The penalty for hiding owners in a Washington legal-pot business is loss of license. But that punishment has rarely been the result of 36 violations the state has alleged. The case of a Seattle store, Vela, suggests why.
Vela, a uniquely designed Seattle pot store, opened last year with fanfare and sophistication.
Snoop Dogg dropped in on Vela’s opening weekend for a fundraiser benefiting the University of Washington Cannabis Law and Policy Project. The store then hosted a speaker series featuring top city and state regulators of the legal pot industry.
All the while Vela, a few blocks south of Safeco Field, was facing closure for allegedly violating state rules by hiding owners in the business.
The rules say if you do that, you lose your license. The sanction is severe because hiding owners is a way for unsavory characters or illicit funds to infiltrate Washington’s tightly regulated industry, which includes FBI background checks on all owners.
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It’s also a way to skirt the state’s limit on three retail licenses per person (soon increasing to five) and rules preventing store owners from also being growers.
Investigators at the state Liquor and Cannabis Board (LCB) have issued 36 hidden-ownership violations since legal sales began in 2014. But only three have led to canceled licenses. Sixteen cases are unresolved.
The lack of revocations isn’t because the LCB is overreaching or caving to offenders who appeal, said Justin Nordhorn, the LCB’s enforcement chief. Investigators haven’t found cartels lurking in our pot industry, Nordhorn said. In many violations, businesses appeared to hide sources of funding more out of negligence or financial desperation than for more sinister reasons, according to a review of investigation and settlement records by The Seattle Times.
Five cases have been resolved with fines and 12 with written warnings. “If you look at how we conduct enforcement, our purpose is not to cancel licenses and be punitive in nature,” Nordhorn said. “Our purpose is to gain compliance.”
That’s especially so if the hidden owners don’t have criminal records that would disqualify them from holding a legal stake, he said.
Records spanning three years reveal a range of reasons behind violations: broken deals, employee profit-sharing, tax maneuvering, desire for anonymity in public records, and dire need for quick cash.
Because investigating boxes of financial, legal and corporate records tends to be complex, the LCB created a new enforcement unit this year to handle such cases, Nordhorn said. With layers of due process accorded business owners, cases can take well over a year to resolve.
Vela’s case, which led to the largest LCB fine for hidden ownership, illustrates the challenges regulators face in trying to untangle and appropriately penalize rule-breakers.
Months before LCB Director Rick Garza spoke at Vela’s in-store education series, state investigators spotted trouble in a form filed by owner Ken Jones.
The owners of the store’s license had previously been reported to the LCB as Jones, his wife, Mary, and Chris Yarnell, a Kitsap County man who had won the license in a state lottery and formed a partnership with the Joneses.
The new business structure filed by Jones showed that he, Mary Jones and Craig Kinzer, a Seattle real-estate executive, would be the governing members of the Vela license, according to state records.
More important, the document showed that Ken Jones, with Kinzer’s help, was buying out Yarnell’s interest for $100,000 and paying $200,000 each to Nick Antonie and Chris Cody, two local pot entrepreneurs, and associates of Yarnell’s.
Antonie and Cody had never been listed as owners, or what state regulators call “True Parties of Interest” on the Vela license application. Investigators concluded the payments “obviously indicate that Nicholas Antonie and Christopher Cody were parties of interest and never disclosed.”
The state Attorney General’s Office filed a complaint in December, citing three violations: hiding owners; misrepresenting facts to the LCB, which also calls for license cancellation; and making changes in ownership without LCB approval, which carries a standard 30-day license suspension.
Accounts vary widely on what had happened but all agree that disputes arose between Ken Jones and Yarnell, Antonie and Cody as they tried to craft a deal.
Jones and his lawyers told investigators that Antonie and Cody were not owners of the Vela license. Jones said they were involved in a different venture with him. When that deal couldn’t be consummated, Jones said, he bought out Antonie and Cody, who went on to become owners of pot-store licenses in Seattle and Mount Vernon, respectively.
Jones blamed the violation on complaints by competitors jealous of Vela’s design. It’s the only store in Seattle with a pot-growing business adjacent to it. So visitors to Vela can look through a window in a common wall at plants being grown next door by Suncliff, a business owned by Kinzer’s son.
Kinzer was not named in the Vela violation, as he is considered a financier of the store but not an owner under LCB rules. Suncliff has nothing to do with the violation.
Antonie and Cody provided affidavits saying they had no ownership stake in the Vela license.
“We were named in that settlement because of other things we were bringing to the table,” Cody said, such as their expertise as medical-marijuana entrepreneurs.
Antonie agreed, but in a follow-up interview changed his story. “The payment was really for the license. We were all planning to be on that license,” he said.
Why hide that? It’s not clear. Cody said he and Yarnell each applied for three retail licenses as individuals. But Yarnell, Antonie and Cody agreed that each of those six applications represented a three-person partnership among them, Cody said.
