Missouri NAACP Threatens Lawsuit To Stop Marijuana Social Equity Arrangements That ‘Defraud’ The State

Missouri NAACP Threatens Lawsuit To Stop Marijuana Social Equity Arrangements That ‘Defraud’ The State

“The very people who were victimized by cannabis laws in the first place are yet again on the losing end of what appears to be a distinctly inappropriate power grab.”

By Rebecca Rivas, Missouri Independent

James Harnden has been a longtime activist for cannabis legalization, ever since he got slapped with a low-level felony possession charge for having an ounce of weed.

The 56-year-old Rockford, Illinois, resident says that charge has cost him job opportunities for 30 years.

Earlier this year, he saw an advertisement in the Craigslist “gigs” section posted by a Michigan cannabis real estate group called Canna Zoned MLS. It was looking for “partners who qualify as a social equity applicant” to participate in Illinois’s lottery to award cannabis business licenses that are, in part, meant to benefit people impacted by marijuana criminalization.

“I spent most of my life applying for jobs and not getting them,” Harnden said. “So I’m like, ‘Okay, so maybe one of these licenses will swing my way.’”

The Craigslist ad read: “If you are eligible and provide the required documentation, we will give you $2,000, just for helping us submit the lottery application! If we win the lottery and secure a license, we will give you an additional $20,000!”

Harnden says what he didn’t realize was that he signed a contract agreeing to hold 100 percent ownership interest on the application, but that he wouldn’t get revenue or profits from the business. After the business passed through all the state and municipal approvals, the contract stated that Harnden would be required to sell his share of the business for $1 to the group or be held in breach of contract.

The contract also authorized the group to enter Harnden’s information into lotteries for social equity cannabis licenses in other states—and that’s how Harden says he got paid $500 to be part of the lottery for Missouri’s microbusiness license program.

Harnden was eligible to apply in Missouri because of his marijuana charge, which is among seven eligibility categories that also includes living in census tracts with high poverty and unemployment rates. Canna Zoned’s Jeffrey Yatooma is listed as the “authorized agent” on the contract Harnden provided to The Independent, leaving a space for his signature at the bottom.

Yatooma secured two of the 16 social equity cannabis licenses—in Columbia and Arnold—issued earlier this month, according to information obtained by The Independent through a public records request. Those records show Yatooma is listed as the “designated contact” for 104 out of the 1,048 applications for dispensary licenses in Missouri’s lottery.

Yatooma’s group was not the only one using the strategy of flooding Missouri’s lottery with applications to obtain a dispensary license. An Arizona-based consulting firm is connected to more than 400 dispensary applicants, including six winners, and a Missouri firm is connected to more than 80 applicants and two winners. Both said their clients did not advertise or promise payment for submitting applications.

In at least three states holding lotteries for social equity cannabis licenses this year—Illinois, Maryland and Missouri—Yatooma’s group has offered to pay eligible people up to $2,000 to apply on their behalf and $20,000 more if they won.

While the Craigslist ads posted in Missouri can no longer be seen online, a screenshot of a similar ad posted by Canna Zoned in Illinois was included in a story by the Chicago Sun Times. Ads are currently up in Maryland, where the state’s social equity cannabis application opens on November 13.

Provided with a copy of Harnden’s agreement, Yatooma said his company,  “never signed any agreements along the lines of the one you mentioned.”

He said that the agreement was part of “early business discussions.” Yatooma’s group made a similar argument earlier this year when efforts to secure licenses in Illinois faced criticism.

“The parties never moved forward with the referenced document, and the state subsequently provided guidance advising on how to structure partnerships,” Yatooma said in an email to The Independent. “In our experience with new laws, it is frequently important to begin business discussions and then be prepared to pivot—and finalize a partnership when new state guidance is announced.”

Yatooma also said he’s aware the microbusiness dispensary licenses “must continue to be majority owned by an individual who meets at least one of the eligibility qualifications” outlined in the constitution.

Voters approved the microbusiness program last November as a provision in the constitutional amendment that legalized recreational marijuana.

Nimrod Chapel, an attorney and president of the Missouri NAACP, reviewed the agreement signed by Harnden and provided to The Independent. He believes it “defrauds the state” because it gives the eligible applicants no voting or financial interest, in violation of the state’s constitution.

“The very people who were victimized by cannabis laws in the first place are yet again on the losing end of what appears to be a distinctly inappropriate power grab,” Chapel said.

