Has Fraud Met Public Corruption in Virginia?


Michael Pocalyko, CFE, MPA, MBA, PI
CEO of Monticello Capital and novelist, bestselling author of The Navigator

Political culture in the Commonwealth of Virginia is a rough environment; one I experienced first-hand as a losing Republican candidate for the House of Delegates in 1999. But "Mr. Jefferson's Capitol," the close-quartered home of Virginia's governor and general assembly, has never been known for fraud and public corruption, even in the petit varieties common in some statehouses. For that reason, the indictment January 21 of former Governor Bob McDonnell and his wife Maureen hit Richmond hard, even though charges had been expected for weeks. (Disclosure: McDonnell backed me in that 1999 run, when he was serving his fourth of seven terms in the Virginia House.)

McDonnell, who left office January 11 and was widely considered a gubernatorial success, is charged in the federal indictment with "a scheme . . . to defraud the citizens of Virginia of their right to the honest services of a Governor of Virginia through bribery" (18 U.S.C. § 1349). Elected to the governor's office in 2009 after serving as Virginia's attorney general, he faces 14 criminal counts including conspiracy and false statements intended to influence banks. Maureen Gardner McDonnell has been charged with the same counts and an additional charge of obstruction.

Those of us who practice in the securities industry and in the anti-fraud profession know that this kind of case is a particularly tough one to make. McDonnell's criminal prosecution is no exception. The case began, as often happens, with a whistleblower, a celebrity chef named Todd Schneider employed in the governor's mansion before being fired for his own impropriety. Schneider eventually pled no contest to two misdemeanor counts of "embezzling food." The chef's termination, disgruntlement and ensuing allegations about the first family triggered a federal investigation and a series of articles throughout 2013 by Rosalind Helderman in the Washington Post and Jim Nolan in the Richmond Times-Dispatch. The investigations delved into the relationship between the governor and Jonnie Williams, CEO of Star Scientific, Inc., a Glen Allen, Virginia-based company marketing "tobacco-based pharmaceutical products and non-nicotine dietary supplements."

The heart of the government's case is that McDonnell and his wife received bribes from Williams—designer clothes by Oscar de la Renta, Louis Vuitton, Rebecca Minkoff and Peter Som for Maureen McDonnell; a Rolex watch, golf outings, golf equipment, Ralph Lauren and Peter Millar designer clothing, substantial cash by wire transfers for Bob McDonnell; and boxes of Anatabloc®, a yet-unproven nutraceutical produced by Williams' company, which both of them say that they personally used. In return, the grand jury alleges, the McDonnells promoted and marketed Anatabloc®, including to potential medical doctor-investors at events in the governor's mansion, and then further attempted to influence Virginia university researchers to perform studies on Anatabloc's® effectiveness. As the former chairman of the board of a biotechnology company I understand this imperative clearly: If those studies were paid for directly by Star Scientific, their results would have been suspect and appropriately dismissed by the scientific community, institutional investors and the product's FDA reviewers. On December 20, the FDA formally warned Williams and Star Scientific for overstating the health claims of Anatabloc® and misrepresenting anatabine, its active tobacco plant alkyloid, as a dietary supplement.

The quid quo pro—services or influence that McDonnell either delivered or attempted to deliver in exchange for what he and his wife received from Williams—is critical to the government's case. McDonnell's preferred pre-trial narrative has emerged, and it is an explanation that we CFEs frequently hear in fraud and bribery cases, particularly where allegations of public corruption burst open in the national media. On January 25, McDonnell's Restoration Fund ("Help Defend Governor McDonnell and Preserve His Legacy") led its email appeal for legal defense donations with the boldface headline "Star Scientific/Williams Received NOTHING of Value."

The burden in the McDonnell case is for the federal government to prove beyond a reasonable doubt that his five "favorable official actions" detailed in the grand jury indictment were of value to Williams and Star Scientific. The case may hinge on whether a federal jury—which the McDonnells have demanded—will consider the governor's actions promoting Anatabloc® to have been of value, any value, to this deeply struggling company and its lifestyle-flamboyant CEO. There is no dispute, even from the defendants, that the McDonnells received cash and designer goods from Williams, who is cooperating with federal prosecutors and is represented by Jerry Kilgore, the former Republican attorney general of Virginia who preceded Bob McDonnell in that office.

Apart from the bribery allegations, the strongest prima facie case that the government has against the McDonnells seems to be for conspiracy (hiding the cash payments), wire fraud (email communications advancing the alleged conspiracy) and false statements on federal bank loan documents (deliberately omitting cash loans from Williams to reduce McDonnell's liabilities on his statement of net worth). If a plea is forthcoming, it will most likely be on one of these charges.

McDonnell and his wife, although mounting a combined defense, are represented by separate attorneys from different law firms. Both are white-collar defense bar superstars. Governor McDonnell's counsel is John Brownlee, a past U.S. Attorney in the George W. Bush administration who was an unsuccessful Republican primary candidate for Virginia attorney general in 2009 (Jerry Kilgore, Jonnie Williams' counsel, was his campaign chair). Maureen McDonnell is represented by William Burck, who was criminal defense counsel for Kim Dotcom and Megaupload Limited in 2012.

Presiding in the case is James Randolph Spencer, a Reagan appointee to the bench and Virginia's first African-American federal judge. He is married to Richmond Circuit Court Judge Margaret P. Spencer, who presided at the September 2013 trial settlement of chef-whistleblower Todd Schneider. The McDonnells' trial date is set for July 28, 2014.

In Virginia, Bob McDonnell's fall from political grace is broadly viewed as a personal tragedy of Shakespearean proportions. This popular, effective governor, a reliable GOP partisan personally liked and respected by the Democratic leadership in the general assembly, has been irredeemably tarnished with the specter of fraud and corruption no matter the outcome of his criminal case. We've all seen these motivations before in occupational fraud, and it's frankly deeply unsettling to find them alleged at this high level by a federal grand jury.

However, all of the elements of Donald Cressy's fraud triangle are right there in the indictment and in Governor McDonnell's January 21 public response. Perceived unshareable financial need: "We are broke, have an unconscionable amount in credit card debt already, and this Inaugural is killing us!!" Maureen McDonnell wrote in a December 2009 email. "I need answers and I need help, and I need to get this done." What she "needed" was for Williams to buy her a designer dress to wear at Bob McDonnell's Inaugural ball the following month. Perceived opportunity: "Because of concerns about disclosures . . . Williams and McDonnell agreed that Williams would simply transfer $50,000 . . . as a loan to the defendants. The loan was not documented." Rationalization: "I deeply regret accepting legal gifts and loans from Mr. Williams, all of which have been repaid with interest, and I have apologized for my poor judgment for which I take full responsibility. However, I repeat emphatically that I did nothing illegal for Mr. Williams in exchange for what I believed was his personal generosity and friendship. I never promised—and Mr. Williams and his company never received—any government benefit of any kind from me or my Administration."

McDonnell's statement is precisely the core of his defense, using exquisitely crafted language. But Williams and Star Scientific receiving "any government benefit of any kind" is not what the grand jury alleged. McDonnell "providing favorable official action on behalf of Williams and Star Scientific as opportunities arose," if proven, is what supports the principal charge of bribery. Whether a federal criminal jury can parse the difference between the former governor's words of denial and the actual words in the indictment could determine the outcome of this case—one fraud examiners will be considering for years to come.