Business

Fruman and Parnas pursued medical pot license in FL. What does it say about industry?

In Florida, the medical marijuana space is headed to becoming a multi-billion dollar business with more than 277,000 patients and counting. The nascent industry has grown exponentially since it was expanded by a 2016 citizen ballot initiative to legalize pot for medical use.

While flourishing, the industry is still new and experts from Florida and beyond say the state has a bit of catching up to do when it comes to creating a secure business environment.

After two Soviet-born South Florida businessmen indicted on campaign finance charges were found to have pursued entry into Florida’s medical marijuana industry, it left an open question for those who work in cannabis: How could this have happened?

Lev Parnas and Igor Fruman — naturalized U.S. citizens now subpoenaed to turn over documents in the impeachment investigation into President Donald Trump — sought to invest in one of Florida’s state-issued cannabis licenses. Their plan appears to have been unsuccessful due to an inability to prove that they had the cash, but a Miami Herald report raised questions of how a purchase like it could happen.

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According to their indictment, Fruman, Parnas, and business partners Andrey Kukushkin and David Correia, worked in Nevada in June 2018 to gain a marijuana license there. Prosecutors say they planned to create a marijuana company, and Correia created a table of planned political contributions worth up to $2 million in a “multi-state license strategy,” the indictment says.

The group failed to obtain a license because it applied too late in the state process, according to the indictment. But prosecutors said Parnas, Fruman, Correia and the foreign business partner “continued to meet into the spring of 2019” in discussion of their marijuana business.

ParnasFruman
Lev Parnas and Igor Fruman Alexandria Sheriff's Office

Florida licenses are obtained from the state following a long and expensive application and vetting process, after which they can be used to grow, process and sell medical marijuana. Currently, 13 of the 22 licenses operate this way.

Alternatively, the license continues to exist as a piece of paper worth around $50 million to a potential buyer. The license can grow in value and eventually flip for large amounts of cash to a wealthy investor or company publicly traded on the Canadian stock market. In other words, those licenses can be purchased by people who wouldn’t have made it through Florida’s requirements that applicants have experience cultivating Florida plants or any real experience in agriculture at all. They must, however, pass a background check.

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The value and intrigue of licenses in legalized states caught the attention of the FBI, which took the unusual step four months ago of warning about public corruption in the marijuana industry in western states where they said an individual license can be resold for as much as $500,000.

“We see people willing to pay large amounts of money to get into the industry,” Supervisory Special Agent Regino Chavez said in a short podcast released in August by the FBI.

A fledgling Florida industry

Florida’s medical marijuana industry has been mired in controversy since its inception in 2014, when lawmakers legalized low-THC cannabis and authorized five licenses under what was called the “Charlotte’s Web” law to primarily treat children with seizure disorders.

In 2016, about 71% of Floridians who voted passed a constitutional amendment to more broadly legalize medical marijuana for other treatments, and the Legislature created a law to implement their wishes in 2017.

The new law required officials at the Florida Department of Health’s Office of Medical Marijuana Use (OMMU) to issue 10 more licenses, bringing the total to 15.

The licensing structure has since been fraught with litigation, including suits from hopeful licensees who were denied, and accusations that the state set up an unconstitutional business structure called “vertical integration,” which requires businesses to grow, test, process and sell their product without any middlemen.

Now, the state is moving forward with a process to issue four new licenses under a different part of the law, which requires more licenses after 100,000 patients enrolled in the program.

Concern over the financials of the marijuana industry is due to banking restrictions. Cannabis companies often do business in cash, and secure payment options can be limited because of marijuana’s standing as a federally illegal substance.

Florida is also a magnet for wealthy Russian expatriates, and Russian entrepreneurs have stepped into the marijuana space. One of the top medical marijuana companies in the country, Curaleaf, is run by Russian billionaire and oil magnate Boris Jordan. Curaleaf, based in Massachusetts, is the third-largest treatment center chain in Florida.

Florida Chief Financial Officer Jimmy Patronis recently cautioned consumers about companies doing business “in duffle bags of cash,” but a former director of Florida’s medical marijuana program, Christian Bax, says banking isn’t a huge issue for the state’s treatment centers.

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That said, Bax says the lack of clarity on how these businesses should manage cash is troubling.

“It’s in the best interest of everyone for the federal government to give some clear direction sooner rather than later,” he said.

Scant regulation at first

When the first medical marijuana licensing plan was set up in 2014, the framework was bare bones.

