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Governor, AG draw scrutiny for Star ties

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McDonnell, left, Cuccinelli / April 03, 2013
Star Scientific, a company with a long history in Mecklenburg County, has come under fire this week for both its business practices and political connections, drawing scrutiny for Virginia’s top two Republicans, Gov. Bob McDonnell and GOP gubernatorial candidate Ken Cuccinelli.

The onetime marketer of alternative tobacco products, now a player in the dietary supplement industry, Star has been featured in multiple news reports this week that raise ethical questions about McDonnell’s and Cuccinelli’s ties to the firm. McDonnell featured prominently in a Washington Post report Monday that detailed an unreported $15,000 in-kind payment that Star chief executive Jonnie Williams made to the wedding of McDonnell’s daughter at the Governor’s Mansion. Williams paid for the food at the wedding reception.

Cuccinelli, Virginia’s attorney general, faced questioning after failing to report his stock ownership in Star exceeded $10,000, as required by state law. The Attorney General’s office is defending the state in a lawsuit brought by Star over $700,000 in disputed tax bills arising from levies on its tobacco barns in Mecklenburg County. If the company loses the case, currently being heard in Boydton, it could face tax liabilities of up to $1.7 million, it has told investors.

Star Scientific was started by Williams, who claimed to have discovered a tobacco-curing process that reduced the amount of carcinogens in cigarettes. The company contracted to purchase leaf from Mecklenburg County and Southside Virginia tobacco growers, who in exchange for a guaranteed purchase of their tobacco at above market prices agreed to cure the tobacco using Williams’ process and his specially-designed curing barns.

At the end of 2012, the company announced it was getting out of the tobacco business, but would continue to look for “licensing opportunities related to our dissolvable tobacco products and technology, including that relating to our Ariva BDL™ and Stonewall BDL™ modified risk tobacco products and the patented StarCured® tobacco curing process used in connection with the manufacturing of our low TSNA dissolvable tobacco products.”

The company’s problems — it has been reported to lose millions of dollars annually — expanded with a field audit of its Mecklenburg County manufacturing set-up by the Virginia Department of Taxation, covering the period from January 1, 1999 through March 31, 2001. After reviewing Star’s activities and tax filings, the department concluded that company owed the state $707,590 in retail sales and use taxes. Star immediately protested the decision, but on October 7, 2004, the tax department announced it was upholding its original assessment.

Star then asked the state to reconsider. It did, but took six years before again deciding to uphold the original assessment. This decision is dated August 10, 2010; the request for reconsideration was filed November 5, 2004.

With interest, Star’s tax bill had grown to nearly $1.3 million. However, the company paid a small portion of the assessment, while continuing to dispute that the monies were owed.

In July 2011, Star Scientific filed suit against the state in Mecklenburg County Circuit Court. The lawsuit, in which Star denied owning the taxes to the state, was filed in Boydton because the taxes were being levied on the portable tobacco curing barns Star offered to farmers in the county.

A deputy attorney general filed an answer to the complaint in August 2011. Since that date, the suit has languished in Boydton. The Attorney General’s office has not asked the court to order Star Scientific to pay the assessment, as it is allowed to do by law. Had the Attorney General’s office made the request, Star Scientific would have had to pay the assessment, post a bond in the amount of the assessment, or provide a letter of credit establishing the ability to pay the assessment, before being allowed to proceed with the litigation.

As of December 31, 2011, the company reported a net loss of $38 million and net sales of only $1.2 million, raising questions about the ability of Star Scientific to meet its tax burdens.

Cuccinelli has come in for criticism for his office’s handling of the Star Scientific case, with political opponents demanding that the AG’s office withdraw and hire a private attorney to handle the litigation. Cuccinelli’s 2012 Statement of Economic Interest lists Star Scientific stock as his only investment. He holds at least $10,000 but no more than $50,000 in Star stock, according to the filing. He admitted to owning the stock in 2010, but failed to disclose that fact until 2012.

A spokesperson for the Attorney General called the non-disclosure an oversight due to the fact that the value of the stock dipped below $10,000 at the time of his 2010 economic interest filing. Cuccinelli did report nearly $800 in gifts from Star Scientific’s CEO Williams for lodging at Williams’ Richmond home. And in 2011, Cuccinelli reported another $13,000 in gifts from Williams, without mentioning his holdings in Star Scientific.

So far, Cuccinelli has refused to hire outside counsel to handle the case, but his office says the handling of the matter is under review.

Earlier in the month, the law firm of Robbins Arroyo LLP filed a class action complaint against Star Scientific in federal court in Virginia. The suit alleges that Star Scientific officers and directors violated the Securities Exchange Act by issuing false and misleading statements to investors regarding the company’s business, operational, and compliance policies. The suit claims that certain officers and directors did not timely disclose that the company was under investigation by the SEC for potential securities fraud.

The suit also alleges that Star Scientific, through one of its pharmaceutical subsidiaries, led investors to believe that researchers at Johns Hopkins University had an active role in the clinical testing of its retail nutritional supplement, anatabine, marketed under the name of Anatabloc. The characterization has been disputed by officials at Johns Hopkins School of Medicine.

The Washington Post also published a report this week on the personal and political ties between Governor McDonnell and Williams. Between 2009 and 2012, Star Scientific and Williams himself contributed a combined $130,000 to Virginia Republicans, among them McDonnell and a PAC that supports McDonnell. Many of the McDonnell donations are for use of the Star Scientific jet during the 2009 gubernatorial campaign.

In 2011, the Post reported that Williams paid a $15,000 catering bill for McDonnell’s daughter’s wedding at the governor’s mansion. The Governor claimed it was a gift to his daughter, not him, and thus was not subject to the state’s disclosure laws.

In the days before the wedding, First Lady Maureen McDonnell flew to Florida to promote anatabine, the key ingredient in Anatabloc, one of Star Scientific’s new dietary supplements. This was followed by a post-wedding Anatabloc launch party at the governor’s mansion. A photo of the governor holding a packet of the Antabloc supplement appears on the company’s Facebook page.

McDonnell claims not to have authorized use of that photo. A spokesperson said the Governor and First Lady’s promotion of Star Scientific’s product is “simply what any governor would do to help his state’s businesses thrive.”

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