Stockton entrepreneur saw future in pot, now eyes prison

phecht@sacbee.comJanuary 21, 2014 

Matthew Davies, a freshly minted MBA graduate from Santa Clara University, was a fast achiever in business.

He launched an online jewelry importing company, moved on to open a property management firm and then an upscale French restaurant, Le Bistro, that served fine wines and Grand Marnier soufflés.

On March 3, Davies, 35, of Stockton, will begin serving a five-year federal prison term for his most ambitious, and ill-fated, venture: becoming a medical marijuana entrepreneur in California.

His ultimate success story – building a $10 million Central Valley medical marijuana enterprise in barely two years – became both his undoing and a cautionary tale for people who saw a green rush in California’s teeming, unregulated cannabis economy.

Starting in 2009, Davies sought to build a new professional model for pot in California.

He created a marijuana production and sales venture similar to those of the Colorado cannabis executives who built booming state-licensed and for-profit medical marijuana enterprises that include retail stores and cultivation warehouses. But Davies claimed to do it while earning a modest salary as a nonprofit dispensary operator under nebulous California laws that authorize patient-run “collectives” or “cooperatives” to grow and share the medicine.

Federal prosecutors saw a criminal profiteer.

“Matthew Davies, a Stockton businessman with an MBA, set out to build a lucrative marijuana empire,” said U.S. Attorney Benjamin Wagner, in a statement announcing Davies’ May 31 guilty plea. He added: “Our investigation has shown that, in the end, it was all about the money.”

Davies operated, at one time or another, seven marijuana dispensaries in the Stockton and Sacramento region. He also set up an industrial cultivation facility, promising certified organic cannabis for a registered network of more than 20,000 medical marijuana users.

He cast himself as a turnaround specialist for distressed marijuana businesses. He put money into troubled, dingy pot shops and remade them as holistic fern bars that dispensed cannabis with “a Zen-like” ambiance and offered health services, including chiropractic care, massage therapy and acupuncture.

When he ran into trouble with the federal government, Davies, a married father of two young daughters, hired a team of lawyers and former Clinton administration official Chris Lehane as a media consultant. He launched a website, www.keepmattfree.org. He drew coverage in The New York Times and The Huffington Post, making a public case that he was an honest man who dutifully followed California’s law, only to be unfairly singled out by the government.

Despite his guilty plea to marijuana conspiracy, manufacturing and sales, Davies today suggests federal authorities unfairly applied marijuana laws against him while allowing entrepreneurs in other states to thrive.

He also blames his fate on California legislators’ failure to set clear rules for a medical marijuana industry that mushroomed to more than $1 billion in taxable marijuana sales by 2010. In contrast, Colorado passed laws that provided meticulous state oversight of marijuana stores and cultivators, apparently satisfying the U.S. government, which sharply curtailed prosecutions of marijuana businesses there.

“Our state happily took $100 million in tax money” from medical marijuana business in California, “but when the time came to help us out, they were never to be found,” Davies said in a recent interview at his accountant’s office in Stockton. “If California had the gumption to remove the ambiguities of our law, there is no way a federal prosecutor would have been able to prosecute me.”

He has closed his Stockton restaurant, is turning over his property management company to others and coming to terms with leaving behind his daughters, ages 2 and 1, and a wife “who will have to be single mother for a while.”

“How do you prepare for this?” he said. “You don’t prepare. I have sort of exited my life.”

Davies says he feels seared by the contrasts: He heads to prison while federal officials stepped back as Colorado and Washington legalized marijuana for recreational use. On New Year’s Day, consumers in Colorado lined up in droves for America’s first retail sales of pot purely for pleasure.

Legal observers suggest the circumstances of Matthew Davies’ case, and the opportunities that he perceived in the California medical marijuana industry, make for a complicated story.

Sam Kamin, a specialist in marijuana law at the University of Denver’s Sturm College of Law, said Davies may have a valid complaint that state lawmakers left him exposed to federal prosecution by failing to set clearer rules for California’s marijuana industry.

“The feds have essentially said that if you’re doing this in a state that regulates this stuff robustly, that is between you and your state government,” Kamin said. “But he (Davies) was operating in this nether land. And the feds came after him.”

San Francisco attorney Matt Kumin, who represented other dispensary operators in unsuccessful appeals of federal enforcement in California, said Davies was part of a business-savvy breed of dreamers who rushed into the marijuana business without grasping the potential perils.

“It was risk-venture capitalism,” Kumin said. “People were jumping into this space, thinking, ‘Oh wow, marijuana, the largest cash crop in the state.’ They didn’t come out of the black market. They were newbies. And next thing you knew, the police were taking them down and they were shocked.”

Federal prosecutors took particular note of Davies’ business acumen, as well as the fact he was neither a cannabis activist nor a seriously ill patient.

Davies did get a doctor’s recommendation for medical marijuana to treat anxiety and insomnia. And in November 2009, he opened one of Stockton’s first marijuana dispensaries, a purportedly nonprofit patients’ “cooperative” for medical cannabis users.