Yatooma said he rejects “any allegations that we have defrauded the state.” Any final agreements with partners in Missouri, he said, “will absolutely comply with all state laws and regulations.”

Lisa Cox, spokeswoman for the Missouri Division of Cannabis Regulation, did not say whether or not the division had seen the agreements between Yatooma and the applicants.

However, she said such an agreement will be reviewed as part of the post-licensure verification process, where the division will “determine whether any microbusiness applications were false or misleading and to ensure all microbusiness licenses are majority owned by eligible applicants.”

That process will be completed by the end of the year, she said.

If the state takes no action to revoke Yatooma’s two licenses, Chapel said the Missouri NAACP would consider litigation to obtain a cease and desist order on the entire microbusiness program.

“If [the division] were to look at the agreements—that show the applications are not true—and they don’t take some action against these licenses,” Chapel said, “then I think that they would be totally complicit in a fraud.”

In response to the NAACP, Cox said the division will revoke the license if it “determines the applicant provided false or misleading information in the application.”

A pattern and practice

Simone Booker, a 52-year-old Chicago resident who works in tax preparation, remembers sitting down with an attorney for Canna Zoned, Amanda Kilroe, this spring at Starbucks to talk about a “great business opportunity.”

Kilroe’s number is currently listed on the Craigslist ads in Maryland, and she’s who responded when The Independent called the number.

However, Booker never saw a Craigslist ad. She was referred to Kilroe by a friend and never received $2,000 for applying.

“She’s a wonderful person,” Booker said of Kilroe. “I have met a few people [from Canna Zoned]. They are absolutely wonderful people. So that was the impression I got from them.”

Booker remembers asking Kilroe multiple questions about what her commission would be and what percent of the profits she would get. She said Kilroe assured her that she would be seen as a “social equity partner” and would get a share of the profits at every fiscal quarter.

Then after a year, Booker would agree to sell her shares of the company for an amount that “we would work out later,” she says Kilroe told her. They talked about how Booker could potentially make $200,000 before she sold her shares, and she could also choose to buy back into the business later if she wanted.

Booker says she now realizes she didn’t read the contract’s fine print closely because Kilroe seemed so trustworthy and professional.

Booker said Kilroe never mentioned the contract would force her to sell her shares for $1. And Kilroe’s description of the partnership, Booker said, was “completely different” than what she signed—that she agreed to receive “no disbursements” other than the $2,000 to apply and the $20,000.

More specifically, she’d get $10,000 after the municipality where the dispensary is located approved the location, and another $9,999 after the state approves the license and she transfers her ownership of the business.

Booker was shocked to find these provisions in her contract when asked about them by The Independent.

“I’m completely blessed that God didn’t approve this business,” Booker said. “I would have never signed the contract…not even for the $20,000 because $20,000 is not worth the millions that they’re going to make off of my name.”

Kilroe did not respond to The Independent’s requests for comment.

Booker fears for the other people who don’t realize what they signed. Having a tax background, she knows how to fill out the paperwork to ensure the group can’t use her name for an federal tax identification number (EIN) in the future.

The contract authorized the use of her Social Security number for an EIN, meaning she would be completely on the hook for tax liability of the business even though the contract claims otherwise, Chapel said. But other people don’t know how to do that, she said.

“Their name is going to be forever used for business, but they’re never going to profit,” she said.

Chapel said he’s never seen a contract like it.

“This agreement is wide ranging, not limited in time,” he said. “It’s not clear when—I guess at death—you would be released.”

It’s essentially agreeing to let the company use their “likeness” and name indefinitely, he said.

“How is this not literally buying at least a piece of a person?” he said.

A public warning

Kilroe told the Sun Times that Canna Zoned “didn’t end up moving forward” with any of the respondents to the ad, after the newspaper reached out to her about a similar agreement the group made with a gun-violence victim.

“We didn’t enter the game in Illinois,” Kilroe told the newspaper.

However, Yatooma’s group was behind at least 20 dispensary applications in Illinois under variations of the name “Chicago Retail LLC,” including Booker’s and Harnden’s, according to state business records. Chicago Retail LLC wasn’t on the state’s list of winners released on July 13, but it’s unclear if Yatooma came away with a license in Illinois.

Chris Slaby, spokesman for the Illinois Department of Financial and Professional Regulation, which oversees the social equity program, said the state’s cannabis law prohibits him from disclosing if Yatooma obtained a license.

