Business

Lawsuit Accuses Washington Companies of Duping Out-of-State Investor

By Willis Jacobson Sep 22, 2020
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Willis Jacobson is an award-winning journalist whose career has spanned both coasts. Now based on the Central Coast of California, he has covered cannabis news and issues since 2015.
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Willis Jacobson is an award-winning journalist whose career has spanned both coasts. Now based on the Central Coast of California, he has covered cannabis news and issues since 2015.
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A Texas man has filed suit against three Washington state marijuana businesses, alleging the owners accepted his investment money while knowing that state law prohibits nonresidents from profiting off Washington licensed cannabis enterprises.

Michael Murray filed his lawsuit this month in Washington’s King County Superior Court. The defendants include Nugs LLC and its manager Melissa Camp; Washington State Cannabis LLC and its manager Kasey Miles; and Ninja Gardens Inc. and its manager Douglas Shima. 

The suit alleges defendants engaged in fraud and deception by withholding information about the state’s nonresident clause while procuring a $50,000 investment from Murray. Although that rule is publicly available to access, Murray claims he was relying on the defendants for information specific to the Washington market. The suit also charges the defendants with breach of contract, unjust enrichment, and violation of the Securities Act of Washington. (Read the suit)

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“A lot of people believe that cannabis companies and businesses can be highly lucrative, and a lot of people are looking to get into the action,” said Michael Solomon, an attorney with Seattle-based Cultiva Law, which is representing Murray. “Unfortunately, as with any industry, there are people that try to take advantage and break the law to enrich themselves. We don’t know if that’s the case here, but that’s certainly our allegation.”

The lawsuit lays out a narrative of Murray joining the companies as an early investor, only to learn later that he had been duped.

According to the court filing, in 2016 Murray traveled to Washington from his home state of Texas to meet with the defendants and consider investing in their businesses. Ultimately, the suit alleges, the parties reached an oral agreement wherein Murray would loan the defendants $50,000. That agreement, per the lawsuit, included a stipulation that Murray would be repaid “above and beyond” $50,000 by receiving a cut of gross profits from Nugs and Washington State Cannabis.

Those agreements were formalized in March 2016 when Murray signed a contract granting him a 25% interest in Nugs, and a separate contract granting him a 6% share of Washington State Cannabis.

Murray’s suit alleges that the companies never granted him those stakes, however, nor did they pay out his share of profits.

“Defendants reassured Plaintiff over the years that he would be repaid the Payment,” the suit reads. “They have failed to do so.”

Murray claims in the suit that he relied upon the defendants’ “specialized knowledge and experience in the Washington cannabis industry” and didn’t discover the illegality of their agreements until he consulted with his own legal counsel.

The suit charges that each of the contracts Murray signed with the defendants are still valid and enforceable and that Murray has sustained damages as a direct result of the defendants’ alleged breach of those agreements.

The suit notes that Washington State Cannabis has shuttered, but that Nugs continues to hold a state marijuana license valued at more than $100,000.

The suit alleges that Shima, with Ninja Gardens, acted as an intermediary between the parties and was the recipient of the original $50,000 investment wired from Murray. The suit further alleges that Shima facilitated the sale of the security interests to Murray and engaged in other related acts.

The defendants are represented by Seattle-based North City Law. That firm did not respond to a message seeking comment.

Not the first

The case is not the first involving Washington’s residency requirement, which was put in place eight years ago in large part to benefit local operators and expedite background checks.

Idaho businessman Todd Brinkmeyer filed a federal suit against the Washington State Liquor and Cannabis Board in August seeking to have that residency rule tossed, arguing that it violates his constitutional rights. 

Brinkmeyer’s suit charges that it is unfair for the state of Washington to regulate and profit from its marijuana market while simultaneously claiming that participants in the market lack the same constitutional protections as other citizens due to the market’s federal illegality.

“The State committed to ‘stop treating adult marijuana use as a crime,’ but the State now seeks to treat its market participants like drug dealers,” Brinkmeyer’s suit alleges.

Brinkmeyer’s suit also takes issue with the idea that state residency is needed for background checks. His suit lists some alternative ways to procure criminal, financial and character records, and also disputes that residency is needed for the state to hold operators accountable.

“Brinkmeyer does not ask the State to lower its standards when evaluating whether an applicant is fit to hold equity in the State’s marijuana market or change its enforcement practices,” the suit reads. “He asks only to be treated similarly to Washington residents, and the Constitution demands that fair treatment.”

That case is still pending.

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