Nearly Half of U.S. Adults Report Trying Cannabis; Percentage of Regular Smokers Remains Unchanged

On July 21, 2021, NFL superstar wide receiver Julio Jones was named as the lead defendant in a 12-count civil fraud, conversion of assets, breach of contract, and breach of fiduciary duty lawsuit filed in Los Angeles Superior Court relating to a cannabis cultivation operation he co-owns. After being traded from the Atlanta Falcons to the Tennessee Titans this offseason, swapping his black and red jersey for a red, white, and blue one, his focus will be on the color green, as in the color of all the money that he is going to need to pay legal fees.

The case is titled Genetixs, LLC v. Julio Jones, followed by nine other individual and entity-named-defendants including retired Falcon receiver Roddy White. (White is listed individually in the charging document by his formal name, Sharod White.)

Additionally, White’s Mississippi LLC, “SLW Holdings,” is the fifth defendant in the civil case. Jones and White, through White’s LLC, had invested millions of dollars to start and operate a Southern California grow facility, Genetixs. The NFL players, through the holding company, shared a fractionalized ownership interest in the cultivation business with other Genetixs company members. In sum, the cultivation business, Genetixs, operated by the man Jones and White installed as the grow house’s chairman, is now suing the players and others involved in the business.

The 26-page civil complaint (also referred to as the “July 2021 lawsuit”) has been circulating across the Internet and the allegations are incendiary. Genetixs, a California LLC, which operated a grow house in Desert Hot Springs, Calif., has charged that each of civil defendants named in the case participated in a scheme that diverted over $3 million of cannabis a month from March to July 2021 from the Genetixs’ grow facility.

The accusations include claims that associates of Jones, White and others involved in Genetixs’ operations had siphoned off “400 to 2000 pounds of cannabis” through a hole in the wall of Genetixs’ Desert Hot Springs grow facility during an almost six-month period.

It also is alleged that Jones and White, and others, “facilitated” the dissipation of millions of dollars of what should have been Genetixs’ proceeds, and even enabled a former Genetixs employee (who had been hired by the LLC members on day one to build out and manage the grow site and was then fired a year later) to stay on, with family, as squatters at the facility.

Jones and White, over two thousand miles from California, have not been accused of committing the misconduct themselves. The legal language of the July 2021 complaint accuses the NFL players, from afar, with aiding and abetting and “conspiring” with the errant grow house squatters.

Philadelphia’s Drexel University LeBow business school professor Stacy Kline, who teaches Best Business Practices of the Cannabis Industry, in discussing the allegations contained solely in the complaint, was stunned by the description of Genetixs’ gross mismanagement.

“The complaint describes a total lack of oversight for the cannabis business venture and the absence of any internal controls,” Kline stated to Cannabis Business Times. “Where were the security cameras that grow sites are, in many states, required to have? How did so many people who created and were to manage the business abdicate their professional and fiduciary duties to the ongoing concern?”

 Inexperience and Lack of Due Diligence Results in Poor Business Outcomes

There is no way to read the July 2021 complaint (whether any of the allegations are ever proven up at trial) without drawing the conclusion that the wannabe cannabis business investor-partner-member-managers had no cannabis-specific business plan and failed to consult or heed the advice of experienced cannabis business experts before starting a cultivation operation. It’s abundantly clear that the NFL players, like many budding entrepreneurs, got into a business they knew next to nothing about. They both admitted as much in court documents.

SLW Holdings v. Freeman by sandydocs

A document in a related civil matter (discussed a bit later) and signed under oath by Jones just three weeks before the filing of the Genetixs lawsuit, demonstrates this point. It proves that a bad and ill-conceived cannabis-business-beginning will certainly lead to an ill-fated and often costly ending.

