Business

$100M+ Marijuana Bank Fraud Case Can Proceed, Judge Rules

avatar Hilary Corrigan / Sep 3, 2020

A federal judge denied an attempt to dismiss a criminal case involving an alleged scheme to deceive banks into approving cannabis sales by credit and debit card.

The Monday ruling from Judge Jed Rakoff of U.S. District Court, New York’s Southern District, comes in a case alleging businessmen Ruben Weigand and Hamid Akhavan set up fake businesses, websites and bank accounts in order to “fool the banks into approving marijuana credit card and debit card sales by disguising those transactions as sales of dog food and the like,” the ruling states. (Read the ruling here.)

The U.S. government claims the banks that issued customers’ cards processed more than $100M worth of pot sales and possibly more than twice that amount.

A federal indictment from earlier this year alleges Weigand and Akhavan were principals of the Online Marijuana Marketplace Company. OMMC developed a website and phone app through which customers in California and Oregon could order marijuana deliveries from various retailers, disguised as transactions unrelated to marijuana in order to fool banks into approving credit and debit card sales and processing the transactions. The conspirators allegedly created web pages to support the illusion that the phony merchants sold those legitimate goods.

When cardholders used credit and debit cards to make marijuana purchases from OMMC, the banks “were tricked into believing that cardholders were purchasing legitimate goods from the Phony Merchants,” the ruling says in outlining the indictment’s allegations.

Although not mentioned in the new ruling or in the indictment, at least one court filing mentioned California online marketplace Eaze Technologies Inc. The Wall Street Journal has reported that at least one former Eaze executive was among other co-conspirators working with the defendants to hide the true nature of the transactions from banks.

Weigand’s role allegedly included managing the phony merchants’ phony bank accounts to process payments on behalf of Eaze. Eaze has not been charged and has said it’s cooperating with authorities. It’s unclear whether any of the transactions used the Eaze platform.

In an email, Eaze stated, “We are aware of this matter, and are fully cooperating with the relevant authorities. Eaze transitioned to supporting new payment systems over a year ago, and this matter does not impact the current customer experience. We have no additional comment at this time.”

The defendants face charges of conspiracy to commit bank fraud. They sought to dismiss the case over a failure to state an offense, a lack of specificity, and law that bars certain government interference with state-legal medical marijuana activity. Attorneys for the plaintiffs and defendants did not return calls for comment.

“Deception”

The defendants have argued that bank fraud requires an intent to inflict harm on a financial institution and deceive it—and that the indictment did not claim that intent. The indictment alleges the defendants made misrepresentations not to banks, but to intermediaries not protected by bank fraud law.

But court precedents “cast a wide net” on harm, the judge’s ruling this week states, noting the indictment need only show a scheme to deprive a bank of something of value. It does not have to allege harm as pecuniary loss. The indictment alleges the defendants deprived banks of funds under their control and to which they had property rights.

Since the indictment alleges defendants intended to deprive the bank of those property rights and get money from under bank control, it describes an intent to harm, the ruling states.

“The banks had concrete property interests in these funds, and defendants allegedly sought to injure those interests by causing the banks to relinquish those funds through deception,” the ruling states. In Rakoff’s view, the indictment sufficiently states an intent to harm their property interests.

The ruling also knocked down defendants’ arguments that allegations of intent to deceive a financial institution don’t apply because the offshore banks and payment processors are not covered by bank fraud law. The defendants argued the deception must be aimed at the same banks that are harmed.

But the indictment states the defendants’ alleged misrepresentations to merchant banks intended to convey those misrepresentations to the issuing banks in order to get their approval of transactions. So the indictment adequately alleges intent to deceive financial institutions protected by bank fraud law, the ruling states.

The ruling also rejected defendants’ argument that the indictment fails to allege the misrepresentations were material. “This borders on the frivolous,” the ruling states, noting that the indictment alleges that many issuing banks would not have approved the transactions if they knew the deals involved marijuana.

The ruling further discounted defendants’ argument that the government sought to prosecute them for a federal felony based only on conduct that is legal under state law. The indictment does not charge them for behavior that is legal under state cannabis laws, the ruling says. And federal law protecting state-legal medical marijuana activity—the law defendants cited—does not condone bank fraud for a MED dispensary any more than it condones murder, robbery or assault, the ruling states.

A “no-loss bank fraud case”?

Discussion during a March hearing in the case briefly brought up the involvement of California-based delivery service Eaze. Weigand’s attorney noted that Eaze functioned like Uber by delivering marijuana to customers in California and Oregon, and used e-commerce to process credit cards so that dispensaries got their payments. The government’s attorney in the case referred to Eaze as a company through which Weigand allegedly handled marijuana transaction proceeds. 

Also at that March hearing, Weigand’s attorney, Michael Artan, disputed the government’s argument about loss, saying “there was no loss to anyone.” That’s because the financial institutions were made whole, the marijuana purchasers paid for their marijuana and the dispensaries got their money. “To suggest that there is a $100 million loss in this case is completely at odds with what the structure alleged by the government constituted,” Artan said.

Artan had also argued that the alleged scheme entails marijuana dispensaries in California and Oregon that are operating legally under state laws. He argued the indictment does not detail conduct Weigand is accused of, but instead uses broad terms to allege his involvement in a criminal network. Artan referred to Weigand as a respected e-commerce consultant with no criminal record—“a successful businessman with an unidentified role in a no-loss bank fraud case.”

In that March hearing, government attorney Christopher DiMase called the scheme a “series of regular lies to banks to get them to move money that they absolutely would not otherwise.” Part of Weigand’s role involved submitting information to banks about the false companies, he said.

DiMase also disputed that there was no loss and that the money went where it was supposed to go. Large chunks of it went to the “criminal actors” who helped facilitate lies to banks, he said. The case has a Dec. 1 trial date.

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