The Marijuana Business: Avoiding Swindles, Scams, & Cons:
California’s cannabis legalization provides fertile ground for scammers. Today, most pot transactions are paid in cash since bank access is limited. As our state develops its administrative oversight, confusion reigns about what is currently legal, in the gray area, or outright criminal. These uncertainties create a ripe environment for cons, who prey on confusion, greed, and easy access to money.
A swindle has just two potential outcomes: Either the con wins, or both sides lose. No matter how good an offer sounds, there’s never something for a “Mark” (the con’s target) to gain. The entire pitch is an illusion.
Here are a few pot-related scams to watch out for.
Attorneys are listed on the state bar website. http://www.calbar.ca.gov/. CPA’s are listed on http://www.dca.ca.gov/cba/. Make sure whoever you hire is legitimate. Cons can generate a lot of money through fake consultations. Some cannabis lawyers charge up to $1,000 per hour. Not only will the client end up paying enormous fees to an imposter (scammers are masters at bleeding their Marks dry), but the advice given in return will likely range from worthless to downright dangerous.
Police or Authority Figures
You have been legally growing for a dispensary. Just as the harvest is ready, the police show up at your door with a warrant, cuff you, interrogate you, and confiscate your plants. Street value, over $70,000. Instead of taking you in for booking, they decide to issue a ticket, assign a court date, and leave. Two days later, you discover the arresting officers weren’t real. The warrant was downloaded off the internet and signed by one of the criminals. The uniforms were rented from a costume store. You got taken.
How can this be avoided? Fill your building with security cameras, and have a system in place to verify whether a visitor is real or a pretender. Most people fear authority. Scam artists know this and use it to their advantage.
Marijuana business stocks are often sold, over the counter, with little to no governmental oversight. They can be difficult to resell, and are the type commonly exploited by ‘pump and dump’ schemes.
These scams are advertised in various ways, from emails to live seminars. But the bottom line is always the same: Act immediately or miss your chance to get rich.
No insider is going to make an outsider wealthy when s/he could make family and friends flush instead.
Things to watch out for include:
• A guaranteed yield or return on investment, especially if it exceeds 7%
• Claims that the company’s stock is grossly undervalued
• A sob story that the stock is being sold at a huge discount because [stick in the pathos of the day…] the Seller’s family member is sick, dying, or got arrested; his house is in foreclosure; he can’t sell openly because of insider trading laws, etc.
These are all indications of fraud.
Small Business Ownership and Partnerships
Vet, vet and vet some more. Make sure your partners have the background, money, knowledge, credentials, skill set, and connections that they claim. Require that every partner has equal skin in the game.
Going into business with someone is like entering into a marriage. Don’t give up control in hopes of getting rich. Partners have equal access to bank accounts, products, and other assets. One slip in judgment, and your colleague could end up living in the Bahamas off of your life savings.
Appeals to greed can be very successful. Never turn over anything of value before scrutinizing the transaction. Be on constant lookout for slight of hand, fake money or marijuana, fake documents, and shills (plants working with the con) who help pull off the scam. How? Observe closely. Ask questions. Test the product. Verify the money. Hire a real attorney. Never make a rash decision. Always demand time to think about things.
When a Mark’s adrenaline kicks in, it can keep him/her from thinking clearly. This is what the con is counting on. Your first question should be, “Is this too good to be true?” If the answer is yes, immediately doubt the deal’s legitimacy and slow down. Pretty soon, the thought “this is so crazy, it must be true!” will creep in. Don’t listen. Your initial reaction was right. Keep digging for the truth. Bernie Madoff would have been exposed decades earlier if the SEC had researched his claims rather than trusted him. His primary sales pitch, that he consistently made a 10.5% annual return for his investors, was easily disproven through public records.
Further, initial resistance is seldom enough. Scammers are masters at anticipating and overcoming skepticism. They have ready-made answers on hand, and use shills, posing as independent third parties, to corroborate their lies. There is no substitute for dogged, independent research and follow-up. If your cousin tells you, through Facebook, that he made a killing on a deal so you should invest in it too, call him on the phone. Chances are, the IM is from a crook who hijacked your cousin’s account.
Once the con gains your trust, he’ll go in for the sinker. This is generally done with a time constraint. He will say something like: “Time’s up. I’ve got three people waiting to take this opportunity. I wanted to give you first dibs, but I can’t lose my other guys – it’s now or never.”
A Story About Dolls
A good example of how time pressure undermines logical thinking is the doll scheme. The con claims to have only a few to sell, so it’s first-come, first-served.
The Demonstrator stands on a street corner, drops a cardboard doll between his legs, and without touching it, watches it dance. An announcer explains that it works because of a Chinese discovery in 2007. He says that an engineer was working to drastically improve lithium batteries when he noticed that chemically altered silver (“Material”) makes paper move. The con claims that this Material is baked into the doll’s cardboard, which is why it’s a gray color and reflects light.
The Demonstrator proclaims that this Material revolutionized China’s ability to conserve energy, and even quadrupled its power plant efficiency. This is how China was able to ratify the Paris Climate Accord. The Material drastically cut its greenhouse gasses without lowering productivity.
These particular dolls were smuggled into the country. The Material is closely controlled by Beijing, so this kind of use – for children’s toys – is very rare. In fact, these are the only ones of their kind available anywhere in the US. It’s now or never. The sale ends in 2 minutes. This is usually enough to sell them for $30 each.