Jones’ account of how he and his friend and former teammate, Roddy White, came to invest “in the cannabis space” is an example of why one  should not invest in cannabis without doing a great deal of research and preparation:

 

“In the summer of 2019, Jones, living in Atlanta, came to Los Angeles for a visit, and while socializing at restaurants and clubs, was approached by someone from Los Angeles named “Al” who had a “proposition” for Jones to invest in cannabis. Based on what was related, Jones believed it would be a “great opportunity to make legal money outside of [his] profession.” 

Jones returned to Georgia and Al from Los Angeles called and texted Jones “about investing in cannabis.” One day, Jones flew back for a cannabis meeting at Al’s office (location not specified). There Jones met future Genetixs’ chairman, Lamarr House, and other men with whom he would ultimately partner at Genetixs.

At some point that day, House urged Jones to not work with Al because Al “did not have his stuff together.” Instead, (as Jones recounts) House urged Jones to do a business deal with him (House). 

Jones talked to House about the business and House drove him around as they looked at a possible grow site. Thereafter, Jones reached out to friend Roddy White and urged him to come aboard for “an opportunity in the cannabis space.” White, who Jones says trusts him greatly, agreed to do the venture.

Weeks later, House informed Jones and White that he had found a cultivator and his name was “Farmer John”. Jones and White flew back to Los Angeles, to meet the farmer. They were driven from Los Angeles by House and others to Farmer John’s Desert Hot Springs cultivation site. “After seeing the grow,” Jones explained, “they knew” Farmer John “was the man for the job.” After that, those present went into the farmer’s office “and started to negotiate the percentages and how much it would cost to build out and for him to grow the product.”

Sometime after Genetixs LLC was formed in California in March 2020 by House, Jones and White (using the Mississippi LLC, which had been formed in February 2020 for the cannabis deal) invested three million dollars in Genetixs.” 

Read more here, here and here

Lack of Planning at the Business Formation Stage

The salacious allegations have spread across sports and cannabis platforms, often with huge chunks of the charging document presented as if the allegations are true. Paul Kuharsky, an all-things-NFL-commentator, was interviewed on a sports program in which, in pertinent part, he reminded the viewers, that the story alleged “if true . . . is not a good look for sure” for the sports figures. Kuharsky also added the caution that, in America, “anyone can sue for anything” and that what is happening “could be a sour grapes scenario.”

Sour grapes is an understatement. A big part of the story in the lead up to the July complaint has been ignored: there were two related lawsuits being litigated in different courtrooms in the same courthouse involving overlapping characters and company entities.

Surely, that earlier lawsuit that Jones and White (as SLW Holdings) filed in May 2021 against Genetixs’ management is what prompted Genetixs to alert the world in a publicly filed civil complaint that there was a dispute between grow house partners.

The NFL players, two months before the July lawsuit in which they ended up as defendants, hired a two-man Los Angeles law firm and went to court. Without notifying their fellow Genetixs business partners, Jones and White asked a judge in Los Angeles Superior Court to intervene in the grow house business operation. The players (who had soured on their investment) tried to wrest control of Genetixs from the LLC principal member, Lamarr House (“the Chairman”). House, who was aligned with partners who were not Jones and White, collectively directed a majority interest of the LLC membership units (akin to shares in a corporation) in Genetixs.

Roddy White, in an under-oath declaration filed as part of the May 2021 lawsuit, informed the court that he had no idea that people involved in the operation of Genetixs had been convicted of fraud crimes and “of federal heroin trafficking.” White emphatically declared that had we [Jones and I] known this “we certainly would not have invested $3,000,000 with them.” 

The players’ lawyers asked for a temporary restraining order (TRO), a preliminary injunction, and sought to expel members from Genetixs’ management and operations. In the May 2021 lawsuit, Jones and White claimed that fellow grow operation members, especially House, who they all had installed as the principal LLC manager, had breached their fiduciary duties to the business. They further asserted that some involved in the business had criminal records, and that unfair business practices were resulting in ruining the cannabis business.

