Star’s Williams Microwaved Tobacco Before McDonnell Probe

(Corrects governor’s age in 14th paragraph.)

Businessman Jonnie Williams cooked tobacco in microwaves from Wal-Mart, packaged it in candy-like lozenges and tried to turn Virginia’s oldest cash crop into an elixir for old age.

Williams’s company, Star Scientific Inc. (STSI), has lost money since 2002. Now, the 58-year-old chief executive officer is at the center of a federal investigation into whether he sought another path to success: thousands of dollars in gifts to Virginia Governor Robert McDonnell, whose wife, Maureen, has helped promote a dietary supplement that’s key to Star’s future.

McDonnell’s relationship with the businessman is tarnishing the reputation of the Republican governor in the final year of his term, who is often named as a potential Republican presidential candidate. It may also hurt Kenneth Cuccinelli, the Republican attorney general seeking to replace McDonnell in November, because of his own ties to Williams.

“He’s got this great personality,” said Victor Kashner, a Sarasota, Florida-based banker who underwrote stocks in Williams-backed companies. “It’s not surprising that he’s got all kinds of friends, including some in high places. You didn’t have to pay a dime for anything if he was around.”

Photographer: Bonnie Jo Mount/The Washington Post via Getty Images

Governor Robert McDonnell, a Republican from Virginia, said his administration hasn't conferred any favors on Star Scientific Inc. Close

Governor Robert McDonnell, a Republican from Virginia, said his administration hasn't... Read More

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Photographer: Bonnie Jo Mount/The Washington Post via Getty Images

Governor Robert McDonnell, a Republican from Virginia, said his administration hasn't conferred any favors on Star Scientific Inc.

Gifts are a focus of questions by the Federal Bureau of Investigation, which is asking people close to the governor whether his administration helped the company, according to a law-enforcement official familiar with the matter who asked for anonymity because of a continuing probe.

‘Healthy Metabolism’

It’s not clear how Williams befriended the McDonnells. For years, Williams has found ways to profit from struggling businesses. He helped start medical companies during the 1980s that foundered after selling stock to investors, and in 1993 settled Securities and Exchange Commission allegations that he sought to inflate the value of a pharmaceutical company that later collapsed.

Williams founded Star’s predecessor company 23 years ago. It shifted from tobacco to unregulated dietary supplements designed to promote a “healthy metabolism” and “support good nutrition,” based according to the company’s website. Its main product, called Anatabloc, is described by the company as helping the body maintain “lower levels of inflammation,” and accounts for nearly all of its $6 million in sales.

Star, based in Glen Allen, Virginia, is being investigated by the U.S. Justice Department for stock sales since 2006, according to a company filing in March with the SEC.

Selling Cars

Williams, who began his career as a car salesman, later amassed enough wealth to buy a Bombardier jet and pay $2.3 million in 1995 for a Virginia estate with its own baseball diamond. He also owns two condominiums in Bradenton, Florida, according to property records. He’s described by people who know him as charming, generous and skilled at promotion.

“He was a very slick salesman,” said David Muller, the founder of Summit Technology, a company that competed with one of Williams’s ventures in the 1990s. “He was the guy who could sell snowballs in Alaska.”

Star gave $108,500 worth of airplane trips to McDonnell’s campaign committees in 2009 and 2010, according to the Virginia Public Access Project, a Richmond group that compiles data on donations. Williams or his company also paid for a McDonnell trip to Massachusetts, a vacation, and $15,000 worth of catering for the 2011 wedding of the governor’s daughter, Caitlin. Williams also gave McDonnell a Rolex watch, according to the law-enforcement official.

Thanksgiving Dinner

In April, Cuccinelli, the Republican gubernatorial nominee, disclosed receiving gifts, including a $1,500 Thanksgiving dinner and trip and use of a summer house. Cuccinelli reported last year that he owned more than $10,000 in Star stock after “inadvertently” leaving it off disclosure reports, said his spokesman, Brian Gottstein. He sold the stock in April, Gottstein said.

Gifts to officials are legal under Virginia law, though there can’t be a quid pro quo.

No one has been charged, and McDonnell, 59, has said his administration didn’t confer favors on Williams’s company. His spokesman, Tucker Martin, declined to comment on the status of the investigation.

Williams also declined interview requests made through his company and his lawyer, Jerry Kilgore, a former Virginia attorney general. Talhia Tuck, a spokeswoman for Star, said the company didn’t seek or receive favors.

When Maureen McDonnell organized a lunch at the mansion in 2011 for Williams and Star executives to promote Anatabloc, the governor’s aides raised questions about whether the governor should participate, according to internal e-mail released by his office. The event went forward.

Gift Bag

Maureen McDonnell also spoke at a Florida seminar about the product, and arranged for it to be included in a gift bag distributed at a meeting of the National Governors Association. In August 2011, she also arranged for Williams to meet with a top state health official to pitch the benefits of his products, according to the Washington Post.

