Tensions over 2018 marijuana licensing resurface with bill that would give losing companies chance to expand

A table of packaged marijuana for sale

An acrimonious battle over the distribution of coveted marijuana dispensary licenses in 2018 spilled over into the Legislature on Thursday, with sharp opposition to a measure that would allow applicants who lost out on the licenses another chance to open new stores.

SB235, sponsored by Sen. Dallas Harris (D-Las Vegas), includes a provision giving “social equity” applicants who have been adversely affected by the War on Drugs a leg up when applying for a Nevada marijuana license. The bill’s most controversial element by far would create a new path for additional dispensaries in the dog-eat-dog cannabis market.

“First, it will allow better access for patients to obtain their medicine. Second, it will address the major flaws in the last licensing process. Third, it will give local Nevada cannabis businesses the opportunity to help Nevada get back on its feet,” said supporter John Ritter, who is affiliated with the marijuana company The Grove and has long been fighting the licensing procedures from 2018.

Unlike most other business types, retail cannabis stores are capped in number by government. A 2018 round of licensing doled out 61 dispensary licenses to 17 different companies even though 127 businesses applied. That drew almost immediate backlash from those who didn’t win; they argued the state’s process was riddled with problems. 

After lengthy and complex litigation, Judge Elizabeth Gonzalez concluded last year that certain actions by the Nevada Department of Taxation, the state agency that issued the licenses, created “an uneven playing field because of the unequal information available to potential applicants.” But she said neither monetary relief nor new licenses should be doled out as a result.

A proposed amendment to SB235 allows applicants unsuccessful in 2018 a route to finally getting permission to expand by allowing those dispensaries, if they have both retail and medical licenses, to spin off the medical marijuana license into a completely new license and double their number of stores. 

Cannabis Compliance Board Executive Director Tyler Klimas said the bill could potentially yield new dispensaries for the 110 businesses that didn’t get a license in 2018. But attorney Mark Fiorentino, representing the Grove, a company that missed out on licenses in 2018, said the number of new dispensaries that might result from the bill was probably closer to 20 because of requirements such as dispensaries having local approvals. 

There are currently 81 dispensaries open statewide, and another 50 are expected to open by a February 2022 deadline.

Proponents commissioned an analysis from RGC Economics that projected the state could support up to 1,283 additional dispensaries. Nevada’s marijuana market grossed nearly $700 million last fiscal year and is on track to break that record this fiscal year.

But opponents cited another study from a different Nevada-based analyst, Jeremy Aguero of Applied Analysis, that concluded adding more licensees would dilute revenue for existing stores. They also say it would go against a settlement with the Cannabis Compliance Board that called for a study on whether new licenses are needed to serve Nevada.

They say licenses should be doled out in a competitive, merit-based process, arguing that inferior applicants are looking for a back door to get a license, and that bill proponents should go through proper channels when a future application window opens up.

“SB235 is clearly an end run around Judge Gonzalez’s decision in an attempt to award licenses to those that were unsuccessful, both in 2018 in obtaining licenses as well as unsuccessful in the litigation,” said attorney Rusty Graf, who represented Clear River LLC, which won three licenses in 2018.

The hearing, in the Senate Revenue and Economic Development Committee, also exposed an internecine conflict that has riven the industry. Nevada Dispensary Association (NDA) Executive Director Layke Martin indicated that an unnamed board member went behind the backs of association leaders, neglecting to give them a heads up about the provisions of the bill before it was introduced.

“There’s a reason for that,” she said, pointing to a portion of the amendment that creates a new pathway for unsuccessful applicants to expand. “The award of licenses as set forth in section 2 of the amendment threatens the strength and integrity of the industry at large, and it's not something that the NDA would ever support.”

Bill co-presenter David Goldwater, a board member of the dispensary association, said the five-member board is stacked against smaller operators who didn’t win a license in 2018, such as his business, Inyo Fine Cannabis Dispensary. 

“This is a unique situation where the association took a position on a bill that the members had a differing of opinion,” he said. “I look forward to working with the sponsor on seeing if we can improve this bill.”

Growing Pains: Records paint a picture of unrest in Nevada marijuana industry

Customers at Nuwu Dispensary

In just two years, the narrative surrounding Nevada’s legal marijuana industry has shifted from praise for the improbably smooth and lucrative launch of recreational cannabis sales to an industry divided by legal wrangling and clouded by questions about the adequacy of state regulation.

Many questions remain unanswered: Who’s on a secretive new governor-convened task force focused on “rooting out potential corruption” in the marijuana realm? Was there corruption to begin with, either by the state or by businesses? Will anyone lose a license? 

Thanks to a bill signed into law this spring, there’s a bit more sunlight on a process that was once completely shrouded in secrecy because of taxpayer confidentiality laws.

Over the next few weeks, a series of stories called “The Cannabis Files” will explore the trends laid out in the data released from SB32 and analyzed by The Nevada Independent. The records not only reveal who has a stake in the business, but paint a picture of a rapidly changing industry that is becoming increasingly corporate, with ownership transfers so frequent that elected officials find it hard to keep up.

