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Baltimore County doctor faces off against Big Cannabis to recoup stake in Maryland medical marijuana firm

Baltimore County doctor faces off against Big Cannabis to recoup stake in Maryland medical marijuana firm
Dr. Mark Schneyer is suing a national medical cannabis company, Vireo Health, to try to reclaim an ownership stake in the Minnesota-based company that he says was secretly stripped from him. (Ulysses Muñoz / Baltimore Sun)

When Maryland lawmakers voted in April 2014 to authorize doctors to prescribe marijuana as medicine, Dr. Mark Schneyer moved quickly to seize the opportunity.

Convinced of the drug’s medicinal and market value, the Baltimore County ears-nose-and-throat physician set out to build a new business before the law took effect.

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Weeks later, Schneyer flew to Denver to jump-start his education at a cannabis business conference. While there he bonded with a Minneapolis doctor and entrepreneur, Kyle Kingsley, over a shared desire to start companies in their home states and ingrain cannabis into standard medical practice.

Their friendship paid off — at first.

Kingsley’s company, Vireo Health, was one of the two firms approved by Minnesota to make and sell medical marijuana as of July 1, 2015. Two months later, Schneyer founded MaryMed LLC with Vireo as a majority partner. And in August 2016, MaryMed won preapproval for licenses to grow and process cannabis in Maryland, where regulatory snags delayed the industry’s launch until the end of 2017.

During that lull, their union crumbled — with Schneyer cast aside as Kingsley’s fortunes took off with Vireo.

Today, Vireo is licensed in 10 states, trades on the Canadian Securities Exchange and began selling products in late March from a Dorchester County facility that ditched the MaryMed moniker for a new name: Vireo Health of Maryland.

During an investors call late last month, Vireo executives announced raising $51 million last year from private investors and generating $18.5 million in 2018 revenue from operations in Minnesota, New York and Pennsylvania.

“It’s an exciting time to be a Vireo shareholder,” Kingsley told investors.

Schneyer, who owns a minimal amount of Vireo stock, is far less excited.

In a lawsuit filed in Minnesota, Schneyer is attempting to recoup a far larger ownership stake that he claimed was improperly stripped from him through Vireo’s purchase of MaryMed — a transaction the Maryland Medical Cannabis Commission is investigating.

“Without Dr. Schneyer’s initiative, MaryMed would not exist, let alone be licensed in Maryland,” said Gregory T. Lawrence, Schneyer’s attorney. Vireo “wiped out Dr. Schneyer.”

The history of U.S. business is filled with tragic tales of near misses at vast riches, especially in new industries booming with investor mania. Schneyer’s five-year odyssey from founding father to floundering litigant proves that marijuana — despite its holistic healing image — is no exception to cutthroat capitalism.

Legal battles have been common in older marijuana markets in California and Washington. Now they are cropping up across the nation as a majority of states have legalized some form of cannabis and as U.S. sales — which hit $26 billion last year — continue to rise, said Hilary Bricken, a Los Angeles-based attorney whose firm specializes in cannabis law.

“It’s probably just hitting the East Coast,” Bricken said.

As more U.S. cannabis firms sell stock in Canada — where the drug is legal — shareholders are pressuring executives for fast growth through multiple acquisitions of smaller companies, pitting savvy corporate teams against often-naive entrepreneurs, experts say.

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Maryland lawmakers this month caved to such corporate expertise after big out-of-state firms used a loophole to exceed what legislators believed was a one-dispensary-per company limit. After several firms took control of two and three stores, the General Assembly had to increase — and then cap — the limit at four stores to prevent further industry consolidation of Maryland’s 102 licensed dispensaries.

Schneyer’s dispute is a microcosm of that broader fear of Big Cannabis squeezing out homegrown firms.

He filed his breach-of-contract claim against Vireo on Feb. 25 as the company approached its March 20 debut on the Canadian Securities Exchange. A confidentiality agreement shields most of the lawsuit from public view, but The Baltimore Sun obtained a judge’s ruling and an accompanying hearing transcript that detailed the dispute. In it, a Minnesota judge ruled against Schneyer’s request to block Vireo’s stock sale, which the physician feared would further devalue the original stake he wants to recoup.

