Interstate Smuggling? How the Vireo Incident Is Testing State Cannabis Laws

In December 2015, Daniel Pella returned to his workplace in Otsego, Minnesota, with discouraging news.

Pella, the chief scientific officer of Minnesota Medical Solutions, had just visited the cultivation facility of Minnesota Medical’s parent corporation, Vireo Health, in upstate New York. Vireo, headquartered in White Plains, was a month away from opening its first dispensary. Minnesota Medical Solutions had been producing cannabis oil, and selling it to patients, for more than five months.

Vireo Health’s New York dispensary needed cannabis oil. Its Minnesota subsidiary had plenty. What happened next will have to be proven in court.

The information Pella relayed to the MMS executive team was stark. Vireo was struggling to satisfy New York state requirements as a licensed medical cannabis provider. The company had to meet production deadlines to ensure an adequate supply of cannabis oil for capsules, tinctures and vaporizer cartridges, the only products allowed under the highly restrictive medical cannabis laws in New York. (Neither New York nor Minnesota allows smokeable cannabis flower.)

Three of the five cannabis strains at Vireo’s Fulton County, NY, cultivation and processing facility, Pella allegedly told his colleagues, were defective. The plants weren’t producing enough THC or CBD to meet production demand under state-required benchmarks. Failure to meet those benchmarks could affect the renewal of the company’s medical cannabis license.

The home office needed help. Vireo’s future in the New York market—potentially one of the nation’s largest—was in jeopardy.

And it just so happened that Vireo’s Midwestern subsidiary, Minnesota Medical Solutions, had plenty of cannabis oil.


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The Problem With State Borders

Interstate transport of cannabis is federally illegal. In late 2015, Minnesota and New York were separated by several states—Wisconsin, Indiana, Ohio and Pennsylvania—where all forms of cannabis were still illegal. (Ohio and Pennsylvania legalized medical marijuana the following year.) Minnesota’s medical marijuana law prohibited the movement of any cannabis product across state lines. As Vireo officials pondered their predicament in late 2015, there was no way to transport cannabis oil from Minnesota to New York without breaking both state and federal law.

A prosecution witness says a company official identified jars of oil that could ‘save New York.’

Nevertheless, according to a criminal complaint filed by the state of Minnesota, the Vireo-Minnesota Medical team pressed on.

Dr. Laura Bultman, who was then Vireo Health’s medical director, and Robert Shimpa, chief operating officer of Minnesota Medical, summoned Daniel Pella to an urgent meeting, prosecutors say. It was allegedly held inside a secure vault at the company’s cannabis production facility in Otsego, Minn., a small town about 30 miles northwest of Minneapolis.

There, authorities allege, Bultman directed Pella to identify jars of concentrated cannabis oil that could “rescue New York.” In a prosecution account that is disputed by Bultman’s lawyers, she allegedly promised to make the outbound inventory disappear from the radar of Minnesota’s cannabis tracking system.

In this photo taken Tuesday, Jan. 5, 2016, Dr. Stephen Dahmer, center, medical director of Vireo Health of New York, is flanked by his Vireo Health colleagues CEO Ari Hoffnumg, left, and Dr. Laura Bultman, chief medical officer at the Vireo Health’s medical marijuana dispensary in White Plains, NY. On the table is a display of packaging for the product scheduled to be made available in New York beginning Thursday, Jan. 7. The source of the cannabis oil in those products is at the heart of the criminal case against Bultman and her colleague, Ronald Owens. (AP Photo/Jennifer Peltz)

Moving Inventory

In almost any other industry, moving inventory from one state to another is a simple task. If a retail store in Pennsylvania runs low on product, the company’s warehouse in Illinois loads a truck and ships it east.

‘It baffles me why a company would risk this, if these allegations are true.’

Robert Mikos, law professor, Vanderbilt University

It’s not so easy when dealing with cannabis. Because it’s a federally illegal Schedule I substance, shipping excess inventory to a subsidiary running low on supply simply isn’t done—at least not when the inventory crosses state lines.

But that’s exactly what state prosecutors allege to have occurred. According to a criminal complaint now awaiting trial in Buffalo, Minn., state officials say that Bultman and Minnesota Medical’s chief security officer, Ronald Owens, set off in an armored vehicle in a clandestine flight to race move jars of cannabis oil – 12.3 pounds of it, valued at $500,000 – from Minnesota to New York, sometime before Christmas 2015.


