Carolina Journal News Reports
RALEIGH — State officials botched the recruitment of a biotechnology company because of a power struggle between the Department of Commerce and an economic development agency in northeast North Carolina, officials of the company say.
Documents also show that rather than helping the company, CropTech Corporation, in their negotiations, North Carolina’s Northeast Partnership continued a practice of seeking equity in the companies it recruits instead of providing services it is supposed to offer for free.
In the process of trying to entice CropTech, state agencies and local agencies in northeast North Carolina actually contributed to the insolvency and demise of the company, a former company executive said (see a related story for much more on CropTech allegations about the regional partnership and Basnight's role.)
Documents obtained by Carolina Journal and interviews with many officials involved in negotiations between CropTech and the state show that an economic incentive deal hinged on CropTech receiving $3 million from the North Carolina Tobacco Trust Fund. The deal fell apart because government officials perpetually postponed closing dates on agreements and imposed numerous other delays, forcing CropTech to expend its limited capital, company officials said.
North Carolina’s Northeast Partnership, chief negotiator with CropTech and led by Executive Director Rick Watson, proposed that the company give ownership equity to the partnership in exchange for helping CropTech get financial incentives. The partnership would put up little, if any, of its own money in exchange for a significant ownership stake. The company rejected the proposal. The state’s seven regional economic development agencies were created to provide free assistance to businesses looking to relocate to North Carolina.
The Northeast Partnership has attempted to work similar deals in the past. In March 2003 CJ reported that Watson and others sought a personal stake in an ethanol plant that a Raleigh businessman wanted to build in Martin County. And in a series of articles in The Daily Advance of Elizabeth City last May, officials of DataCraft Solutions alleged that partnership representatives tried to get a 15 percent stake in their company in exchange for services from their side business.
The DataCraft executives claimed they were told that Watson owned 50 percent of the side business and would "close deals" for DataCraft — which would have been a violation of Watson’s contract with the partnership.
Senate President Pro Tem Marc Basnight, D-Dare, appears to wield strong influence over the Northeast Partnership, sometimes determining whether and how businesses get state incentives. Evidence from the CropTech case bears out this influence. Officials representing Basnight and the Northeast Partnership did not respond to phone messages and questions submitted by electronic mail.
In mid-2001 Blacksburg, Va.-based CropTech looked to North Carolina and South Carolina hoping to find incentives that would enable it to build research and production facilities, and to operate for a few years. CropTech specialized in the "development and commercialization of the use of genetically engineered plants to produce high-value proteins and biochemi-cals." CropTech officials wanted to raise mass quantities of "transgenic" tobacco, which would be genetically altered to produce human proteins.
CropTech already had contacted Dr. Charles Hamner of the N.C. Biotechnology Center, a nonprofit organization established by the state to develop economic opportunities in the biosciences. Hamner had a track record of success in judging the viability of technology companies, and he became a cheerleader for a CropTech move to North Carolina.
"I was enthusiastic about CropTech because I thought it had the potential to provide NC farmers the opportunity to raise up to 15 to 20 thousand acres of a new crop," he told CJ via e-mail.
Richard Roberson of the state Department of Commerce introduced the CropTech project to the Albemarle Economic Development Commission — a regional agency representing the governments of Camden and Pasquotank counties and Elizabeth City — in late June 2001. CropTech wanted funding to build facilities and "to go commercial" with its products, and Roberson believed Elizabeth City was a good fit.
Roberson informed AEDC that company officials would visit Raleigh on July 10 and July 11 to meet with Basnight, and that the group would also visit sites in Elizabeth City. Before the meetings, Bill Prince of AEDC notified Vann Rogerson of the Northeast Partnership of the impending visit. Roberson’s introduction of Basnight and the partnership into the process made the AEDC’s involvement, despite the lead Roberson gave it, short-lived.
At the July 10 meeting, CropTech expressed the need for a $3.5 million "bridge" investment to get it to a larger "institutional round" of investing, in which it hoped to raise $10 million to $15 million. The need for seed money to attract private investment was a theme to which CropTech would repeatedly return throughout the negotiations.