Same Scam, More Status
If the con wants to charge $2,500 per doll, s/he must make the offer more exclusive and prestigious. The higher the product’s price, the greater the sucker’s resistance. Targeted Marks are ushered into a room with no clocks or windows, where they’re told they’ve been carefully selected for their ability to keep a secret. Each signs a Non-Disclosure Agreement, a pre-purchase agreement, and takes a vow of silence. A few shills get turned away for being too weak or unreliable to trust.
After a half hour of priming, the con congratulates everyone for making it this far and explains the situation. His brother, a New York City business attorney, represents the Chinese government. Last year, when his brother was there visiting, the Head of State asked him to smuggle the Material back into the US.
You see, the Chinese had just bought America’s third largest power plant and didn’t want the U.S. government to know the Material exists. Therefore, it couldn’t be imported through regular channels.
There were many reasons for this, but the biggest one was, the Material quadruples a power plant’s efficiency and those savings are taxable. For every million dollars the plant could save by using the Material, it would need to pay $330,000 in state and federal taxes – because the US government considers the savings ‘income.’
Therefore, the Material was smuggled in, baked into common cardboard, and cut into paper dolls to be quietly held by private, trustworthy individuals until China is ready to use it. This way, it wouldn’t be held in a central location, or by a single large corporation in bed with the authorities. As long as everyone in the room upholds his/her oath of silence, our government will never find out that the Material is here, or that it’s slated for the Chinese Power Plant.
A Chance at a Fortune for a Small Investment
The con explains that next month, after the plant’s deep site inspections are finished (which won’t occur again for another 10 years), the Chinese will repurchase the material from the Marks, melt it down, and install it. This will allow China to avoid the 33% corporate income tax for a decade, thereby keeping an estimated ONE BILLION DOLLARS ($1,000,000,000) in tax revenue for itself. The fact that the dolls can dance on their own [the con demonstrates] proves the Material is embedded into their cardboard.
At the buyback, each Mark will be paid ONE MILLION DOLLARS ($1,000,000) for his/her loyalty. The money will be deposited into an untraceable account in the Bank of China and pay 10% annual interest.
So, if a Mark can live off $10,000 per month or less, s/he will be able to permanently retire thirty days from now. Those interested must put up $2,500 today, as insurance that they won’t narc to the FBI or local police once the Material is in their trust. The con takes cash, Visa, and Mastercard. No personal checks. Who’s in? You have one (1) minute to decide.
The Mark’s head starts spinning: 1) This is so outrageous, it must be real. 2) Why doesn’t the seller just hold onto the Material himself until the buyback? 3) Why would a foreign nation trust me with such a valuable metal? 4) Since when does silver make paper move? 5) Why didn’t the Chinese do the smuggling after the plant inspections were done? For every question, the con will have a believable, rational answer.
When there’s time to think, reason tells us that the dolls don’t work and there is no baked in, altered Material. But in the heat of the moment, when you’re looking at a $2,500 investment in exchange for the chance to permanently retire next month, it looks like a smart longshot. Maybe, just maybe, you’ve stumbled onto the right place, at the right time, and this IS your lucky day. Your mind says,
“I better commit right now before I lose my chance!”
It’s Still a Con
In reality, this scam is a spin on alchemy, the idea that lead can be turned into gold. The doll dances because it’s attached to a tape player or turntable by an invisible string. As the tape recorder/record plays music and goes in circles, it pulls and releases the string from the side, which causes the doll to move horizontally. The Demonstrator has another invisible string attached around his neck, which lets the doll hang between his legs without flopping over. As the Demonstrator dances along, it causes the doll to move up-and-down. Total, actual value of the item: $.01 cent worth of recycled cardboard and silver glitter paint.
This scam is perpetrated worldwide. The only thing that changes is the story of why the doll works.
How does this apply to the marijuana business?
Just substitute in a pot theme. Instead of dolls, the con is selling dreams like:
• A ‘newly discovered’ cannabis strain with massive potency.
• Revolutionary nutrients from the Amazon that quadruples the flower output.
• Genetically modified seeds that do six months worth of growing in six weeks.
• An Amnesty Card from the East African territory of Mumbotu (a small, Christian province unlikely to be included in Trump’s travel ban). You receive Ambassador status and diplomatic immunity, so no matter what you do with marijuana in the US, you can never be jailed, fined, or deported.
The potential bunk is endless. FYI, Mumbotu doesn’t exist. I made it up.
So, what should you watch out for? Offers that appeal to basal human needs like greed, fear, companionship, desperation, avoidance of physical pain, and the desire to be liked. If the pitch raises your emotions into a ‘now or never’ panic, walk away, calm down, and think. Once rationale kicks back in, things will become much clearer.
Remember, cons steal by building trust and then violating it. If you don’t bite, they can’t eat.
Michael Heicklen is a Los Angeles area based attorney practicing in California since 1993. He focuses on family and business law for the cannabis community and is on the legal committees for NORML and FLCA, as well as the National Cannabis Bar Association.
In 1997, he was part of a legal team that overturned 200 years of forfeiture history at the US Supreme Court. This win forced the Clinton Administration to change the nation’s applicable laws.
He can be reached at or (818) 907-7771.
NOTE: This article does not constitute legal advice, and reading it does not form an attorney-client relationship. If you have a legal question or issue, do not rely on the contents above. Instead, contact a qualified attorney in your area.