Pubdate: Sun, 20 Jul 2014
Source: Denver Post (CO)
Copyright: 2014 The Denver Post Corp
Contact:  http://www.denverpost.com/
Details: http://www.mapinc.org/media/122
Author: Eric Gorski
Page: 1K

CHEEBA CHEWS BITTEN

State Alleges Hidden Ownership Interests in High-Profile Pot Edibles Producer

Cheeba Chews began as an experiment in a home kitchen and grew into 
one of the biggest successes of Colorado's medical marijuana 
industry, winning awards and attracting fans with the promise of 
being "potent, consistent and discreet."

Then, last spring, the medicated chocolate taffy began disappearing 
from shelves. There was no public explanation other than a letter 
from CEO James Howler citing "internal changes." He promised things 
would get back on track soon.

The reasons behind the upheaval - spelled out more precisely in 
records and correspondence reviewed by The Denver Post - provide an 
inside look at how questionable marijuana business structures and 
state regulatory delays in scrutinizing them can lead to problems.

Cheeba Chews' case also exposes a blind spot in the state's 
regulation of edibles companies: By licensing out production, owners 
effectively can skirt the scrutiny that others in the business face, 
including criminal background checks and Colorado residency requirements.

Cheeba Chews stopped production after the state in March denied the 
business license application of Green Sky Confections, which had a 
licensing agreement to produce and distribute the brand.

The Colorado Department of Revenue cited 20 grounds for denial, 
including allegations of hidden ownership interests, off-the-books 
employees, an employee who had not passed a criminal-history check, 
record-keeping failures and unsanitary kitchen conditions.

The owner of Green Sky, Boulder entrepreneur Mark Mallen, challenged 
some findings, including the claim of illegal ownership. But the 
enforcement actions shut down his leased kitchen in Denver.

The state and Mallen reached a settlement that he said will ban him 
from the marijuana industry for a year.

Kevin Merrill, assistant special agent in charge of the Drug 
Enforcement Administration's Denver field division, said the license 
denial validates the law enforcement belief that some marijuana 
businesses are not complying with state regulations and have taken 
advantage of the system and delays in processing applications.

"The catastrophic decision was allowing these businesses to operate 
without being properly vetted for a number of years," he said. 
"Colorado is often touted as this best regulated system, this 
experiment. Yet the company was allowed to operate an illegal 
business for 31/2 years? No one finds that concerning?"

Cheeba Chews marketing director Eric Leslie sought to distance the 
company from the state enforcement actions, saying they are unrelated 
to Cheeba Chews. He said the company follows the rules.

However, state regulators did raise red flags about the licensing of 
at least one Cheeba Chews employee.

Also, investigators questioned whether a related company - identified 
in business records as Cheeba Chews' registered agent, Earthwise LLC 
- - was essentially a partial owner of Green Sky's license. An attorney 
for Mallen denied that.

Shared ownership

Mark Mallen owns Glacier Homemade Ice Cream and Gelato in Boulder. 
His move into the marijuana trade, he emphasizes, is separate. He 
said it began with shared ownership in a distribution company and 
branched into pot-infused ice cream he no longer makes.

In April 2012, Mallen entered into a contract to purchase Green Sky 
Confections and applied for an ownership transfer, according to his 
lawyer's motion challenging the state enforcement action.

Ownership transfers are common in the Colorado pot industry. State 
regulators said the frequent changes, along with budget-driven staff 
cuts in 2012, contributed to a huge backlog in processing business 
applications that only recently was eliminated.

Mallen inherited a business that had applied for a license for 
marijuana-infused products in August 2010 - and was still waiting.

The business, like others stuck in the bureaucratic backlog, was 
allowed to operate while regulators processed applications.

On Feb. 27, 2013, it was Green Sky's turn for a pre-licensing inspection.

The business occupied leased space at a commercial commissary kitchen 
on Morrison Road in Denver. Suite C offered stainless-steel tables, 
large ovens and bars on the door. Rent was $5,500 a month.

