Weed Trafficking Plot: California Co. Sues Competitor Over Alleged Black Market Profiteering

A California cannabis company has been accused of transporting and shipping cannabis across state lines on airplanes, according to a lawsuit filed by one of its competitors, reported Green Market Report.

The Long Beach-based 562 Discount Med Inc., which is doing business as Catalyst, filed a suit against Glass House Brands Inc. GLAS GLASF in Los Angeles County Superior Court on June 6, accusing them of profiting from the illicit cannabis market in California, and thus undercutting the legal market and those complying with regulations.

The suit claims Glass House is "one of the largest, if not the largest, black marketers of cannabis in the State of California, if not the country."

What Happened

Glass House allegedly used a combination of both legal and illegal distributors to send cannabis nationwide, according to the lawsuit.

It collaborated with companies that utilize a "burner distros" approach. The phenomenon usually implies legal cannabis operators that purchase or obtain distribution licenses in various local jurisdictions, often where cultivation operations are prevalent and/or where such licenses are relatively easy to acquire.

They do this by using an array of different frontmen who agree to attach their names to the licenses. Once licensed, the burner distros purchase large quantities of cannabis from cultivators within the state, which in return look the other way to keep excess cultivation tax money flowing in. The suit alleges these burner distros have been supplying lawfully made cannabis to the black market across the country.

"By specifically choosing to deal with Burner Distros and others to channel its cannabis to the black market, GHB is supporting a flourishing black market that pays no taxes – a market that permits GHB to sell 'excess capacity' that it could not otherwise sell in the legal market without substantially affecting the legal price of cannabis – and by doing so has been able to sell a veritable mountain of illegal cannabis at high margins," the suit claims.

The document also suggested that GHB's 75% year-over-year increase in net cannabis sales in the fourth quarter can be attributed to illicit marijuana sales as well as the opening of a 5.5 million square foot greenhouse facility in Southern California.

With the lawsuit, Catalyst seeks to crack down on GHB's alleged "illegal, fraudulent and unfair business practices."

"The dual-channel structure it has employed is a huge 'win-win' for GHB, but a huge loss for Catalyst and other legal operators who lose sales to illegal dispensaries and are required to actually pay the mandated taxes that are not paid in black market transactions," the suit claims.

California's Illicit Cannabis Market Faces Regulatory Action

Meanwhile, the California Department of Cannabis Control (DCC) has improved enforcement of illegal marijuana operations over the past two years, according to a new report released by the agency in March.

David Hafner, a spokesman for the DCC, explained what the focus was in 2022.

"We have been focused on cultivation efforts in 2022 which have a higher yield of illegal cannabis versus dispensaries (...) There's always a safety risk with these illegal operations because many of these are organized by criminal organizations who often are armed and dangerous," Hafner said.

To that end, the agency launched a $20 million grant program to boost cannabis retail programs statewide. The Local Jurisdiction Retail Access Grant seeks to allow local jurisdictions to broaden access to cannabis products in areas that are not well-served while prioritizing markets that promote social equity initiatives.

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