In a landmark case involving licensed Colorado marijuana retailers, the owners of the shuttered Sweat Leaf dispensary chain each were sentenced to one year in prison Friday for their role in selling large quantities of pot to the same customers in the same day.

Christian Johnson, Matthew Aiken and Anthony Sauro each pleaded guilty in Denver District Court to violating the Colorado Organized Crime Act and illegally selling and distributing marijuana. Their plea deals stipulated one year in prison, followed by one year of mandatory parole and one year probation, to be served concurrently.

“I think this was obviously a first case in Colorado,” lead prosecutor Kenneth Boyd said in an interview. “I think it was the first in the nation where a state prosecution office went after a licensed marijuana company. We did not see this scope with anybody else.”

At the heart of Sweet Leaf case is a practice in the marijuana industry called “looping,” where multiple times in a day, a customer would be allowed to buy the maximum amount of marijuana allowed under the law — one ounce — and do it over and over again.

“This was the culmination of a year-long investigation by Denver police and subsequent year-long investigation by a Denver grand jury,” Boyd told Judge Shelley Gilman Friday.

Boyd said his team had evidence of loopers doing this on the shops’ recreational side 30 to 40 times a day. The practice led to almost 2.5 tons of illegal marijuana going into the black market, he said.

“This was a case where it was widespread,” Boyd told the judge. “And the owners knew what was going on and encouraged the practice.”

The parent companies of Sweet Leaf, Dynamic Growth Partner LLC and AJS Holdings LLC, also pleaded guilty Friday to violating the Colorado Organized Crime Control Act and failure to file a tax return or pay a tax. Each corporation was ordered to pay a $125,000 fine.

Sweet Leaf’s big business

Before their rash of legal problems, Sweet Leaf Marijuana Centers was raking in huge sums of money across its vast pot empire in metro Denver, The Denver Post reported in July.

By December 2017, the company had grown to 300 employees and brought in $5 million in monthly sales. The owners even had their eyes on expanding into markets in Nevada and Massachusetts.

By mid-December of that year, it was all gone.

Denver police raided Sweet Leaf stores on Dec. 14, 2017, seizing assets, shuttering retail locations and arresting more than a dozen budtenders.

“This case began thanks to a watchful citizen who observed the same people making multiple purchases of marijuana from a single Sweet Leaf dispensary in one day and tipped off the Denver Police Department,” Denver District Attorney Beth McCann said in a statement. “The vast majority of Denver’s marijuana industry businesses are reputable and responsible and strive to obey our marijuana laws. However, Sweet Leaf is an exception. My office will prosecute those who do not comply with our marijuana laws.”

This case became one of the highest-profile criminal cases to emerge from the legalization of marijuana sales in Colorado five years ago.

And the ruling came down to the parsing of vague language in the state’s Medical Enforcement Division rules. Until 2017, the rule stated that a marijuana store is “prohibited from selling more than one ounce of Retail Marijuana flower or its equivalent in Retail Marijuana Concentrate or Retail Marijuana Product during a sales transaction to a consumer.”

The Sweet Leaf owners argued in the past that they were following the letter of the law by allowing customers to buy one ounce at a time — and then leave and come back to buy another ounce.

Closing the loophole

On Jan. 1, 2018, the Medical Enforcement Division tightened the regulations to clarify that a “single transaction” encompasses multiple sales to the same customer during the same day, if that person is buying more than one ounce of marijuana. The Sweet Leaf raids occurred before the updated language, but McCann argued in court filings that the activity was a criminal matter and rose to a level of public concern.

Sam Kamin, the Vicente Sederberg professor of Marijuana Law and Policy at the University of Denver, served as an expert witness on behalf of the Sweet Leaf owners during a previous administrative hearing.

“It has always been my view that what they were doing what exploiting a loophole in the law,” Kamin said. “At the time, there was no explicit ban on multiple sales on the same day … I believe they got close to the line but didn’t cross it.”

Kamin, who also served on the legalization task force that drafted Colorado’s initial marijuana regulations, said the loophole closure makes any precedent regarding looping pretty clear, but “in a broader sense this shows that the city and this state are gonna be vigilant about these things.”

“One thing this said was, ‘We are going to look for clear compliance,’ ” Kamin said regarding the district attorney’s actions in this case.

Other states, he said, will continue to look at Colorado for all things marijuana, and the Sweet Leaf case will be no exception.

Boyd detailed just how extensive the looping had become at Sweet Leaf. One effect, he said, was that these customers would buy up all the medical marijuana immediately after it arrived in the store, frustrating patients who needed it.

These stores also became an alternative for people who might otherwise go to a cartel for black market marijuana, he said. Sweat Leaf eliminated the risk of getting robbed when dealing with huge amounts of cash.

“Sweet Leaf essentially operated as a safe haven, if you will, for people to buy marijuana for the black market,” Boyd said.

Increase in self-regulation?

While the co-owners prepare for prison time, Sweat Leaf budtenders received dismissals, Boyd said, in exchange for community service and fines. Most of those cases have been resolved, he said.

As for the loopers, a grand jury returned a 160-count indictment last month, charging 10 individuals. Those cases are in their early stages, Boyd said.

Friday’s plea agreement comes one month after the co-owners were hit with an $8.8 million judgment after they were found to have failed to honor commitments to the owner of properties they were buying in Denver.

Boyd said he doesn’t believe that people are still looping in quite the same way as they did at Sweet Leaf, “but I do believe it is still occurring where they’re going to different dispensaries and accumulating marijuana that way.”

Regulation, he said, may start from the dispensaries themselves.

“I think you’re going to see the industry actually start regulating themselves more,” Boyd said. “I think that this case served as a big wake-up call to say there’s more that can be done on the compliance side to make sure that your customers aren’t doing things illegally.”