Politically connected Syracuse group flips NY marijuana license for pot of gold
Politically connected Syracuse group flips NY marijuana license for pot of gold
SYRACUSE, N.Y. - Syracuse building contractor Dino Dixie and ex-police chief Dennis DuVal paid no money to own shares in a startup medical marijuana business that eventually sold for millions of dollars, a former partner said.The two men each received a slice of the business "chiefly due to their political connections,'' the partner said in a 2016 lawsuit.The other founders of the company - a plumber, a shoe store owner and a security contractor, each of whom ponied up at least $100,000 - wagered that political connections could help them win a lucrative state license to sell medical weed, according to court records.The business, NYCanna, is now worth more than $40 million because it landed a state license to sell marijuana.Whether political connections helped (government officials say they did not), NYCanna survived a fierce competition to win one of 10 coveted state licenses.And within a year of winning the license -- before the company had made a single retail sale -- Dixie, DuVal and the other founders flipped the company and cashed out.NYCanna was bought in August by a bigger company. The deal appeared to value NYCanna at more than $48 million, based on documents filed this month.Half of that - an estimated $24 million - likely went to five founders of NYCanna, including Dixie and DuVal. What share each got has not been disclosed.The sale of NYCanna (pronounced Ni-KAN-uh) occurred as big money poured into the newborn marijuana industry. But no amount of money matters unless you can secure a license. That's the ticket into the game.New York gave out licenses based on written applications that were scored by Albany bureaucrats. But the major part of each application was kept secret, raising suspicions among critics that they were not graded consistently.Dixie and DuVal are friends and long-time political backers of former Onondaga County Executive Joanie Mahoney, a strong ally of the governor, whose health department awarded licenses.Dixie also has connections to other political heavyweights, including Assemblywoman Crystal Peoples-Stokes, D-Buffalo. Peoples-Stokes said she "worked really hard'' to help NYCanna win a license.She didn't know if her efforts mattered, she said, but she was grateful for the outcome.A pot of goldNYCanna grows marijuana in a section of the former New Venture Gear auto parts factory in DeWitt. The company opened its first retail store earlier this month, but had not opened any before being acquired.No matter. NYCanna's value stemmed from its state license.Owning one of the 10 licenses in New York gives new owner Acreage Holdings a leg up as the state moves to legalize pot sales to recreational users. That could open a market worth $3 billion a year in sales.NYCanna began growing marijuana in 2017 in the former New Venture Gear factory in DeWitt, after winning a highly coveted state license. (Michael Davis | Syracuse New Times)Acreage Holdings, of New York City, went public this month on the Canadian Securities Exchange. With marijuana businesses in 14 states, the company is valued at about $2.8 billion, according to Investor's Business Daily.New York officials anticipated that pot licenses would be valuable, and they established regulations prohibiting their sale. But a company that controls a license can be sold, if state officials sign off.The acquisition of NYCanna was approved by the state health department in August. The company founders who applied for the license no longer have any role in the business.In the fast-evolving marijuana industry, New York licensing officials hold the key to potential riches. Critics say the process for awarding licenses has been mysterious and flawed.The state health department held a competition in 2015 that determined who got licenses. Forty-three companies submitted applications - each hundreds of pages long - which were given numerical grades by a panel of health department staffers. The top 10 finishers won licenses.The seemingly apolitical process did not stop many of the companies from deploying lobbyists or soliciting help from elected officials. Three years after the grades came out, the results are still contested.Seven of the 33 companies that were denied licenses have filed grievances with the health department, saying the selection process was unfair and inconsistent. The litigation continues.State officials say the medical marijuana licenses were awarded based on merit. But the founders of NYCanna apparently believed political connections would help their case."Mr. Duval and Mr. Dixie in particular brought considerable political connections, talent, experience, and other assets,'' wrote John Vavalo, one of the founders, in a sworn statement from a 2016 lawsuit. Both men had "established relationships with others who can assist (NYCanna) in its quest to obtain a license.'''I've known Dino for years'Dixie, 53, owns a construction management company, 1st Point LLC, which routinely does work for Onondaga County, among other clients. Dixie has helped raise money for Mahoney's campaign committee, and he and his company have contributed $2,250.Dino Dixie, right, chats with then-NY State Comptroller H. Carl McCall in 1996 at a luncheon in Syracuse. (John Berry) Dixie, whose company also does work in Buffalo, has contributed $1,500 to Peoples-Stokes since 2014, according to state records."I've known Dino for years, from his work in construction management,'' Peoples-Stokes said.DuVal, 66, is a former Syracuse University and NBA basketball player, a former Syracuse police chief and the former president of Hofmann Brands hot dog company. He and his wife have contributed $2,400 to Mahoney's campaigns and $500 to Peoples-StokesMahoney appointed DuVal to three county boards - the Onondaga Civic Development Corp., the Cultural Resources Trust and the county Board of Ethics.Both Dixie and DuVal were with Mahoney at a DeWitt restaurant in December 2016 during an incident that made news. Mahoney got into a dispute with a political enemy who was trying to take her picture.NYCanna has another connection to Mahoney: Ben Dublin, who worked as a consultant to the company, ran Mahoney's campaigns for county executive and served as her chief of staff.Dublin left Mahoney's staff in September 2014 to become a lobbyist. Dublin's wife also worked for Mahoney's campaign and was a top aide to the county executive, who resigned Nov. 1 for a state job.Ben Dublin, chief of staff, accompanies Onondaga County Executive Joanie Mahoney during a 2014 live chat on syracuse.com. After leaving county government, Dublin worked as a consultant to NYCanna and other clients. (Lauren Long)Mahoney wrote a letter to Cuomo extolling NYCanna that was included in the company's 3,300-page application in June 2015. "A number of potential applicants'' had sought her support, Mahoney wrote. NYCanna "brings the best team and proposal to the table.''It's not clear whether Mahoney made other efforts to support the company. She declined to comment for this report.Dixie and DuVal also declined comment. Other founders of NYCanna ignored repeated requests for interviews. But some of the company's history can be gleaned from a lawsuit between the partners, public documents and interviews with others in the marijuana industry.From Yonkers to SyracuseNYCanna's origins go back to late 2013, a year before New York legalized medical marijuana.Dominic Falcone, who owns a plumbing company in Yonkers, started a company called New Amsterdam Distributors with the intent of seeking a medical marijuana license. He teamed up with a guy he knew from the Masonic Order, entrepreneur James Esposito, who operated a New York City security company and other ventures, according to Falcone's affidavit in a lawsuit.An unidentified employee of NYCanna tends marijuana plants in the former New Venture Gear auto parts factory in DeWitt. (Acreage Holdings photo)It's not clear how Falcone and Esposito connected with John Vavalo, the co-owner of J. Michael Shoes on Marshall Street in Syracuse. Besides his interest in the shoe store started by his father, Vavalo worked as an executive at a biodiesel company in Wayne County.Vavalo, Falcone and Esposito each agreed to contribute at least $100,000 to support the effort to get a marijuana license, according to court records and company emails. DuVal and Dixie, who joined the company in 2014, did not put up cash but were given small ownership shares in return for their political connections and sweat equity, Esposito claimed in a 2016 lawsuit.Vavalo and Falcone, who opposed Esposito's lawsuit, agreed with him that Dixie and DuVal "brought considerable political connections, talent, experience, and other assets'' to the company. Both Vavalo and Falcone signed affidavits to that effect.In November 2014, DuVal was given 5.3 percent ownership; Dixie received 1.3 percent. A year later, their shares were increased to 10 percent each, court records show.Vavalo had known Dublin, Mahoney's former chief of staff, since their days together in high school. Dublin was hired as a consultant to the startup marijuana venture. He did not appear to be an owner, according to company filings. He declined comment.In June 2015, the group submitted its application for a medical marijuana license under a new corporate name, New York Canna, Inc. That company was later reorganized as NYCanna, LLC.DuVal, the former hot dog company executive, was listed as CEO. Falcone, the plumber, was director of facility operations. Dixie, the construction executive, was facility manager. Vavalo, the shoe store owner and biodiesel executive, was director of engineering and