Opening up the information “ushers in a new era of transparency that will benefit the industry and the public,” Gov. Steve Sisolak said when he signed the bill in May, and it offers a glimpse of the challenges that will lie ahead as Nevada once again overhauls its marijuana regulation next year and adopts a Cannabis Control Board oversight regime not unlike the one that reined casinos into a respected mainstream.

“I will say, overall, I think our industry is at a point that is not terribly different than gaming was,” said John Ritter, a board member with The Grove and the Nevada Dispensary Association. “I welcome the fact that the industry is treated seriously and being treated like gaming.”

Buyers outside marijuana dispensary

Hundreds of people line up to purchase recreational marijuana in Nevada at Reef Dispensaries on Saturday, July 1, 2017. Photo by Jeff Scheid.

A house divided 

Nevada’s launch of recreational marijuana sales in July 2017, six months ahead of schedule, was met with great fanfare, especially in light of troubles neighboring states encountered with their rollouts. 

But in spite of the high-flying revenue numbers — the state brought in $70 million in its first year, or 140 percent of what it had projected — critics now wonder whether corners were cut in the rush to unlock the recreational marijuana market, which dwarfs the size of the medical marijuana market. And they wonder whether the Department of Taxation that assumed responsibility of marijuana regulation in 2017 was prepared for a task that has since dominated its workload and that in the future will be assigned to a marijuana-specific board with more enforcement teeth. 

“This is another area where I think there was a rush to get revenue into state coffers,” Sisolak said on Thursday at the release of an audit of the state’s Marijuana Enforcement Division. “We’re doing everything we can to clean up those issues.”

Chief among those issues are questions about whether the state was unfair when it awarded 61 conditional dispensary licenses in late 2018, in response to more than 460 applications. While many dispensary owners agree the initial voter-approved dispensary cap is prudent to keep the quality of the stores high and avoid having one on every street corner, the concentration of those new licenses among just 17 businesses — including one business that captured a full 11 licenses — surprised and angered those who did not win. The state is involved in about a dozen lawsuits over the situation.

An audit launched in March and released last week concluded that the state’s licensing process was adequate, if not perfect. Auditors said more transparency about the scoring criteria and automation to reduce human errors while reviewing business applications would help, as well as redistributing licenses that can’t be used because they’re for jurisdictions that have a marijuana moratorium. 

The audit revealed no bombshells or conclusive evidence that the process was rigged. But the questions will be further litigated in court at trial, scheduled to begin this spring.

Court proceedings stemming from a lawsuit filed by dispensary owners who did not win additional licenses lasted for months this summer and led to a partial preliminary injunction in August that barred the state from granting some dispensaries final approval to open. Clark County District Court Judge Elizabeth Gonzalez agreed that there were flaws with the process, saying it “was impacted by personal relationships” and that a diversity category was “subject to manipulation by applicants,”  but did not toss the entire licensing round out of hand. 

Marijuana enforcement agency leader Jorge Pupo, whose dinners with certain applicants and apparent selective sharing of information about applications was a focal point of the court proceedings, left the post under circumstances that have not been fully explained. But one of the biggest consequences of the lawsuit and subsequent moratorium has been a split between the haves and have nots, with dispensary license winners blaming the losers for lawsuits that have jammed up their efforts to open the new stores.

“It’s created a giant schism with the industry,” said David Goldwater, a board member of the Nevada Dispensary Association and owner of Inyo Fine Cannabis Dispensary, which did not win additional licenses in the latest round.

Late last month, eight cases against the state were consolidated as they head for trial.

Employee at Acres Cannabis
Amber Jansen organizes marijuana merchandise inside the Underground, a cannabis farmers market inside Acres Cannabis in Las Vegas on Friday, April 20, 2018. Daniel Clark/The Nevada Independent

Foreign influence

On top of that dispute, a recent indictment alleges that two associates of former New York City Mayor Rudy Giuliani with ties to Eastern Europe conspired to get involved in the industry. Once they missed the deadline, they allegedly made illegal campaign donations to Republican gubernatorial hopeful Adam Laxalt and attorney general candidate Wes Duncan — financed by a foreign national — in hopes that they would sway well-positioned politicians to change the entire licensing scheme.

Though the two men were unsuccessful in obtaining a license, the revelation prompted Sisolak — a champion of the industry, if the marijuana world’s more than $700,000 in campaign donations in the 2018 cycle is any indication — to proclaim his outrage and order sweeping action.

Ask industry advocates, though, and they point to the haplessness of the conspirators: They appeared to hatch their plan in early September 2018, the same time as a deadline for a complicated application that some businesses had worked on filling out for months or years. They tried to woo a gubernatorial candidate who, in 2016, campaigned against legalizing marijuana and then lost the 2018 election.

“I think what happened with the Ukrainian thing was a Three Stooges thing,” said Clark County Commissioner Tick Segerblom, a champion of the industry now and in his former career as a state lawmaker.

Nevertheless, it’s prompted Sisolak to convene a secretive task force aimed at “rooting out potential corruption” in the industry. Sisolak has declined to so much as name the agencies that are part of the task force, saying he doesn’t want to compromise their investigations. While insiders say the force is comprised of law enforcement, Sisolak’s office said Friday it still needs time to answer a records request about the membership, three weeks after The Nevada Independent first submitted the inquiry.

