Justice Department Is Investigating Marijuana-Related Businesses Over COVID Relief Loans, Industry Sources Say

The Justice Department is investigating marijuana-related businesses that allegedly took coronavirus relief loans in violation of federal rules, with third-party actors leveraging a whistleblower policy that allows them to take a portion of settlement money if they report on the cannabis companies.

Multiple sources in the cannabis legal space confirmed the trend with Marijuana Moment this week, though they declined to identify active clients involved in the litigation. This evidently involves both direct cannabis businesses that are involved in the production or sale of marijuana as well as ancillary companies that are not plant-touching.

One public case that DOJ disclosed last month involved a holding company of the Bob Marley namesake cannabis company Marley Natural.

A company that specializes in facilitating whistleblower complaints for alleged Paycheck Protection Program (PPP) violations, Sidesolve, successfully reported the cannabis business Docklight Brands to DOJ for receiving the funds in contravention of a federal Small Business Administration (SBA) policy prohibiting companies from taking the loans if they work with cannabis or indirectly service the industry.

“Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity,” SBA said in 2020. “Therefore, businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana may be ineligible for SBA financial assistance.”

Sources who requested anonymity say there are up to 100 active cases, with the Justice Department sending letters notifying businesses that are directly or indirectly associated with the state-legal marijuana industry that they are being reviewed for possible violations under the False Claims Act (FCA).

Under DOJ policy, individuals who report on PPP loan violations under FCA may be entitled to 15 percent of the proceeds from any settlement agreement. In the Sidesolve-Docklight case that was submitted to the U.S. Attorney’s Office for the Western District of Washington, that meant Sidesolve will receive $148,416 of the settlement funds, DOJ said in a press release last month.

“Those seeking vital assistance from SBA’s pandemic response programs must comply with the requirements,” SBA OIG’s Western Region Special Agent in Charge Weston King said, adding that the “settlement sends a strong message of accountability.”

But the situation is more widespread, industry insiders and legal experts familiar with the trend say. And notably, it is affecting companies that are not specifically involved in the production or distribution of cannabis itself; any business that took the PPP loans that works with the state-legal marijuana market (e.g. accountants and consultants) could be impacted.

To be clear, it doesn’t seem the DOJ is proactively investigating these cases. A source in one federal prosecutor’s office told Marijuana Moment that they are aware that marijuana-related businesses seem to be uniquely targeted by third-party “relators” who could be using public databases to identify loan recipients who are adjacently involved in the cannabis sectors in order to receive the 15 percent payout.

The Docklight case is a rare example of a FCA settlement related to marijuana that’s been made public. Sources say this trend is relatively new, and legal documents are generally sealed until the cases are finalized, which could take months to years.

But as the Justice Department ramps up its efforts to reclaim fraudulent PPP loan distributions, the cannabis industry is apparently in the sights of companies hoping to cash in on possible settlement agreements they initiate.

“We looked at a number of different theories” about how to litigate under the SBA rules, Jason Marcus, a partner at Bracker & Marcus LLC that represented Sidesolve, told Marijuana Moment. “And one of the theories that came pretty early was marijuana companies. So Docklight was really kind of our test case.”

“We did our research,” he said. “We found where the SBA said, ‘This is not allowed. Whether you’re a direct or indirect marijuana related business, you’re not supposed to be receiving PPP funds.’”

Marcus said that his sense of the scope of potential liability among ancillary cannabis businesses is “pretty huge, frankly.” There are some more obvious examples of federal violations—such as cannabis dispensaries receiving the funds—but the SBA policy itself is broad enough to cover virtually anyone who received the loans and who derived some income from cannabis businesses.

He advised that any direct or indirect cannabis businesses that might be impacted self-report to DOJ to potentially avoid multiplied penalties. But the blood is in the water, and Marcus suspects his firm’s successful litigation and DOJ’s public disclosure of the case could be influencing other PPP data-miners to follow suit.

It’s “unusual” to have outside parties report businesses over alleged FCA violations, he said. “Not unheard of, but it’s unusual.”

The difference here is that there are public databases of PPP loans recipients available to potential litigants interested in assisting DOJ and possibly winning a 15 percent settlement cut. And cannabis-adjacent businesses are relatively low-hanging fruit.

The exact number of cannabis businesses that DOJ is investigating or prosecuting is unclear. But numerous sources confirmed at least one detail: There is a recent surge in letters from federal prosecutors to cannabis-related businesses about active investigations related to the PPP loans.

Aaron Smith, executive director of the National Cannabis Industry Association (NCIA), told Marijuana Moment that he’s “heard from a handful of our ancillary business members that have been contacted by the DOJ about their PPP loan.”

“These businesses do not handle cannabis directly nor violate any state or federal laws and should absolutely have access to the Paycheck Protection Program, just as any other legal business,” he said.

Hilary Bricken, a partner at the firm Husch Blackwell, told Marijuana Moment that this “could set off a domino effect of reporting ancillary companies to the feds where the majority or all of the revenue is derived from the cannabis industry.

She added that this is “another technical nightmare” caused by the Schedule I status of cannabis under the Controlled Substances Act (CSA).

The Justice Department and offices of individual U.S. attorneys did not respond to multiple requests for comment.

As Bricken noted, the issue at hand underscores yet another policy complication resulting from the federal-state marijuana disconnect. At the same time that the Drug Enforcement Administration (DEA) under DOJ is exploring whether to reschedule cannabis based on a U.S. Department of Health and Human Services (HHS) recommendation, federal prosecutors in certain cases are evidently willing to prosecute the industry over alleged FCA PPP loan violations that, theoretically, might not apply if the recommended Schedule III reclassification is ultimately accepted.

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