Although the court initially granted the TRO as a way to maintain the status quo until she heard from the other side (to include House and other Genetixs employees), the restraining order was ultimately vacated. A portion of the court’s July 8, 2021 order in the May 2021 case states: “Having considered Plaintiff’s probability of prevailing and the balance of harms, the court denies the preliminary injunction.”

The reasons? The court ruled, in part, that some parties to the lawsuit had not been properly served by Jones and White’s lawyers as well as that the player-plaintiffs had not satisfactorily explained how the operations at the grow house and its alleged personnel issues caused Jones and White quantifiable damages (which the law requires for the kind of equitable court action that they had requested.)

A Corporate or LLC Agreement is Not a Cannabis Business Plan

Arguably the most significant aspect of the White and Jones lawsuit, which influenced the court’s decision to not force any management changes or expel any members, was that the very filing of Jones and White’s lawsuit was barred by the terms of Genetixs’ LLC operating agreement.

Genetixs’ 38-page operating agreement contained pages boilerplate and arcane LLC-related legal language with little specifically related to a cannabis cultivation business. Yet, White, House, and the other Genetixs members did execute it.

The operating agreement contained a curious attachment labeled Exhibit A. There, on a half-page, was the chart alluded to in Jones’ declaration—the part where they negotiated ownership percentages in Farmer John’s office. Exhibit A showed what each of Genetixs’ member-partners had provided to the business in exchange for shares in the grow house business. Only one member put in cash, and specifically noted was the number “$700,000+.” This was the initial capital provided to the Genetixs operation by White and Jones as SLW Holdings. Beside the name of every other member-partner were the words “sweat equity” or some other kind of intangible such as “expertise.”

Who got how many shares in exchange for what seems to have been the primary focus of Genetixs’ owners. Failing to read, understand, and tailor an operating agreement and neglecting to craft a detailed and thorough business plan, can easily lead to being tossed out of court. And this happened here. The Genetixs operating agreement contained a provision that no decisions about business affairs could be made unilaterally by a member. An agreement would be needed by “an affirmative vote” of the members or with the consent of those with a majority interest.

Once the move for injunctive relief was intercepted by the court on July 8, 2021, with the denial of the permanent injunction and the lifting the TRO, some of Genetixs’ operators (who had been sued by Jones and White) decided to file their own lawsuit against the players. Genetixs would go big and name Jones, White, and others individually, as well as SLW Holdings in their counter lawsuit.

On July 21, the NFL stars had become the defendants, and the sports and cannabis news feed world went into overdrive.

Without a PR team in place, the first story to catch the public’s eye about the NFL players involvement in a Desert Hot Springs grow site was the version of the events spelled out in the Genetixs lawsuit. Even though a lawyer could read the complaint and see that the players were not directly or personally involved in misconduct, the drafting of the legal instrument accuses all the civil defendants of the same conduct, and the attendant news coverage made it appear that the players had been involved in nefarious civil (and suggestively criminal) activity.

No Quick End In Sight For The Players

Civil litigation with two coexisting cases (the earlier May 2021 case has new motions for that judge to consider filed by, among other people, the NFL players’ lawyers) and the cringeworthy July 2021 allegations will continue to get much attention because of the combination of celebrity, sports, and cannabis. Also, since it was filed in the vast county of Los Angeles, home to some ten million residents, with state court judges having heavy case dockets and carrying many complex cases, the case will likely persist for years.

But the biggest reason it will take so long for the case to conclude is the amount of money alleged to have been squandered, specifically over $12 million in product or cash, as well as the removal from the site of expensive cultivation and extraction equipment.

Lawsuits can be dismissed “on the papers” if the legal action fails on its face to state a claim. Not here. Genetixs’ lengthy complaint more than amply states a claim (in fact, many claims). These unproven factual assertions could mean big money judgment for the folks bringing the lawsuit if proven in a court of law.