In neighboring California, The Sacramento Bee found loopholes in the process of changing ownership on marijuana licenses that had allowed dispensary ownership to fall to a small number of people — including a Ukrainian-born businessman indicted on campaign finance charges — in spite of anti-monopoly rules. Sacramento is now considering a moratorium of its own on license transfers, and the FBI is investigating whether bribery of city officials played a role in the licensing process.

Still, Segerblom believes Sisolak’s response has cast too much suspicion on the system.

“I understood what [Sisolak] was saying but I think he tarnished the whole industry unnecessarily,” Segerblom said. “Does he know something I don't know? … While there could be a few problems here and there … it’s phenomenally successful.”

Senator Tick Segerblom standing in front of a cash register
Democratic Sen. Tick Segerblom makes the first marijuana purchase at The Source in Las Vegas on July 1, 2017. Photo by Joe Fury.

Moratorium on license transfers

Even more sweeping, state officials in mid-October called for an indefinite moratorium on transfers of licenses. Transfers are common, and can result from things like shareholders wanting to sell out or going through a divorce.

But critics say the process of transferring a license is too much easier than the initial application process, and could lead to unsavory characters getting a foothold in the industry. The Department of Taxation said it would not be processing new or existing applications as it tries to ensure “a more thorough and appropriate vetting process within the industry.”

The moratorium can also stall major mergers and buyouts, though, causing businesses to miss contractual deadlines and face fines. At an Oct. 23 Reno City Council meeting, officials with Deep Roots Harvest went so far as to say the hold is likely to scuttle New York City-based Acreage Holdings’ plans to acquire the company for $120 million.

“With everything that is going on at the state … there is a very low likelihood that that transaction will manifest,” Keith Capurro, part-owner of Deep Roots Harvest, which won five new dispensary licenses in the latest round.

“It’s definitely affecting folks,” Goldwater said. “We’re all trying to figure out the moratorium. It came as a surprise.”

Asked for details on the timeframe of the moratorium, Sisolak deferred to the leader of the Nevada Department of Taxation and his appointee to lead the forthcoming Cannabis Control Board: Tyler Klimas, a former lobbyist serving the governor’s office in Washington D.C. who was also previously a spokesperson for Gov. Brian Sandoval and the Silver State Health Insurance Exchange.

“No,” Sisolak said in a brief interview Thursday when asked if he knew when the moratorium would end. “I’ve got total confidence in [Taxation] Director [Melanie] Young and Tyler and they’re going to move forward.”

Tryke Companies, which owns Reef Dispensaries and this fall announced plans to be acquired by Cresco Labs, is urging quick action. Late last month, the company completed a Hart-Scott-Rodino Act review, a detailed antitrust probe involving the U.S. Federal Trade Commission and Department of Justice.

“While we fully support the Governor’s efforts to ensure a strong and empowered regulatory framework for Nevada cannabis, we strongly urge a swift resolution to the moratorium,” said Brett Scolari, Tryke’s general counsel. “We look forward to working with state officials on a quick resolution of the approval process in the coming months as we take the final step in this highly regulated public transaction.”

Some in the industry say they support the moratorium, although they sympathize with companies hampered by it. It’s a step toward bolstering public confidence in the business of marijuana, they say.

“Look at how the public perceived gaming 50 years ago —  that was a huge sin and it was looked down upon,” Ritter said. “Because of what Nevada did to clean up the industry, get the mob out, we proved that can be done and now gaming has proliferated across the world. That’s why I think that in the long term, making sure that this industry is properly regulated, that the owners and managers are properly vetted — in the long term [that’s] good for our industry.”

A man, asking to be identified only as Junior, selects marijuana products inside Exhale Nevada dispensary in Las Vegas on Friday, April 20, 2018. Daniel Clark/The Nevada Independent

Consolidation

Data released by the state through SB32 illustrate the trend of businesses once led by prominent local names selling for sometimes hundreds of millions of dollars to major, multinational companies that seek to launch powerful chains. It has troubled some local government officials who envisioned a more home-grown, local industry and not a Wal-Mart for pot.

“I think the idea was to keep it local and home-grown and sadly I think it’s been lost,” Reno Mayor Hillary Schieve said in an interview. “How is someone from Canada going to care about the local environment? … Are they watching out for the community?”

Some companies have gone public on the Canadian Stock Exchange — a move that critics say is making it harder to tell who is in control, but that industry advocates say is a fact of life because marijuana remains illegal on the federal level and traditional banking and access to capital is out of reach in the U.S.

“You can’t go to a bank and borrow money to expand,” said Segerblom, who was previously on the board of a publicly traded Canadian marijuana company that purchased Greenmart of Nevada. “You have to get to a stock exchange somewhere.”

The data also show an industry where female owners are firmly in the minority, in spite of efforts to promote diversity. High barriers for entry, which included $250,000 in liquid capital, appear to be getting higher as the industry grows in sophistication.

The professionalization also shows in the Nevada Dispensary Association’s recent decision to create a PAC aimed at shaping more unified state marijuana policy going forward. The PAC, called the Nevada Can Committee, aims “to assist Nevada's legal cannabis industry in coalescing its political efforts and engagement, including providing education and support for candidates for elected office,” said NDA Executive Director Riana Durrett, and “will support candidates from all parties and a variety of backgrounds.”

