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The Agriculture Improvement Act of 2018 (“2018 Farm Bill”) legalized hemp by removing the crop and its derivatives from the definition of marijuana under the Controlled Substances Act (“CSA”) and by providing a detailed framework for the cultivation of hemp. The 2018 Farm Bill gives the US Department of Agriculture (“USDA”) regulatory authority over hemp cultivation at the federal level. In turn, states have the option to maintain primary regulatory authority over the crop cultivated within their borders by submitting a plan to the USDA. This federal and state interplay has resulted in many legislative and regulatory changes at the state level. Indeed, most states have introduced (and adopted) bills that would authorize the commercial production of hemp within their borders. A smaller but growing number of states also regulate the sale of products derived from hemp.

In light of these legislative changes, we are presenting a 50-state series analyzing how each jurisdiction treats hemp-derived cannabidiol (“Hemp CBD”). Each Sunday we will summarize a new state in alphabetical order. So far, we have covered Alabama,  Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, and Georgia. This week, we look at Hawaii.

Hawaii is one of the growing list of states that has created an industrial hemp cultivation pilot program. The Hawaii Department of Agriculture (“DOA”) launched the state’s hemp cultivation program and issued the state’s first license in June 2018. In May 2019, Hawaii enacted SB-1353, a bill that required DOA to establish a permanent hemp program under the 2018 Farm Bill, among other things. It’s important to note that DOA’s authority only falls on cultivation and not processing or retail sales, but DOA warns that processing could subject a person to different sets of regulations or different legal authorities.

But if you thought Hawaii would be friendly to Hemp CBD products, think again. Sort of like California, a May 2019 press release by the Hawaii Department of Health (“DOH”) states that the sale of CBD infused-products is unlawful in Hawaii.  DOH’s Food and Drug Branch echoes this press release on its website:

• Products containing CBD are not generally considered safe and there may be potential health risks associated with them.
• It is illegal to add CBD to food, beverages and cosmetics that are manufactured, distributed and sold in Hawaii.
• CBD may not be sold as a “dietary supplement.”
• CBD may not be marketed by asserting health claims because that would constitute prohibited misbranding or false advertising.
• CBD is the active ingredient in an FDA-approved prescription drug. Therefore, it cannot be put into food, beverages and cosmetics, sold as a drug without a prescription, or marketed as a “dietary supplement.”

These statements by the DOH make pretty well clear that they are following the federal Food and Drug Administration’s (“FDA”) guidelines (by repeatedly citing/referring to them), but they also cite Hawaii’s food, drug, and cosmetics laws, similar to what California has done.  In fact, Hawaii appears to have gone further than both the FDA and California in prohibiting Hemp-CBD in cosmetics. Hawaii’s position on Hemp-CBD is one of the strictest in the nation as the sale of Hemp CBD products such as foods, beverages, cosmetics, dietary supplements, unapproved drugs, or any other kind of Hemp CBD product that makes health claims, appears to be unlawful in Hawaii.

The bottom line is that the sale of many different kinds of Hemp CBD products in Hawaii appears to be unlawful, at least according to the DOH. Anyone who follows this blog knows that these laws are fluid and changing rapidly, so stay tuned to the Canna Law Blog for further developments.

Cannabis is hyped as a hot investment, and it can be, though it is not without risk as a recent CNN article points out. (See also links below).  Setting aside issues concerning the federal prohibition on marijuana, the cannabis industry’s path from the black market to legalization has been rife with hucksters and promises of easy money, and strewn with burned investors. Not surprisingly then, deals involving cannabis have received scrutiny from the SEC and given rise to civil lawsuits and criminal proceedings.

On such case is Bell on Behalf of Eco Sci. Sols., Inc. v. Taylor in which just last week (April 26), the federal district court of Hawaii denied the defendants’ motion to stay a civil securities fraud case pending resolution of a parallel criminal proceeding.

The case arose from several business transactions that involved Eco Science Solutions, Inc. (“ESSI”) between 2015 and 2018. The plaintiff (derivatively, on behalf of ESSI) alleged that one of the defendant’s, Giguere, was the mastermind of a pump and dump scheme where the defendants artificially inflated ESSI’s stock price through false representations and manipulative trading practices, then sold large quantities of the inflated stock to other investors. How so? The ruling explains that the the officers of ESSI caused it to enter into numerous deals with companies owned or controlled by Giguere or other defendants in exchange for transfers or sales of ESSI stock. Meanwhile, Giguere operated a stock promotion website, “TheMoneyStreet.com,” which encouraged readers to purchase ESSI stock. The amended complaint alleges that defendants caused a loss of market capitalization of over $137 million as the stock price of ESSI went from $4.48 in early 2017 to $0.28 by June 2017.

