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After the Green Gold Rush

A recent Oregonian article serves as an example of the new mythology surrounding the "legalization" of recreational marijuana in Oregon. The article opens with the line "The next president could rip up the federal memo that lets Oregon, Washington and other states allow sales of recreational marijuana while the drug remains forbidden under federal law."

Lets be clear. There is no federal memo that lets any state allow the sale of recreational marijuana. The article is most likely referring to what has come to be known as the Cole memo. The Cole memo is an internal policy memorandum drafted by Deputy Attorney General James Cole on August 29, 2013. Far from allowing state's a free hand in allowing recreational marijuana it serves as a warning of pending, possibly large scale federal prosecution of those engaged in what is now colloquially referred to as "cannabusiness."

The Cole memo simply offers the various United States Attorney Offices "guidance" on how to expend limited prosecutorial resources when contemplating the prosecution of individuals and organizations engaged in the manufacture and distribution of marijuana under state laws purporting to authorize such activity. The Cole memo grew out of two earlier such memos, referred to as the Ogden memos, which similarly spelled out federal law enforcement priorities with regard to the prosecution of those engaged in various state medical marijuana programs. The Cole memo itself was updated in 2014 to address the prosecution of federal financial crimes related to marijuana production and distribution.

All of these memos make clear that under federal law, Marijuana is classified as a dangerous schedule I controlled substance with no recognized medicinal uses. Taken together these memos outline a number of federal law enforcement priorities that must be protected in the face of the growing state relaxation of marijuana prohibition. These include, among others;

- Assuring that state laws are not used as a pretext for unlawful trafficking in marijauana

- Assuring that marijuana is not distributed to minors.

- Assuring that marijuana is not distributed outside the state in which it is "legally" grown or produced.

- Assuring that criminal enterprises are not profiting from "legal" marijuana

With regard to medical marijuana the Ogden memos drew a sharp distinction between small time growers and their individual "seriously ill" patients and larger scale operations. As noted in the Cole memo itself;

"In drawing this distinction, the Department relied on the common-sense

judgment that the size of a marijuana operation was a reasonable proxy for

assessing whether marijuana trafficking implicates the federal enforcement

priorities set forth above."

In plain English this reads: Unless you are growing or providing small amounts of marijuana for seriously ill patients you are at risk for federal prosecution regardless of whether you are otherwise in compliance with the Oregon Medical Marijuana Act. According to recent Oregon Department of Human Services records, Oregon is now home to almost 600 grow sites that serve 11 or more medical marijuana patients each, more than double the number registered last year. This visible, and documented explosion of large scale grow operations in Oregon is exactly the type of activity that should be prosecuted according to the Department of Justice. Oregon's larger scale marijuana producers are on a direct collision course with federal law enforcement. It is not a question of "will it happen" it is one of "when it will happen."

Similarly, in regard to the legalization under state law of recreational marijuana, the Cole memos' make clear that the Department of Justice expects vigorous and effective state regulation and prosecution to see to it that federal law enforcement priorities are satisfied. If they are not, the memos are clear; federal prosecutions will commence. While Oregon's regulatory framework is still being drawn up it is already clear that far more marijuana is produced in Oregon than is consumed by both medical and recreational users. The current trend only points to increased production. This increased production will have a number of effects that will only focus federal law enforcement attention on Oregon growers and distributors. First, given a relatively static user population, as the supply of high grade marijuana increases, prices will fall. As the price of marijuana falls, smaller operations will have a harder time maintaining profitability. Also has prices fall within the state, the attractiveness of selling marijuana out of state or on the black market will rise. A pound of high grade Oregon-grown marijuana will sell for a lot more in Idaho, Nevada or even New York, than it will in Oregon. The explosion of recreational production and distribution we are seeing in Oregon is simply an invitation to increased rather than decreased federal marijuana prosecutions.

Anecdotally we think the federal government is in a wait and see type of approach. We do not feel this stae fo affairs will last in the face of burgeoning production. Nor are we confident that the state has either the capacity or the tools to effectively regulate the recreational and medical marijuana industries. As more and larger producers and distributors go on line, the risks for everyone in the cannabis industry in Oregon increases.

The second Cole Memo, issued on February 14, 2014, is in our view the most chilling of all. It reminds federal prosecutors that in addition to the straightforward prosecution of individuals and organizations for the manufacture and distribution of marijuana, a full panoply of federal financial laws can be brought to bear against those engaged in marijuana ventures. Federal financial statutes are violated in almost every monetary transaction involving state-legalized marijuana. The memo extends the threat of such prosecutions even to federally insured financial institutions who deal in the "proceeds" of marijuana-related activity. Most disturbingly the memo reminds federal prosecutors that in all such cases involving marijuana, federal civil asset forfeiture remains available even in cases which do not result in a criminal conviction (or even a prosecution for that matter.)

Under federal civil forfeiture laws the government may seize and forfeit any and all assets that represent the instrumentalities or proceeds of specified unlawful activities. The government need only show that it is more likely than not that such assets are subject to forfeiture before it takes them from you. Any involvement in the production or distribution of marijuana qualifies.

There is a gold-rush of sorts going on right now in Oregon. Money is being made hand over fist. Producers are gobbling up real estate and warehouse space. Distributors are lining up for permits and retail space. A regulatory system that will endeavor to keep meticulous records of who, what, when, and where is in the offing. What then comes after the gold-rush? What always comes?...

We think it too cavalier to hope that federal attitudes change for the better at the same time that the reality of Oregon's production and distribution only worsens. Far from seeing fewer federal - and perhaps state - prosecutions for marijuana offenses we see a very real potential for more. By simply participating in the cannabis gold-rush and signing up for production or distribution under either the medical or the recreational programs you are not only handing over to the federal government your own gift-wrapped criminal prosecution, but all of your assets as well.

It won't take a new president. And not a single federal memo needs to be torn up to do it.

by Andrew M. Kohlmetz

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Kohlmetz, Steen & Hanrahan, P.C.

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