On July 12 Prince e-mailed Watson in an effort to learn more about CropTech’s meeting with Basnight.
"The company reps make it pretty clear that [Basnight] is key to the project and they will go wherever the money is made available," Prince wrote. "They seemed to think that some ‘hopeful’ comments were made to them during their meeting."
Roberson invited representatives of several government-created nonprofit organizations, all with public money to use for economic development incentives, to a follow-up meeting scheduled Aug. 2. That meeting included Basnight, his director of special projects, Rolf Blizzard, and Watson.
According to records of the Northeast Partnership, "Senator Basnight want[ed] this project very much." Blizzard’s notes from the meeting state that the N.C. Biotechnology Center offered a $250,000 loan, and that Watson would work to get $1 million in venture capital and $50,000 in local government funds for CropTech. Blizzard would secure $3 million from the Tobacco Trust Fund, $250,000 from the Governor’s Competitive Fund, and $200,000 from the N.C. Rural Economic Development Center. The goal was to get $5 million in cash for CropTech.
At that point Commerce’s "involvement declined a lot," a department official said.
While Basnight’s soldiers took charge, frustration over turf surfaced. In a telephone call with an AEDC official, Roberson said "he was annoyed that [AEDC] had told the CropTech management that they needed to talk with Rick Watson if they were going to do a project in the Northeast," according to notes of the conversation.
The AEDC official reminded Roberson of a previous conversation they had, when the official said that if Roberson was going to meet with Basnight to ask for support and money, it was necessary for Watson to know about it.
According to notes of the phone conversation, "further discussion cleared up [Roberson’s] ‘annoyance’ issue." But the notes also said, "Roberson has had negative experiences in the past with the [Northeast Partnership] taking over control of his projects," and thought AEDC "had facilitated this again."
"Negativism abounds with Commerce and the [partnership] on control of projects," the notes read. "Keep this in mind."
A former CropTech official confirmed the negative atmosphere between the Commerce Department and the Northeast Partnership.
"[Commerce representatives] cited chapter and verse of Rick Watson screwing up projects," the official said.
The Northeast Partnership enlisted the help of a University of Virginia professor, Barry Johnson, to research CropTech’s technology, patents, and business model. His findings were largely favorable, emphasizing that CropTech was able to secure more than $7.7 million in federal funding through highly competitive research grant programs. Johnson said the company held excellent growth potential, but was just beginning to "pursue commercialization activities."
Blizzard was the point man for the deal. On Aug. 13 Cathy Scott (of the partnership) wrote to Johnson, asking him to send his report to her and Wat-son, because "we will need to send it on to our higher powers first thing in the a.m."
That "higher power" was Blizzard, who received from Scott some summary points from Johnson’s 67-page report.
Meanwhile on Aug. 14 and Aug. 20 Scott e-mailed Roberson and Prince, who were wondering about the project, and explained that the Northeast Partnership drafted a letter of intent to "exert its best efforts" to find $10 million in financing for CropTech, through "its relationships with state, federal, and private funding sources."
"Rolf Blizzard, on behalf of Senator Basnight, has reviewed this information and has indicated that the Senator’s support for this project remains intact," Scott wrote.
In response to the Northeast Partnership’s commitment letter, CropTech President Robin Radin wrote Aug. 27 that he was "strongly encouraged" by the incentives package, and anticipated making a final relocation decision the following week. But in reality a deal was not close.
The Northeast Partnership, Blizzard, Roberson, and CropTech officials were to meet Sept. 7 in Raleigh, and several documents showed that Blizzard lined up the funding sources. Roberson told Prince that "Rolf Blizzard is the source."
"Thanks for all your leadership on this project," Mike Scott, Cathy’s husband and business partner, wrote to Blizzard. "Let us know how we can assist you."
"Obviously [Sen. Basnight’s] got power in the system," said a Commerce official who didn’t want to be identified. "He’s able to get meaningful accomplishments through the system."
"Mr. Blizzard was able to assemble all the funding agencies together in order to negotiate a recruitment incentive package attractive to CropTech," said Peter Rascoe, a lawyer for Edenton and Chowan County (where the company ended up trying to locate), in an e-mail to CJ. "Mr. Blizzard was also very concerned that the state’s and Chowan County’s resources be protected."
