Finances, legal challenges hobble Northeast Patients Group's pot dispensaries

Two years ago when Mainers voted to expand the distribution of medical marijuana in the state, the future looked bright for marijuana advocates, patients and those hoping to benefit from the widening market for the herb. That seemed especially true for Northeast Patients Group, a spinoff of a California organization, which won four of Maine's eight dispensary licenses, including one to open a retail store for medical marijuana in Portland.

But now, eight months after the Portland dispensary was first expected to open, NPG appears to be in disarray, having recently lost two of its original board members, severed ties and financial support with its parent corporation, Berkeley Patients Group, and become embroiled in a lawsuit. Neither the Portland dispensary, nor its three companion operations in Augusta, Bangor and Thomaston, are open, and there are questions around NPG's viability and the status of its four licenses.

Becky DeKeuster, the CEO of NPG who advocated for the four retail operations during the state licensing review, says she can't comment on the situation, but hinted at positive new developments with NPG that would be revealed after this story is published. In the meantime, she is being sued by Berkeley Patients Group for breaching her employment contract and using confidential information to forge a financing deal with another investor, according to a lawsuit filed in the Cumberland County Superior Court July 6. In February, DeKeuster signed a letter of intent with Cuttino Mobley, a former NBA basketball player, and the suit claims she resigned as an employee of BPG to open a dispensary.

So what happened to BPG and NPG's plans to ease sick people's discomfort? At least one investor who made a financing offer to the two organizations says they were overly confident of their ability to see their vision through, both financially and logistically, in the timeline they set.

Sam Eakin, a Cape Elizabeth investor who last year offered to finance the ventures, now questions whether the state looked closely enough at the two organizations before awarding them half the state's dispensary licenses in Maine's most populated areas. A June ruling by the Franklin Superior Court in Farmington also recently found that the Maine Department of Health and Human Services did not provide enough evidence to justify its choice of some dispensaries over others. The judge asked for a review of the dispensary approval process for York, Hancock and Washington counties -- none of the districts for which NPG applied. John Thiele, manager for Maine's medical marijuana program, says his department has submitted additional documentation to the court to back up its selection process.

Eakin, whose investment offer to NPG was rejected by the state, says he believes Maine should consider pulling NPG's dispensary permits to start anew. "The public deserves a new, level playing field so the smoke and mirrors of BPG and NPG can be rid from a tainted process," Eakin says. "If Mr. Mobley is as capable as he appears, he can reapply just like the rest of the world and provide the state with more transparency than Becky DeKeuster or the DHHS have cared to share."

NPG's start

On Berkeley Patients Group's website, it describes itself as one of California's largest and most respected medical cannabis collectives, providing "safe access, fair prices and a 2,500-square-foot community center to thousands of northern California patients since 2000." According to state tax documents, BPG earned a little under $51.2 million from marijuana sales between 2004 and 2007.

When Maine passed its Medical Marijuana Act in 2009, BPG saw an expansion possibility on the opposite coast. Its director, Tim Schick, has Maine roots: he grew up in the Brewer area. In its lawsuit against DeKeuster, BPG claims it was instrumental in the formation and initial funding of NPG, providing NPG with "significant expertise, specialized knowledge and confidential information" that enabled it to win four dispensary permits.

In NPG's dispensary applications to the state, BPG pledged a loan of $300,000 to establish and operate the dispensaries. The lawsuit also says that BPG paid DeKeuster $111,000 a year. BPG asks that NPG repay it $632,195 in loans as well as have DeKeuster pay for the "loss of the value and profits of the business opportunity of providing services to NPG, and obtaining licensing revenues from NPG."

BPG, in the dispensary application, also promised to help NPG secure an additional $1.2 million to open the four dispensaries. This quest for financing brought them to Eakin, whose company, Relentless Capital LLC, engages in distressed or complex transactions. He says he became interested in medical marijuana after seeing its transformative effects on his wife, who has chronic pain from a severe spinal injury. She has been able to cut her use of pharmaceutical medicine in half since being prescribed medical cannabis, he says, and her cognitive skills and short-term memory have returned.

Last fall, Eakin entered discussions with BPG and NPG and eventually offered them a financing deal that was nixed by the state as "too commercial," Eakin says. Before the state rendered its decision, Eakin took a trip out West to visit BPG's operations. "In three days we learned that BPG owed the state of California $6 million in back sales taxes, had a highly suspect balance sheet and warring board members," he says.

BPG would not speak on the record about this case, but a spokesman described BPG as financially sound and operationally intact, with the tax issue not being relevant to the Maine case.

An audit of BPG by California's tax authority between 2004 and 2007 found that BPG owed more than $6.4 million in unpaid taxes and interest. During those years, BPG claimed the sales it made of medical cannabis were exempt from sales tax because marijuana, as a medicine, is tax exempt, according to state documents. But the state's Board of Equalization ruled this year that medical marijuana was not exempt.

Eakin says he was shocked no one in Maine appeared to have checked into BPG's finances before awarding four permits to NPG. "One would have thought that the head of DHHS would have made a similar trip before issuing the top dispensary licenses to [the] company," Eakin says.

