due to similar concerns about local consumers being unable to find supplies of that commodity. Notably, those bans on exports were deemed unconstitutional under the dormant commerce clause. The book discusses the dormant commerce clause and discrimination against non-residents on pages 283-288 and 451-452.

In addition, however, states might fear that shipping marijuana across state lines would spark a crackdown from the federal Department of Justice. I discuss those fears and why I think they are unfounded – at least regarding medical marijuana – in this earlier post (also involving Minnesota) here.

Second, the case highlights the usefulness of monitoring systems states have adopted to track the production of marijuana from seed to sale. The monitoring system MMS used is what tipped state regulators off that MMS (or its employees) might be unlawfully diverting marijuana, and that system generated what appears to be the most incriminating evidence in the case (detailed above). Tracking systems like the one used by Minnesota are discussed in the book on pages 466-467.

Third, I wonder what actions Minnesota or New York might take against MMS or Vireo NY. For its part, Minnesota provides specific penalties (including revocation of a license) for transferring medical marijuana out of state:

“In addition to any other applicable penalty in law, the commissioner may levy a fine of $250,000 against a manufacturer and may immediately initiate proceedings to revoke the manufacturer’s registration, using the procedure in section 152.25, if:

(1) an officer, director, or controlling person of the manufacturer pleads or is found guilty under subdivision 1 of intentionally transferring medical cannabis, while the person was an officer, director, or controlling person of the manufacturer, to a person other than allowed by law; and

(2) in intentionally transferring medical cannabis to a person other than allowed by law, the officer, director, or controlling person transported or directed the transport of medical cannabis outside of Minnesota.”

Minn. Stat. Ann. § 152.33.1a.

If the two employees are found guilty of violating section 152.33.1, it would appear that MMS would be subject to separate penalties under section 152.33.1a.

However, one ruling made by the judge in her opinion denying employee defendant’s motion to dismiss could potentially hamper imposition of such penalties. In the motion to dismiss, the employee defendant claimed that MMS and Vireo NY were a single entity, and thus, that a transfer from MMS to Vireo NY (or from one agent thereof to another) was not a transfer to a separate “person” as required by section 152.33.1. The court (correctly, I think) rejected this claim, finding that MMS and Vireo NY are, in fact, separate entities. But the court provided an alternative basis for its decision that could later trouble state regulators:

“Even if this Court were to determine that MMS and Vireo Health of New York are a single entity and therefore an intercorpoation transfer was not a violation of Minnesota Statute §152.33, there is no evidence, inferences, or reliable hearsay which could lead this Court to the conclusion that Defendant Bultman and Defendant Owens were acting at the discretion of MMS/Vireo Health New York as agents for the manufacturer. Utilizing agency theory, it seems as if there was no manifestation by MMS/Vireo Health New York for Defendant Owens and Defendant Bultman to act upon orders given by the organizations or its leadership to transport the cannabis oil to New York. The Court finds that Defendant Bultman and Defendant Owens were working on their own behalf and not as agents or MMS/Vireo Health New York. Therefore, Defendant Bultman and Defendant Owens were separate persons transporting cannabis to Vireo Health of New York in violation of Minnesota Statute §152.33.”

Here’s the problem (for regulators): If the state later tries to discipline MMS under section 152.33.1a, MMS could argue that the employees were “working on their own behalf and not as agents of MMS” when they broke the law, and thus, they did not commit their violations “while [they were] officer[s], director[s], or controlling person[s] of the manufacturer”, per the terms of section 152.33.1a. I am not sure the company would win the argument, but it seems like one they could champion if faced with charges under section 152.33.1a. The book discusses how states discipline commercial licensees in more detail on pages 468-478.

Readers can find more about the case at these sites:

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