The Funny-Money Man Behind McDonnell's Fall

Bob McDonnell
Outgoing Virginia Governor Bob McDonnell, who is currently under investigation for the acceptance of more than $160,000 in gifts and loans for himself and his family, waves to guests as he arrives for the swearing-in ceremony of incoming governor Terry McAuliffe in Richmond, Virginia, January 11, 2014. REUTERS/Mike Theiler

In a ballroom at New York City's Four Seasons hotel, a hectic swirl of politicians, contributors and hangers-on bustled about, smiling and glad-handing at another of the untold number of "meet and greet" fundraisers held each year. It was at this political event in December 2009, prosecutors contend, that then-newly elected Governor Robert McDonnell of Virginia met Jonnie Williams, the man who would destroy his career.

On Tuesday, McDonnell-a one-time rising star in the Republican party whose name had been whispered as a possible future president-was indicted on corruption charges that told a sordid tale of money and political favors involving the former governor, his wife and Williams. In the indictment, Williams is portrayed as a virtual ATM for the governor's mansion, doling out cash for designer dresses, parties, planes and other goodies, while attempting to win benefits from the McDonnells for his company, Star Scientific.

While the McDonnells maintain that the flamboyant businessman received no tangible or illegal benefits for his largesse-claiming that there was no quo delivered in exchange for any alleged quid-what was the former governor, or any politicians for that matter, doing hanging out with a man like Williams in the first place?

Williams has left a trail of bankruptcies, lawsuits, government charges and allegations of sleazy stock dealings. Star Scientific itself was deeply controversial, a financial sinkhole investors portray either as an up-and-comer or as a penny-stock company built on deceit. In other words, Williams is the kind of notorious executive sophisticated politicians should avoid, not embrace.

From the beginning of his career, Williams could sell-and sell well. To finance his education, he took a year off between his freshman and sophomore year to work as a car salesman at Purvis Ford in Fredericksburg, Va., and boasted he was the top salesman. After attending business school at Johnson Wells Institute in Providence, he headed back to Virginia to try his hand at real estate.

Then, on the advice of a friend, it was on to a master's program at the Johns Hopkins School of Advanced International Studies; he quickly dropped out, but there developed a relationship that would prove key to his future after meeting a medical resident in ophthalmology, Frank E. O'Donnell Jr. The two men became business partners in what became a string of lucrative investments in companies that developed unpleasant or even sordid reputations.

Williams bought an optician's shop and hired O'Donnell to examine patients. It was there Williams had his first known run-in with the law-he was fined for fitting contacts without a license. Soon, awash in debt, including federal loans from the Small Business Administration, the optician's shop closed.

In 1983, Williams and O'Donnell formed CME-SAT Inc., which produced training videos for medical specialists. On the promise that CME-SAT would be a non-profit, Williams persuaded Johns Hopkins and other prestigious institutions to provide doctors to give on-air lectures, allow him to use the schools' video facilities and to grant academic credit to physicians who watched the recordings. But the promise was a lie-CME-SAT was a for-profit, and Williams took it public, raising $2 million, which went toward high salaries for himself and O'Donnell. Outraged at the deception, court records show, the universities withdrew their support and threatened to sue. In 1985, the two men sold all their shares, gaining more than $1 million from the transaction, and left the company. It soon filed for bankruptcy.

From there, it was on to their next venture, a new company called Spectra Pharmaceutical Services Inc. The company sold a vitamin A ointment that Williams began to flog as a medical breakthrough for treating eye diseases and wrinkles-despite the fact that the only data supporting the claim was based on exceedingly small and flawed research conducted by someone with a financial interest in the product's success. Still, that was enough to froth up the market, and Spectra held an initial public offering in 1985, selling $3 million in shares; the stock price quickly jumped four-fold, to $8 a share.

Williams set up an office at a shady stock brokerage in Florida, where he deposited 600,000 Spectra shares. Then, according to court records and other documents from the Securities and Exchange Commission, Williams paid a Florida stock analyst named Robert Baker to write hyped research reports touting Spectra, claiming that it had close ties to Johns Hopkins, that its cream cured dry eyes and made wrinkles disappear, and that the Food and Drug Administration was on the verge of approving it. While pumping up the stock, Williams began unloading shares, pocketing more than $1 million before once again walking away, leaving behind the bankrupt Spectra.

That time, though, Williams didn't get to keep all of the proceeds. The Massachusetts Securities Division and other state regulators filed fraud charges, and he settled, paying a $100,000 fine and agreeing to repay cheated investors $300,000. The S.E.C. also got into the act, forcing a $300,000 disgorgement of illicit profits.

That didn't slow Williams and O'Donnell. In 1991, they each contributed $50,000 to a company called Lasersight Inc. in exchange for hundreds of thousands of shares. O'Donnell was named chairman. While neither man was named in subsequent government charges, during the time of their involvement in Lasersight, the company engaged in a series of sham consulting transactions and illegal stock offerings that drained hundreds of thousands of dollars from the company. That money was pocketed, according to an S.E.C. complaint, by the company's president, Jui-teng Lin.

During their tenure at Lasersight, the company issued a press release proclaiming that it had developed lasers for ophthalmic applications; that news pushed up the company's stock price. A competitor-Summit Technologies-read the release and specifications described in it with disbelief. What Lasersight was describing, Summit executives thought, defied the laws of basic physics, and they issued a press release saying so. Lasersight stock dropped.