In the meantime, Watson attempted to co-opt some financial compensation for the Northeast Partnership. A letter from Watson to CropTech introduced a surprise requirement: that the Northeast Partnership and the state would be considered "joint owners of intellectual property developed and patented in North Carolina facilities." The partnership, with no investment of its own money but simply by helping obtain incentives from others, would also be included as "stockholders in the Corporation with all associated rights."
By Sept. 19 CropTech was still waiting for a proposal from the Northeast Partnership, including the promised $5 million — three months after the process began.
On Sept. 27 Watson and Mike Scott of the Northeast Partnership, trying to secure $3 million of the $5 million it promised to CropTech, made a presentation about the company before the Tobacco Trust Fund Commission. Commission members agreed to earmark the $3 million for the project.
Notes obtained from the Tobacco Trust Commission indicate that Edenton, in Chowan County, was immediately considered the prime location for CropTech, over Elizabeth City.
According to a former CropTech official, Watson said that Edenton was the only place CropTech could go if they wanted help from the partnership. But that was fine with CropTech, as long as the money was there.
Radin sent Blizzard commitment letters Oct. 31 for each contributor to the North Carolina incentive package, and stressed to Blizzard the need to close the deal within two weeks.
"I would appreciate your OK," Radin wrote, "before I distribute this package of documents to each member of the NC group." On Nov. 5, according to Blizzard’s notes, he "advised Robin to forward along." Radin did so the following day.
By Nov. 10 CropTech was dealing exclusively with the Edenton-Chowan Development Corporation for a site. ECDC sent CropTech a letter, approved by Blizzard, agreeing to the terms in Radin’s memorandum. All the parties planned for a meeting to close the deal Nov. 30 in Raleigh.
On Nov. 23 Mike Scott asked CropTech for financial and ownership information for "funding entities" in order to complete proposals from the ECDC and the Northeast Partnership. He also requested that company officials meet the morning of Nov. 30 in Basnight’s conference room "to discuss final proposals… by all partners."
The request alarmed Radin, who was adamant about closing the deal by the agreed date. He told Mike Scott that all problems needed to be resolved in time to sign the agreement on Nov. 30.
"As I have discussed with [Blizzard]… we would appreciate your assistance in arranging that planned closing on the afternoon of November 30th," Radin wrote to Mike Scott. "In view of the central role Senator Basnight has played in lining up the various pieces of the incentive package and making CropTech’s relocation to North Carolina feasible, a signing and closing at his offices at that time in Raleigh would be most appropriate…"
Radin added that timing was critical in order to support CropTech’s planned institutional round of financing.
"I believe that the key pieces of the North Carolina package are now substantially resolved and that the relevant Commitment Letters under the [Memorandum of Understanding] can be signed by November 30, in order to complete the transaction," Radin wrote to Mike Scott.
But the day before, Nov. 29, the signing was delayed because Watson told Radin that the ECDC and the Northeast Partnership needed until Dec. 5 "to finalize their commitments." Still, Radin was assured that the "pieces will fall into place by that time."
But Radin’s patience was tested again the following day, when at the last minute deputies of the Attorney General’s Office, who reviewed earlier versions of the agreements, recommended more special provisions. On Nov. 30 when the Tobacco Trust Commission voted to grant the $3 million, the board of directors added a stipulation that to receive the money, CropTech must "meet the standards utilized by the N.C. Department of Commerce for grants of similar magnitude and purpose…" Those specific standards were not outlined in meeting minutes.
Following the Tobacco Trust’s approval, Radin thanked Executive Director William Upchurch in an e-mail, but said, "I am sorry to have expressed some frustration with the input of the [attorney general’s] attorney as this stage relating to the [new] condition. But I thought that the participation of Doug Johnston [the special deputy attorney general who recommended the new conditions] at our negotiating meeting would have prevented any last minute hitches of this sort."
Radin also expressed his disappointment the following day in a message to Blizzard.
"I am deeply distressed that the AG attorney has thrown a bomb at the last minute that effectively preempts the agreement of the parties arrived at… with the benefit of [Doug Johnston’s] counsel. Again, I beg your intervention to enable the realization of our shared goal," he wrote.