The judge, Edward T. Wahl, ruled that Schneyer’s case is not “without merit” but that the stock sale would not stop him from recovering the stake if his argument prevails.

The University of Maryland medical school graduate has argued that Kingsley — whose Vireo held a 90 percent stake in MaryMed — demanded a corporate restructuring in late 2016 to distance the company from Vireo Health. At the time time, two of Vireo’s Minnesota employees stood accused of smuggling products.

Schneyer supported the strategy, which also included an infusion of $3.6 million from new investors — most of whom Schneyer had brought on even though it reduced his stake from 10 percent to 8 percent in the new company, called Dorchester Capital.

Its only asset was MaryMed’s imperiled licenses.

In May 2017 Maryland regulators suspended MaryMed’s pre-approved status because of the smuggling case and the company’s failure to notify the commission about Dorchester’s creation. MaryMed appealed, but the new investors began to worry as the appeal lingered.

“They start calling Kingsley at Vireo and saying, ‘We don’t want to lose our $3.6 million, what are you going to do for us?’” a Vireo lawyer said during a March 5 hearing in Minnesota.

Kingsley devised a second restructuring to convert the investors’ Dorchester stock into $3.6 million of shares in Vireo, which then would fully own MaryMed, according to court records. That way if MaryMed failed, the investors would own part of a company already operating in other states.

Schneyer was left out because Vireo claimed the sale needed approval only from the majority ownership group of Vireo and the new investors who had put in actual cash. Schneyer’s 8 percent stake was based on “sweat equity” — forming MaryMed and using his Maryland residence and connections to help win the licenses.

His Dorchester stake was now worth nothing.

Lawrence said Schneyer was unaware of his exclusion because Kingsley and Vireo avoided talking to him for months before and after the deal was agreed to last May. At the time a Maryland arbitrator had cleared the company of involvement in the smuggling case.

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When they did talk, Lawrence said, Vireo officials told Schneyer what they told the cannabis commission: The deal was an even swap of ownership for investors.

“Contrary to what Vireo falsely represented to the [commission] staff, Dr. Schneyer’s ownership in MaryMed/Dorchester was not converted into ownership of Vireo,” Lawrence said in an email response.

Last July, the commission, which is now investigating the transaction, reinstated MaryMed’s preapproval status after the arbitrators ruling, allowing the company to work toward winning its final license. Vireo then completed the Maryland purchase in October and the commission granted final licenses a month later, company records show.

In his suit, Schneyer claimed the $3.6 million purchase price for Dorchester by Vireo was far too low. The true value, his lawyer said, was approximately $22 million or more based on various calculations and a separate $30 million sale in Maryland.

Vireo lawyers said the price was fair because MaryMed was not operational and the licenses were in jeopardy. They said Kingsley did talk to Schneyer and offered him options to buy Vireo shares.

“Dr. Kingsley was not unmindful of Dr. Schneyer’s role here,” a Vireo attorney told the Minnesota judge. “Dr. Schneyer wants money, and he sees the best way to get money is to put a stick in the spokes of” Vireo’s stock sale.

In an interview, Kingsley declined to answer questions about the lawsuit or why the company did not disclose it in its March 19 public filing with Canadian authorities. The mandatory report to potential investors acknowledged a dispute about MaryMed but called the deal fair and “reasonable.” It also stated that no legal action had been filed in court.

Jacob S. Frenkel, a former senior counsel for the U.S. Securities and Exchange Commission, said a lawsuit about an ownership dispute “falls into the category of obligatory disclosure” to investors under both U.S. and Canadian law.

Canadian securities regulators did not respond to a request for comment. A Vireo spokesman said Schneyer’s claims “lack merit” and the company is “satisfied with its disclosures.”

Lawrence said he wants the court to void Verio’s deal for Dorchester/MaryMed. Doing so would benefit all Dorchester investors, not just Schneyer, because Maryland’s market is fully operational and generated $109 million in revenues last year. A new sale could be far more lucrative, he said.

“Is it going to be $3.6 million? I don’t know. Is it going to be $10 million? I don’t know,” Lawrence told the judge. “What about an all-cash transaction at $35 million...? I don’t know the answer to this … What you need to do is just unwind it and see what happens.”

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