By Mark Gutglueck
Further indication emerged last week that federal investigators are getting closer to action with regard to insider trading conflicts involving Adelanto city officials.
Reports of collusion between city officials and a number of investors seeking marijuana cultivation and cannabis product licensing in Adelanto have persisted since even before the Adelanto City Council in November 2015 voted to legalize the massive scale cultivation of medical marijuana for commercial purposes within the city’s industrial park.
Earlier in 2015, a commanding majority of the Adelanto City Council demonstrated itself as stridently opposed to allowing the city to become a host for any type of marijuana-related commercial activity, which some individuals were touting as a panacea to the cash-strapped city’s financial woes. But by late summer 2015, the attitude of the council as a whole appeared to be shifting.
Just prior to the city becoming the first of San Bernardino County’s 24 cities to embrace cannabis horticulture, then-city attorney Todd Litfin tendered his resignation, refusing to declare his reason for doing so. At least some of the grounds for Litfin’s reservation became embarrassingly – indeed painfully – apparent before 2015 ended.
On December 9, 2015, the Adelanto City Council rather inexplicably sold 47 acres of land in the city’s industrial park that was in the possession of the successor to its former redevelopment agency to an investor, Newport Beach-based Kojima Development, Inc., at the bargain basement price of $375,000.
Yet the city’s action allowing large scale marijuana cultivation operations to function out of the same industrial park had transformed the value of those 47 acres – at least potentially – to somewhere in the $9 million to $12 million range, depending upon which market analyst was running the numbers. Overnight, reports were afoot that illegal inducements in the form of bribes and kickbacks had been or were soon to be provided to city officials in return for their having signed off on the land transaction.
Things grew even worse on December 23, 2015, the day which the city’s new marijuana cultivation-allowing ordinance went into effect. The day after the ordinance had been adopted, a mad frenzy of applicants came into City Hall to apply for marijuana cultivation permits. The ordinance was somewhat vague with regard to how those applications were to be evaluated, and the ultimate decision making standards were extraordinarily arbitrary. The ordinance states, “The city manager will accept applications for medical marijuana cultivation permits during a thirty day period after adoption of this ordinance. Such thirty day time period plus an additional seven days to complete the reviews and the preparation of the reports called for in this section shall be deemed the ‘application period.’”
There was no firm and fast standard on who would or would not pass muster with the city manager, who relied upon city staff to then evaluate and rank the applicants, ostensibly under the standards laid out in the ordinance. There was no formula for accountability and even less transparency on this score.
The circumstance deteriorated in March 2016 when the city retained Jesse Flores as its economic development consultant. Flores had been involved in the Adelanto Charter Academy scandal along with now-disgraced former supervisor Bill Postmus, convicted political corruption figure Adam Aleman, as well as C. Steven Cox and another Postmus political affiliate, Dino DeFazio, both of whom have now been indicted and are awaiting trial. Flores’ role in the Adelanto Charter School Debacle, in which those participating looted the school of $3.1 million between its chartering on August 19, 2009 and the time it was permanently shut down by the California Department of Education on April 17, 2012, involved the misuse of two of Flores’ entities, Professional Charter Management, Inc. and Diamond Limousines, to bilk the school of money that should otherwise have gone toward the education of students but instead was diverted to activities, purchases and disbursements having no conceivable academic application, such as ferrying Postmus, Cox, Aleman, DeFazio and Posmus’ successor as supervisor, Brad Mitzelfelt, around in Flores’ limousines.
Under its contractual arrangement with Flores, the City of Adelanto put no limitations on Flores’ relationships with the entities he was dealing with in his effort to interest them in locating their businesses in Adelanto or otherwise making investments in the city. Thus, Flores was free to serve as a consultant to those businesses and/or accept fees from those businesses or have an economic interest in those businesses. In this way, under the guise of inducing entrepreneurs or investors to come to Adelanto, Flores was in a position to offer favorable terms – ranging from sales tax springbacks to facilitating permits to engineering zone changes to all order of other perquisites – to entities he himself had an interest in. Throughout his tenure as economic development director, getting cannabis farms, with their potential of making millions upon millions of dollars, up and running was a major focus for him.
