Pubdate: Tue, 21 Jan 2014
Source: Sacramento Bee (CA)
Copyright: 2014 The Sacramento Bee
Author: Peter Hecht


Matthew Davies, a freshly minted MBA graduate from Santa Clara
University, was a fast achiever in business.

He launched an online jewelry importing company, moved on to open a
property management firm and then an upscale French restaurant, Le
Bistro, that served fine wines and Grand Marnier souffles.

On March 3, Davies, 35, of Stockton, will begin serving a five-year
federal prison term for his most ambitious, and ill-fated, venture:
becoming a medical marijuana entrepreneur in California.

His ultimate success story - building a $10 million Central Valley
medical marijuana enterprise in barely two years - became both his
undoing and a cautionary tale for people who saw a green rush in
California's teeming, unregulated cannabis economy.

Starting in 2009, Davies sought to build a new professional model for
pot in California.

He created a marijuana production and sales venture similar to those
of the Colorado cannabis executives who built booming state-licensed
and for-profit medical marijuana enterprises that include retail
stores and cultivation warehouses. But Davies claimed to do it while
earning a modest salary as a nonprofit dispensary operator under
nebulous California laws that authorize patient-run "collectives" or
"cooperatives" to grow and share the medicine.

Federal prosecutors saw a criminal profiteer.

"Matthew Davies, a Stockton businessman with an MBA, set out to build
a lucrative marijuana empire," said U.S. Attorney Benjamin Wagner, in
a statement announcing Davies' May 31 guilty plea. He added: "Our
investigation has shown that, in the end, it was all about the money."

Davies operated, at one time or another, seven marijuana dispensaries
in the Stockton and Sacramento region. He also set up an industrial
cultivation facility, promising certified organic cannabis for a
registered network of more than 20,000 medical marijuana users.

He cast himself as a turnaround specialist for distressed marijuana
businesses. He put money into troubled, dingy pot shops and remade
them as holistic fern bars that dispensed cannabis with "a Zen-like"
ambiance and offered health services, including chiropractic care,
massage therapy and acupuncture.

When he ran into trouble with the federal government, Davies, a
married father of two young daughters, hired a team of lawyers and
former Clinton administration official Chris Lehane as a media
consultant. He launched a website, He drew
coverage in The New York Times and The Huffington Post, making a
public case that he was an honest man who dutifully followed
California's law, only to be unfairly singled out by the government.

Despite his guilty plea to marijuana conspiracy, manufacturing and
sales, Davies today suggests federal authorities unfairly applied
marijuana laws against him while allowing entrepreneurs in other
states to thrive.

He also blames his fate on California legislators' failure to set
clear rules for a medical marijuana industry that mushroomed to more
than $1 billion in taxable marijuana sales by 2010. In contrast,
Colorado passed laws that provided meticulous state oversight of
marijuana stores and cultivators, apparently satisfying the U.S.
government, which sharply curtailed prosecutions of marijuana
businesses there.

"Our state happily took $100 million in tax money" from medical
marijuana business in California, "but when the time came to help us
out, they were never to be found," Davies said in a recent interview
at his accountant's office in Stockton. "If California had the
gumption to remove the ambiguities of our law, there is no way a
federal prosecutor would have been able to prosecute me."

He has closed his Stockton restaurant, is turning over his property
management company to others and coming to terms with leaving behind
his daughters, ages 2 and 1, and a wife "who will have to be single
mother for a while."

"How do you prepare for this?" he said. "You don't prepare. I have
sort of exited my life."

Davies says he feels seared by the contrasts: He heads to prison while
federal officials stepped back as Colorado and Washington legalized
marijuana for recreational use. On New Year's Day, consumers in
Colorado lined up in droves for America's first retail sales of pot
purely for pleasure.

Legal observers suggest the circumstances of Matthew Davies' case, and
the opportunities that he perceived in the California medical
marijuana industry, make for a complicated story.

Sam Kamin, a specialist in marijuana law at the University of Denver's
Sturm College of Law, said Davies may have a valid complaint that
state lawmakers left him exposed to federal prosecution by failing to
set clearer rules for California's marijuana industry.

"The feds have essentially said that if you're doing this in a state
that regulates this stuff robustly, that is between you and your state
government," Kamin said. "But he (Davies) was operating in this nether
land. And the feds came after him."

San Francisco attorney Matt Kumin, who represented other dispensary
operators in unsuccessful appeals of federal enforcement in
California, said Davies was part of a business-savvy breed of dreamers
who rushed into the marijuana business without grasping the potential

"It was risk-venture capitalism," Kumin said. "People were jumping
into this space, thinking, 'Oh wow, marijuana, the largest cash crop
in the state.' They didn't come out of the black market. They were
newbies. And next thing you knew, the police were taking them down and
they were shocked."

Federal prosecutors took particular note of Davies' business acumen,
as well as the fact he was neither a cannabis activist nor a seriously
ill patient.