Radin’s objections, while not specifically clear, had to do with the issuance of the $3 million from the Tobacco Trust, which was to be paid in three $1 million increments. An earlier version of the agreement, which Johnston said in an e-mail "looks good," called for the distribution of the money equally upon:
1. Execution of the letters of commitment between the parties,
2. A groundbreaking ceremony for the construction of the bioprocessing facility,
3. Receipt of a certificate of occupation from the local authority for the facility.
On the later advice of Johnston, the Tobacco Trust placed more stringent conditions upon CropTech for the money. In an e-mail to his other ECDC colleagues, lawyer Peter Rascoe confirmed the late changes.
"The Tobacco Trust Fund apparently was not as willing to write a check for $3 mil[lion] as quickly as originally indicated," Rascoe wrote. "They voted to give the money — but subject to several contingencies."
The new contingencies may have arisen from ECDC’s own letter of intent, that required CropTech to raise $8 million by June 1, or its building lease with ECDC could be terminated. That stipulation caused lawyers in the Attorney General’s Office to consider advising the Tobacco Trust to revise conditions for its $3 million.
CropTech was depending on the tobacco money in order to raise the private funding, but the lawyers worried that the money could be lost if ECDC pulled the plug in June 2002.
After further internal discussions, ECDC raised its private funding requirements for CropTech from $8 million to $10 million by June 1, 2002.
The Northeast Partnership followed suit and submitted an offer letter to CropTech that required the company get $10 million in private financing by June 1, 2002. Upchurch wrote to Blizzard Dec. 17 that the Tobacco Trust was prepared to send CropTech its own commitment letter.
"I told CropTech we were on board," Upchurch wrote, "but they didn’t seem too happy. They apparently are having heartburn over [the Northeast Partnership’s] and ECDC’s letters. I think they realize our information will look very similar."
Radin’s recourse was to seek "heartburn" relief in a seven-page letter to Blizzard. He outlined CropTech’s objections, the most significant of which was the requirement by the Tobacco Trust to raise $10 million in private investment by June 1. He said that demand was a "material change in previously agreed milestones."
"The proposed change converts the transaction into a $2 million matching grant for a $10 million equity raise," Radin wrote. "This scheme makes no economic sense… since it requires [CropTech] to implement a relocation program in exchange for $1 million, and then penalizes [CropTech] if, for example, it succeeds in raising (only) $9.9 million by June 1…or $10 million by June 2…."
Radin also objected to changes in the ECDC offer, which he said substantially scaled back and increased conditions "of commitments previously set forth in writing by the ECDC."
"The ECDC required contingencies for CropTech to raise private funds in order to protect the ECDC’s equity offered to be invested in this recruitment project," Rascoe told CJ in an e-mail.
As for the commitment letter submitted by the Northeast Partnership, Radin told Blizzard that CropTech found all 16 of its enumerated conditions objectionable.
"The proposed letter contains only best efforts commitments for possible equipment financing arrangements that we believe, in line with [Watson’s] speculation, are unlikely to materialize," Radin wrote.
Notes obtained from ECDC showed that, in the opinion of Hamner of the N.C. Biotechnology Center, forcing CropTech to raise $10 million after the Sept. 11, 2001 terror attacks was "unrealistic."
ECDC, the Northeast Partnership, and the Tobacco Trust Commission all stood firm on their proposal.
The deal stood still until after New Year’s 2002, when N.C. group members began to speculate on CropTech’s plans. A company official left a voicemail at the Northeast Partnership, asking for a meeting to work more on the deal.
"(CropTech’s) other efforts must have fallen through," Watson wrote to Blizzard. "I think someone should call [CropTech] to hold firm on our offer, but tell them how bad we would love to have them here.
"Can I, can I, please, please, let me call!" Watson begged Blizzard.
By then CropTech, a former executive said, was weary of dealing with the Northeast members of the negotiating team. Mike Scott informed Blizzard and Watson that the Biotechnology Center was working with CropTech to show them other areas in the state, including Wilson County.