Deepening the intrigue at City Hall was that one of the members of the city council who had in fact been at the forefront of the effort to approve the marijuana cultivation strategy for enhancing city revenues was John Woodard. A real estate professional, Woodard stood poised to get a piece of the marijuana growing action by serving as a broker on property being sold to would-be cannabis growers. Last fall, it appears, Woodard did just that.
At one point, the city seemed content with just realizing tax revenue from levies on growers. The city would hold the line at farms, i.e., large wholesale operations, council members said. No retail sales in the city were to be permitted. In 2016, however, that prohibition against selling to end users faded, and the city began preparing to allow cannabis clinics and dispensaries to set up shop. There were indications that potential investors were provided with advance information that the City of Adelanto was not only going to reverse its policy of prohibiting marijuana retail sales within city limits but that they were told precisely where the zones where those sales were to be permitted would be designated. There was a flurry of activity with regard to land acquisition in Adelanto last fall, including six properties in the area being considered for the district in which marijuana sales will be permitted, four of which were finalized. In fact, on November 29, the very day the council held its workshop to discuss creating that retail zone, Industrial Integrity Solutions, which had already raised suspicions about its having previously participated in an inside information scheme in Adelanto when its parent company, Frontier Enterprises, bought 31 acres for its marijuana farm less than two weeks before the planning commission made a re-zoning of the property to accommodate that use, purchased property at 12011 Air Expressway. By buying the Air Expressway property before city officials indicated their readiness to put it into the marijuana sales district, Industrial Integrity Solutions cut hundreds of thousands of dollars or perhaps more than $1 million off the asking and eventual sales price on that property.
When the city council involved itself in the discussions of where and where not such operations would be permitted, Woodard was active in arriving at a decision on how those zoning maps would be drawn. In at least one case, he was the broker on a sale of property that, either by coincidence or deliberate calculation, was purchased just prior to the zoning being changed to that permitting marijuana sales. There was no proof that the buyer had benefited from inside information provided by Woodard, but the circumstance was suspicious enough that the Securities and Exchange Commission began looking into the matter. While the Securities and Exchange Commission normally does not interest itself in real estate transactions, even in matters where insider trading or deals made involving the sharing of insider information with investors is involved, it is chartered to look into circumstances involving financial instruments tied into real estate holdings or those involving real estate trading.
And the DEA and the FBI were not far behind. By last December, agents for all three federal agencies were nosing around Adelanto.
Certain elements of what had interested federal officials were not lost on at least some local residents. A group of them retained the Los Angeles-based Sutton Law Firm to take a look at Flores’ activity. This confluence of events – FBI agents asking questions and looking at documents, DEA agents doing spot checks and obtaining search warrants, the Securities and Exchange Commission churning through minutes to see who knew what when and investigators from a law firm engaging in embarrassing inquiries – made some city officials downright nervous. In January, the city moved to disentangle itself from Flores. On January 19, then-Adelanto City Manager Cindy Herrera posted to Flores a letter in which she said, “the city is terminating the independent contractor agreement entered into between Municipal Economic Development Service, Inc. [Flores’ company] and the City of Adelanto on March 29, 2016. The official date of termination will be February 3, 2017. The city is not accusing, or insinuating, that you engaged in any unethical behavior, but the city has a duty to investigate the repeated allegations of misconduct and must suspend this agreement in the meantime.”
Three weeks later, however, the city abruptly reversed course, announcing that Flores would remain in his capacity as the city’s economic development consultant.
