Ethics questions arise as Oregon audit argues for easing regulations on cannabis industry

Oregon’s recreational cannabis system has overly strict regulations that make running a business expensive and hamper people aspiring to join the industry, state auditors found in an audit released Thursday.

The report is likely to be cheered by current and aspiring participants in Oregon’s legal cannabis market. It suggests the state should consider easing up on security requirements and other safeguards that made sense when Oregon first legalized cannabis, but have become outdated. And it calls on state officials to use financing tools to help cannabis businesses succeed.

But the document comes at an awkward time for Secretary of State Shemia Fagan, a Democrat whose office carried out the study.

On Thursday, Willamette Week reported that Fagan for the last two months has been a contract consultant for an Oregon company, Veriede Holding, LLC, an affiliate of the cannabis chain La Mota. The owners of the company, Aaron Mitchell and Rosa Cazares, have racked up millions in unpaid federal and state taxes and have been sued repeatedly by vendors for not paying their bills, the paper has reported.

At the same time, the couple has ingratiated themselves with members of Oregon’s political class, becoming major funders of Democratic candidates including Gov. Tina Kotek, Senate President Rob Wagner, then-Labor Commissioner Val Hoyle and Fagan.

Fagan’s office said Thursday it could not offer specifics about her side job, but that it had nothing to do with the agency’s forthcoming audit.

Fagan began her consulting work for Veriede Holding on Feb. 20, a spokesman said. That’s five days after she’d told members of her staff she’d decided she should no longer have a role in the audit of the Oregon Liquor and Cannabis Commission’s regulations on the legal weed industry.

“I will soon be consulting for a company involved in the cannabis industry in multiple states,” Fagan wrote in a Feb. 15 email, adding that she was following state ethics guidelines. “I do not believe a real conflict exists because any action required [in response to the audit] would be taken by the legislature or OLCC, and any benefit could flow to all cannabis companies in Oregon, not this specific company.”

Fagan wrote to staff she was recusing herself from “further work” on the audit. She tapped her deputy secretary, Cheryl Myers, to take her place overseeing the matter.

In a press conference about the report’s findings Friday, Audit Director Kip Memmott said Fagan attended two critical meetings regarding the audit prior to recusing herself. The first was a “kickoff meeting” to discuss the purpose and scope of the audit, where auditors solicited feedback from people including Fagan.

Then Fagan participated in a meeting after auditors finished their “survey work,” Memmott said. “We present our plan and approach to the secretary. She does not approve that plan, she does not weigh in on that plan,” he said.

Memmott said Fagan recused herself following that meeting. But working papers associated with the audit, first reported by Willamette Week, show that the work was all but finished by the time Fagan stepped away. Auditors had been discussing initial findings for the report with OLCC officials as early as September 2022, and the agency had had a chance to respond to findings by February 14, the day before Fagan’s recusal.

What’s more, notes from a “kickoff meeting” in December reflect that Fagan specifically asked auditors whether they had interviewed Cazares, months before the secretary announced her consulting arrangement.

Memmott emphasized Friday that Fagan did not have a say in his team’s findings.

“All audit work — our conclusions, our methodologies, our recommendations — are all generated and done by the professional audit team,” he said. “The final call on all our audit reports is me.”

Ben Morris, communications director for the Secretary of State’s Office, said it was “outside the scope” of his job to provide a copy of the contract that Fagan signed, or information on how much money she’s been paid to date. Fagan did not respond to requests for those items on Thursday.

Mitchell, the La Mota co-owner, first began donating to Fagan’s campaign account during her 2020 race for secretary of state, but the majority of the $45,000 he has contributed came after she won office. In 2021, $20,000 he gave Fagan was the most she received from any donor in a non-election year where the secretary received relatively few contributions.