"I hope [CropTech] understand(s) that puts the whole package that we developed in jeopardy," Blizzard wrote to Scott. "They need to understand that very clearly. We can count real well."
The N.C. agencies sent a letter to Sandy White, CropTech’s board chairman, on Jan. 17 to restate their interest in the company, but did not change their offer.
White responded five days later with a pared-down modification to the original proposal, which would eliminate ECDC and the Northeast Partnership from any financial interest in the deal. Only the Biotechnology Center’s and Governor’s Competitive Fund grants would remain in the mix, and the Tobacco Trust would ante up only $1 million for CropTech. In exchange, the company would build its own building in Edenton —- with a land gift from the town —- without other financial assistance from ECDC.
Blizzard, the Northeast Partnership, ECDC, the Tobacco Trust, and CropTech officials planned to meet Jan. 30 in Raleigh. If the new financial terms White proposed were agreed upon, state and local taxpayers would pay $3.4 million less than what was offered by the North Carolina group in the original deal.
Despite CropTech’s willingness to take fewer incentives, the North Carolina group kept most of the funding intact. White’s scaled-back proposal was ignored, as the Northeast Partnership kept its $50,000 in equipment financing in the deal. Also, the Tobacco Trust Fund incentives offer remained at $3 million, with slightly adjusted milestones. ECDC withdrew its offer to construct a building for CropTech.
On Feb. 7 Dept. of Commerce Secretary Jim Fain, who had apparently not been involved in the CropTech discussions to date, wrote to Tobacco Trust Chairman Billy Carter.
"CropTech has approached several agencies or economic development entities seeking incentives and financial commitments for their project," Fain wrote. "As you explore the prospect of granting funds for this project, I would urge you not to commit resources to the venture until you have completed a thorough due diligence process and satisfied yourselves… that the venture is viable."
The Northeast Partnership and Tobacco Trust had already looked extensively into CropTech’s history, patents, and finances, which confirmed that the Commerce Department had almost no involvement to that point in negotiations. Fain also recommended that the Tobacco Trust commit funds only if CropTech raised "substantial" private capital, another requirement that was already in the deal.
"The Department of Commerce has experience in underwriting economic development investments and is available to provide assistance to you where we can," Fain wrote to Carter.
A former CropTech official said he thought Fain’s letter was an attempt to insert the Commerce Department into the negotiations. A week after Fain wrote his letter, Carter accepted his offer, and the Commerce Department’s influence over the Tobacco Trust increased.
The move began a long delay, as Blizzard and the Northeast Partnership waited for Fain to rubberstamp the Tobacco Trust offer to CropTech. Upchurch informed ECDC that he was waiting for a letter from Fain "offering suggestions about continued due diligence for the state." Others in the Northeast group stewed.
"I am running out of things to tell [CropTech]," Watson wrote to Blizzard on Feb. 21. "Any ideas, besides the truth?"
"I have absolutely no problem with the truth," Blizzard responded.
"You always tell the truth," Watson replied. "I am the salesman and I have to soft pedal the truth. I plan to tell [CropTech] for a draft approval we feel good about the middle of next week. Is that OK?"
"I hear ya, although I am not satisfied with that," Blizzard answered. "Where the crap is the Fain letter?"
Watson then told CropTech that Fain’s letter "was the hold up," and that he and Blizzard would "push him in person" on an unrelated trip the following Monday.
Fain finally approved the due diligence efforts and funding milestones, but Watson had to stall CropTech into mid-March, as he waited for the Attorney General’s office to produce a final "memorandum of understanding" between all the parties.
J. D. Brooks of CropTech pressed for an update March 8, and Watson turned to Blizzard for help.
"Rolf, are you mad at me? If you and R.V. do not call, I get worried," Watson wrote. "Do you have any answers?"
"R.V." is likely R.V. Owens III, Basnight’s nephew and chief fund-raiser, and a powerful influence in the Northeast.
By March 22, CropTech was still waiting to hear about a firm proposal.
By the end of the month the patience of the Northeast group wore thin. A letter from Chowan County Manager Cliff Copeland to the governor further illustrated the breach between Basnight’s Northeast cronies and the Commerce Department.
