Cannabis, Conflicts And Self-Dealing At Issue In Illinois Complaint

The Illinois Administrator has filed a complaint alleging misconduct by an attorney who had been employed by three law firms (designated as Firms A, B and C) beginning in 2019.

From November 18, 2019 until March 3, 2021, Respondent was employed fulltime as a lawyer in the Boston office of a large international law firm (“Firm A”), where he concentrated his practice in the areas of private equity and corporate mergers and acquisitions. At all times related to the events described in this complaint, Respondent, as an attorney employee of Firm A, owed a fiduciary duty to Firm A and its partners to act with the highest degree of good faith and honesty in all matters relating to Firm A’s business and property and to avoid using the Firm A’s goodwill, reputation, and resources for his own personal benefit.

He allegedly owed similar duties to Firms B and C.

Respondent left Firm A on March 3, 2021. From April 5, 2021 until June 1, 2022, Respondent was employed full-time as a lawyer in the Boston office of a large international law firm (“Firm B”), where he continued to concentrate his practice in the areas of private equity and corporate mergers and acquisitions. At all times related to the events described in this complaint, Respondent, as an attorney employee of Firm B, owed a fiduciary duty to the firm and its partners to act with the highest degree of good faith and honesty in all matters relating to Firm B’s business and property and to avoid using the Firm’s goodwill, reputation, and resources for his own personal benefit.

Next move

Respondent left Firm B on June 1, 2022. From September 6, 2022 until July 13, 2024, Respondent was employed full-time as a lawyer in the Denver office of a large international law firm (“Firm C”) where he continued to concentrate his practice in the areas of private equity and corporate mergers and acquisitions. At all times related to the events described herein, Respondent, as an attorney-employee of Firm C, owed a fiduciary duty to the Firm and its partners to act with the highest degree of good faith and honesty in all matters relating to Firm C’s business and property and to avoid using Firm C’s goodwill, reputation, and resources for his own personal benefit.

An opportunity presented itself in the cannabis industry

The Commonwealth of Massachusetts established the Cannabis Control Commission (“CCC”) in 2017 to implement and administer Commonwealth law enabling access to medical and adult-use marijuana in the Commonwealth of Massachusetts. The CCC also was the Commonwealth agency responsible for providing cannabis manufacturer, sales, and delivery licenses in the Commonwealth. In 2019, the CCC established the Social Equity Program (“SEP”), which was a free, statewide technical assistance and training program whose purpose was to create pathways into the cannabis industry for individuals most impacted by the War on Drugs, including by disproportionate arrest and incarceration as the result of marijuana prohibition. One of the services the SEP provided to its participants was access to an Equity Services List, which was a list of professionals who stated a willingness to provide pro bono or low-cost professional services, including but not limited to legal services, to SEP participants.

In or in about June, 2020, a woman with the initials T.S. applied for admission to the SEP, and on July 1, 2020, was accepted to the program. T.S. sought a license to deliver cannabis. Cannabis delivery licenses were valuable because the CCC issued only a limited number of cannabis delivery licenses. T.S.’s license would be even more valuable because licenses obtained by SEP participants were exclusive within a geographic zone, and the license would be exclusive within that geographic zone for a period of three years beginning on the date of the issuance of the license, meaning that T.S.’s business would not have any competition from similar businesses within that particular geographic zone for that period of time.  Among the requirements for a cannabis business’s maintenance of this special license was that the SEP participant retain at last 51% control of the business.

At the time she applied to the SEP, T.S. was a mental health counselor without experience opening or operating a cannabis business and without legal experience of any kind. T.S. qualified for the SEP program because of where she lived in Massachusetts and because her family had been impacted by the War on Drugs, as defined by the CCC.

T.S. created an entity she called Kush Kart LLC

On July 10, 2020, Respondent submitted his name to be included in the CCC’s Equity Services List as a pro bono services provider…In submitting his name for inclusion in the Equity Services List, Respondent agreed to be contacted by SEP participants, and understood that those participants may be seeking pro bono or reduced-rate services, including but not limited to legal services.

He was connected with T.S. and got involved with Kush Kart

Between September 8, 2020 and November 1, 2020, T.S. asked for and Respondent provided legal assistance and legal advice relating to the drafting of contracts, permitting, and applications to be submitted to the CCC on behalf of Kush Kart. Respondent did not execute an engagement agreement with T.S. or with Kush Kart, or explain to T.S. that he was not acting as her lawyer. Based on the fact that T.S. saw on the CCC’s Equity Services List that Respondent offered pro bono legal services to SEP participants, that T.S. asked Respondent for and received from Respondent legal advice and legal services, and that Respondent was communicating with Respondent from Respondent’s Firm A email account, T.S. reasonably believed that Respondent was her lawyer.