extraction. Security company operator Esposito was security director.NYCanna also recruited experienced marijuana cultivators as employees or partners. (A company with marijuana business experience, EPMMNY LLC, partnered with NYCanna on the 2015 application, but they later parted ways. EPMMNY sued this month for breach of contract.)Besides Mahoney, several civic leaders wrote letters supporting NYCanna's application, including Rob Simpson, president of business development group CenterState CEO. Other license seekers around the state also obtained letters of support from their local elected officials.In 2015, NYCanna finished just out of the money. The company was ranked sixth, with a score of 90.43. No. 5 squeaked past with a score of 90.59. The health department issued five licenses.But two years later, the health department used the same 2015 rankings to award five more licenses. NYCanna was approved in August 2017.'I don't begin to understand'Some companies that were denied marijuana licenses say NYCanna and the other winners succeeded in a state licensing process that was cloaked in secrecy. Health department officials say it was transparent and fair."The Department of Health firmly stands behind the fairness and neutrality of the process by which applicants were selected,'' said Jill Montag, speaking for the health department. "(The) program relied on an extensive, thorough and entirely transparent process that applied rigorous, objective criteria equally to all applicants.''Most of NYCanna's application for a NY medical marijuana license was redacted by health department officials to protect confidential information. Likewise, applications from other companies were mostly blank. This image shows one of hundreds of redacted pages. A panel of health department employees ranked the applications. They assigned numerical scores after evaluating factors ranging from the manufacturing process to the "moral character" of company officials.How each factor would be weighted was not divulged until after the application deadline. Critics question how the health department translated lengthy, written applications into numerical scores. Each application is posted on the health department's website, but most of the details are blacked out.Rochester lawyer Kurt Odenbach, president of Great Lakes Medicinals LLC, said he requested written records from the health department in 2015 to better understand the score his company received. Great Lakes ranked 11th, one spot too low to receive a license.Odenbach said he is still waiting, three year later, for the health department to comply with his Freedom of Information request.The department sends periodic emails that his request for documents is still "being processed." Meanwhile, department officials have said they would meet in person to go over his company's score, Odenbach said.Seven other companies that did not receive licenses have taken legal action, formally challenging the license awards in administrative hearings. They claim the process was unfair and the rankings were inaccurate.Among their complaints: Some of the license winners were contacted by state officials to correct deficiencies in their applications prior to having them scored, while other companies were not.State Sen. Diane Savino, a sponsor of the 2014 medical marijuana legislation, said it was never clear to her how the health department chose the companies."I don't begin to understand their scoring system,'' Savino said. "I never did.''Influential peopleWithin months of issuing the first five licenses in 2015, health department officials indicated that more licenses might follow, Esposito later recalled in court papers. NYCanna was next in line.Assemblywoman Crystal Peoples-Stokes, D-Buffalo, said she advocated for NYCanna to get a medical marijuana license. (Facebook image)In an email in October 2015, three months after the rankings came out, an aide to Assemblywoman Peoples-Stokes wrote to Dixie and Vavalo and urged them to be patient."We had a chance to speak to some pretty influential people high up on the food chain today,'' wrote Mark Boyd, chief of staff. "All I can say is your concerns are already under review. The Assemblywoman should have reached back out to Joanne Mahoney by now (to tell her the same). ... I know time equals money, all I can say is please try to remain patient as the process plays out.''Peoples-Stokes said one of her priorities has been to see minority-owned businesses benefit from legalized marijuana. She did not recall whether she spoke with Mahoney about NYCanna's license. But she did recall speaking with other officials. She said she advocated for NYCanna in part because Dixie and DuVal are African-American."I thought it was important that minorities have access to the business,'' she said. "So, we focused on that and just talked to a lot of people who were decision-makers to see