Davies did get a doctor's recommendation for medical marijuana to
treat anxiety and insomnia. And in November 2009, he opened one of
Stockton's first marijuana dispensaries, a purportedly nonprofit
patients' "cooperative" for medical cannabis users.

According to prosecutors, Pathways Family Health Cooperative, started
by Davies and a business partner, Lynn Smith, handled more than $2.2
million in marijuana sales in less than a year before the city shut it
down. He went on to open another Stockton dispensary, Central Valley
Caregivers, which racked up $4.5 million in gross sales by 2011,
before moving to Sacramento - and pot business glamour.

Davies soon bought into a struggling local dispensary on Northgate
Boulevard called East Bay Health Solutions. "It was dingy. It looked
like a head shop. It was one of the worst places in the city," he said.

He remodeled the establishment as a cannabis wellness facility called
MediZen. It offered upscale ambiance, top-shelf marijuana strains at
discount prices and a range of "holistic" health services for patient
clients. MediZen took out ads on the back page of the Sacramento News
& Review and ran commercials on local television. Its daily pot sales
spiked from barely $500 to $17,000.

Davies went on to take over other city dispensaries, including River
City Wellness in Natomas and the Twelve Hour Care Collective in south
Sacramento, and to acquire a 50 percent interest in a Stockton medical
marijuana store, Port City Wellness.

He said his cannabis ventures eventually employed 100 people, from
cultivators to the "bud tenders" who sell pot to patients, earning $15
to $30 an hour. Meanwhile, he said, he took less than $40,000 in
salary in two years - while anticipating greater future earnings as
the CEO of an expanding nonprofit medical marijuana network.

Federal prosecutors say Davies' nonprofit claim was a

Their sentencing memo said he wrote $117,000 in checks from MediZen
and Central Valley Caregivers accounts to pay down credit card debts
for his Le Bistro restaurant and a mobile home park he operated in
Stockton. They alleged he used hundreds thousands of dollars in
cannabis earnings to acquire other dispensaries, planning "to
comfortably support himself via the expansive marijuana business."

Davies claims the feds put "a spin that didn't exist" on his actions.
He says the modest salary he reported included $20,000 he used to pay
off restaurant expenses, but otherwise his pot venture was "fully
segregated" from the restaurant and property businesses. He argues
that reinvesting cannabis earnings to grow his medical marijuana
enterprise doesn't constitute profiteering.

But he admits having made fateful decisions that drew scrutiny from
the feds.

In summer 2011, Davies took over a problematic south Sacramento
dispensary, R & R Wellness Collective, soon after it had been raided
by Elk Grove police and Sacramento County sheriff's deputies.

Authorities, investigating a scheme involving multiple grow houses,
stolen electricity and illicit marijuana sales in Southern California,
recovered $256,000 in cash at the Elk Grove home of the operator,
Bryan Smith. They also found a video of the 27-year-old man bragging
of how much money he was reaping in the pot business. In 2013, Smith
was sentenced to six years in federal prison.

Davies changed the name of R & R Wellness to Sacramento Patients
Group. He said he paid off the dispensary's back taxes to the state
and tried to repair its reputation. But when U.S. prosecutors brought
charges against Smith and other R & R Wellness employees, Davies
immediately closed the establishment.

"It associated us with a bad apple," he said, "and it was a

He said a greater mistake was opening an industrial marijuana
cultivation center in a 30,000 square-foot Stockton warehouse in hopes
of producing high-grade cannabis for medical marijuana customers at
low cost. He calls it "the worst decision in my life," one that
"brought this prosecution upon us."

On October 4, 2011, three days before California's federal prosecutors
announced a sweeping crackdown on California medical marijuana
businesses, federal agents served warrants on the Stockton cultivation
facility, seizing nearly 2,000 flowering marijuana plants, 900 starter
plants and 50 pounds of pot. Prosecutors threatened Davies with more
than 10 years in prison.

His business partner, Lynn Smith, pleaded guilty and got a 3 1/2-year
federal sentence for his role in the marijuana enterprise. Davies'
chief grower, Robert Duncan, took a deal for two years in prison.

Davies fought on, taking his case to the media. His wife, Molly
Davies, penned a public letter to President Barack Obama.

Writing in The Huffington Post, she noted Obama's comments that the
federal government had "bigger fish to fry" than going after
recreational pot users in Colorado, where state-licensed marijuana
stores were supplied by massive pot warehouses. She asked why the
government "was forcing my young daughters to grow up without a father?"

Davies pondered his options. He realized he couldn't cite California
medical marijuana law as a defense in federal court and, "without
being able to put my facts into the record, I'm no different than
(Colombian drug lord) Pablo Escobar to the jury." He decided to take
the deal for five years behind bars.

Now resigned to his fate, the former business school whiz kid allowed
himself some fleeting nostalgia on his career as a pot CEO.

"It was the most fun in my life," he said. "I've never seen employees
with such high morale. Everyone believed in what we did. I've got to
tell you, it was fun kicking everyone's butt in Sacramento."

Asked if he would ever return to the marijuana business, he replied

"No way in hell."  
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