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Facing Felonies

Bultman and Owens each face two felony charges brought by authorities in Wright County, Minnesota, the home of Minnesota Medical’s Otsego cannabis processing plant. In February 2017, county officials filed charges alleging that Bultman and Owens conspired to illegally transfer medical cannabis to a person other than a patient or a legal caregiver.

The charges were filed under a criminal statute written into Minnesota’s 2014 medicinal medical marijuana law by lawmakers hoping to fortify the state’s cannabis industry against federal intervention. In a nod to the 2013 Cole Memo—the Justice Department memo document calling for “robust controls” to prevent cannabis diversion from state-licensed cannabis businesses—Minnesota lawmakers adopted a strict seed to sale tracking system. Enforcement of that system included penalties of up to two years in prison and a $3,000 fine.


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A Minnesota Test Case

The Cole Memo no longer exists. US Attorney General Jeff Sessions scuttled it earlier this year. But Minnesota’s rigorous MMJ laws remain in force, and the case of the Minnesota midnight run is setting up as a test of the state’s ability to criminally enforce its cannabis compliance program.

Minnesota’s cannabis tracking and transport laws are clear, according to legal scholars familiar with the case. Robert Mikos, a Vanderbilt University law professor and author of a federalism and cannabis law text, “Marijuana Law, Policy and Authority,” said Minnesota clearly established a strict regulatory program to ensure that its two licensed cannabis companies could maintain supplies for patients in Minnesota—not for a parent corporation in New York.

“It baffles me why a company would risk this, if these allegations are true,” Mikos said.

A Credible Witness?

Lawyers for Bultman, Owens, and Vireo Health dispute the prosecution’s construction of the alleged events. They are seeking to discredit the chief witness, Pella, by portraying the former chief scientific officer as a fired employee who is making unfounded charges in retaliation for his April, 2016, dismissal.

The prosecution’s star witness is a former employee who, it’s claimed, once said the company would ‘pay’ for his termination.

“Upon his dismissal…Mr. Pella indicated to his former employees that the company would ‘pay’ for his termination and that he would ‘take this company down,’” stated Bultman’s defense attorney, Paul Engh, in court documents challenging the prosecution’s case.

The defense contends Bultman and Owens did indeed trek in an armored vehicle to New York—but did so to deliver information technology equipment, not cannabis oil.

Assistant Wright County Attorney Shane Simonds, who is prosecuting the case, scoffed at that contention. Simonds argued in court papers that Bultman and Owens personally shipped the oil and then tried to cover their tracks.

“Just as the evidence of flight shows consciousness of guilt, evidence of a cover up also shows consciousness of guilt,” he wrote.


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A Doctor and a Former Cop

The Vireo officials accused of illegal transport are not accustomed to answering criminal charges in court.

Dr. Laura Bultman is the co-author of a cannabis guidebook, “Medical Cannabis Primer for Healthcare Professionals.” Co-defendant Ron Owens, the security officer, is a law enforcement veteran. According to the Journal News in New York, Vireo’s cannabis license application listed Owens as a former Secret Service agent and Minnesota police officer who has “extensive experience in high-risk transportation.”

Minnesota law allows for two-year sentences for diverting cannabis from the legal supply chain, but Simonds, the prosecutor handling the case, told Leafly that Owens and Bultman are more likely to face a reduced term—a year and a day in jail—if convicted.

A year in jail is not insubstantial. And  those convictions could derail careers, especially in the tightly regulated cannabis industry.  After charges were filed last year, a Vireo Health spokesman said tersely than Bultman and Owens no longer worked for the company. A bio for Bultman from Bloomberg said she was chief medical officer until August 26, 2016. Whether Bultman or Owens could return to the cannabis industry, even if acquitted, is an open question.


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A Weak State System Already

Beyond the criminal counts, the pending trial poses a public relations challenge to Minnesota’s nascent medical cannabis industry.

Although the state’s medical marijuana system has been open and operating since 2015, it remains one of the nation’s most notoriously tight industries. In a state with 5.8 million residents, barely more than 9,000 are registered cannabis patients. They are served by only a handful of dispensaries. By contrast, Arizona (pop. 7 million) has more than 150,000 registered patients and 130 dispensaries. Michigan (pop. 9 million) has more than 275,000 patients and 215 dispensaries.

Until recently, Minnesota’s licensed cannabis companies have been losing millions of dollars per year, clinging to life in the hopes that eventually the state will allow a wider set of qualifying conditions.