The Los Angeles Superior Court judge assigned to the Genetixs case is former federal prosecutor Barbara Scheper, who handled, among other things at the Los Angeles U.S. Attorney’s Office, complex white-collar crimes. She knows fraud and even when the typical motions to dismiss are filed, will likely let the case proceed to the discovery phase. This means each side will be subpoenaing the other side and other ancillary witnesses for testimony and documents. Then, the forensic accountants on both sides will assess how much money the business generated, how much, if any, was removed, and where the money (mostly cash) went. As forensic accountant Marion Wickersham of Forensic Resolutions, Inc., often opines on cannabis business education panels, “Cash can be tough to trace but we examiners have our ways.”

Takeaways for Cannabis Cultivation Businesses

No doubt that this case is convoluted, but there are clear lessons to be gleaned for cannabis business owners:

• Choose business partners wisely. Vet them to include background and resume verification checks.
• Do not invest money with any person or entity that has no seasoned and experienced management team in cannabis.
• Be wary of investing anywhere which is geographically too far away to drive over and do a spontaneous inspection of the premises.
• If you are planning to get in and stay in the cannabis business, have experienced civil practice lawyers (often current or former “big law” complex civil practice litigators now doing niche and focused cannabis work who have a roster of lawyers who understand and actually practice in civil cannabis law.)
• Know this maxim: A corporate or LLC formation document is not a detailed cannabis business plan. Understand that the latter is typically needed for investors, and often must be submitted as an attachment to state and town licensing applications.

Plus, based on the Genetixs’ saga which concerns investing and operating a cannabis cultivation business, the cannabis business participants would be wise to hire, consult with and create a legal team that should include, but is not limited to, lawyers who have direct experience in:

• Cannabis corporate/LLC/partnership/company formation
• Cannabis licensure (for both states, U.S. territories and towns for both horizontal and vertically integrated operations)
• Real estate and rental premises acquisition specific to cannabis businesses
• Cannabis security systems to include cameras, logs, key card systems, guards, and employee apparel restrictions (for example, bans on clothes with pockets and pre and post work apparel and purse and backpack searches)
• Cannabis tax, accounting, and books and records system expertise for IRS 280E federal compliance
• Cannabis product tagging and tracking, seed-to-sale requirements
• Cannabis and banking (to include those with expertise in how to properly safeguard and report what is still overwhelming a cash-based business due to the ever-present federal illegality of cannabis)
• Cannabis employment and personnel practices to include expertise in background checks, drug testing, felon, and misdemeanor licensing exclusion provisions in each state of operation, as well as conviction expungement practices, and
• Cannabis and insurance to include coverage for employee theft, break-ins as well as personal injury and costs of employees being prosecuted for workplace activities.

And as exemplified by this sordid cannabis business tale, the investor/business person’s team must include lawyers who understand and have had significant experience in drafting and specifically tailoring both cannabis operating agreements and cannabis-focused business plans.

Additionally, any successful cannabis business must have experienced forensic accountants on hand—certified public accountants who have worked with cannabis businesses, not just friends or bookkeepers who know how to input cash on an Excel spreadsheet.

And with reputation devastation one lawsuit away for anyone involved in cannabis, cannabis businesses (especially those in which public figures are involved) must have people on the team who have worked in cannabis public relations and crisis management.

Summing Up

Investing in cannabis businesses comes with significant risk, but for the handsomely capitalized (those who can lose money without losing much sleep) there can be great rewards. Had the sports figured treated their investment and participation differently, the outcome and duration of the litigation as well as “their spin” in the public eye would likely have been different.

One hopes Julio Jones, who missed practice with the Tennessee Titans in the first week of August, will soon have better days. With the right combination of expertise by his side or at his disposal, he might just be able to change the odds in the game.

Julie A. Werner-Simon is a former federal prosecutor, now law professor adjunct and cannabis legal analyst at Drexel University’s Kline School of Law and the LeBow School of Business.