The last of these suspect deals involved cannabis. In May 2017, ESSI announced it was acquiring Ga-Du Bank, Inc. (a Nevada corporation) through a stock-purchase agreement. In its press release, ESSI stated the acquisition would allow ESSI to provide “payment processing, cash management and financial services to its customers in the cannabis industry.” According to plaintiff, the charter and formation of Ga-Du was questionable and, as a result of the acquisition process, Ga-Du became a wholly owned subsidiary of ESSI. Ga-Du, it seems, was to provide foreign jurisdictions with legalized cannabis a banking mechanism (under the regulatory laws of the Uruguayan Central Bank) for their dealings with the U.S. cannabis industry.

A May 2017 press release for the ESSI/Ga-Du deal includes a lot of familiar buzzwords. The President of Ga-Du, John Lewis explained, “By combining Ga-Du Bank with Eco Science Solutions, we see how our synergies will create an important financial institution to serve a category that is in need of a fully integrated vertical product suite.” Said Jeff Taylor, CEO of ESSI, “It has been our vision from day one that, in order to fully service the cannabis industry and execute on our business plan, we needed to be creative in securing and offering a banking platform that further differentiates us from everyone in our category . . . The deal with Ga-Du Bank is a game-changer for not only ESSI, but everyone in the cannabis industry. This new division of our Company will put us years ahead of our goal to create a full-service marketplace among growers, suppliers, distributors, retailers and consumers.”

Sounds impressive right? (Taylor and Lewis are defendants in the civil case).

In June 2018, Giguere was indicted in a California federal court for federal securities fraud and conspiracy to commit securities fraud. The indictment was based, in part, on the same events and facts as the civil lawsuit described above. One month later, the SEC filed a civil action based on Giguere’s involvement with ESSI and other corporations. That action was stayed pending resolution of the criminal proceeding, for which trial is set in August 2019.

Before the Hawaii federal court was a motion to stay proceedings of the civil case pending resolution of the criminal case. The defendants argued that Giguere’s Fifth Amendment rights would substantially interfere with the discovery process as to all defendants.

The Court disagreed with the defendants in a short, well-reasoned opinion. Beginning from the premise that the Constitution does not ordinarily require a stay of civil proceedings pending the outcome of a criminal proceeding, the Court analyzed defendants’ motion under “the particular circumstances and competing interests” involved in the case including (1) the extent to which the defendant’s Fifth Amendment rights are implicated, (2) the interest of the plaintiffs in proceeding expeditiously, (3) the burden the proceedings may impose on the defendants, (4) the convenience of the court and the efficient use of judicial resources, (5) the interests of persons not parties to the civil litigation, and (6) the interest of the public in the pending civil and criminal litigation.

On the first element, the Court recognized that Giguere’s Fifth Amendment rights were clearly implicated in the parallel proceedings, noting this was particularly true because he had been indicted and a trial date had been set. But Giguere was only one of five individual defendants and the only defendant named or charged in the criminal proceeding – so these other defendants’ Fifth Amendment rights were of no moment. The Court concluded this factor weighed only slightly in favor of a stay.

On the second element, the Court easily concluded that the plaintiffs had an interest in proceeding with the litigation in order to preserve the integrity of testimony and evidence and to obtain adequate redress.

On the third element, the defendants argued that they could not adequately prepare their defenses without Giguere’s “unfettered” testimony, which would be unavailable if he summoned his Fifth Amendment rights. The Court disagreed, reasoning that this argument wrongly assumed that the other defendants were entitled to Giguere’s testimony in disproving their own individual liabilities. Put differently, said the Court, Giguere’s Fifth Amendment rights did not extend beyond himself. As for Giguere, the Court found significant that he previously argued against a stay in the SEC action and indicated he had the capacity to proceed with multiple simultaneous litigations.

The Court found the remaining elements weighed against a stay and the Court concluded that no substantial prejudice would result because, to the extent Giguere’s Fifth Amendment rights became implicated, his assertions could be more efficiently dealt with piecemeal rather than staying discovery as to all defendants and effectively halting the case.

What’s the lesson for investors in the cannabis industry whether that be marijuana, hemp, or CBD? Beware of buzzwords and do your homework. For more on cannabis securities and fraud issues, check out the following: