RICO Lawsuit Reaches Ancillary Businesses

RICO lawsuit

On February 19, 2015, Safe Streets Alliance filed two lawsuits in the U.S. District Court for the District of Colorado in another effort to derail the state’s legal marijuana industry. The new twist in these suits is that they make use of the Racketeer Influenced and Corrupt Organizations Act, or RICO, to target defendants far removed from growing and selling marijuana. Whatever the ultimate fate of the legal actions, this is a troublesome development because these are the businesses with which investors have felt relatively secure.

The complaints are very similar, although the parties involved are somewhat different. In one, Safe Streets Alliance, a pro-law enforcement group, headquartered in Washington, D.C., is joined by Phillis and Michael Reilly, who own real property in Rye, Colorado. The principal target is Alternative Holistic Healing, LLC, which does business as Rocky Mountain Organics. In the other, Safe Streets Alliance is joined by New Vision Hotels, Inc., which runs a Holiday Inn in Frisco, Colorado, and the principal target is Summit Marijuana.

Each complaint advances two theories. The first is the familiar preemption argument that federal law, in this case the Controlled Substances Act, should trump inconsistent state law, namely Amendment 64 to the Colorado Constitution and the Colorado Retail Marijuana Code. This is very like the federal lawsuit brought by the states of Nebraska and Oklahoma against Colorado.

The RICO theory, on the other hand, treats Rocky Mountain Organic and Summit Marijuana’s efforts to establish duly licensed growing and retail operations as vast criminal enterprises, and it nets some defendants who have little to do with the plant.

The RICO defendants named in the Rocky Mountain complaint include, among others, the out-of-state corporation that has issued a surety bond to Rocky Mountain, a company that has agreed to truck water to the growing facility and the builder.

The defendants named in the Summit complaint include not only Summit, its owners and the surety bond company, but the owner of the real property leased for the facility, the lenders who are financing the business, Summit’s accounting firm, the construction contractor and the bank where Summit maintains an account.

There is no reason the RICO net could not have been cast even wider, to include not only ancillary businesses, but investors themselves. Imagine what this could look like with a publicly traded company.

Plaintiffs’ attorneys like RICO lawsuits because the statute provides for treble damages, three times the value of whatever harm has been suffered. The financial damage to defendants who lose can be ruinous, but the cost of mounting a legal defense for those who prevail can feel like a penalty as well. That may be Safe Streets’ real motivation.

An accounting firm, building contractor or trucking company may simply decide that dealing with a marijuana business is not worth the risk. The same is true of investors who have previously felt comfortable with hydroponic growing equipment or testing facilities. Even if the claims are ultimately dismissed, as they may be, the legal marijuana industry could feel the chill for some time.

Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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