The shenanigans at Spectra and Lasersight fit a pattern, according to a shareholder class action filed last year against Star Scientific. The two men "followed a similar script in nearly each of their business,'' the complaint says. They would take over a medical-related product or service company, proclaim it had developed a medical breakthrough without providing reliable data to prove it, pump up the stock price with those false claims, pay themselves generous salaries and options out of proceeds from stock offerings, then sell their shares before leaving behind a company that collapsed in financial ruin.

The history of Star Scientific traces back to another Williams/O'Donnell company called C.A. Blockers Inc., a developer of what they claimed was a cigarette that contained no dangerous toxins. Stock offerings. Touts. Yada, yada, yada... In 1989, the FDA ordered the cigarette off the market because the claims of its safety were bogus. Once again, Williams walked away with millions and the company went bankrupt.

But Williams and O'Donnell weren't done with C.A. Blockers. In 1990, they purchased its remaining assets and rolled them into a new business, called Star Tobacco, that also declared it was developing a safe cigarette. Williams had no scientific training, but decided he could solve the toxins problem himself, and began shoveling tobacco leaves into microwave ovens. Soon, he proclaimed that his curing method created a completely safe cigarette, and even testified in a court trial that he had "eliminated carcinogens from the curing barn." Williams hired a researcher who proclaimed that the microwave oven technique worked. The F.D.A., once again, disagreed, and refused to allow Star Tobacco's cigarettes to be labeled as safe. Independent researchers also found that Williams' claim was bogus.

Star manufactured cigarettes for other companies and tried to produce a tobacco-laced gum-the F.D.A. shot down that idea, saying that the carcinogen level of the gum was dangerous. Over time, large corporations like Brown and Williamson Tobacco stopped purchasing from Star, and in 2007, the company-then known as Star Scientific-shut down its cigarette business. Instead, Star began developing what Williams said were low carcinogenic smokeless tobacco products, but that business also failed.

That same year Star Scientific ventured into the business that would ultimately ensnare former Governor McDonnell into Williams's business dealings. In 2007, Star Scientific began developing nutraceuticals-products derived from foods or other natural ingredients that are supposed to have health benefits but-unlike pharmaceuticals-are not required to produce rigorous data to prove they work.

Even with that low standard of proof, Star Scientific couldn't rack up big sales. By 2011, the company had incurred operating losses for each of the previous eight years, and said in S.E.C. filings that it expected to keep racking up losses for years to come. Williams and his team at Star Scientific pinned their hopes on a product they developed called Anatabloc, which combined vitamins with alkaloids found in tobacco and other plants. And this time, rather than claiming a Williams company had developed something that cured one or two health problems, Star Scientific touted its use in treating an array of serious medical problems, including diabetes, Alzheimer's disease, ulcers, multiple sclerosis and more. If anything being claimed was true, Star Scientific had discovered a miracle drug.

What was missing, as always, was proof. So Williams once again helped to create a financial conflict of interest by providing royalties in the product to a research group called the Roskamp Institute, which then proclaimed that its clinical trials testing Anatabloc for the treatment of inflammation were showing positive results. Williams announced that one study showed Anatabloc relieved inflammation in 26% of the people tested; two days later, it proclaimed that the same study showed a positive result in 61% of the test subjects. Except for those conflicting numbers, Williams never released any of the test data to prove the efficacy of Anatabloc.

Williams still needed credibility, and that was what he seemed to hope Virginia Governor McDonnell could provide. From the day the two men at the end of 2009, Williams had been showering the governor and his wife Maureen with cash and gifts. In October 2010, just as Star Scientific was beginning to ramp up its commitment to Anatabloc, the two men were together on Williams's private jet. During the flight, Williams began speaking excitedly about his miracle drug, explaining how it cured myriad diseases, while adding that Star Scientific needed clinical studies to prove its benefits. Star Scientific needed the help of the state of Virginia, Williams told the governor, and McDonnell promised to put him in touch with the Virginia Secretary of Health and Human Resources.

That meeting took place the next month, and Williams sang the praises of his miracle drug. The Secretary was rightfully skeptical, because no data proved there to be any benefit, so Williams extended an invitation for an official visit to see some researchers-at the financially conflicted Roskamp Institute.

At Williams's urging, McDonnell appeared at a Star Scientific marketing event for doctors and health professionals, and gave short comments praising the company. Maureen McDonnell flew to Florida to appear at an event at the Roskamp Institute. And bit by bit, the McDonnells were pulled into the role-perhaps unknowing-of lending an air of credibility to a penny-stock hype artist.

Even while Williams was drawing the McDonnells closer, he was preparing to turn on them. In early 2013, Star Scientific was served with federal criminal subpoenas concerning potential fraud in private placements of stock beginning as early 2006. Around that time, Williams began cooperating with federal prosecutors, providing evidence about his relationship with McDonnell. The indictments against the governor and his wife were handed down last week.

The couple doesn't deny taking many gifts from Williams, which has severely damaged their reputation, regardless of how their case plays out in court.

As for Williams, there isn't much of a reputation left to sully. But even if he has to spend some time in prison, he will emerge a wealthy man; court records related to the divorce of his investing partner indicate that over 30 years of failures, frauds, bankruptcies and ruined shareholders earned Williams in excess of $100 million.