San Francisco

Berkeley Patients Group Closure Marks Biggest Casualty Of Pot Crackdown

This article comes to us courtesy of California Watch.

With its only retail outlet due to close today, Berkeley Patients Group is set to become the biggest casualty so far in a bold and controversial legal offensive by federal prosecutors against California's pot industry.

The group sent an e-mail to customers earlier today announcing the pending closure.

While dozens of other medical marijuana dispensaries around the state have been forced to shut down since California's four U.S. attorneys launched the crackdown in October, none is as large or commands the same local political support as Berkeley Patients Group.

Late last year, Melinda Haag, U.S. attorney for Northern California, warned the group's landlord, David Mayeri, that the government would seize his assets if marijuana continued to be distributed at the property. The letter cited violations of federal law and the outlet's 1,000-foot proximity to two schools.

"Marijuana dispensaries are full of cash and they're full of marijuana, and everybody knows that," Haag said in an interview in March. "They are at risk of being robbed, and many of them are robbed."

Haag said another dispensary being targeted for closure was located next to a preschool in Santa Cruz. In February, armed gunmen robbed the facility.

Berkeley Patients Group supporters, including neighboring businesses, contend the facility has operated safely for 12 years and has never been the scene of a serious crime.

The group's owners declined interview requests. But in written responses today, they said closing the current site "would deprive many patients safe access to their medicine and be particularly difficult for the hundreds of low income patients who rely on BPG for free medical cannabis and holistic health services. This is an outcome that we have been working very hard to prevent."

Under a legal agreement with Mayeri, Berkeley Patients Group must cease operations at its location tomorrow and vacate the premises by June 1.

Medical marijuana activists have denounced efforts to close the facility. They've also condemned a recent raid by federal agents on nearby Oaksterdam University, a medical marijuana training school that has been dubbed the "Princeton of pot." With federal indictments possible in that case, owner Richard Lee announced he's stepping down.

Berkeley Patients Group representatives declined to say whether they have secured a new location for their dispensary. But real estate experts said the federal crackdown has left property owners nervous about renting to medical marijuana establishments, even if they have permits from local authorities.

"It's almost impossible to relocate, especially under the rules and regulations that the cities and state have in place right now," said Adam Peterson, a real estate agent for Cassidy Turley BT Commercial.

Even if the dispensary reopens, other challenges remain, including a whopping tax bill.

According to a 2011 state audit, Berkeley Patients Group owes $6.4 million to the California State Board of Equalization for its failure to pay sales taxes from 2004 to 2007. Officials have said they are paying off the debt in monthly installments.

The group has also been embroiled in bitter legal battles with two former employees - the group's co-founder and a senior manager.

Part of the dispute stems from the group's decision - at the peak of California's pot boom three years ago - to invest hundreds of thousands of dollars in four dispensaries in Maine.

Beginning in 2009, Berkeley Patients Group helped create a sister business, Northeast Patients Group, which eventually won permits from the state. Annual revenue projections for the dispensaries have ranged, from $7 million to $22 million, according to documents submitted to Maine's Department of Health and Human Services.

Court documents from Maine show Berkeley executives pumped more than $600,000 in loans, services and other expenses into the enterprise, which was headed by a former manager and modeled on the group's operations in the Bay Area.

But the collaboration went sour. Last year, Berkeley Patients Group filed a lawsuit against the former employee, Rebecca DeKeuster, and Northeast Patients Group, alleging they sold trade secrets to a competitor and failed to repay the loans. The case is still in litigation. Since then, DeKeuster opened three dispensaries in Maine, but Berkeley Patients Group has ended its involvement in the project.

In a written statement, the group's executives said they decided to establish the business in Maine because they wanted to help set up the nation's first state-run dispensary system.

"The decision to work in Maine was not taken lightly, but it was a unanimous decision by our Board," the statement read.

But two former employees criticized the way the group went about the expansion.