While some lament that a substance that landed low-level dealers in jail even a few years ago has evolved into a multibillion-dollar industry that is the purview of the wealthy and sophisticated, others say the industry’s evolution into an increasingly corporate political and legal powerhouse is a sign of a healthy and maturing industry, and is ultimately a good thing for the state.

“Nevada marijuana excise taxes fund our states education program … Growth in the cannabis industry is not just good for jobs and redevelopment, it is good for education,” said Bob Groesbeck, an owner with Planet 13. “We cannot speak specifically to all mergers and acquisitions taking place in Nevada – but generally we view this as a positive sign of a healthy industry.”

Check back with The Nevada Independent in the coming days and weeks for more stories in the “Cannabis Files” series on the most notable names in the industry, diversity in the business, and the consolidations and transfers that are changing the face of the nascent marijuana business in Nevada.

Sour grapes by dispensary applicants not given licenses delayed openings, cost taxpayers money

Cannabis plant ready for harvest

By Brandon Wiegand

In the most recent round of retail marijuana dispensary licenses issued by the State of Nevada, there were 116 applicants who submitted 461 applications vying for 61 licenses. The selection process was arduous and had the full support of the majority of companies applying for the licenses – until a handful of applicants with a sense of entitlement, including Nevada insiders, former politicians and real estate tycoons, were not chosen. When the process didn’t work in their favor, they cried sour grapes and have delayed the opening of new dispensaries by the companies that were granted licenses. Unfortunately, it is Nevada’s taxpayers that shoulder the costs of these delays in deferred jobs and lost tax revenues.

There are as many claims about how the process was flawed as there are plaintiffs in the lawsuits. This is evidenced by the five separate lawsuits in existence caused by the plaintiffs’ unwillingness to work together because they disagree on the issues, even amongst themselves. 

One of the major complaints espoused by plaintiffs is that the Department of Taxation (DoT) hired temporary employees to evaluate the applications submitted for the latest round of retail dispensary licenses (the same process that was used to evaluate the 2014 medical applications). Without this assistance, the volume of work required to grade and evaluate the 461 applications received would have ground the DoT’s primary responsibility of industry oversight to a complete halt. The state selected professionals that were not associated with the industry in any way and removed identifying information from the applications in order to ensure a fair and impartial evaluation. 

It has been revealed that some of the applicants, including select plaintiffs, put so little effort into their applications that they recycled their medical marijuana applications from five years ago, simply replacing the word “medical” with “retail.” Rather than accepting responsibility for their lack of preparation and poor execution, the plaintiffs are now focusing their attention outward and blaming other applicants, the government, and the process for their own abject failure to complete an application that met or exceeded the benchmarks needed to secure a license in the industry as it exists today.

The plaintiffs have argued that the state did not make any efforts to determine whether applicants were in compliance with state regulations and properly conduct background checks. On the contrary, the state required that all applicants be in good standing to even apply. The state conducted background checks on all officers and board members, including any owners with an interest of 5 percent or greater. This was consistent with all policies adopted under medical marijuana licensing. Like the regulators of other industries in Nevada, the DoT is allowed specific latitude to ensure that regulations grow with the industry. No one could have anticipated that we would have publicly traded companies when Question 2, the ballot initiative that legalized retail marijuana, was written. The fact is, publicly traded companies are beneficial to Nevada’s regulatory process in that they bring additional oversight, compliance, and scrutiny – rigor that we should welcome to the industry.

Plaintiffs claimed that the state improperly eliminated a location requirement from the application; however that is patently false. In order to pass a final state inspection and open for business, the state verifies that the applicant’s location meet all local jurisdiction and state requirements before issuing an operational license. The local jurisdictions are required by state law to uphold the minimum requirements of the state.

In almost every instance, the local jurisdictions have adopted more conservative policies that exceeded these benchmarks. This was a thoughtful and deliberate policy change that was discussed and considered far in advance of the applications. In fact, Gov. Brian Sandoval sponsored a task force to discuss retail marijuana policies in which this very topic was discussed – and at least two of the plaintiffs, John Ritter from The Grove and David Goldwater from Inyo, were a part of that task force

Much has been made of the preliminary injunction issued by Clark County District Court Judge Elizabeth Gonzales. It must be noted however that this order was issued without the benefit of discovery having even been started. While the lawsuits and debates will continue, the real findings of fact are already evident – after failing to wield their influence on the licensing process, Nevada insiders, former politicians, and real estate tycoons are using political leverage in an attempt to call the entire process into question.

Brandon Wiegand is the Regional General Manager of Nevada Organic Remedies.

How Nevada lost millions in federal grant dollars from a lawsuit over a software contract

Four computers in a computer room

For more than two years, a six-figure contract to operate a statewide grant management system has been on ice amid a lawsuit charging that the administrator juiced the contract for a preferred vendor.

Although state lawmakers in 2017 approved $200,000 a year in new funding for a grant management software program — a system backers said could result in up to tens of millions of dollars in untapped federal funds — a lawsuit filed by a company that sought but didn’t receive the contract has stalled implementation of the system for the foreseeable future.