While Fagan’s consulting duties remained unclear Friday, Morris said the work is “for projects outside of Oregon.” He sent a portion of Fagan’s contract with the cannabis company that specifies the secretary will follow Oregon ethics rules and will not use her position as a prominent elected official “to create the opportunity for additional personal income…”

Morris said Fagan spoke with the Oregon Government Ethics Commission three times about the arrangement in February. “OGEC did not advise Secretary Fagan of an actual or potential conflict,” Morris said in an email. “However, the Secretary voluntarily recused herself from the OLCC audit because she holds herself to a higher standard than the minimum required by law.”

Fagan did not seek written advice from state ethics watchdogs about the contract, the Oregonian/OregonLive reported. That’s a different approach than at least one prominent past statewide elected official. In 2013, then-Gov. John Kitzhaber asked for a formal opinion from the Ethics Commission over whether he could resume paid speaking engagements. Commissioners said he could.

As secretary of state, Fagan earns $77,000 a year. That’s the same statutorily set salary as the state treasurer and labor commissioner, but it’s far less than many of Fagan’s employees make.

According to statements of economic interest filed with the state, Fagan gets additional income from HKM Employment Attorneys, a law firm she used to work for. Morris said that money was for “residuals from cases that predate Secretary Fagan’s administration.”

Fagan also earns money from Willamette University, where she teaches a law school course on “voting rights and modern democracy.”

“As a mom, she does what it takes to support her family and her community,” a statement from Fagan’s office said.

News of Fagan’s moonlighting cast a shadow over the cannabis audit her office released Friday. The 40-page document offered a detailed history of Oregon cannabis regulation, from the 2014 vote to legalize recreational cannabis to the present day.

Cannabis remains illegal under federal law, and auditors noted that many rules Oregon created in the early days of legalization were put in place to ensure that the federal government didn’t crack down on Oregon’s new system. But plenty of states have legalized recreational or medical marijuana use since then, and the federal government has taken halting steps in that direction. Because of that, auditors found Oregon’s strict rules might be outmoded.

“While it is true that the federal government has not intervened in Oregon’s cannabis industry, it also has not done so in any other state,” the audit said.

Auditors pointed out that cannabis dispensaries have security requirements that don’t apply to liquor stores – like mandatory steel-framed doors and 24-hour surveillance. They suggested the state’s system for tracking cannabis from seed to sale was growing too expensive. And they chastised Business Oregon, the state’s economic development agency, for refusing to help cannabis businesses with grants and other assistance because it fears federal reprisal. Similar agencies in other states work with the cannabis industry, the audit said.

“Business Oregon’s refusal to work with cannabis businesses results in cannabis entrepreneurs or potential entrepreneurs not having equal access to state economic development programs that could help offset the financial challenges associated with starting their businesses,” the report said. “This lack of equal market access is especially problematic for communities of color.”

The audit also suggested the state rethink its decision to stop issuing new licenses for cannabis growers, processors and retailers. The step was taken in response to the supply of cannabis in the state overwhelming demand and tanking prices.

With no new licenses allowed, the audit said, “the only option for new cannabis industry entrepreneurs is to purchase a license from an existing licensee, who can charge any amount they want as the sale of a cannabis business is not regulated.”

Auditors also found that Oregon was lagging other states in its efforts to ensure its cannabis industry is diverse. States like New York, Colorado and Vermont offer financial help to some applicants for that purpose.

The audit did point out that Oregon has among the cheapest application fees for a cannabis license in the country, at $250.

Auditors formally recommended that the OLCC rethink security rules that are no longer necessary, reduce costs for its cannabis tracking system, gather better demographic data about people with industry licenses and assess whether its moratorium on cannabis licenses is having a negative impact.

In response to the audit, the OLCC issued a letter agreeing to pursue the recommendations, though it also defended rules in place for maintaining security at cannabis dispensaries.

“Marijuana businesses, through no fault of their own, face unique public safety and security risks that no other industry faces,” OLCC interim Director Craig Prins wrote in the letter. “These concerns must also be front and center in OLCC’s considerations so that all participants in the industry — owners, employees, and customers — are safe and secure.”

The audit also recommended Kotek and the Legislature direct Business Oregon to work with cannabis businesses and develop guidance for how other state agencies should work with the industry.