Prosecutors Claim 420 Clinics Worked with Organized Crime

Jennifer Wadsworth, San Jose Inside

From the lobby of the THC Doctor, a clinic tucked inside a three-story brownstone on South First Street in downtown San Jose, Diana Kara watches an unmarked black van pull up outside. “They’re back,” she mutters under her breath.

Kara summons Dr. Bennie Brown from the back office. Medical Board of California investigators Ralph Hughes and Victor Sandoval had dropped by a few hours earlier to interrogate her and the doctor who runs the place. Did she get lunch breaks? Who pays her? Who signs her checks?

“I couldn’t get up even for water,” says Kara, thinking back on the afternoon of July 23, 2013, which led to her arrest more than a year later.

In a separate room, investigators grilled the doctor about the clinic’s business model. Brown explained that he posted a query on Craigslist looking “essentially for a job.” A young man named Michael Malenkov wrote back, offering him a deal. Malenkov would manage day-to-day office operations and marketing, freeing up the doctor to issue medical marijuana recommendations. Brown, in his mid-60s and ready for a second act as a pot doc after 36 years as an obstetrician-gynecologist, took him up on the offer.

According to Hughes’ investigation report, Brown’s total salary: $24,000 a month.

Just after 3pm on the sweltering summer day in 2013, authorities reappear for another round of questioning. This time, they hold up a photo of their lead suspect: Mykhail Malenkov—Ukrainian national, 130 pounds, 6 feet tall, date of birth Oct. 17, 1987.

“Do you know him?” Sandoval asks.

Kara acknowledges him as “the guy who brings in advertising.”

In a separate room, according to their own report, they ask Brown the same question.

“Yes, that is Michael,” the doctor replies. “Should I be concerned?”

Malenkov, a 27-year-old Ukrainian immigrant with lofty ambitions and a gentle manner, faces a litany of felony charges. Santa Clara County prosecutors contend he ran a chain of medical marijuana clinics generating millions of dollars, which he then laundered and sent overseas. Hughes believes that Malenkov reports to higher-ups abroad. The investigator says the clinics with which Malenkov worked are part of an international black market enterprise.

The resulting criminal complaint levels 13 felony counts—including practicing medicine without a license, money laundering, conspiracy and aiding and abetting—against six suspects.

“It’s organized crime,” Hughes tells San Jose Inside. “Michael used these doctors as a front.”

Most doctors refuse to prescribe medical marijuana, because it’s illegal under federal law, which leaves the task to specialized clinics. As they have proliferated up and down the state, the medical board has struggled to keep up with enforcement. But medical cannabis insiders say Malenkov’s case marks a notable change of course for the medical board.

Past state investigations have focused on how doctors issue cannabis recommendations, taking down “prescription mills” and clinics that fail to keep records or otherwise fall short of complying with state regulations. The Malenkov case examines the corporate structure—that is who actually owns the business. By law, only a licensed doctor can run a clinic.

“They want to make an example of him, which is never something you want to see as a defense attorney,” says Jessica McElfresh, a lawyer specializing in marijuana law who’s observing the case. “[Michael has] a problem because this is above average in terms of the amount of time and energy they’ve put into this.”

In the medical board’s narrative, Malenkov, the enterprise’s ringleader, managed to pull in up to $4 million a year. Investigators concluded that, based on shipping receipts and packages found at Malenkov’s Fairfield rental home, heaps of cash were sent back to Ukraine.

“He was sending huge sums of cash overseas,” Hughes insists. “This was an all-cash business; someone else was controlling the money.”

Malenkov tells quite another story.

“The only reason Mr. Malenkov is in court,” his attorney Allison Margolin says, “is because a competitor wanted to put him out of business.”

After finishing high school a few years early in Dnepropetrovsk, Ukraine’s fourth-largest metropolis, Malenkov graduated from National University with a degree in physics. He was 19 and his options were limited.

“In Eastern Europe, there are not that many opportunities for young people who want to become somebody, or to try something different,” Malenkov says. “Unless you have a connection or you have money, you don’t have much choice.”

While he enjoyed engineering, Malenkov felt more inclined to become an entrepreneur. He arrived in San Diego and took two jobs.

“I worked hard,” Malenkov says. “I did it right. When I first came here, I didn’t speak the language. I didn’t speak a word. I learned it by working.”

In 2012, Malenkov and two acquaintances, Sergey Kostikov and Olexandr Filippov, came up with the idea for a marketing/management company. They would find licensed physicians interested in venturing into the medical marijuana business and help them run their clinic. A year later, they registered Legal Aid as a limited liability corporation. In early spring 2013, they opened a storefront in San Jose. Malenkov says the medical cannabis industry appealed to him as a robust emerging market. But he knew it was a legal gray area; there would need to be extra precautions. (Full disclosure: San Jose Inside's parent company accepts medical marijuana industry ads, and Malenkov in the past advertised ventures in Metro.)

“We made sure this was 100 percent legitimate,” says Malenkov. “You work hard, you compete honestly [and] you work for something better. That’s how it’s done in America.”

For the first few months, Malenkov slept in the basement of the South First Street office. He spent his time passing out colorful postcards to promote the new clinic, trying to rustle up a clientele.

“We wanted to do it well,” he says. “We wanted to do it right.”

Last month, CBS Channel 5 ran a breathless report of Malenkov’s case, closing it with insinuating remarks about how the clinics were an all-cash business without bothering to explain how the federal marijuana prohibition prevents any cannabis business from using banks. By the time the newscast reached his family in Ukraine, the translated version had painted him as “a drug lord.”

“My mom was already upset at me for leaving like I did,” says Malenkov from his Los Angeles apartment, where he’s under house arrest while his case plays out in court. “Now, she doesn’t even know what to think. This case is just blowing up and hurting my life in every possible direction.”

When Malenkov walked into the holding cell of Santa Clara County’s Main Jail after self-surrendering last December, he says, corrections officers and inmates were shocked by his bail amount. At $400,000, it was 50 times the typical bail for a charge of violating the California Business and Professions Code. Margolin said that’s because Hughes sensationalized the narrative against Malenkov, casting him as a mobster when he was nothing more than a marketing consultant who does contract work for clients in a range of industries.

Malenkov’s case, which comes up for a pretrial hearing later this month, may portend a shift in oversight. While medical marijuana advocates lobby for state legislation that would bring sensible regulations for the burgeoning multibillion-dollar industry, the medical board may start enforcing what rules are already in place. Even if that takes some creative prosecution, like accusing someone who never saw patients of practicing medicine without a license.

Don Duncan, California’s director of Americans for Safe Access, says the case should serve as a wake up call for other pot doctors, and encourage them to run their business in line with longstanding regulations that apply to all medical clinics in California.

“California is so far behind the curve on regulating medical cannabis,” Duncan says. “Lawmakers don’t have the political will to clean it up … and meanwhile, regulators have lagged.”

McElfresh agrees that this apparent doubling-down on enforcement could put the pressure on other clinics to come up to code.

“I would say this is a case we should all watch, if only to provide clarity in the future for physicians,” she says.