That company, Streamlink, prevailed in its lawsuit in September, with an administrative law judge finding that the head of the state’s grant management office based the contract on a proposal submitted by a preferred vendor that promised her professional opportunities and other benefits, while she submitted artificially low scores for competitors applying for the contract under the state’s competitive bid process.

The state has appealed and disputed the claims; oral arguments in District Court have been scheduled for next month. The litigation has meant a waste of not only the $400,000 in unused state dollars but also a possible loss of millions of dollars not tapped by the state over the last two years.

Grant management isn’t a typically hot-button issue, but concentrated efforts to secure federal grants and dollars by state governments can have potentially major effects on budgets. Federal dollars make up roughly 33 percent of Nevada’s yearly budget (roughly $9 billion), providing for services and programs without raising taxes or expending state revenues. Some estimates project Nevada is losing out on as much as $500 million a year in federal grant revenue, in large part because of the state government’s lack of programs and resources dedicated to obtaining federal grant dollars.

“We are so far behind other similar states, that we just have to get this stuff in place as fast as possible,” said John Ritter, chairman of the statewide grants advisory council. “Not having this grants management system in place is just delaying Nevada getting hundreds of millions of dollars a year in additional federal funding.”

Lawmakers, who for the most part were unaware of the lawsuit or declined to comment on it, nonetheless say they’re frustrated the money put up by the state has so far not resulted in a tangible result.

“It is disappointing,” said Democratic Sen. David Parks, who carried the 2011 bill to create the state’s grants management office. “My personal interest is that I would like to see a more extensive program operated by the state to acquire even greater amounts of money. When you compare us to states like New Mexico, they probably get three to four times as much federal funding as Nevada gets.”

Nevada and grants

The concept of federal grants typically evokes imagery of Medicaid, Medicare and other large federal government grant programs automatically dished out to states through a formula based on population.

But federal grants are much broader, and often crucial to cash-strapped state governments, local agencies, nonprofits and businesses while accounting for roughly a third of all state government revenues according to Census Bureau data. In total, the share of federal funding as a source of revenue for state governments has been climbing for years — in large part because of the expansion of Medicaid under the Affordable Care Act.

And though a 2018 report from the nonpartisan Guinn Center found federal money accounted for more than 34 percent of Nevada revenues for the 2017-2019 biennium, the state’s grant revenue per capita has consistently lagged behind other western states, often ranking among the lowest in the country. As of 2017, Nevada received an average of $1,475.78 in federal government grant dollars per capita — the 44th lowest of any state.

“I think who’s actually being hurt the most are Nevadans, because they are ultimately the recipients of programs and services that are beneficiaries of the grants,” said Meredith Levine, Director of Economic Policy at the nonpartisan Guinn Center. “The purpose of grants are to serve populations. To the extent that grants aren’t coming through, then we are not addressing the unmet needs of people who live in this state among certain populations and in certain communities.”

That doesn’t necessarily mean that Nevada is worse at grant management than states such as New Mexico, which took in $2,954.49 per capita in federal grants in 2017. Levine said that because many large federal programs are based on a formula that uses poverty levels and population, substantive differences in federal funding are largely the result of demographic trends.

But expanded Medicaid — which former Gov. Brian Sandoval agreed to implement in 2014 — inflates those numbers; with those dollars excluded, Nevada’s funds per capita for federal grants drops to $485.26, 49th lowest of all states. To Levine and others, that’s evidence that the state isn’t getting as much in federal grants as it theoretically could.

“To the extent that folks in the state would be resistant to any sort of tax increases, this is a way to get money,” she said. “It’s not free money, there’s no such thing as free, but this is a situation where we could be bringing in more money to the state to help support something where the general fund has to do a lot of the work.”

Lawmakers have been aware of the problem since at least 2011, when a bill by Parks creating a statewide grants management office was approved unanimously in the Senate and Assembly and signed into law by Sandoval. The office, which has five employees, acts as a statewide advisory clearinghouse for federal grants, either reviewing applications submitted by other agencies or entities or reaching out to them if it discovers a possible grant opportunity.

In 2015, legislators passed a bill creating the Nevada Advisory Council on Federal Assistance — an entity composed of lawmakers, head of the grants office and other appointees charged with studying and determining ways by which to obtain and maximize federal assistance, including grants.

Between legislative sessions, that advisory council listed as one of its top recommendations the creation of statewide grant management software. Such a system would replace the “ad hoc and complex” web of Excel spreadsheets currently in use, according to a description in the eventual request for proposal (RFP) for a grants management system.

Ritter, who chairs the advisory council, said the recommendation came out of the realization that neighboring states with higher reported federal grant revenue all used some sort of centralized tracking software.

“Every single one of the states that does significantly better than us has some sort of system with which grant officials, whether its in state agencies or municipalities or philanthropic agencies, they all have a way of seeing simply what’s going on in the grants world within their state; grant opportunities grant partnerships, active grants,” he said. “Often, states like ours need to collaborate on grants, and right now there’s just no way of knowing who’s working on what, what assets are available, what collaboration or coordination is possible.”

Such a system would be a boon to the state, Levine said, as the lack of any sort of centralized tracking system means there’s no way to quantify how much money the state could be losing out on through not applying for grants.

“There’s absolutely no way to know,” she said. “We just know that there are grants out there that we’re not going for or we're not getting for whatever reason. If we don't have tools to assess that, then we can’t even begin to know.”