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Losing a Maryland License

The criminal case to date hasn’t resulted in any civil actions taken by the Minnesota Department of Health. Despite the charges against the two Minnesota Medical employees, the state renewed the company’s license for another two years in 2017. Minnesota Medical’s Cannabis Patient Center dispensaries in Minneapolis, Rochester, Moorhead and Bloomington remain open.

A spokesperson for Minnesota Medical Solutions, reached by Leafly for comment, said: “We are not a party to this case. That being said, the focus of our attention remains on serving our patients who depend on us for life-improving medication and on upholding our responsibilities as a corporate citizen in Minnesota and in every community we serve.”

Vireo, the parent corporation, has suffered some fallout from the case. Last year Maryland regulators rejected the final license approval of MaryMed, Vireo’s Maryland subsidiary. The company had been awarded a preliminary permit, but regulators turned down final approval largely based on the Minnesota state allegations.

In June 2017, Pennsylvania officials awarded a cultivation license to Vireo’s local subsidiary, Pennsylvania Medical Solutions. Some officials from companies that did not win licenses criticized the state for not penalizing Pennsylvania Medical Solutions’ application score in light of the Minnesota controversy. One grower filed a lawsuit to block the development of the company’s Scranton, PA, grow facility. That lawsuit was later dropped.


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Further Fallout

There may be further consequences in Minnesota if Bultman or Owens are convicted. Minnesota Department of Health spokesman Scott Smith told Leafly that the state can revoke, suspend or refuse to renew the company’s production license if an executive staff member “pleads or is found guilty of diverting medical cannabis while an officer of a medical cannabis manufacturer.” And ramifications of the trial may be far-reaching.

Maren Schroeder is president of Sensible Minnesota, an advocacy group that promotes cannabis law reform and access to medical marijuana. She worries the case may haunt the medical cannabis community, embolden opponents and imperil the industry’s growth in Minnesota.

‘The risk that was (allegedly) taken here really feeds into the opposition to medical cannabis in Minnesota.’

Maren Schroeder, president of Sensible Minnesota

Schroeder, who has met with Bultman on a few occasions, described the former Minnesota Medical official as a kind and extremely well versed cannabis expert. “She really seemed to care about the patients,” Schroeder said.

“To be completely honest, I’m kind of conflicted about this,” Schroeder said of case. On one hand, she’s bothered by criminal charges alleging transport of cannabis to New York. That cross-border run, if it happened, would have been carried out in order to serve medical cannabis patients. “I don’t think it’s fair to demonize or criminalize patients getting their medicine,” she said.

On the other hand, Schroeder says she is upset over the alleged recklessness, if Minnesota Medical Solutions did indeed ship product out of state.

“The risk that was (allegedly) taken here really feeds into the opposition to medical cannabis in Minnesota,” she said. “It gives the opposition something to stand on when opposing any expansion. They may say we only licensed two companies and one of them diverted product and broke the law.”


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The Missing Jars of Oil

Shane Simonds, the assistant county attorney, says his prosecutors have “voluminous and clear” evidence that suspicious outbound cannabis oil deliveries, listed by Bultman in the state’s software tracking system, BioTrack, were illegally transported to New York.

There’s one piece of evidence that remains missing, though: the allegedly diverted jars of  cannabis oil. Those were never recovered. The case is being built on circumstance evidence, including transfer logs and inventory lists in Minnesota and New York. That evidence includes company emails referring to “Christmas reds,” which authorities claim were code words for the diverted oil.

It is a prosecution akin to a murder case without a body. That’s not an insurmountable challenge, said Vanderbilt University law professor Robert Mikos.

“It is not unusual for the government to be unable to produce the drug at issue and have to rely on circumstantial evidence that someone was trafficking in a prohibited substance,” Mikos told Leafly. “The prosecution doesn’t need a ‘body’ to win the case. They don’t need the actual drug.”


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‘Christmas Reds’

Prosecutors claim the circumstantial evidence in the case is strong. In a telephone interview, prosecutor Simonds said it was clear the cannabis oil was diverted from Minnesota Medical’s facility in Otsego—a de facto violation of the medical cannabis “diversion statute under state law.”

“Medical cannabis in Minnesota is heavily regulated,” Simonds added. “Not only can you not divert raw materials—such as cannabis oil yet to be processed and packaged as retail product— to your distribution locations, but you can’t divert it to another production facility” in-state or out.

‘Medical cannabis in Minnesota is heavily regulated. Not only can you not divert raw materials to your distribution locations, but you can’t divert it to another production facility’ in-state or out.