Tom Davis, a former Republican Congressman from Virginia who has known McDonnell for about 20 years, said he’s never known the governor to push ethical limits.

“I have observed him in some tight situations -- and I’ve never seen him come close to the line,” Davis said. “So you wonder how close he was to this stuff.”

Williams, barrel chested with dark hair, grew up in the rural area around Fredericksburg, Virginia, and graduated from a two-year business program at Johnson & Wales University in Providence, Rhode Island.

Eye Business

He began his career selling cars at a Lincoln, Mercury and Ford dealership. He then invested in an optometry business in Fredericksburg, which he abandoned in 1980.

In the early 1980s, Williams pursued ventures with Frank O’Donnell, a Johns Hopkins University-trained eye doctor and entrepreneur. At least three companies the two helped start went out of business after selling stock to investors, while another, Eye Technology Inc., languished until a 1998 merger with Star.

Samuel Sears, a Boston lawyer who worked with Williams, said the businessman had little role managing the companies once they went public.

“They didn’t fail because of him,” Sears said.

Sears said Williams is honest.

“Does he get enthusiastic about things? Yes,” he said. “In my experience, he’s not one of those people who are capable of lying.”

SEC Allegations

Yet Williams ran afoul of the SEC, along with Kashner, the Florida banker. In 1988, Williams paid an analyst at a newsletter Kashner owned to write a research report sent to thousands of investors to promote a drug from one of his companies, Spectra Pharmaceutical Services Inc., according to the SEC. The report made exaggerated claims about its prospects, according to the agency.

Williams in 1988 sold about half his stake in the company, making illicit gains of $178,000, according to the SEC.

Williams paid $295,000 to settle the case, without admitting or denying wrongdoing, according to the SEC. Kashner also was fined.

Spectra went bankrupt in 1990.

LaserSight Inc., another Williams company, sought to create better tools for eye surgery. Jui-Teng Lin, the company’s initial CEO until 1994, settled with the SEC over allegations of orchestrating sham transactions to divert company funds to himself and his wife. The company later entered bankruptcy.

Making Cigars

Williams’s most recent company, Star, emerged from the failure of C.A. Blockers Inc., another company that Williams and O’Donnell invested in that was trying to develop safer cigarettes. It went out of business in 1990 and sold its manufacturing operations to Williams and O’Donnell to satisfy a debt, according to Arizona court records stemming from O’Donnell’s divorce.

Until 1994, Star made cigars and cigarettes for other companies. Williams tried to develop tobacco-laced gum as a substitute for smoking. He was told by the Food and Drug Administration that it would still be unsafe because of a carcinogen that forms during curing, he said in a hearing stemming from a 2001 patent-infringement lawsuit he brought against R.J. Reynolds Tobacco Co. in U.S. District Court in Greenbelt, Maryland.

Williams consulted a University of Kentucky professor, who told told him that carcinogens form after the yellowing of the leaf, according to 2009 testimony from Williams in the case. So he looked for ways to stop curing before that happens. He experimented cooking leaves in microwaves and in Maytag driers and then patented the curing process, according to Williams’s testimony.

‘Health Problems’

“It’s causing all these health problems,” he testified. “I decided I could make a difference.”

In an effort to sell his cured tobacco, Williams called Chris Coggins, a former vice president at Lorillard Inc. (LO) in Greensboro, North Carolina. Coggins said the calls came day and night for months and didn’t result in a sale.

“He had a process that was advertised beyond belief as the magic bullet that would cure everything,” he said. “He never came up with any data.”

Still, the company had initial success, with sales reaching $223 million in 2000, a year after it signed an agreement to sell tobacco to Brown & Williamson. The contract was canceled in 2003 and Star has lost money every year since, according to Star’s SEC filings.

In 2007, Star shuttered its cigarette business. The patent lawsuit ended when R.J. Reynolds agreed to pay Star $5 million.

Making Cosmetics

Since then, Star focused on developing nutritional supplements and cosmetics. In 2012, Star recorded a net loss of $22.9 million, and it said in its annual report that it may run out of money in the first three months of 2014.

Williams, who earned $9 million in 2011, including stock options, agreed to cut his usual $1 million annual salary to $1 a month until the company earns a profit. Its shares slumped to $1.39 in New York trading at the close on June 28, down 70 percent from a year earlier.

Star is fighting shareholder lawsuits in U.S. District Court in Alexandria, Virginia, alleging that the company delayed its disclosure of the Justice Department investigation, misrepresented the role of Johns Hopkins University in research and oversaw improper transactions involving Williams.

Marc Oken, a former Bank of America Corp. chief financial officer who served on Star’s board from 2005 until 2009, said Star is struggling like other research and development companies. The company’s ability to raise money shows Williams’s success.

Star “raised a lot of additional money from current investors who believe in the company and believe in Jonnie,” he said.

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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