At a budget committee hearing in the 2017 session, grants management office Director Connie Lucido told lawmakers that the office believed it could acquire a sufficient software program for $200,000 a year, which would help the state manage and track existing grants while having access to a centralized clearinghouse of grants that people, organizations and agencies in the state might be eligible to apply for but were not aware of.

“I would imagine we’re missing a lot of them,” she said at the time. “So this system would bring in those identified opportunities for agencies as well as our office to be able to look out.”

Lawmakers were enamored, especially by Lucido’s claim that a similar system in Arizona had identified more than $1 billion in potential lost revenue after it brought grant management software online. With little fuss, lawmakers approved the $200,000 per year for the office, giving it the go-ahead to contract with an outside firm and obtain the software for the state.

But for more than two years, litigation has delayed implementation of any such software — two additional years of money left on the table.

Litigation

Unbeknownst to lawmakers and only revealed through records requests and court documents, Lucido had determined as early as 2016 that her preferred choice for a grant management software would come from a company called eCivis, which provides software for Arizona and other states.

Connie Lucido, former head of the Office of Grant Procurement, Coordination and Management

In November and December of 2016, Lucido sent several emails seeking possible contracts with eCivis and another vendor, Streamlink, before the grants office began to pursue a formal competitive bidding process.

But Lucido’s opinion of Streamlink quickly soured; she later testified that the company was “deceitful” and had hired a lobbyist — Carrara Nevada’s Rocky Finseth — to “throw rocks at my budget.” Upon cross examination, she said she had “closed the book” on the company by April 2017. Finseth and other Carrara lobbyists did not speak during public budget hearings on the request in 2017, but had conversations with lawmakers about her description of the scope of the project compared to what Lucido had told them prior to the session.

In a later email to the CEO of eCivis on Aug. 22, 2017, she said in reference to Streamlink “no one in their right mind would ever do business with (your) competitor.”

During the pre-bid process and the actual preparation of the RFP, Lucido communicated frequently with key eCivis staff through text messages and over the phone, including conversations with eCivis Executive Vice President and COO Merril Oliver and Director of Government Solutions Tom Grimes.

In these conversations, an administrative judge determined Lucido was improperly offered professional perks or “things of value” that would stem from a contract with eCivis, including increased interactions with county governments and opportunities to sit on committees or a “more prominent presence” on federal issues in the state.

After the contract went out to bid in July 2017, both eCivis and Streamlink submitted bids. Like other competitive contracts put up for bid by the state, the request for proposal (RFP) process includes scoring certain aspects of each bid by a three-person committee. For this contract, the committee included Lucido, who recommended herself to serve on it given her experience with both companies.

During the week prior to the RFP being issued by the state, Lucido and Grimes exchanged multiple text messages. Both testified in court that they could not remember the content of text messages and had since deleted them, but the timing of the messages (revealed through a records request by Streamlink) raised concerns.

“Informal and not clearly identified communications during such a critical time in the preparation of a competitive bid are problematic,” the court wrote.

Purchasing Division head Jeff Haag testified during a 2018 administrative hearing that Lucido was “disappointed that we had to go to [request for proposal],” adding that “we’d been through a long process and you know, they felt pretty strongly that eCivis could, again, deliver on their technical requirements at a cost that they could accept, that met their budget limitations.”

Once the RFP was closed and bids were being evaluated, administrative court documents allege Lucido “minimized real concerns as to additional costs involving eCivis as to licensing yet continued to emphasize irrelevant pre-competition bid concerns as to Streamlink being able to comply with the budget set forth under [the RFP].”

Those assessments were then applied to Lucido’s scoring of each bid as an evaluator, where her scoring of StreamLink were found to be “inconsistent, arbitrary and capricious” by the administrative judge, who also said she was “willing to overlook key defects in eCivis’s response.”

Those defects include an alleged inability by eCivis to provide a system within the state’s $200,000 budget, largely because of the obfuscation of certain licensing fees related to an eCivis subcontractor, WizeHive. If those fees were added, the eCivis system would reportedly cost $360,000 for the number of individual licenses required by the state.

In 2017, Lucido told lawmakers that the initial projected cost for the software program was $2.5 million for a “top of the line” system, but that she determined that price tag “was not something we’d be able to pursue in our economic environment.”

Lucido told lawmakers that the much lower $200,000 price point would be enough to purchase “very robust systems,” with varying levels of the number of users who could access the software, functionality and other upgrades. It’s a point Ritter agreed with; saying that a lower price point would be an easier sell amid the fierce battle for state dollars that occurs every legislative session.

“I don’t remember a session where we had enough money,” he said. “So it’s necessary to get stuff done, at least in my experience, to try and find the best possible solution that is the most affordable, because otherwise it’s not just going to be funded.”

Additionally, the court found “problematic” aspects to the relationship between eCivis employees and Lucido. On the day the bid was opened, a high-ranking eCivis member— referred to as the “LeBron James of grant management” by a coworker —  invited Lucido to speak on a grant-focused panel at a Nevada Association of Counties meeting later that year.

“The pursuit of such opportunities and networking as head of the Grants Office is well within Ms. Lucido’s job duties under regular circumstances,” the court wrote. “However, as the head of the using agency and a member of the Evaluation Committee, while a competitive bid was open and actively pending, is another matter.”