Doug McVay, Berkeley Patients Group's bookkeeper in 2009 and 2010, said the decision to invest in out-of-state dispensaries was "ill-conceived and over-ambitious at best," leaving the organization financially vulnerable.

"Funds went out without a clear understanding of whether they were for a loan, an investment or something different, and those designations would change over time," he said in an e-mail.

Deborah Goldsberry, a co-founder who left Berkeley Patients Group last year, alleged money for the Maine project was pulled from a special trust account set aside to cover the group's state tax obligations, according to a wrongful termination complaint filed in Alameda County Superior Court in November.

Goldsberry declined to comment on the complaint, which was settled in January. In a statement, Berkeley Patients Group denied "using any money set aside for taxes to fund the work in Maine" and said the complaint "was never served and any matters have been resolved to the parties' mutual satisfaction."

Company business documents show money for the Maine expansion came from internal reserves as well as a loan from the group's landlord, Mayeri. The documents do not show the group drew funds from a special tax account.

McVay, Berkeley Patients Group's former bookkeeper, said the dispute over the Maine project was connected to other financial arrangements, including a deal in which current CEO Tim Schick and Goldsberry purchased a property adjacent to the dispensary. Berkeley Patients Group provided the down payment and covered monthly mortgage installments, according to McVay.

"At the time ... we never had a signed agreement on file - no interest, no repayment plan, no terms, nothing," he said. "The paperwork was minimal."

In a written statement, Berkeley Patients Group said the property was purchased by Goldsberry and Schick in 2009 "in anticipation that BPG would expand physically at that location. Clearly those plans have changed, and what will be done with that additional space has yet to be decided."

Some prominent players in the Bay Area's medical marijuana industry said the acrimony was fueled by a clash between Berkeley Patients Group's "hippie" roots and the need to operate an increasingly sophisticated business amid murky laws and zealous federal law enforcement.

"It was a very different organization back then," said Mickey Martin, an Oakland-based dispensary consultant, referring to the founding of the group after Californians legalized medical marijuana in 1996. "Very hippie-rooted. They tried to run it like a family organization."

In 2003, SB 420 provided legal cover for medical marijuana outlets. Six years later, the medical marijuana retail business was booming across California. Operating with a city permit, Berkeley Patients Group was serving thousands of customers a month with $19 million in annual revenues, according to interviews and Internet postings by company managers.

The group also cultivated a community-friendly reputation, donating thousands of dollars to local groups ranging from a special school for hearing-impaired children to the local chamber of commerce. In 2009, the Berkeley City Council declared "Berkeley Patients Group Day," lauding the dispensary for its tax revenue, donations, sponsorships and "living wages."

But that same year, Berkeley Patients Group started to move away from its hippie roots, according to Martin.

Martin said the group's push into new business ventures was spurred in part by competition. In 2010, Steve DeAngelo - owner of Harborside Health Center in Oakland, another large dispensary - founded "CannBe" to export marijuana-related business opportunities.

CannBe offered the services of a legalization "A-team" that would work to pass local medical marijuana regulations and win coveted distribution permits for clients around the country. A CannBe internal sales brochure dated October 2010 lists consulting fees of $270,000 for each signed contract plus an additional $5.15 charge for every customer transaction, payable monthly for at least 10 years.

DeAngelo said the document was similar to a franchise agreement but that actual deals were for "significantly" less money. CannBe folded last year.

As a bill to tightly regulate medical marijuana is debated in Sacramento, Henry Wykowski, a finance expert who advises dispensaries, said more rules could mean fewer disputes of the kind that Berkeley Patients Group and other operators have experienced.

"I don't think that more regulation would be bad for the industry. The guidelines are gray and when they're gray that can lead to all sorts of problems," he said.

This story was reported in collaboration with KQED public radio. Michael Montgomery and David Downs are investigative reporters for California Watch, a project of the nonprofit Center for Investigative Reporting. Find more California Watch stories here.

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