Kayvan Khalatbari co-owns Denver Relief Consulting and the Sexy Pizza restaurant chain. (Cyrus McCrimmon, Denver Post file)

Update: Pot lawsuit targets Colorado businessman’s Illinois expansion

CHICAGO — A colorful Denver businessman and city council candidate schemed to monopolize the new medical marijuana industry in Illinois, according to a lawsuit that has joined a parade of legal challenges from competing marijuana business applicants in the state.

Medponics Illinois filed the lawsuit Monday in Lake County. It claims Kayvan Khalatbari (KAY’-vohn Kahl-aht-BAR’-ee) and his Denver companies have controlling interests in more than three Illinois cultivation centers.

If true, that would violate Illinois regulations. But some industry insiders say Khalatbari has played by the rules and, while he’s an owner in one Illinois company, he’s merely a contract consultant for another — a much lower level of involvement.

“That’s not gaming the system. That’s staying within the letter of the law,” said Kris Krane, a cannabis consultant who is familiar with the Illinois industry and is not involved in the lawsuit.

Khalatbari responded to the lawsuit on Wednesday, saying “there are some very misled statements made in the lawsuit and the basis for any and all of it is simply not true.” Khalatbari’s whole statement:

“After traveling much of (Tuesday) morning I became aware of this development upon landing and spent much of the day trying to collect information about what exactly my companies and I were being accused of,” Khalatbari said in an email to The Cannabist. “After having the opportunity to do so, all I can say is there are some very misled statements made in the lawsuit and the basis for any and all of it is simply not true.

“It’s unfortunate that these irresponsible lawsuits persist as a distraction to this very serious process at hand, the goal of which is to be able to provide safe and consistent medical cannabis to qualifying patients in Illinois as soon as possible. This misinformed public slander of my character and my ethical values will only slow that down, not stop it, and I’m confident this process and the revelation of the facts surrounding these claims will dismantle these accusations and allow me to help this state realize that goal.”

Khalatbari founded a Denver pizza chain called Sexy Pizza and has been an outspoken advocate for legal and regulated marijuana. Earlier this month, he lost an election for an at-large Denver city council seat.

The new lawsuit alleges Denver Relief Consulting and founding partner Khalatbari entered into agreements with two Illinois companies — Cresco Labs and Progressive Treatment Solutions — “in a scheme to control and profit from more than three different cannabis cultivation centers,” said attorney Kathleen McDonough, who represents Waukegan-based Medponics.

Between them, Cresco and Progressive now hold four cultivation permits and are in the running for a fifth.

“He calls himself different things,” McDonough said. “He was the front man for Progressive … much more than an adviser. And he’s the CEO of Cresco Labs, which has three permits.”

Progressive Treatment Solutions won one permit and plans to build a cultivation center in East St. Louis. It’s in the running for another permit in a region that includes Lake County.

The Illinois Department of Agriculture is still reviewing applications in the Lake County region. The plaintiff in the lawsuit, Medponics, applied to grow marijuana in the Lake County city of Zion.

“Medponics wants the license in Lake County,” McDonough said. “They put an enormous amount of effort into that process.”

Khalatbari is a principal officer and part owner in Cresco Labs, which now holds three Illinois cultivation permits after another challenger on Monday dismissed legal claims that had tied up one of the permits. Khalatbari is also a part owner of a Denver-based cannabis consulting company.

Out-of-state consultants like Khalatbari helped with many of the Illinois companies’ applications, said Krane, a managing partner in 4front Advisors, a cannabis consulting company with offices in Phoenix and Boston.

“The only expertise in Illinois is going to be from the black market,” Krane said. It would make sense, he said, for an inexperienced Illinois operator to get help from a consultant in a state with a legal market like Colorado.

What’s more, with only a few qualified consultants, prohibiting companies from using the same advisers “would be like saying no more than three operators could use AT&T for telecommunications,” Krane said.

Charles Bachtell, a founder and principal of Cresco Labs, said Khalatbari’s involvement in the Illinois industry complies with the law. Of the allegations in the lawsuit, Bachtell said, “It’s just not true.”

AP Medical Writer Carla K. Johnson can be reached on Twitter: @CarlaKJohnson