In September 2018, state appeals officer Rajinder Nielsen ultimately ruled in favor of Streamlink, arguing in a 45-page decision that not only had eCivis representatives “improperly involved themselves” in the bidding process, but that “no reasonable methodology” had been applied to Lucido’s bid scoring, “even when reviewing such applied methodology with the widest lens.”

These offenses were found to be violations of state law that govern the state’s purchasing contracts, and require the contract to be put out to bid again. But Nielsen’s decision also argued that this particular situation was unique to Lucido’s conduct as head of her department, and had no bearing on the conduct or procedures used by the Grants Office or Purchasing Division at large.

In a court filing submitted ahead of a District Court hearing this month, the state disputed these arguments nearly whole cloth, arguing — among other things — that Nielsen “acted in excess of authority, committed errors of law, and found against the Purchasing Division contrary to the evidence” in order to cancel a contract that was awarded according to the relevant state laws.

Key to the state’s argument is whether Nielsen had improperly relied on a formal discovery process — a process where both sides in a legal case have the opportunity to request evidence that would normally be unavailable to an administrative hearing without first being authorized.

It was this process that Nielsen used to show communication between Lucido and eCivis regarding “things of value,” a violation of NRS chapter 333. Such a violation would, crucially, require the perks offered to Lucido to be “things of value” and not, as the state argued, routine business.

The state also argued that Nielsen “glossed over” details of Streamlink’s application that would make the company unlikely to receive the contract. In its filing, it states that the company’s initial range of pricing for the software was closer to $2.5 million, and that the $200,000 contract would only result in a pilot program that covered a handful of state agencies, rather than the hundreds requested as part of the RFP. It also noted that the judge should have recused herself from the case, given that her ex-husband had a relationship with one of the attorneys for Streamlink.

For his part, StreamLink CEO Adam Roth told The Nevada Independent that from his perspective, the case has gone well — even with the state appeal.

“There doesn't appear to be any new arguments being presented in the appeal, it appears to just be a rehash of the old arguments that had already been determined at the hearing officer level,” he said. “And the facts of the case, with those arguments, I think bore out an accurate decision.”

eCivis did not respond to a request for comment. The case in District Court is proceeding, and an oral argument date has been set in May. Lucido left the grant office in 2019, and was hired by the Department of Health and Human Services in January as Social Services Chief under the department’s community partnership and grants division. She did not return multiple calls for comment, and a DHHS spokeswoman said she would not be able to provide information about the case “while this matter is pending.”

Republican Sen. Pete Goicoechea, who served on the Advisory Council on Federal Assistance when it made the recommendation that the state pursue grants management software, said he never questioned or thought twice about Lucido’s conduct as a member of the board, but said the result of the initial court proceeding spoke for itself.

“Clearly she overstepped it, or there wouldn’t be a lawsuit that did prevail,” he said.

What comes next

Two years later, there’s still no timeline for when a grants management system might be in place. Deonne Contine, the new head of the state’s Department of Administration said in an email to The Nevada Independent that any plans for a new RFP related to the contract are on hold until the ongoing litigation is sorted out.

In the meantime, state lawmakers appear likely to reauthorize the $400,000 in funding for the grants management software. A budget subcommittee that met last month voted to recommend continuation of the funding, with some contingency language in case the state loses its case in court and is required to put the contract back out to bid.

In the meantime, Contine said that state agencies “continue to report a lack of grant application capacity and the same barriers to increasing grant funding in Nevada, which include duplicative financial reporting and a lack of affordable grant training resources.”

However, the state statute in question does provide for the Purchasing Division to cancel an RFP, back out of an awarded contract and ultimately re-issue an RFP. It’s happened at least once before in the last year, when the state canceled an RFP and contract for a dental benefits administrator in 2018.

Regardless, several measures aimed at improving the grant process are pending before state lawmakers. SB205, which is sponsored by Democratic Sen. Marilyn Dondero Loop, would create a pilot program allocating $2.5 million to the grant office over the next two fiscal years for use as a source of matching funds for any federal grant that requires a match. It’s designed to combat what the Guinn Center calls a “vicious circle” where agencies and nonprofits with tight budgets are unable to apply for grants given the lack of state authorization for matching grant funds. The bill has been exempted from legislative deadlines.

Another bill affecting the grant management process is SB206, a measure sponsored by Democratic Sen. Joyce Woodhouse that would amend the state’s current law requiring the Interim Finance Committee to grant approval before an agency accepts a grant. The bill was passed out of committee on Friday, surviving the deadline for bills to pass out of their first committee.

If approved, it would allow the committee to grant “provisional” approval for grants prior to them being awarded, and lower the amount of time the committee has to approve a bill from 45 to 30 days before it is automatically deemed approved.

Lawmakers may also decide to take up another top suggestion of the Nevada Advisory Council on Federal Assistance, the state board charged with studying ways to obtain and improve the state’s grant process.

In its 2018 annual report, the council recommended the ideas taken up in the form of SB205 and SB206, but also recommended that lawmakers amend language in budget bills requiring any state agency’s state funding be decreased to the extent that it receives other revenue sources, such as federal grants, during the two-year budget period.