The department was aware of posts like the Michigan group’s and issued a public warning in February to potential applicants about the dangers of these types of agreements, Slaby said in an email to The Independent.

Illinois conducted its lottery on July 13, and the department is currently assessing the winners’ eligibility. Slaby said it “may deny a license in the event it determines any false information was used to apply.”

Booker’s contract appeared to be identical to the one Harnden signed in Missouri.

Both stated that Yatooma’s group can use the applicants’ information in any of the other states lotteries for social equity cannabis licenses, and the group recently contacted Booker again about entering the next lottery in Illinois.

At the end of July, Harnden was notified that the group was entering his name in the Missouri lottery, which was conducted on August 28.

The Missouri contract is with a Michigan limited liability company called “Report Head LLC,” but Yatooma is the authorized agent listed on the contract.

Adolphus Pruitt, president of the St. Louis City NAACP chapter, also reviewed the agreement and said it establishes up a “modern-day indentured servitude.”

Pruitt agrees with Chapel that the Michigan group is defrauding the state, as well as putting the applicants in that position whether they know it or not. The St. Louis City NAACP chapter, he said, would support the state NAACP’s move to get a cease and desist order.

“It appears that it was never the intent for the ‘social equity partner’ to own, operate, nor benefit from the micro license as envisioned by the voters,” Pruitt said.

Of the 16 winners of dispensary licenses, only five appeared to have submitted just one application—meaning they didn’t make agreements with eligible people to apply on their behalf.

On October 2, the state issued 48 microbusiness licenses in total—six winners in each of Missouri’s eight congressional districts.

In each district, two were microbusiness dispensaries, and four were microbusiness wholesale facilities—where the owners can grow up to 250 plants.

According to records obtained by The Independent, the wholesale side—where there was 577 applicants total—did not appear to see the same kind of flooding strategy as for dispensaries, which had total of 1,048 applicants.

As far as finding multiple eligible applicants to apply on one person’s behalf, Yatooma’s operation was not the biggest. And he only applied in half of the state’s eight congressional districts—the 2nd, 4th, 5th and 6th.

A Phoenix cannabis consulting firm, Cannabis Business Advisors, is listed on 42 percent of the applications for dispensary licenses. And they are the designated contact for six of the 16 winning licenses.

In every congressional district where the firm’s clients won a dispensary license—including the 1st, 2nd, 4th, 5th 6th and 7th—its president, Maxime Kot, is the contact listed on between 40 percent and 60 percent of the applications in that district.

For example, in the 1st congressional district—which encompasses the City of St. Louis—Kot was listed as the contact person for 76 dispensary applications, making up 62 percent of the total submitted. In the 2nd district, it was 63 percent and in the 4th, 53 percent.

When asked how CB Advisors was able to find that many eligible people to apply, Sara Gullickson, founder and CEO of the firm, said: “As far as our intellectual property and how we submit applications—either lottery or merit based—obviously that’s the secret sauce of the company.”

However, after hearing about Yatooma’s strategy of posting Craigslist ads and paying applicants, she said that was “not our business model.”

“We’ve probably worked in 30 states and five countries,” Gullickson said. “I’ve been at this since I was 26 years old. I’m now 40 years old. I’ve just been around for a while.”

Gullickson has a stake in several cannabis licenses across the country that are minority- or women-owned. But in Missouri, she was acting as a consultant, she said, and wasn’t vying for a license herself.

When asked how many of the applicants are from out of state, she said that she didn’t want to disclose the information.

John Payne, founding partner at Amendment 2 Consultants, acted as campaign manager for both of the constitutional amendments to legalize medical and recreational marijuana in the state. He’s listed as the contact for 16 percent of the dispensary license applications statewide, including two winners—both in the 3rd district.

One of his winning clients applied with just one application, records show and Payne confirmed. The other had 68, which Payne said the person pooled with friends and associates to work together to apply and to get a license.

Like Gullickson, Payne said also he didn’t advertise or offer payment like Yatooma.

“It was almost all internal networks,” Payne said. “We knew a lot of people and those people knew a lot of people. So that’s how we kind of grew our client base.”

Payne said any questionable agreements made as part of the microbusiness license application process should come out in the next couple months, during the state’s post-licensure verification process.

“The department does a pretty thorough job of vetting these sorts of things,” Payne said. “They do ask for your operating agreements and contracts that you’ve signed, so that could be something that they look into.”

This story was first published in the Missouri Independent.

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Photo courtesy of Mike Latimer.

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