Respondent incorporated Kush Kart, allegedly inserted himself into the business and sought out investors

The Bylaws provided that the business and affairs of Kush Kart would be managed by the directors, but that the directors could only take action if a majority of directors voted for that action. Since there were only two directors—Respondent and T.S.—the bylaws Respondent drafted effectively provided Respondent with a veto over any proposed action by Kush Kart. At no time did Respondent explain to T.S. that his business or personal interests could conflict with her interest in maintaining control of Kush Kart, or that he was not acting as her attorney.

Firm A discovered the Kush Kart connection

On or about March 3, 2021, employees at Firm A discovered that Respondent was communicating with T.S. about Kush Kart from his Firm A email account, and directed Respondent to inform T.S. that Firm A was not representing her. Respondent sent T.S. a text message stating, “Can you reply to the email I’m about to send you from my firm. They think I was providing services under the [Firm A] brand to Kush Kart and not in my personal capacity. A simple ‘Lol I know and thanks.” Respondent then emailed T.S. stating, “As already stated at the outset: I write to clarify that I have been assisting you in my personal capacity and not on behalf of [Firm A]. You do not and have not formed an attorney client relationship with [Firm A]. If you have any questions, please direct them to my personal email address which is as follows: [Respondent’s personal email address].” Less than 20 minutes later, T.S. responded to Respondent’s Firm A email address, as Respondent instructed, “Lol I know and thanks.” Respondent’s email did not make it clear that Respondent was not acting as an attorney for T.S. or for Kush Kart.

He negotiated with investors

By the terms of the memorandum of understanding, Group One would provide: an operating budget to Kush Kart of $3.5 million over the following three years, subject to Group One’s sole discretion; invest the necessary funds for Kush Kart to commence delivery operations; and be responsible for all delivery operations. In exchange, Group One would acquire a 40% membership interest in Kush Kart, with T.S. maintaining 51% equity, and the two individual investors’, described in paragraph 20, above, and Respondents’ interests being reduced to 3% each. Based on its proposed investment, Group One assessed the investment value of Kush Kart at the end of its investment of capital to be at least $8.75 million. At the time the memorandum of understanding was executed, Kush Kart had no funds.

Matters progressed

After March 6, 2021, when Kush Kart and Group One executed the memorandum of understanding detailing terms of Group One’s proposed $3.5 million investment, Respondent sought alternate investors who would provide alternative funding to Kush Kart on different terms. As part of his effort to seek alternate investors, Respondent arranged an interview with Leafly, an online cannabis publication. On March 14, 2021, Leafly published its interview with Respondent and T.S. In the interview, Respondent stated that Kush Kart had raised $3.5 million, and was still looking for new investors and vendors.

Respondent’s statement that Kush Kart had raised $3.5 million was false, because Group One had only entered into a memorandum of understanding with Kush Kart, and had not yet provided any funds.

There were additional business dealings between him and T.S.

At the time he entered into the transaction with T.S., Respondent knew the terms of the transaction were unfair and unreasonable, because Respondent had paid a total of $20,000 to T.S. in exchange for 25% of Kush Kart, when Group One had offered to invest up to $3.5 million in and provide its operating expertise to Kush Kart in exchange for 40% of the company five months earlier. Respondent did not obtain T.S.’s informed consent to the transaction because he did not explain to T.S. that he was not representing her in the transaction.

He allegedly made false representations to an investor identified as S.W.

One of the representations and warranties Respondent made to S.W. in the MIPA was that LNG Capital II was a 32% owner of Kush Kart, a 6% owner of a company called Atamos, LLC, an Illinois entity, and the 100% owner of a company called LNG Energy, Inc., a Massachusetts entity.

Respondent’s representation and warranty to S.W. with respect to LNG Capital II’s ownership of LNG Energy, Inc. was false, because LNG Capital II owned only 42% of LNG Energy, Inc. at the time Respondent and S.W. entered into the MIPA, not the 100% Respondent claimed.

Respondent knew his representation and warranty to S.W. was false at the time he made it because, unbeknownst to S.W., Respondent’s friend, D.S., had been an equal owner with LNG Capital of LNG Energy, Inc. since LNG Energy Inc.’s inception on June 8, 2022.

Self dealing charge

Between December 3, 2021 and May 20, 2022, Respondent raised $580,000 in investment funds on behalf of Kush Kart. $80,000 of those funds came from S.W., as described in paragraphs 36 through 40, above, and the remaining funds comprised convertible debt provided to Kush Kart from three other investors. On or about March 17, 2022, T.S. obtained the license on behalf Kush Kart from the CCC which permitted Kush Kart to exist as a deliverer and operator of a marijuana establishment.