The entire episode caused many people’s antennae to itch. Someone, or several someones, with maybe a few governmental entities into the mix, local and national, appeared to be playing a very deep game. Flores’ role was to glad-hand with everyone, and perhaps make them interested in setting up a business in Adelanto. His contract did not preclude him from representing business interests, and questions have emerged about his relationship to some entities looking to establish dispensaries in Adelanto. The question remained ‘Was money exchanging hands and how much?’ Word was that Flores had been turned by the FBI and had become an informant. Adelanto cashiering him in January had interrupted the FBI and DEA operations, locals speculated. The whisper to the wise went that Flores was wearing a wire and anyone dealing with him would do well to watch what was said as the discussions proceeded. If he were to casually mention that his contract with the city allowed him to represent those looking to locate into the city and that he was in a position to make sure that his clients succeeded in what they were trying to establish, it might be best to not take him up on that offer.
Adelanto, which stands at the cutting edge of the incipient era of cannabis tolerance in California triggered by the passage of Proposition 64 and its condoning of marijuana for recreational smoking purposes, presents a unique opportunity for the federal government, which yet classifies marijuana as a schedule 1 narcotic, to reassert its primacy over states like California with regard to drug laws. The stampede of would-be millionaires with dollar signs in their eyes into Adelanto City Hall has given rise to a circumstance wherein it is not unthinkable that a handful of municipal officials and perhaps dozens of applicants might be ensnared in sting operation wherein applicants for permits on highly lucrative cannabis-related enterprises consent to sharing a portion of their proceeds with those granting them licenses. Moreover, California’s law extends only within the state. Growing marijuana that is then transported across state lines for sale or any other purpose remains a serious federal crime which typically entails a ten-year prison sentence. Given the current atmosphere in Adelanto, federal officials might not want to pass up the opportunity to create an example for all other municipalities in California that illustrates to politicians that run a risk if they get too feverish in their promotion of cannabis as the newfound economic lifeblood of their community.
An FBI spokeswoman refused to confirm or deny her agency is actively involved in an operation in Adelanto.
Erin Stattel, the press officer with the U.S. Securities and Exchange Commission in Washington, D.C., while acknowledging the SEC had been provided with a full range of information about the situation in Adelanto, told the Sentinel in March, “We decline to comment.”
In May, the city council extended Flores’ consulting contract with the city, upping his hourly rate from $35 per hour to $75 per hour and obliterating the $30,000 per year ceiling on the amount he was to be paid to $80,000 per year. The new contract left intact his ability to accept money from any outside interests, including those seeking to set up operations or invest in Adelanto. City officials dismissed any suggestions that there was something untoward in the arrangement, saying Flores’ had been key to the city’s nascent economic recovery, including persuading manufacturing concerns and brand new businesses going into recently constructed buildings, retail and service operations locating into preexisting structures that were empty, to say nothing of the influx of commercial cannabis operations. Those criticizing Flores, mayor Rich Kerr said, were naysayers or the political allies of the failed Adelanto politicians of the past.
Last week, however, city attorney Curtis Wright, of the law firm Silver & Wright LLP, abruptly announced he would leave as city attorney effective July 12. Wright’s 15-month tenure as city attorney began in the immediate aftermath of Flores’ retention as economic development consultant. The previous city attorney had been Julia Sylva, who was brought in on the fly upon the equally abrupt resignation of Todd Litfin in November 2015. It was Sylva who had put the finishing touches on the cannabis cultivation permitting ordinance that had prompted Litfin’s exodus.
Wright, like Litfin and Sylva, did not provide a reason for his departure, although he was upbeat in assessing the city’s prospects as it moves into the future.
Attorneys must maintain confidentiality with regard to the inside knowledge they have obtained relating to the entities and individuals who have employed them, and are barred from disclosing any derogatory information they may have with regard to that knowledge under the principle of attorney-client privilege.
In response to the Sentinel’s inquiries of the city with regard to city official’s knowledge of the investigation and their degree of cooperation with it, including responses to any subpoenas, Adelanto’s official spokesman, Michael Stevens in a response cleared with mayor Rich Kerr said, “We know nothing of an investigation and no one in the city has been contacted – including me.”
By Mark Gutglueck