"It has been a long frustrating process, but we feel that now we have put a package together that will entice CropTech to relocate to this state," Copeland wrote to Easley on March 27. "At this point, your intervention is needed because we feel that state agencies are still reluctant to proceed without your wholehearted endorsement."
An April 10 advisory letter from the Northeast Partnership’s legal counsel, Ernie Pearson, to Watson further illustrated the tug-of-war between Commerce and the partnership over influence of the Tobacco Trust. Pearson had reviewed concerns raised by Fain and his financial advisor, Stewart Dickinson, in early February, which mostly questioned CropTech’s viability.
"Many of the points they raised have been discussed fully and in my opinion fully accommodated," Pearson wrote. "The conclusion that this is an early stage company is no surprise."
Pearson emphasized that the decision to grant the $3 million in incentives belonged solely to the Tobacco Trust Commission. He also said that "a reasonable level of due diligence [was] completed."
In a letter to CropTech April 10, Watson confirmed the Tobacco Trust’s reluctance to sign the agreement because of Fain’s concern about granting $3 million to an high-risk, speculative company (see a related story about Watson's attempt to bill the Tobacco Trust Fund for expenses related to the CropTech deal, including "future legal expenses" and those involving dealing with the Department of Commerce).
On April 16 the Tobacco Trust Commission met and approved the grant for CropTech, with the possibility of using the Northeast Partnership as a "fiscal agent" to administer the funds to the company.
However, the final agreement — not received by CropTech until May 8 — again proved distasteful to the company. Included in the deal was a demand for the company to provide a five-year, $3 million performance bond (see related story), which would be forfeited to the Northeast Partnership if CropTech failed to meet any conditions in the agreement. Also objectionable to CropTech was that it would need to raise $5 million in private funds by Jan. 1, 2003, to receive the third $1 million installment.
The performance bond appeared to be another opportunity for Watson to fill Northeast Partnership coffers while making only a minimal investment ($50,000 over two years, if incentives were reached). If CropTech missed any milestones in the overall agreement, a bond insurer would need to cough up the insurance money to the partnership, which was the "fiscal agent" for the deal. No documents provided to CJ showed that bond funds would revert to any other funding agencies.
On May 30, 2002, CropTech announced it would relocate to Charleston, S.C.
South Carolina gave CropTech a site where public money would provide infrastructure to a privately constructed building, which the company would lease from a developer. That arrangement meant CropTech didn’t have to find money to build a building.
Also included in the package was "millions of dollars of incentives" from public and private sources, including $1.5 million in grants, according to The Post and Courier of Charleston, S.C.
On June 2 Cathy Scott informed ECDC officials about a call among her, Blizzard and Brooks of CropTech, which explained why the company spurned North Carolina.
"It was what we all pretty much knew in the back of our minds — the delay of the [agreement]," Scott wrote. "[Brooks] said that what he felt should have taken days ended up taking months.
"He indicated South Carolina was able to act quickly and coordinate a comparable deal… (and) provided a developer that was very easy to work with.
"[Blizzard] offered to [Brooks] the main reason (person) for the hold up in NC’s package, which I feel is above my pay grade to report here."
According to a former CropTech official, after dealing with so many agencies in North Carolina’s fragmented economic development, "going to South Carolina was like a breath of fresh air" (see a related story about allegations that the state's regional partnerships and the involvement of powerful legislators are compromising North Carolina's economic development).
Construction on the building began in South Carolina, but by March 2003 CropTech filed for bankruptcy protection and ended operations.
"It wasn’t a fundamentally flawed concept," Bob Faith, South Carolina’s commerce secretary, said to The Post and Courier last year. "[CropTech] ran out of capital and it’s a tough venture capital market out there."
For one North Carolina lawmaker, the CropTech episode illustrated the state’s flawed economic development policy.
"The bottom line is these incentives, where everybody says we have to do it, well that isn’t necessarily so," said state Rep. John Rhodes, R-Mecklenburg.
"I believe we should be the state that draws the line in the sand. It’s selling our state short. Let everyone else continue to sell their state out."
Paul Chesser is assistant editor of Carolina Journal.