According to state officials, there was no expectation or protocol to investigate the dispensary applicants' finances. "We didn't ask anyone from the Department of Professional and Financial Regulation to score the applications," says Rep. Anne Haskell, D-Portland, who was part of the state task force that shaped the medical marijuana law. "We didn't ask for that kind of financial detail."

Cathy Cobb, director of the division of licensing and regulatory services at DHHS, says this level of background check didn't fall under the government's scope. "We don't normally get into those details. We don't do credit checks," she says. "We made the decision based on the quality of applications at that time."

Financial challenges

If it can open its dispensaries, NPG has the potential to earn healthy revenues (in its application, it says would net close to $1.4 million by 2013). The decision by the state to make all medical marijuana dispensaries nonprofit was deliberate. "[We] really didn't want this sector to have people raking in money on the backs of sick people," Haskell says.

All of the dispensaries with investors must have clear loan terms, including payoff dates and reasonable interest rates, Cobb says. "In the [dispensary] selection process, we looked at interest rates to see if people were unduly profiteering from the nonprofit," she explains. The state anticipates that any year-end revenue surpluses will be used to reduce the price of medical cannabis or donated to local charities.

But it's tough finding an investor willing to take a risk on a startup selling criminal goods, at least in the eyes of the U.S. Department of Justice, without being guaranteed a high return. Selling a product that the feds regard as illicit curtails traditional lending from banks, while the nonprofit status makes attracting private investment tricky. Eakin's investor group was seeking one-third of NPG profits, as well as financial, accounting and management oversight. He says he was willing to fund $300,000 to $500,000 to open a Portland dispensary as a starting point.

Medical marijuana's sketchy legal status with the feds led to the resignation of one of NPG's original three board members. Mark Dion, a Portland lawyer, former county sheriff and current Democratic state representative, explained in his resignation letter to DeKeuster that in light of the federal stance on medical marijuana, he was stepping away from NPG to protect his license to practice law. He says his decision does not reflect his opinion of NPG or medical marijuana. "I still believe in this issue," he says.

The other member who resigned from the three-person board, Faith Benedetti, didn't return a call for comment.

Dion says NPG struggled to find a way to finance its operations and get going. "I don't think the policy makers spent enough time thinking of the financial structure and how [the dispensaries] would come into existence," he says. "There are no white knights." He believes the state should reevaluate its dispensary financing regulations. "I think it's important that the state have a conversation around that once all the dispensaries are established, around the lessons learned," he says.

Rep. Haskell agrees. She says when the task force was debating the details of the new medical marijuana law, it prioritized other issues, such as security, over financing. "I told people at the beginning and ending of the task force that we will see marijuana legislation every year because it is still evolving at the state level and the federal level," she says.

She's not personally committed to a nonprofit structure. "That was a structure we thought would help us manage the dichotomy of marijuana's legal and illegal status, and added some purity to the deal. But if it is going to kill it, we need to rethink and we need to be open," Haskell says.

Cobb says, however, the nonprofit model is keeping Maine safe. "I tell you, if we went to a for-profit model of growing and selling marijuana in the state, we would be inviting the federal government to intervene."

NPG's next move

Now that NPG has severed ties with BPG, whatever new investment it attracts must be in line with its original plan, according to Cobb. "Our role is to make sure their financing meets the requirements of the nonprofit organization that we selected in a competitive bidding arrangement," she says.

NPG has refused to disclose the details of its investment deal with Mobley Pain Management and Wellness Center LLC, which is backed by 35-year-old Cuttino Mobley. Mobley retired from professional basketball in 2008 due to a congenital heart condition. Cobb says NPG claims its new loan terms are a trade secret, and the state has given the organization until Aug. 4 to find a judge to back up this argument before releasing the papers.

Cobb says the new deal's final terms have changed since the first letter of intent was signed by Mobley and NPG in February. But in that letter Mobley promises to invest $2.1 million in NPG at an annual interest rate of 18% for seven years. The letter also outlines a licensing and supply arrangement for Mobley products and services, including cannabis-containing potables, edibles, tinctures and topical medicines, and allows him to appoint two of five board members.

Mobley is also the sole backer of Summit Medical Compassion Center in Warwick, R.I., one of three approved medical marijuana dispensaries in Rhode Island. He's pledging a $3.5 million line of credit at a 6% annual interest rate, plus is donating an additional $500,000. But this center is in limbo at the moment. Soon after Rhode Island approved the three medical marijuana centers this spring, it halted the program after receiving a letter from the U.S. attorney for Rhode Island warning that state-approved dispensaries could be subject to federal enforcement. Gov. Lincoln Chafee's legal staff is evaluating the situation, according to a Rhode Island government spokeswoman.

Dion says this kind of back-and-forth legal posturing must stop for medical marijuana to get a firm footing anywhere.

"We need the federal government to revisit its classification of marijuana as medicine, and put it on the same playing field as other medicines," Dion says. "The future is uncertain unless we create more harmony between state and federal law."