FEDERAL PROSECUTORS RATTLE CALIFORNIA'S MEDICAL MARIJUANA INDUSTRY

Venture capitalist Steve Berg figured he had an unassailable business
model.

Berg's San Francisco firm, the ArcView Group, was pledging to find
"angel investors" for startups offering products and services for
California's $1.5 billion medical marijuana industry.

But last week, U.S. prosecutors in California announced criminal
prosecutions against targeted marijuana dispensaries and threatened
landlords with property seizures.

Suddenly, the state's burgeoning medical marijuana sector is dealing
with fear and introspection. Industry advocates are calling for
increased state regulation, thinking that could weed out bad actors in
the trade and ward off the feds.

The government's action has left politicians, medical marijuana
businesses and would-be investors weighing the risks of operating in
the industry.

Berg, whose firm is looking to fund companies that provide legal
services, sales software, marijuana vaporizers and other items for
dispensaries, was a panelist last weekend at a previously scheduled
San Francisco forum on "jobs in the legal cannabis industry."

The mood at the event was unexpectedly dour. The day before,
California's four U.S. attorneys declared that the state's medical
marijuana law had been "hijacked by profiteers" and trumpeted charges
against dispensaries and speculators allegedly raking in cash from
purportedly nonprofit marijuana stores.

"Is this scaring the (expletive) out of investors?" Berg asked. "The
answer is it's not making it any easier."

Assemblyman Tom Ammiano, D-San Francisco, said the federal actions are
a signal that California lawmakers must enact state regulations "to
provide clear lines" for legal medical marijuana distribution.

He pointed to Colorado, America's second-largest medicinal pot market.
Colorado has avoided federal raids while sanctioning for-profit
marijuana stores and commercial cultivation with strict oversight,
including mandatory video surveillance and state licensing of all
marijuana workers.

"What is happening in Colorado is something we should emulate here,"
said Ammiano, adding that he would like to see a regulatory program
but not necessarily for-profit operations.

But Sam Kamin, a University of Denver law professor who studies
marijuana policy, said the federal crackdown in California is shaking
the foundations of the medical marijuana economy everywhere, including
Colorado.

"The bottom can fall out at any time," Kamin said. "If the federal
government decides right now it's the end, it's over tomorrow."

IRS is a player

Along with federal enforcement actions, the outcome of legal battles
over Internal Revenue Service rules for marijuana stores could be a
major factor in their survival.

Oakland's Harborside Health Center is girding for a December court
fight over an IRS demand for $2.4 million in penalties. Center
director Steve DeAngelo said the government, citing federal
drug-trafficking laws, is prohibiting the dispensary from claiming
routine business tax deductions, such as salaries for Harborside's 100
employees.

"The legal medical marijuana industry has created tens of thousands of
jobs," said DeAngelo, who boasts that Harborside paid $1.1 million in
taxes to Oakland and $2 million to California last year. "And the
Obama administration wants to shut that down? Talk about a job killer.
Talk about a tax killer."

DeAngelo said he is telling "traumatized" medical marijuana users that
Harborside will stay in business despite the federal threats.

The government says it isn't targeting medical use. Criminal cases to
date include a North Hollywood dispensary accused of shipping up to
600 pounds of marijuana a month to the East Coast and a Los Angeles
attorney accused of reaping millions of dollars organizing cultivation
networks for marijuana stores.

"They went after drug dealers," said Lanette Davies, whose family
operates the Canna Care dispensary in Sacramento. "I think their
intention is to stop the abuses in the system."

Davies blames some dispensaries' marketing campaigns featuring women
"with marijuana leaves over their breasts" for fueling federal
authorities' contention that the industry serves recreational users,
not people with serious medical needs.

Looming fight or hot air?

The irony of the current crackdown is that a 2009 U.S. Justice
Department memo, by Deputy Attorney General David Ogden, is widely
credited with spurring the explosion of medical marijuana businesses
in California.

That memo said the government would target drug traffickers, not
individuals who are "in clear and unambiguous compliance with existing
state laws providing for the medical use of marijuana."

But a new memo this summer by Deputy Attorney General James Cole
asserted the government would enforce U.S. drug laws in the face of a
boom "in the scope of commercial cultivation, sale distribution and
use of marijuana for purported medical purposes."

"It was never the (Justice) department's policy to have a hands-off
policy toward marijuana stores," Sacramento U.S. Attorney Benjamin
Wagner said Thursday on Capital Public Radio. He said pot stores
surged in California in a "virtually unregulated free-for-all."

U.S. Attorney Laura Duffy in San Diego said she may target TV and
radio stations and print publications that run medical marijuana ads.

But the man who led the drive for California's 1996 medical marijuana
law scoffed at the notion that the government could shutter the
state's teeming medical marijuana trade.

"It's a lot of hot air," said Dennis Peron, who years ago battled
authorities over his pioneering San Francisco Cannabis Buyers Club.
"There's no way they're going to do 2,000 jury trials" for marijuana
stores.

Dan Rush, director of the "medical cannabis and hemp division" for the
United Food and Commercial Workers International Union, said he will
push for a ballot initiative to legalize a for-profit medical
marijuana industry in California. Despite federal enforcement threats,
his union continues to organize pot workers in the state.

George Mull, a Sacramento attorney who heads the California Cannabis
Association, said he hopes lawmakers will put a ballot measure before
voters to create state oversight for a "well-regulated" marijuana
industry so federal authorities "would be less likely to use their
enforcement powers."

But state Sen. Mark Leno, D-San Francisco, said lawmakers in
California's capital and in Congress have little appetite for dealing
with medical marijuana and conflicts between state and federal law.

"My experience is that the Legislature is very tepid about engaging in
this subject," said Leno. "And as tepid as Sacramento is, Washington
is just fearful of it."