 On or about May 1, 2022, Respondent drafted an employment agreement between himself and Kush Kart. The May 1, 2022 employment agreement purported to offer Respondent the position of Chief Operating Officer of Kush Kart, even though Respondent had already held himself out to the public as having that position for over one year, and even though the April 3, 2021 operating agreement identified him as having that position with the company.

Even though on May 1, 2022 Respondent was currently employed as a full-time attorney-employee with Firm B, the purported employment agreement required that Respondent devote his “full business time, attention, and energies to the performance” of his duties with Kush Kart. The agreement provided a base annual salary of $50,000, and provided for reimbursement of his housing and vehicle costs up to an additional $5,000 per month. The agreement required that any such reimbursement payments would be made by the company’s “third-party executive benefits provider,” and that any such payments would be made “directly to the company responsible for the applicable mortgage, lease, or insurance company.” Respondent advised T.S. to execute the document on behalf of Kush Kart, and she did so. Respondent also executed the agreement.

More complications

On May 17, 2022, Respondent’s father and step-mother incorporated a limited liability company in the Commonwealth called “The CFO Exchange, LLC.” Shortly thereafter, The CFO Exchange opened its own account at Avidia Bank. On May 23, 2022, Respondent, or someone at Respondent’s direction, initiated a wire from Kush Kart’s Avidia bank account, described in paragraph 37, above, to CFO Exchange’s Avidia bank account in the amount of $72,000. Between June 7, 2022 and September 7, 2022, Respondent received five payments originating from the CFO Exchange totaling $25,000, purportedly for reimbursement of Respondent’s expenses.

On or about August 26, 2022, Respondent, in his capacity as Corporate Operating Officer for Kush Kart, purchased an Audi Q5 in the amount of $68,784.81 for the use of the founder and majority owner of Kush Kart, T.S. Respondent listed himself in his personal capacity as purchaser of the vehicle on the sales contract because Kush Kart was not extended credit sufficient to purchase the vehicle at the time of purchase. Respondent, or someone at Respondent’s direction, provided the dealership with a $1,000 down payment, and the balance of payments on the vehicle would be due over time pursuant to a motor vehicle retail installment contract. T.S. took possession of the vehicle on or about August 26, 2022. On August 31, 2022, instead of paying for the vehicle over time as provided for in the motor vehicle retail installment contract, Kush Kart paid the entire balance due on the vehicle to the dealership, which totaled $66,784.81.

In November of 2022, Respondent stopped payment of T.S.’s and his own salary. Following Respondent’s actions, and without income from other employment, T.S. issued to herself and cashed two checks drawn on Kush Kart’s Avidia bank account totaling $10,000. That amount equaled the amount of her monthly salary from Kush Kart, the payment of which Respondent had stopped that same month. T.S. wrote “owner’s draw” on the face of each check.

On or before December 12, 2022, Respondent learned of T.S.’s issuance and cashing of the two checks described in paragraph 50, above, and accused her of embezzling those funds. Then Respondent, or someone at Respondent’s direction, repossessed the Audi Q5 that had been previously provided to T.S., described in paragraph 49, above. After the vehicle was repossessed from T.S., Respondent, or someone at Respondent’s direction, returned it to the dealership where it had been purchased. The dealership re-acquired the vehicle in exchange for $47,000. As Respondent was the named purchaser on the sales contract, the dealership tendered those funds to Respondent personally, and not to Kush Kart, even though Kush Kart had paid the purchase funds for the vehicle less Respondent’s $1,000 initial deposit. On December 12, 2022, Respondent deposited those funds in his personal account at Chase Bank with an account number ending in the four digits 1613.

Between December 12, 2022 and March 31, 2023, Respondent used the $46,000 from the resale of the vehicle which belonged to Kush Kart for his own personal and business purposes, including but not limited to by engaging and paying attorneys to assist him in seizing control of Kush Kart from T.S. and for himself. Respondent did not obtain T.S.’s authority to use those funds, and, prior to January of 2023, had not informed T.S. or any investors in Kush Kart or in LNG Capital that he had received and kept the proceeds that the dealership had paid Respondent for the return of the vehicle that T.S. had been using.

Charges involving his law firm employers

Respondent never disclosed to either Firm A, Firm B, nor Firm C that he was acting as the Chief Operating Officer of Kush Kart during the time of his employment with Firms A, B, and C. Respondent further failed to disclose to Firm C that he had received salary from Kush Kart during the period of his employment with Firm C. Respondent’s failure to disclose to Firms A, B, and C that he was simultaneously employed by Kush Kart while employed with each Firm was dishonest, because Respondent knew that Firms A, B, and C required him to devote his full time to each Firm’s practice, and further knew that the Firms were paying him to devote his full time and attention to each Firm’s practice.

(Mike Frisch)