“In effect, this means that securing new grant funding has no positive net benefit for an agency’s budget, and actually costs the agency through expenditure of precious staff time,” the report stated. “And the harm to agencies does not stop there – when the grant funding runs out the agency must submit a budget enhancement request just to get back to its pre-grant funding level.”

Although those changes may help, Goicoechea said the state’s grant office could stand to even double in size, given the vast scope and potential federal dollars not tapped by the state.

“We’re not dedicating near enough resources to it,” he said. “If we truly want some benefits. We’re dealing with it like we do with a lot of these agencies, boards and councils, the advisory board will meet every two or three months, and give them a little direction, and we’re not following through. We really need to get down and get dedicated.”

Eleven marijuana businesses sue, arguing state 'arbitrarily' issued dispensary licenses, lack of transparency could be hiding corruption

A customer and retailer exchanging money at a cannabis retailer

Nearly a dozen cannabis businesses that applied but failed to receive dispensary licenses after a recent application period are suing the Nevada Department of Taxation, saying the agency’s marijuana regulations are invalid and that a lack of transparency in awarding licenses is opening the state up to corruption.

The lawsuit filed earlier this week in Clark County seeks a preliminary injunction barring enforcement of current marijuana regulations and invalidating certain actions the department has taken thus far — including granting 61 conditional licenses and denying hundreds more applications. It’s the latest in a string of lawsuits since the state announced in early December that it had granted additional licenses, but refused to reveal even the business names of those who won without the winners’ written consent.

“The Department of Taxation — refusing to reveal the information necessary to audit the process under the guise of ‘privacy concerns’ — has cavalierly taken the position of: ‘just trust us,’” the motion says. “The lack of transparency is of even graver concern given the fact that the market has established that cannabis licenses are worth tens of millions, even hundreds of millions, of dollars. Given the Department’s lack of transparency in the 2018 application scheme, the system is therefore ripe for corruption on all levels.”

The Nevada Department of Taxation didn’t respond to the specific allegations in the filing.

“The Department has not yet been served with this case, so we haven’t had the opportunity to see the specific complaints,” the agency said in a statement. “However, our newly appointed executive director, Melanie Young, is committed to providing further clarity on the Department’s licensing process as we move forward with our attorneys on litigation.”

Issues raised by the plaintiffs range from concerns about the breadth of criteria the taxation department allowed itself to use in scoring to allegations that some business entities received more licenses than legally allowable in each jurisdiction to fears that the licenses granted will essentially form a monopoly and starve the smaller businesses that helped the industry get off the ground in the first place.

John Ritter, who’s a board member of the Nevada Dispensary Association and affiliated with marijuana company The Grove, which is involved in the suit, said his company has been used as a model for other dispensaries, and the state has referred people to take tours of the company to learn about the industry. So he was surprised to be denied in the latest licensing round.

He said he asked taxation officials what the criteria the department used to score applicants, but was denied further explanation of the process. Appointments with the department to review scores were not available until after the 30-day window to appeal the applications, and during the score review, applicants were only allowed to take notes, not pictures of their scores, Ritter said.

Ross Miller, a former secretary of state and one of the lawyers working on the lawsuit, said the applicants have been denied appeals to the tax department, ignored in their request for help from the tax commission and thwarted when they have tried to request public records.

“They expanded the original intent of the confidentiality provision, which was intended to protect medical records, patient confidentiality. They then expanded it and used that provision to try to apply broader protections,” said Miller. “But as they have now interpreted that, they won’t tell you absolutely anything about what’s going on at the department.”

Plaintiffs also find it suspicious that some locally owned companies have recently been sold to publicly traded entities around the time they were applying. In one example, a company that ended up winning numerous licenses announced in November — during the scoring period — that it had been acquired by a large multinational company.

“Did that mean that the department said, ‘Our applicants are changing and we’ve got to know who these other applicants are. We’ve got to get all their information and we’ve got to do background checks on all their owners?’” Ritter asked.

But he said he assumes background checks were not conducted, because conditional licenses were awarded to the company three weeks later, and the state had been relying on temporary workers with the firm Manpower to screen the applications.

Lawyers for the applicants say they believe the tax department has taken liberties beyond what the Legislature allowed in statute, including the plan to consider any criteria — even ones that were not initially laid out —  in evaluating an application.

Although the regulations were approved unanimously by lawmakers on the Legislative Commission in February 2018 (after they were warned that there would be no regulation on the industry at all if the language was not approved, because temporary regulations were expiring), plaintiffs believe they are invalid. They want the current version not to be enforced, and to revert back to an earlier version of the rules.

The regulation “textually permits the Department to rank applications and allocate conditional licenses based upon arbitrary, irrelevant, vague, ambiguous, undisclosed, and unpublished criteria, rather than criteria ‘that are directly and demonstrably related to the operation of a marijuana establishment,’ as textually required by Nevada law,” the motion says.

Attorney Vincent Savarese says the lack of information being released prevents the public from holding the state agency accountable to its own laws.

“It allows wiggle room for corruption that cannot be accounted for,” Savarese said. “And I’m not saying there has necessarily been actual corruption, but I am saying that this lack of transparency would permit corruption to take place behind closed doors that no one can account for.”

Read the full motion below.