if they could work with the company to try and ensure that they had an opportunity.''She declined to specify who she talked to. Peoples-Stokes said the health department did not adjust its scoring criteria to help NYCanna. She said she doesn't know if her advocacy had an effect."I don't know whether it helped or not, but they actually did get an opportunity to get a license, so I was grateful for it,'' she said.A bigger share for Dixie, DuValAs the partners continued to hope for a license, NYCanna was nearly torn apart in a dispute. The issue: How much were the political connections of Dixie and DuVal worth?In November 2015, Vavalo and Falcone - who together controlled 60 percent of the company - proposed to increase the ownership shares of Dixie and DuVal to 10 percent each and to make them voting members of the board. Esposito, the other major shareholder, with about 30 percent, objected.After several months of quarreling, Esposito sued in April 2016, claiming that his interest in the company was being unfairly diluted. "Neither DuVal nor Dixie contributed any tangible capital,'' he complained.By the time Esposito sued, the other partners had voted to remove him from the board.Esposito settled the lawsuit in April 2017, about a year after he filed it, for an undisclosed amount. His lawyer, Larry Lonergan, said the settlement included a non-disclosure agreement. Esposito could not be reached for comment.A second lawsuit against NYCanna was filed this month by EPMMNY, a company with experience licensing and operating marijuana businesses in other states.EPMMNY, represented by attorney Lonergan, accuses NYCanna of appropriating its intellectual property and breaching their agreement.Big money flows inSavino, the senator, said she expects legislation to be introduced next year to authorize sales of marijuana for recreational adult use. That could generate $3.1 billion in annual sales, according to an estimate by the New York City comptroller.Investors are shoveling money into the marijuana sector, as a trend toward legal recreational pot sales spreads across the continent. Constellation Brands, the owner of Corona beer and other products, recently invested more than $4 billion in a Canadian marijuana company.Big marijuana companies are increasingly interested in New York, Savino said. At least three of the 10 startups with New York licenses already have been bought.In the only other publicly reported deal, a Canadian marijuana conglomerate bought Orange County-based Citiva Medical for $18 million. That was a year ago, before Gov. Andrew Cuomo signaled that New York was likely to legalize recreational pot sales.Acreage Holdings acquired 25 percent of NYCanna last year, before buying the rest of the company this year. A large group of Rochester investors also bought a minority stake last year, including several members of the prominent family of developer Tom Wilmot and some attorneys from the Harris Beach law firm.As of February 2017, the remaining original investors in New Amsterdam Distributors - Vavalo, Falcone, Dixie, DuVal and a pharmacist named Patrick Harvey - still owned half of NYCanna, according to documents filed with the state. Of that half, Dixie and DuVal each owned 10 percent, according to a January 2017 affidavit from Vavalo, who said he owned 26 percent.Acreage Holdings paid $36.6 million in August to acquire the 75 percent of NYCanna it did not already own, an indication that the whole company was valued at more than $48 million. The purchase price consisted of roughly $10.3 million in cash, $24 million in stock and more than $2 million in IOUs, according to documents filed with Canadian securities regulators.In addition, Vavalo, who became CEO in 2017, received a "separation'' payment of $645,000 from Acreage Holdings. DuVal, the COO, received a $610,000 separation.Acreage also paid $4 million for a separation agreement with the "manager'' of NYCanna, according to company filings. Although Acreage officials declined to identify the manager, NYCanna had previously received management services from Terradiol Management Group, a company owned by Vavalo, Dixie, DuVal and others.Peoples-Stokes said she is "a little disheartened'' that NYCanna no longer claims any significant minority leadership. But she celebrates the company's success."If they sold it already, then some of what I hoped for, for them, has already happened,'' she said.Contact reporter Tim Knauss | email | Twitter | 315-470-3023Joanie Mahoney recommendation by Tim Knauss on ScribdIf you purchase a product or register for an account through a link on our site, we may receive compensation. By using this site, you consent to our User Agreement and agree that your clicks, interactions, and personal information may be collected, recorded, and/or stored by us and social media and other third-party partners in accordance with our Privacy Policy.