A very small number of licenses were awarded through a grading system, and in just a few years became part of a highly sought public market. Multinational companies turned their eyes to Florida, and the licenses soon flipped for millions.

Because of the federal prohibition on marijuana, the oversight over these major transactions falls to state regulators. The quickly growing industry will “continue to be a strain on resources for state governments until the federal government does something,” said Bax, who ran Florida’s marijuana program from 2015 to August 2018.

“The current banking issues with cannabis, and the sheer size of transactions that can reach well into the hundreds of millions of dollars, the mergers and acquisitions happening in cannabis right now are extremely complicated,“ Bax said. “Every cannabis regulator in the country is having to figure out how to handle the sheer volume and complexity of all of these deals.”

To date, there’s only about 35 dedicated marijuana program employees in the state, and the program is run by the health department’s chief of staff, Courtney Coppola.

Because the state law was created with a public health and medical focus, the approach is patient-forward and limited. The office is limited to acting within the narrow scope of the law, which sets the budget and hiring power for the department.

In a statement Thursday, a department spokesman said OMMU “remains committed” to using best practices with license applications and change of ownership requests.

“Each ... application is thoroughly vetted for compliance with Florida law and department rules before consideration is given to any change to a medical marijuana treatment center application,” Alberto Moscoso said.

Lewis Koski, a regulatory consultant who helped get Colorado’s marijuana program off the ground, said Florida differs from states like Colorado in that way. In Colorado, the state issues thousands of licenses and employs thousands of employees to oversee the process.

“The Florida market is largely dictated by what’s in that legislative component,” said Koski, who now runs a marijuana tracking company in Lakeland. “It makes sense that the agency around it is tailored to what’s in the legislation.”

But some people in the industry are less trusting.

Adam Elend, the CEO of Florigrown, said there “could not be more of an opportunity for someone who wants to prey on our medical marijuana market.” Elend said he’s not at all surprised that people like Fruman and Parnas showed interest.

Florigrown is the Tampa marijuana company fighting the state’s medical marijuana licensing process in court.

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Elend said he fears the lack of oversight by the state on some of the publicly traded companies leaves room for corruption, and wonders why the state isn’t doing more to look into the private equity funds that own some of the licenses worth millions.

“We’ll never catch them here,” he said. “And that’s not really acceptable.”

Robert Friedman, a South Florida-based cannabis legal consultant, says the limitations in Florida’s system make it difficult for anyone to operate in the state. While the booming market and skyrocketing patient numbers look appealing to outsiders, Friedman said the limited license structure is “incredibly prohibitive” and gives preference to wealthy investors who can afford to navigate the application process.

“They created a golden ticket. Right now, depending on your resources and who you know, you can apply for a license for $1 million and if the cards go your way, it’s $50 million on a piece of paper,” he said. “Only wealthy people can be in the game ... for this industry to survive, it is going to take some really deep pockets.”

In addition to attracting wealthy, foreign investors due to high license costs, Friedman says the industry also draws in people who are “used to doing things outside the lines.”

“Cannabis is still transitioning from a black market,” he said. “This is an industry trying to clean up its act.”

Is Florida vulnerable?

But there is some skepticism as to how susceptible to corruption Florida really is.

Some experts say that while the industry faces growing pains, there’s a reason why actors like Fruman and Parnas weren’t able to break into the industry.

Medical marijuana licensure is one of the most closely watched issues in Florida, said Bax. So closely watched by the Legislature and media, he said, that there’s less room for fraud than some may think.

“The idea that someone at this stage in the game could make a phone call and get a license worth $50 million completely misunderstands what’s going on in Florida right now,” he said. “It’d be like walking onto the field in the middle of the Super Bowl and trying to steal the game ball.”

Koski, who also has a background in gaming, says the marijuana industry can look to casinos as a “platinum standard” in ensuring those interested in obtaining licenses don’t have criminal backgrounds. Casino licensing was born from the industry’s history with organized crime, and the standard for vetting license holders is relatively high nationwide.

But that being said, Koski notes that there’s “no right way” for state regulators to act.

Whether it’s a single state licensing authority like in Colorado, a cannabis commission in Massachusetts or the medical program in Florida, “all have the potential to be successful.”

Samantha J. Gross is a politics and policy reporter for the Miami Herald. Before she moved to the Sunshine State, she covered breaking news at the Boston Globe and the Dallas Morning News.
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