Shane Simonds, prosecuting attorney, Wright County

According to the criminal complaint, Daniel Pella, the ex-Vireo staffer testifying against his former colleagues, provided Minnesota state authorities with computer data indicating that Bultman filed BioTrack reports in Dec. 2015 indicating several “outbound” cannabis oil deliveries, without listing destinations.

Authorities claim that Bultman reported another bulk delivery to the company’s dispensary in Minneapolis. But an official at the dispensary told state investigators the Minneapolis location had no ability to store or process bulk cannabis oil, so officials there would have refused such a shipment.

Authorities also say Owens presented state investigators with paperwork indicating that he had 5.6 kilograms –12.3 pounds – of cannabis oil destroyed at a waste management facility in Alexandria, Minn. But prosecutors claim a separate transportation delivery manifest listed only boxes of discarded piping and plastic, including waste capsules and manufacturing residues. According to court documents, a waste management official told investigators that less than two pounds of materials were received at its facility and that any claims otherwise were “full of shit.”

Prosecutors also seized upon email exchanges that Simonds says appeared to refer to a cannabis oil called Vireo Red that was needed by Vireo Health in New York.

In a Dec. 8, 2015, email to Minnesota Medical executive Robert Shimpa, Bultman wrote: “I will send you a lab report on the reds,” adding: “I am calling them Christmas reds.”

“Nice name!” responded Shimpa, who hasn’t been charged in the case. “I was trying to figure out a way to describe the red discreetly.”

Authorities claim that those emails followed the delivery of diverted cannabis oil to New York. An earlier Dec. 6 email from Mia Zang, a Minnesota Medical technician who was at Vireo Heath in New York, is also presented as evidence. “Laura [(Bultman]) is here with Christmas presents from MN,” Zang allegedly wrote in an email to a colleague. “We might start formulations this week.” Zang has not been implicated in the case.


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CEO’s Computer Searched

Court documents reveal that Minnesota investigators searched the computer of Dr. Kyle Kingsley, a physician who is the founder and CEO of both Vireo Health and Minnesota Medical Solutions. He isn’t charged in the Minnesota case, and New York authorities haven’t filed charges against any Vireo Health officials. However, the New York State Department of Health has initiated its own investigation while awaiting the outcome of the Minnesota case.

Vireo Health operates a cultivation and extraction facility in the town of Perth, NY, about 40 miles northwest of Albany. Vireo sells cannabis oil products at its dispensaries in Albany, Binghamton, White Plains, and the New York City borough of Queens. New York’s emerging medical cannabis industry serves about 50,000 patients for limited medical conditions.

In a statement last year, Vireo Health said it was cooperating with investigating agencies: “We take seriously our legal obligations, our regulatory responsibilities and our own standards and procedures.”

Laura Bultman’s attorney declined telephone and email requests to comment on the case or make his client available for interview. Ronald Owens’ attorney did not respond to Leafly’s inquiries.


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A Spirited Defense

In court documents, though, attorneys for the accused aggressively questioned the motives of the prosecutor’s key witness, Daniel Pella, characterizing him as a “purported whistle blower.” In a motion seeking dismissal of the charges, Bultman’s attorney Paul Engh portrayed the former chief science officer as a man with a vendetta. Attorneys for the defendants claim that Pella not only threatened to take down the company after his firing, but acted out by vandalizing Minnesota Medical’s cannabis-testing equipment, resulting in $2,445 in repairs and $100,000 in lost production time.

In a court filing, Engh raised questions about “a gap year” on Pella’s resume at the University of Minnesota, where he earned a doctoral degree. His defense motion assailed Pella, who was born in South America, for a two-year marriage that ended in divorce, suggesting it may have been a ruse for him to gain United States citizenship.

That last shot may have gone too far. In a recent ruling, Minnesota District Court Judge Kathleen A. Mottl slapped down the defense’s assault on Pella. “Defendant’s request for information regarding Daniel Pella’s academic and marriage record is denied due to unsubstantiated claims,” she wrote in a Feb. 16 decision.

Judge Mottl also rejected a motion to dismiss the case, which defense attorneys filed based on the fact that prosecutors hadn’t produced the alleged diverted cannabis oil, which defense attorneys had hoped to test.

All parties are due back in court in June for pretrial motions, with trial set for November. Until then, the alleged interstate movement of cannabis oil may remain a mystery. But interest in the case—and its implications for emerging cannabis economies—most definitely crosses state lines.

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