Is it Safe?

December 14, 2007 2:11 PM

Question regarding the real-life legality of Marijuana dispensaries in California. A friend of a friend invested in semi-passive ownership in some dispensaries, and apparently it’s paying out very handsomely for him...

I may have a chance to invest as well ($50K for an assumed 120% annual return), but I am very skeptical about the legal implications of it. Yes, I know that Prop. 215 passed in 1996, and that there are thousands of such pharmacies, but how do they really work? Any personal experience with ownership around here? Or as Christian Szell asked in Marathon Man: “Is it Safe?”

posted by anonymous to law & government (12 comments total)

The DEA has declared war on medical marijuana facilities here; they announced recently that they will start prosecuting landlords who rent to med. mar. stores in Sacramento. They have and will shut them down, arrest people, and confiscate the product. This is not the state police, mind you - this is federal, because although state law allows it, the feds say federal law trumps state law, and it ain't legal in fedland. They're the 800-pound gorrilla, and if they target a medical marijuana facility, that facility will be shut down.

I don't know if they're coming after "silent partners", but they probably could if they chose to (trafficking charges? something like that - IANAL), and even if they didn't pick on you specifically, your investment will be gone, almost certainly with no way to recoup it.
posted by rtha at 2:22 PM on December 14, 2007

If you are going to put down $50,000, you could spend $2,000 to talk to a lawyer before doing so. I think that's what you need to do.
posted by Ironmouth at 2:37 PM on December 14, 2007 [2 favorites]

From experience watching these things get shut down/raided all the time (one literally next door to where I work semi-recently), I can say with relative confidence that this is not a "safe" investment. It is, however, a lucrative one.

As far as the legal implications if the place you invested in was indeed raided, you'll probably want to consult an attorney.
posted by rooftop secrets at 3:22 PM on December 14, 2007

Well, risk equals reward. You are taking a greater risk for a greater reward. 120% annual return is roughly 12x greater than what you could expect from the stock market. The downside, though, could be greater than your original investment. At that rate of return, though, you could pay a hefty fine and still make a profit assuming you are able to keep operating after tangling with the feds.
posted by charlesv at 3:56 PM on December 14, 2007

I can't comment on the safety or lack thereof of this investment, but the return sounds suspicious. Suspiciously high.

Now, all of the below assumes that 120% isn't a typo for 12%. 12% would be a more reasonable return.

120% on a 50K investment? That's a 60K annual return, which would be high for a participating partner, but is outrageous for a silent partner. It seems to be more in the range of returns for illicit drug operations, in which the extreme street markup of the product makes for huge returns for the wholesalers. Of course, this return is justified, because the wholesaler and merchant are assuming an enormous legal and financial risk. In your case, you're not. The business is legally legitimate, at least on the state end.

So, you have to ask, why is the seller allowing you to invest at 120%, rather than keeping most of these proceeds, and offering the investment at, say, 12%? 12%, a mere one-tenth of the return, would be tremendously lucrative semi-passive ownership deal that many investors would jump at.

A 120% annual return is what usually "accrues" from crooked pyramid schemes and real estate flip deals from 2004. Most people who swallowed the bait for these deals lost their fortunes (as we are seeing right now with the subprime fallout.)

Don't touch this with a 30 foot pole.
posted by Gordion Knott at 4:08 PM on December 14, 2007

No actually, I would expect even more than 120% on the return. I would expect at least 3-5x on a venture like this, perhaps even more.

Here's the deal, drug laws are not nice. Forget about the jail factor, assume that you won't go to jail for this, even though you very well could it is unlikely. What is likely, however, that they can take everything. They can seize your house, cars, everything. Then what do you do during the time it takes to go to trial, and then trying to get your life back together?

I would not do this unless you had an active interest in medical marijuana, that is you really want to deliver medical marijuana to patients. Do not treat this like an investment opportunity, any more so than you would treat "Doctors without Borders" as marketing to get more patients back home.

Look at this way, you could lose everything in this, and it is a good possibility. We're not talking about a "black swan" here, we're talking about a very real possibility that $50,000 will turn into $200,000 in a year or so, but you also losing all your assets. Anyway you look at it, that is not a good investment. I would not enter into it as casually as I would a restaurant or bar a friend was opening.

I have a whole stack of case studies on portfolio managers who thought they were smarter than you, and probably were, who made similar bets in the financial markets. It didn't work out too well for them.
posted by geoff. at 4:33 PM on December 14, 2007

In one of the very worst mis-applications of the "Interstate Commerce" clause in recent memory, SCOTUS (unanimously in 2001, and again unanimously in 2005) decided that the Federal Government had jurisdiction to prosecute sales of "medical marijuana" in the state of California, even if the marijuana was grown inside the state and never came anywhere near a state border. (They even have jurisdiction under those rulings to arrest and prosecute patients who grow their own.)

Prop 215 notwithstanding, it's still a federal crime and as mentioned the DEA is going after it. Nothing California can do about it, either.

So if you get involved in this, you're not just risking losing your investment. You're risking being arrested and prosecuted for drug dealing.
posted by Steven C. Den Beste at 4:58 PM on December 14, 2007

Here's a San Francisco Chronicle story about some formerly successful pot dealers who got busted big time by the Feds. If you want to go ahead with your plan, you definitely need to know that it could end the way it did for these losers.
posted by ikkyu2 at 6:42 PM on December 14, 2007

The risks in an absolute sense have been laid out. So how can you play the odds?

I would find out if you can what the law enforcement climate is like in the particular locale you are considering. The pot clubs here have been around for years now, plenty of time for a bust to have taken place. I don't know if the Feds are willing to override a local law enforcement climate that is reluctant to prosecute them. I suspect there are way more clubs out there than there have been busts. How do the Feds pick their targets? I'm guessing but they probably look for a community that doesn't want them there and then cooperate with the local law enforcement. In Berkeley a Federal bust would be a heavy handed operation that would have to go solo and would generate public outcry.

Pick your spots.
posted by scarabic at 9:21 AM on December 15, 2007

You might consider talking to a crime reporter at a local or regional paper to find out more about what the law enforcement climate is like. They should know, and they might be more approachable than the Sheriff. I'm sure if you talk to them about your pot club investing circles you can hook them into a conversation or two, but watch out. There's no such thing as "off the record."
posted by scarabic at 9:23 AM on December 15, 2007

I suspect that if the DEA isn't really going full-out against this, the reason is that they're concerned about jury nullification.

If they arrest and try med-marijuana dealers in Berkeley, they'd have to form their jury pool out of Berkeley voters, and there's a high chance of acquittal irrespective of the facts of the case, I would think.
posted by Steven C. Den Beste at 2:39 PM on December 15, 2007

Two childhood friends of mine were just indicted on federal charges for running a pot club in Oakland. They had also previously been shot, shot at, had cars driven at them and been taken hostage in a robbery. I don't recommend this as a career.
posted by parmanparman at 12:28 AM on December 17, 2007