According to prosecutors, Pathways Family Health Cooperative, started by Davies and a business partner, Lynn Smith, handled more than $2.2 million in marijuana sales in less than a year before the city shut it down. He went on to open another Stockton dispensary, Central Valley Caregivers, which racked up $4.5 million in gross sales by 2011, before moving to Sacramento – and pot business glamour.

Davies soon bought into a struggling local dispensary on Northgate Boulevard called East Bay Health Solutions. “It was dingy. It looked like a head shop. It was one of the worst places in the city,” he said.

He remodeled the establishment as a cannabis wellness facility called MediZen. It offered upscale ambiance, top-shelf marijuana strains at discount prices and a range of “holistic” health services for patient clients. MediZen took out ads on the back page of the Sacramento News & Review and ran commercials on local television. Its daily pot sales spiked from barely $500 to $17,000.

Davies went on to take over other city dispensaries, including River City Wellness in Natomas and the Twelve Hour Care Collective in south Sacramento, and to acquire a 50 percent interest in a Stockton medical marijuana store, Port City Wellness.

He said his cannabis ventures eventually employed 100 people, from cultivators to the “bud tenders” who sell pot to patients, earning $15 to $30 an hour. Meanwhile, he said, he took less than $40,000 in salary in two years – while anticipating greater future earnings as the CEO of an expanding nonprofit medical marijuana network.

Federal prosecutors say Davies’ nonprofit claim was a ruse.

Their sentencing memo said he wrote $117,000 in checks from MediZen and Central Valley Caregivers accounts to pay down credit card debts for his Le Bistro restaurant and a mobile home park he operated in Stockton. They alleged he used hundreds thousands of dollars in cannabis earnings to acquire other dispensaries, planning “to comfortably support himself via the expansive marijuana business.”

Davies claims the feds put “a spin that didn’t exist” on his actions. He says the modest salary he reported included $20,000 he used to pay off restaurant expenses, but otherwise his pot venture was “fully segregated” from the restaurant and property businesses. He argues that reinvesting cannabis earnings to grow his medical marijuana enterprise doesn’t constitute profiteering.

But he admits having made fateful decisions that drew scrutiny from the feds.

In summer 2011, Davies took over a problematic south Sacramento dispensary, R & R Wellness Collective, soon after it had been raided by Elk Grove police and Sacramento County sheriff’s deputies.

Authorities, investigating a scheme involving multiple grow houses, stolen electricity and illicit marijuana sales in Southern California, recovered $256,000 in cash at the Elk Grove home of the operator, Bryan Smith. They also found a video of the 27-year-old man bragging of how much money he was reaping in the pot business. In 2013, Smith was sentenced to six years in federal prison.

Davies changed the name of R & R Wellness to Sacramento Patients Group. He said he paid off the dispensary’s back taxes to the state and tried to repair its reputation. But when U.S. prosecutors brought charges against Smith and other R & R Wellness employees, Davies immediately closed the establishment.

“It associated us with a bad apple,” he said, “and it was a mistake.”

He said a greater mistake was opening an industrial marijuana cultivation center in a 30,000 square-foot Stockton warehouse in hopes of producing high-grade cannabis for medical marijuana customers at low cost. He calls it “the worst decision in my life,” one that “brought this prosecution upon us.”

On October 4, 2011, three days before California’s federal prosecutors announced a sweeping crackdown on California medical marijuana businesses, federal agents served warrants on the Stockton cultivation facility, seizing nearly 2,000 flowering marijuana plants, 900 starter plants and 50 pounds of pot. Prosecutors threatened Davies with more than 10 years in prison.

His business partner, Lynn Smith, pleaded guilty and got a 3½-year federal sentence for his role in the marijuana enterprise. Davies’ chief grower, Robert Duncan, took a deal for two years in prison.

Davies fought on, taking his case to the media. His wife, Molly Davies, penned a public letter to President Barack Obama.

Writing in The Huffington Post, she noted Obama’s comments that the federal government had “bigger fish to fry” than going after recreational pot users in Colorado, where state-licensed marijuana stores were supplied by massive pot warehouses. She asked why the government “was forcing my young daughters to grow up without a father?”

Davies pondered his options. He realized he couldn’t cite California medical marijuana law as a defense in federal court and, “without being able to put my facts into the record, I’m no different than (Colombian drug lord) Pablo Escobar to the jury.” He decided to take the deal for five years behind bars.

Now resigned to his fate, the former business school whiz kid allowed himself some fleeting nostalgia on his career as a pot CEO.

“It was the most fun in my life,” he said. “I’ve never seen employees with such high morale. Everyone believed in what we did. I’ve got to tell you, it was fun kicking everyone’s butt in Sacramento.”

Asked if he would ever return to the marijuana business, he replied briskly.

“No way in hell.”

Call The Bee’s Peter Hecht, (916) 326-5539.

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