DEA: Gang that sold millions worth of Colorado-grown pot outside state not unusual
Michael Stonehouse planned to build a close-knit community whose members would hold prayer meetings once a week — presumably when they weren’t growing and packaging hundreds of pounds of pot each month.
But the kumbaya dream ended in the arrest of Stonehouse, 53, and 15 others on March 16.
The Stonehouse operation was selling millions of dollars worth of pot across state lines, reaping profits higher than they could hope to earn doing legitimate business in Colorado, investigators say.
The operation wasn’t that unusual in Colorado, where law breakers are hiding in plain sight as they grow high-quality pot and ship it to states where weed remains illegal.
In 2015, the Colorado State Patrol made 394 seizures of Colorado pot that was destined for 36 different states, according to a 2016 report by the Rocky Mountain High Intensity Drug Trafficking Area, which tracks the impact of marijuana legalization in Colorado.
“They get appropriate paperwork, but they are going to grow as much as they can and all of the excess is going out of state,” Denver Drug Enforcement Administration spokesman James Gothe said.
Colorado’s legal marijuana businesses follow a dense thicket of regulations designed to shut out black-market sales. Growing facilities, dispensaries and retail shops all require separate licenses and tight record keeping.
Marijuana plants must be tracked digitally from seed to sale, and tags using radio frequency identification technology must be attached to all viable plants over 8 inches tall, said Robert Goulding, spokesman for the Colorado Department of Revenue’s Marijuana Enforcement Division. “Any time it moves, is sold, destroyed or weighed, that information is updated in an inventory trafficking system.”
Documents related to the Stonehouse arrests allege that the group had some of the necessary documentation, but were brazenly violating the law.
The ring was growing, packaging, and distributing, marijuana from locations in Denver, Arapahoe, Douglas, Elbert and El Paso counties.
One 39,000-square-foot warehouse in Denver’s Stapleton neighborhood was licensed to grow plants, according to the documents. Half of 1,000 plants growing there were RFID tagged, but there was no record that any of the weed harvested at the site was legally sold or distributed.
“The warehouse on East 37th Street in Denver had been inspected by the state in an effort to appear to be in compliance with state laws, but we’re not aware of any other locations that had been inspected,” said Paul Roach, supervisor of the DEA’s financial investigations team in Denver.
Eight of those indicted are listed in Colorado records as having active or expired licenses to work in the legal pot business. But Stonehouse, the group’s leader, wasn’t licensed to own any marijuana business in the state, Goulding said.
In reality, none of the plants Stonehouse grew were legal, Roach said.
“The Stonehouse organization had many licenses,” he said, “but that was likely just to present the appearance of compliance with Colorado law.”
The investigation began in August, when Elbert County deputies and building inspectors asked 18th Judicial District Attorney’s Office investigators attached to a DEA drug task force to take a look at a marijuana grow in Elizabeth.
On Aug. 25, investigators went to the equine property on County Road 13, called the “farm” by the Stonehouse ring, and found eight dome-shaped tents covered with heavy plastic and packed with marijuana plants.
Building inspectors had previously told Stonehouse that the first of the makeshift greenhouses he had erected at the property was in violation of building codes. By Aug. 25, he had built seven more hoop houses, each one 100-yards long, and 20-yards wide.
“Each greenhouse had tomato plants situated just inside and across the opening of the structure as if to disguise the grow as a tomato cultivation site,” according to the documents.
Stonehouse provided copies of medical marijuana patient registrations and physician recommendations for some of the pot.
On Sept. 26, an Elbert County SWAT team, and DEA task force officers raided the property and seized marijuana valued at $5 million.
Two days later, an agent met with a confidential source who had participated in arranging sales and transport of Stonehouse’s marijuana across state lines.
The seizure kicked off a months-long investigation during which local law enforcement — from Colorado Springs to Denver — worked with the DEA and federal prosecutors on the case.
The Stonehouse operation was homegrown, but there are similar operations scattered throughout the state, some headed by people who came to Colorado from other states where they were illegally growing and selling weed, Roach said.
“They just pick up shop and set up here because it’s legal. They don’t do the growing where they are from, but they keep the distribution network the same,” Roach said.
The most common destinations identified by the Rocky Mountain High Intensity Drug Trafficking Area report were Missouri, Illinois, Texas, Iowa and Florida.
Mexican pot, once in high demand, has taken a backseat to that grown in Colorado, Roach said. The state’s indoor grows offer superior conditions for cultivation, and “produce a higher quality.”
The Stonehouse group’s wheeling and dealing included a money laundering operation that ran illegal cash through shell businesses and a legitimate food truck, Dos Locos Mexican Food, Roach said.
Stonehouse also told the confidential source that he kept Kuwaiti money that he used to buy property and equipment for the operation, according to the documents.
Piles of money changed hands. Roach said that in some markets outside the state, Stonehouse was able to get $3,500 for a pound of weed that would bring between $1,500 and $2,000 on Colorado’s legal market.
He neither reported nor paid taxes associated with cultivating, or distributing, pot.
Stonehouse told the confidential source:
- That Vincent Castillo, 34, one of the mules who drove weed and cash to and from drops throughout the country, was making $40,000 a month.
- Stonehouse could move up to 400 pounds per-week of “the right stuff.”
- In a statement suggesting that he had an eye on markets where he didn’t deal, he said that he had heard buyers paid $4,500 per pound in New York City and Atlanta.
- Between January 2014, and December, Stonehouse deposited more than $1 million in cash into accounts he controlled in the name of a variety of shell businesses.
Stonehouse told the source that he learned how to grow marijuana by watching YouTube videos and started the business with a $20,000 investment. The monthly cost of running an operation, which included making and selling hash oil, was $220,000.
Hash oil, a form of concentrated THC, is extracted from marijuana trimmings using highly flammable, liquid butane, and its manufacture has resulted in numerous explosions.
The ring made the hash oil on the second floor of a riding barn on the Elizabeth property. Stonehouse was aware of the danger, telling the confidential source that butane could explode “like a big bomb.”
The source responded that the man making hash oil in the barn, “shouldn’t light up a bowl right by it.”
Stonehouse replied that he would tell the man wait until he was done with work to get high.
Calls that law enforcement intercepted between Stonehouse and others suggest that he either enjoyed talking tough or wouldn’t flinch at violence.
In one call, he “said he is going to employ a sniper on the ranch, and if (law enforcement) showed up like they did last time, that he would have people stand on the side of the fence with M-16s.”
In another, he said “he wanted to make sure he wasn’t the only one unloading a clip while everybody else ran.”
In that same phone call, he said that after he and other members of the ring discussed the possibility of gun play, “they had a nice prayer session.”
Investigators said Rudy Saenz, 62, Stonehouse’s partner, told the informant that “he and Stonehouse need to operate illegally to afford the expenses with the hope of operating a legal marijuana company,” in the future.
But Roach said a desire to build a legal business was little more than a pipe dream. “There was not any indication they were going to go straight.”
Stonehouse is scheduled to be arraigned at 1:30 p.m. on Fridayat the Arapahoe County Justice Center.
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