The investigator cited eight violations. Video surveillance coverage 
was lacking. Signs were missing. Labels on products in storage were 
dated or incomplete. Kitchen preparation areas and utensils were not 
cleaned properly.

Mallen characterized some findings as minor or off-base. The products 
in storage, he said, were never going to market.

Of the kitchen, he said: "Of course it's not clean. Every single room 
is being used, and we're making a product. It's a kitchen. That's 
insane. It's clean at the beginning of the day and the end of the day."

Nevertheless, Mallen said he promptly fixed everything. No one with 
the state reinspected the kitchen, he said.

The Marijuana Enforcement Division, however, began a separate 
financial investigation into the business' ownership structure.

The findings are spelled out in an April grounds-for-denial letter. 
According to the Department of Revenue, Green Sky:

Failed to disclose everyone with a direct or indirect financial 
interest in the license. The state defines ownership as "the person 
or persons whose proprietary interest is such that they bear risk of 
loss other than as an insurer, and have opportunity to gain profit 
from the operation or sale of the establishment."

Did not notify the state of all owners, officers, managers and 
employees before they began work or had a financial interest in the business.

Employed individuals and had others working under contract who had 
not applied for or received a valid state license.

Employed people who had not passed a criminal-history record check.

In a motion filed in Denver District Court, Mallen's lawyer, Lauren 
Davis, contended the state provided "no basis in law or fact" in 
making a case for illegal ownership.

The motion said the state had a few reasons for its suspicion: Some 
employees were paid a flat fee per items produced instead of an 
established or hourly salary; checks were made out to an entity 
instead of an individual; and a supplier of sugar, flour and similar 
items was not licensed or an applicant.

Davis said none amounted to ownership, and she challenged the state's 
legal interpretation of what constitutes ownership.

A judge denied the motion, and the state and Mallen settled for terms 
that have not been publicly disclosed.

The state's financial investigation also involved another employee, 
Raymond Barker. In March 2012, Barker, Green Sky's then-manager, was 
arrested and charged with driving under the influence, state records show.

Neither Barker nor Green Sky reported the arrest and pending charge 
to regulators, as required, the state said. According to Mallen's 
lawyer, Barker was fired in late 2013 and had no ownership stake.

Barker declined to comment for this story.

Mallen acknowledged an "oversight" in the structuring of his business 
arrangement with his former employee. Barker ran a division of Green 
Sky and was involved in a brand called Twice Baked, Mallen said. At 
the end of the year, Barker was paid by getting a percentage of the 
profits, Mallen said.

"That was a mistake," Mallen said.

Wrapped in colorful labels

At the kitchen on Morrison Road, workers with black Cheeba Chews 
shirts and matching caps stirred cannabis extract from small corked 
bottles into a baking dish layered with creamy chocolate.

After the all-organic-infused chocolate came out of the oven, it was 
sliced and wrapped in colorful labels.

The products included the flagship Cheeba Chews, Green Hornets and 
mint-flavored Dabba Chocolate bars.

In a March article, High Times Magazine called Cheeba Chews "far and 
away" the most successful medical marijuana edible company in the country.

That same month, regulators shut down the kitchen.

"The license holder had obligations and failed in those obligations," 
said Leslie, Cheeba Chews' marketing director. "He learned a very good lesson."

Leslie said Cheeba Chews controlled branding and manufacturing.

Neither Leslie nor Mallen would discuss details of the licensing 
agreement. Typically, such agreements involve the licensor granting 
the licensee the right to produce and sell goods, or apply a brand 
name or trademark.

Cheeba Chews sought a licensing deal rather than its own 
infused-products license because it made it easier to deploy in 
multiple states, Leslie said. The company also has agreements to 
distribute in California and Washington state, he said.

Leslie described Cheeba Chews as a small business that puts the 
spotlight on the product and not its people. He said the sole owner, 
Howler, is "hands-off" and private.