One reason for doing that might be so the trio could share in more than three licenses if they were able to obtain them from the LCB.
In April, Jones agreed to pay a $50,000 fine. His settlement with the state was finalized by a judge last month. (Vela’s April pretax sales totaled $75,979, according to state records.) He and Kinzer did not respond to interview requests after the settlement.
Jones agreed to the fine for practical reasons, said Joe Brotherton, who said he is in the process of becoming a part-owner of Vela and was acting as Vela’s spokesman regarding the settlement. “It came down to a business decision. This thing goes away rather than risk that it lingers.”
Brotherton, a lawyer who works for Kinzer’s real-estate firm, maintained that Antonie and Cody had no legal claim to the store license, pointing to their affidavits attesting that.
Although Jones admitted to a hidden-ownership violation, circumstances warranted less than loss of license, according to the settlement. Yarnell, the original license owner, had the primary obligation to disclose his partners, it said.
Nordhorn noted that Antonie and Cody weren’t hiding backgrounds that would disqualify them from legal ownership, the LCB’s chief concern.
The LCB wouldn’t necessarily investigate the duo further, Nordhorn said, because the enforcement system is geared to specific licenses, not the people behind them. “If we have violations at one Safeway, it doesn’t impact all 454 Safeways across the state,” he said, likening it to liquor rules.
Garza, the head of the LCB, appeared at Vela in November, following in-store talks by Seattle City Attorney Pete Holmes, David Mendoza, a policy adviser to Seattle Mayor Ed Murray, and Alison Holcomb, chief author of the state’s legal pot law.
Interviewed after his talk, Garza said he knew of Vela’s violation. (Holcomb, Holmes and Mendoza said they didn’t.) Records show that Vela’s lawyer wrote him about the case last year, noting that Kinzer had contacted Garza earlier that day about “what is an admittedly complicated set of facts.”
But Garza insisted his appearance didn’t present a conflict of interest. He was not involved in the ultimate decision about the violation, he said. That was left to the LCB’s three board members, appointed by Gov. Jay Inslee and advised by the Attorney General’s Office.
“I wouldn’t. I couldn’t,” Garza said of influencing the decision. Nordhorn agreed the decision wasn’t political.
Vela speakers also have included former LCB member Chris Marr, who has been paid $44,000 since the start of 2016 to lobby for a company of which Kinzer and Jones are governing members, according to state records. Marr, also a former state senator, is listed as a proposed new part-owner of Vela in an LCB record. He said his lobbying “never involved any work or LCB contact” related to any license violation, including Vela’s.
“You know the rules going in”
The hidden-ownership rules are well-intended but misguided, said Aaron Pelley, a lawyer who has represented companies with violations.
They were crafted largely to safeguard against federal authorities, he said. Washington and other states have been allowed to proceed with legal pot as long as they adhere to eight Department of Justice priorities.
One of those priorities is preventing Washington’s pot-industry money from flowing to cartels, gangs and criminal enterprises.
“I don’t think cartels would invest or ever have invested because they don’t want to be in a highly regulated and taxed industry,” Pelley said.
Of the three licenses the LCB has canceled, one of those was for a business that had been inactive for six months, had given away equipment to pay debts and had been all but dissolved by its squabbling owners. In the other, a hidden owner of a pot farm had a criminal record that would have disqualified him had he been disclosed to the LCB, according to enforcement records.
In the third case, an owner said she and her husband were quitting the business and canceling their license “to stop the bleeding.” That was after they appeared to deceive, according to records, an old friend and her disabled son who said they were investors and 49 percent owners but were never disclosed to the LCB. “I am done with the mj business and never belonged in this environment. I’m much better in academia,” the license-surrendering owner, a retired teacher, wrote the LCB.
Some violations tend to occur because owners need financing to keep the grow lights on and can’t wait for the necessary LCB approval. Facing a choice of shutting down or breaking rules, they take a chance, Pelley said.
In the most naive of violations, the LCB found that a Bellingham pot farm had signed contracts with four employees offering them a cut of net profits for their labor, technically making them owners. “None of the employees had a full understanding of the rules/laws,” wrote an LCB investigator. No profits were ever paid to employees; all parties agreed to replace the contracts with a pay scale, according to records. A written warning was issued.
But an industry group, the Cannabis Organization of Retail Establishments (CORE), wants the LCB to keep up its watchdogging.
The pot industry’s success depends on rule-abiding players, said Logan Bowers, a store owner and CORE spokesman. “You have to look at the bigger picture,” Bowers said. “I’m not going to play with fire. But if somebody else does, it diminishes the integrity of the industry.”
Arguing that owners caught in a financial pinch need more slack, Bowers said, is “dangerously close to saying I had to speed on the highway or I’d be late to a meeting.”
“You know the rules going in,” he said. “The rules are in place to keep dirty money from leaking in. Do we want risk-takers flouting rules to be the ones getting an advantage? I think the answer from the citizenry is ‘no.’ ”