Last February, when New York’s cannabis agency opened an anti-corruption unit, it raised hopes that officials were cracking down on businesses that had been breaking the rules in the state’s highly competitive market.
However, in a sudden turnabout in December, Gov. Kathy Hochul pushed out the director of the agency, the Office of Cannabis Management, along with the official in charge of the new unit, the Trade Practices Bureau, following the collapse of its first high-profile case.
The developments threw the cannabis industry into fresh turmoil in the midst of an overhaul that Ms. Hochul had ordered to steady a rollout of legalization in the state that she called disastrous. And it prompted criticism of the governor, who is running for re-election as legalization approaches the five-year mark in New York.
Lt. Gov. Antonio Delgado, who is running against Ms. Hochul in the Democratic primary, said the latest shake-up at the Office of Cannabis Management was a symptom of a larger failure of leadership.
“New York had a once-in-a-generation opportunity to build a legal cannabis market that was fair, well regulated and centered on small businesses and communities that have been harmed by prohibition,” he said. “Instead we’ve seen confusion, instability and decision-making that leaves operators and consumers in limbo.”
Kristin Devoe, a spokeswoman for the governor, defended Ms. Hochul’s stewardship of the cannabis rollout, pointing to the mostly small, local businesses that make up the industry as well as to the rapid growth of the market, which has conducted more than $2.8 billion in sales since 2022. She added that Ms. Hochul’s budget proposal also committed millions of dollars to community grants and business development programs.
Overall, the proposal includes $110 million for the Office of Cannabis Management. But it leaves the agency’s operating budget flat at $68 million.
Mack Hueber, the president of Ayrloom, a cannabis beverage company, said the office needed a bigger budget and more employees to handle the size and complexity of the market.
“Without that, New York will continue to have a market where illegal activity persists and state tax revenues fall short of their potential,” said Mr. Hueber, who is also the president of the Empire Cannabis Manufacturers Alliance.
More than half of the state’s cannabis sales revenues were generated just last year. And the number of licensed dispensaries open in New York has more than doubled since last January, to 578 outlets.
But the cannabis agency has continued to stumble, making decisions that have stirred confusion and led to lawsuits. Officials set off a panic last summer when they told 152 dispensaries that they were located too close to schools under the agency’s newly revised method of measuring the state-mandated 500-foot buffer. The move prompted a lawsuit that forced the state to pursue a legislative fix before adopting the revised definition.
Efforts to bust unlicensed sellers slowed significantly after a court said that raids without warrants of licensed hemp shops accused of illegal sales were improper. And more than 3,500 business-license applications remained on hold because a judge barred the cannabis agency from reviewing them simultaneously with another batch of applications that had been submitted earlier.
The latest shake-up was prompted by regulators’ decision to withdraw civil charges against Omnium Health, a Long Island-based cannabis processing company accused of giving mostly out-of-state firms an illegal back door into New York’s licensed dispensaries while facilitating the sale of cannabis from unauthorized growers. Officials at the agency said it needed to review new information.
In a ruling this month, an administrative judge at the agency gave prosecutors the option to refile the charges. The Office of Cannabis Management said it was reviewing the case.
Taylor Randi Lee, a spokeswoman for the agency, said it remained “committed to a balanced enforcement framework that supports compliant operators, protects consumers and safeguards the long-term health and equity of New York’s cannabis market.”
The fallout has deepened doubts about the state’s ability to police the industry and fulfill the promises of the law legalizing recreational cannabis, which was intended to foster Black- and minority-owned businesses and support communities drained by decades of drug arrests.
Nicole Ricci, a licensed cannabis grower and the president of NY Small Farma, a collective of craft growers, said scofflaws had been emboldened. “It basically has given everyone assurance that they can get away with it,” she said. “Not because the O.C.M. is looking away, but because they just gutted the unit that was looking into it.”
Governor Hochul, who appointed new leadership to the agency in 2024, said the botched Omnium case showed how the Office of Cannabis Management stood in the way of legalization reaching its full potential.
“Realizing that potential requires strong leadership, a deep understanding of the regulatory framework and a steadfast commitment to the people of this state,” she said.
But critics said the governor was admitting failure while shifting blame.
Hirsh Jain, the founder of Ananda Strategy, a cannabis consulting firm in Los Angeles, said that Ms. Hochul, who took office after the recreational cannabis law passed in 2021, inherited a difficult rollout. However, like some other governors, she took a hands-off approach and assumed legal weed would sell itself, he said.
Regulators in New York began handing out licenses in 2022 while they were still creating the rules of the market, an approach that officials frequently likened to building a plane in flight. That led to turnover among regulators, the proliferation of illicit shops and a series of court decisions finding some of the agency’s policies legally dubious — all problems that have overshadowed the compelling case New York presents for the justice and economic benefits of legalization, Mr. Jain said.
“Now it’s incumbent on her to recognize that her oversight and her engagement are necessary to steward this experiment successfully forward,” he said of Ms. Hochul.
That will require addressing not only the unlicensed shops, but also the illegal cannabis being funneled into the regulated market and undercutting the state’s sanctioned growers, Mr. Jain said. The practice, known as inversion, has emerged as one of the industry’s biggest concerns, prompting a trade group representing medical operators to sue the state in order to compel enforcement.
Inversion is precisely one of the problems that the Trade Practices Bureau was established to combat. The unit is meant to prevent New York from becoming like Florida and other states, where cannabis markets have been consolidated by a few companies, people who were prioritized for business licenses have been pushed out and the legal market has been used to further crime.
According to the Office of Cannabis Management, the unit has received 69 complaints, primarily concerning ownership violations and the illegal sale of cannabis from unlicensed growers. Investigators have opened 13 cases and are considering opening 17 more, while the remaining 39 complaints have either been closed with no action taken or referred to other teams, the agency said.
State Senator Jeremy Cooney, a Rochester Democrat who leads the chamber’s Subcommittee on Cannabis, has introduced a bill to define inversion in the law and create penalties for violators and protections for whistle-blowers.
Mr. Cooney said he expected that lawmakers would meet a Feb. 15 deadline to come up with a fix to spare the 152 dispensaries that the agency deemed too close to schools from having to move or close. He said he also hoped to work out a solution in the budget to allow the state to quickly process the backlogged license applications.
“We have to make sure that our legal cannabis market is strong,” he said. “We don’t want to see the people who have invested a lot of time and money into opening up their legal business now shut down.”
Ashley Southall writes about cannabis legalization in New York.
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