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Dispensing profit

Documents in pot shop cases show a cash-infused world bearing little resemblance to the one pitched to voters for '96 medical marijuana law.

June 17, 2012|Joe Mozingo
  • Some pot shops in Southern California are making big money, mostly in cash, even as they claim to be nonprofit, court and law enforcement records involving medical marijuana dispensaries show.
Some pot shops in Southern California are making big money, mostly in cash,… (Genaro Molina / Los Angeles…)

In the first raid, Orange County sheriff's detectives hit a Dana Point marijuana storefront, the San Clemente home of its director and a "stash house" he allegedly maintained nearby.

In the two homes, they found cash stuffed everywhere: in buckets in the garage and attic, in an Igloo cooler in a bedroom, under a mattress, on an ironing board, in a dresser. According to a search warrant affidavit filed in November, they recovered more than $700,000.

At the shop, investigators found spreadsheets showing sales over 10 months totaled $3.17 million, according to the affidavit, with $2.47 million "cash on hand." Paperwork indicated that a silent partner, a convicted drug dealer named John M. Walker, controlled the shop and six others in Orange and Los Angeles counties.

A subsequent raid of one of Walker's properties recovered a Beretta handgun, a shotgun, a Chinese AK-47 with a bayonet and grocery bags filled with four dozen rubber-banded bundles of cash; one of the bags contained a note with calculations totaling $99,324.

The discoveries and many others like them across California are starkly at odds with the image presented by medical marijuana providers, who label themselves as "compassionate caregivers" and say they work on slim margins, give away cannabis to the poor and comply with the law.

But many medical marijuana dispensaries have been making huge sums of money even as they claim to be nonprofit, according to court and law enforcement records, industry insiders, police and federal agents. The Times found a cash-infused retail world unlike the one pitched to voters who passed the Compassionate Use Act for "seriously ill Californians" in 1996.

Few would suggest that everyone in the industry is making huge profits; many dispensaries do struggle to stay afloat. Nor do the court cases capture the relief truly ill patients ascribe to high-quality marijuana they might have difficulty getting if these shops did not exist.

One reason for the vast disparities within the medical marijuana trade is that the regulations governing it are hazy. The 1996 initiative and a law the state Legislature approved in 2003 never made clear how patients were supposed to get marijuana, much less whether sales were legal. Attorney general guidelines issued in 2008 allow only for fees "that are reasonably calculated to cover overhead costs and operating expenses." Dispensaries decide to abide by that or not.

Records from a Granada Hills dispensary showed sales revenue topping $10,000 on many days.

Spreadsheets from a Long Beach operation indicated the owners bought $247,040 worth of marijuana and sold it in the next five months for $776,589. A state Board of Equalization investigator testified that the pair sold a total of $1,672,206 that year and reported only $206,980 to the tax agency.

A Venice-area dispensary's bookkeeping revealed it did about $5.1 million in sales in just over a year. One month's total was $468,331 -- with $154,493 in "total profit." Another's profit was $116,625, after a $25,382 payment to the owner.

In North Hollywood, the two partners behind NoHo Caregivers emailed encrypted messages estimating they would each make $194,000 a month in profit, according to a federal indictment.

The state Board of Equalization gives a very rough estimate that it collects up to $105 million a year in sales tax from stores that are doing up to $1.3 billion a year in sales.

There is no way to know what the average dispensary earns because they are unregulated, aside from those in a few cities, including Oakland, Berkeley and West Hollywood. That void has allowed operators to sell huge amounts of pot at giant mark-ups, seeding public mistrust of the industry and giving law enforcement ample incentive to crack down.

"Some people are abusing the system and raking in profits," said Don Duncan, operator of a West Hollywood dispensary and director of the California chapter of Americans for Safe Access. "That draws the credibility of the field of medical cannabis into doubt."

He and fellow leaders of the movement are pushing for a bill to better regulate the business. But the legal challenges to growers and dispensaries are mounting.

The federal government, which considers all marijuana use illegal and has signaled it will target any commercial operations, has launched a multi-pronged campaign to put this all back in the bottle. And local authorities throughout California, led by the Los Angeles Police Department and Los Angeles County Dist. Atty. Steve Cooley, are going after them too, based on the notion that nothing in the medical marijuana law permits sales or profits.

Money flowing

On July 31, 2008, the DEA and Culver City police raided a dispensary called Organica, on the border of Venice and Culver City. After seizing about half a million dollars' worth of weed and $16,379 in cash, the agents expected the shop to stay closed.

They were wrong. Organica's owner Jeffrey K. Joseph said he had an obligation to his "collective of patients."

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