In media interviews, Howler has described himself as a 31-year-old 
Boulder resident who legally produced hash from his medical marijuana 
grows and sold it to "compassion clubs" before starting Cheeba Chews.

The Post attempted to contact Howler by e-mail and received a 
response referring questions to Leslie. Leslie said Howler does not 
give interviews and answered previous media questions by e-mail.

A search of public records found no evidence of a James Howler living 
in Colorado. And no James Howler is licensed with the state Marijuana 
Enforcement Division.

A man named John Gardner filed articles of incorporation for Cheeba 
Chews LLC in 2011 with the Colorado secretary of state. The records 
identify Cheeba Chews' registered agent as Earthwise. Gardner, in 
turn, is identified as Earthwise's registered agent.

Both entities list the same mailing address - a mailbox at a UPS 
Store in Boulder.

Asked about Gardner, whom The Post was unable to locate or contact, 
Leslie said: "I think he may be a silent partner who came on at some 
point. I am not too familiar with the guy. He has not been active in 
the business."

Cheeba Chews operations manager Dave Maggio is better known among 
local marijuana industry people. Maggio was a Green Sky employee 
dating to at least June 2012, according to Mallen's lawyer. But 
according to state officials, Maggio first applied for and received a 
state license to work in the industry in January of this year.

Leslie said Maggio applied by mail in 2012. Processing delays 
occurred, Leslie said, and Maggio scheduled an appointment as soon as he could.

Handling of application

Mallen expressed frustration with the state's handling of his 
application. His court motion said he paid thousands of dollars in 
license and applications fees while awaiting his fate and said his 
attempts to communicate with state regulators largely were ignored.

Mallen said he took several steps, including hiring a former top 
state marijuana regulator as an independent auditor.

The notice of denial was delivered March 28 - more than a year after 
Mallen's kitchen was inspected.

"You sit there, and you've got 20 different violations," Mallen said. 
"I'm not making excuses. I'm saying fine, some are legit. But we 
corrected it. We did everything we had to. We were as compliant as 
anyone in the market."

Natriece Bryant, a spokeswoman for the Marijuana Enforcement 
Division, said follow-up on the initial inspection may have been 
delayed because of staffing shortfalls - at the time, 18 people were 
doing the work of 55. She also pointed to the complexity of such cases.

Jeff Gard, a Boulder lawyer who represents marijuana businesses and 
has no connection to the case, reviewed public records at The Post's 
request and said the state was forced to act.

"The most concerning thing was, essentially, this business was truly 
a set of businesses holding itself out to be a single business," Gard 
said. "If it quacks like a duck, it is a duck. You don't get to 
rename it and retitle it and call it a licensing agreement."

Lewis Koski, director of the Marijuana Enforcement Division, said 
license holders must disclose licensing agreements so regulators can 
determine whether they amount to ownership interests. Agreements vary 
widely, he said.

"The devil is really in the details in these kinds of situations," he said.

If someone is getting paid a percentage of the profit, Koski said, 
that would "likely trigger a licensing event" - or possible enforcement action.

Mallen said the state was "trying to close us down" from the start. 
"They wanted to show your newspaper and the state of Colorado that 
they're taking action, not everyone is getting licensed, we pulled 
down the biggest company," he said.

Koski said that is not the case.

"We're taking each case on a case-by-case basis on the merits of 
those cases, without respect to the size of the company or anything 
like that," he said.

Mallen and Cheeba Chews have gone their separate ways.

And the brand that calls itself "America's favorite edible" is about to return.

Leslie said the company has reached a new licensing agreement with 
another infused-product license holder. He said Cheeba Chews has been 
cooking in its new kitchen for the past few weeks. Dispensaries are 
beginning to advertise the edibles' return.

Leslie would not identify the license holder or discuss details of 
the deal's structure except to say it's "a little bit different" than 
the previous one.

He said Cheeba Chews is working closely with the Marijuana 
Enforcement Division to make sure it complies with regulations - 
including turning over a copy of its new licensing agreement.
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MAP posted-by: Jay Bergstrom