RICO Suit against Colorado Cannabis Firms Highlights D&O Dearth

By | March 23, 2021

A scarcity of directors and officers coverage for cannabis companies may be take an even bigger spotlight following a Colorado lawsuit in which two large cannabis operators and several executives are accused of illegally transporting marijuana to Arkansas.

The lawsuit also invokes the Racketeer Influenced and Corrupt Organizations Act, or RICO, which seeks increased damages for the plaintiff.

Among the firms named is Chicago, Ill.-based Verano Holdings, which is accused in the lawsuit of illegally transporting marijuana from its home state of Illinois to Arkansas.

While medical marijuana is legal in Arkansas, cultivation, sale, and possession of the drug remains federal offenses in Arkansas. Cannabis also remains a controlled substance in the eyes of the federal government, as the lawsuit notes.

The allegations of illegal interstate marijuana shipments stem from the attempted acquisition of Verano by Phoenix, Ariz.-based Harvest Health & Recreation in a deal that fell through last year, according to the Chicago Sun-Times.

Verano (VRNOF: OTCMKTS) is a vertically integrated, multi-state cannabis operator that designs, builds, and operates dispensaries under retail brands Zen Leaf and MÜV. Harvest (HRVSF: OTCMKTS) is a vertically integrated cannabis company and multi-state operator that has been expanding its retail and wholesale presence throughout the U.S. by acquiring, manufacturing, and selling cannabis products for patients and consumers in addition to providing services to retail dispensaries.

The lawsuit was filed on March 8 in Colorado District Court. It also names dozens of executives from the cannabis companies.

Nicholas Nielsen is the plaintiff named in the suit. Nielsen is a former employee of Natural State Wellness Enterprises in Arkansas, formerly owned by Harvest. Nielsen was arrested in 2020 and charged with setting up an Arkansas dispensary for several of the corporate defendants.

“Nielsen received his instructions directly from various executives of those companies,” the suit states. “When police raided the site, however, it was only Nielsen who was criminally charged and left holding the proverbial bag.”

Ian Stewart is an attorney who represents numerous carriers and is a regular speaker on cannabis topics at conferences and in the media. Stewart, founder and co-chair of the cannabis and hemp law practice at Wilson Elser, believes the lawsuit underlines a big problem for insuring the cannabis industry: D&O coverage for cannabis companies is expensive, it’s hard to get, and, as a result, there may be big gaps in some D&O policies written to cannabis companies.

Stewart said he’s seen a growing number of D&O lawsuits filed in the cannabis segment, and he believes that a case like the Nielsen suit may further show that D&O coverage is limited in the cannabis space.

“I would take an educated guess that there’re some gaps in their D&O coverage,” he said of the companies involved.

Stewart described the D&O dilemma as a cycle that cannabis companies are getting drawn into: management mistakes give rise to claims and ensuing settlements, and the resulting payouts give rise to premium hikes or declinations.

Those cycles may get repeated, as many cannabis companies find it increasingly difficult to bring experienced, quality executives on board, because they cannot procure the proper D&O coverage.

“That’s the vicious cycle,” Stewart said.

Matthew Buck, with the firm Red Law, represents Nielsen. He wasn’t immediately available for comment. A spokesperson for Verano has been reached out to for comment.

A representative for Harvest said the company intends to “vigorously defend itself against these claims and expects the case will be dismissed in due course.”

A statement supplied on behalf of the company calls the suit a “thinly veiled shakedown” and said that it is “replete with inaccuracies.”

“Knowing his client was legally bound to take any dispute to binding confidential arbitration, Mr. Neilsen’s lawyer threatened to unleash a smear campaign by filing a lawsuit filled with damaging false information unless we paid him millions of dollars,” the statement reads.

The suit states that Nielsen’s former employer arranged for him to receive several under-the-table payments to keep quiet about what he saw while he was at Harvest.

Worth noting in the suit is that is states that dealing in marijuana is considered racketeering activity under RICO, and “those who engage in a pattern of racketeering activity through a corporation or other enterprise are liable for three times the economic harm they cause plus costs and attorneys’ fees.”

The suit notes that RICO also enables federal courts to order racketeering enterprises and their coconspirators to cease their unlawful operations.

“Accordingly, the Plaintiff asks this Court to award him the damages, costs, and fees he incurred as a result of the Defendants’ actions, and to which he is entitled,” the lawsuit states.

Stewart was dubious about the merit of the suit.

“I’m a little skeptical that the complaint really has legs,” he said, adding that the plaintiff looks to be part of the alleged conspiracy, and when he allegedly got caught taking marijuana plants from out of state, he cried foul.

“Now he’s airing dirty laundry apparently,” Stewart said.

The case is Nicholas Nielsen Vs. Verano Holdings LLC (1:21-cv-00692-SKC).

Topics Lawsuits Cannabis Colorado Directors Officers

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