News: CJ Exclusives

Easley, Basnight Manipulate Golden LEAF, Papers Show

State leaders have sway over foundation’s grants and investment decisions

The Golden LEAF Foundation, which administers half of North Carolina’s share of the national tobacco settlement, claims to operate independent of political persuasion. But documents obtained by Carolina Journal suggest that Gov. Mike Easley and N.C. Senate President Pro Tem Marc Basnight wield significant influence over the nonprofit foundation.

The centerpiece of their involvement — a recent $85.4 million Golden LEAF proposal to invest in biotechnology initiatives in North Carolina — was part of a larger plan by state Democrats seeking to campaign on a platform of creating jobs in the midst of the state’s troubled economy.

A Winston-Salem Journal article Aug. 25 offered insight into Basnight’s motives as he pursued a multipronged strategy to get public money directed to biotechnology interests. The newspaper detailed issues that Republicans and Democrats planned to emphasize in the state’s fall campaigns. Basnight cited business incentives as among his party’s major issues.

“The issues that we run on are jobs — putting people back to work,” he said. The newspaper reported that Basnight listed “the recruiting incentives and biotechnology proposals as Democratic initiatives.”

Basnight appears to have achieved part of his goal by pressuring Golden LEAF’s leaders, threatening to intercept its tobacco settlement payments this year unless the foundation immediately devised a $150 million biotechnology investment plan.

Once the plan was in place, members of Easley’s staff and associates stepped in to guide where the money would flow.

On the surface, optimism

When the Golden Long-term Economic Advancement Foundation announced its immediate $85.4 million investment in biotechnology initiatives in August, Easley and Basnight shared in the optimism of the press conference.

As North Carolina’s attorney general in 1998, Easley persuaded the General Assembly to create Golden LEAF as an independent organization that would distribute half ($2.3 billion over 25 years) of the state’s portion from a lawsuit settlement against large tobacco companies. At the press conference Easley said he wanted Golden LEAF created because the state needed an aggressive economic development engine, “one that operates outside the grasp of political pressure, as this one does.”

The legislature created the nonprofit foundation with the stated intention that its board of directors would decide how its funds would be spent — even though the 15 board members would be appointees of the state’s three top Democrats: the governor, the Senate president pro tem, and the speaker of the House, Jim Black.

However, an investigation by CJ revealed that political influence upon Golden LEAF extends beyond mere appointments by politicians.

The biotechnology vision

Specifics of the state plan, which includes the Golden LEAF initiative to “invest” public money in biotechnology interests, reflects the vision of Dr. Charles Hamner, who retired in May as president of the North Carolina Biotechnology Center after 14 years. Some details of Golden LEAF’s program are nearly identical to a proposal Hamner made to Basnight’s staff.

NCBC was created by the legislature in 1981 to help spur the economic development of the biotechnology industry in the state. The center employs about 45 people and in FY 2001-02 had a budget of $8.7 million, most of which was taxpayer funds. Its board of directors comprises several leaders in bioscience, finance, higher education, economic development, and government.

In March, North Carolina Citizens for Business and Industry held its annual meeting, which, news reports said, was marked by fretting over the decline of the state’s economy. Hamner told CJ that Easley approached him during the meeting and asked him what could be done to immediately help keep business and industry in the state. Hamner told Easley he knew of biotechnology companies in various stages of development that would like to expand in, or move to, the state. However, Hamner said North Carolina lacked a trained workforce and financial programs to help companies with plant construction and equipment. Hamner outlined for Easley a plan that included the need for millions of dollars to create biotechnology-related educational programs and facilities and other biotechnology investments.

After his conversation with the governor, Hamner said he received a phone call from Rolf Blizzard, Basnight’s director of special projects and research, asking Hamner for an outline in writing of the ideas he gave Easley.

“The governor, I guess, went and talked to Mr. Basnight and Mr. Black,” Hamner said.

In his letter to Blizzard, Hamner proposed a $150 million plan to fund education and training facilities for biosciences and biomanufacturing. His proposal said the state should “find a mechanism to establish a $150 million investment fund,” and that “a finance professional should work with the legislative leadership/Treasurer’s office/Governor’s office to determine an appropriate financing vehicle.” Hamner wrote that once the financing was available, the Biotechnology Center (working with the Department of Commerce) should serve “as an initial screening and company source point.”

Specifically, the plan would call for:

• Community colleges to create eight to 10 regional training facilities;

• Universities to provide appropriate bioscience degree programs and build bioscience facilities and laboratories;

• The state to build a biopharma-ceutical/bioprocess manufacturing training center.

The document apparently became a game plan for Basnight for the 2002 legislative session.

Why the change in strategy?

When the Golden LEAF biotechnology press conference was held Aug. 14, board chairman S. Lawrence Davenport told reporters that Golden LEAF remained separate from political influence. “It’s certainly more independent than anything else we have in this state,” he said.

Events leading up to the announcement of the biotechnology proposal indicate otherwise.

Golden LEAF’s policy since it was established in 1999 was to invest money from the tobacco settlement and to award grants from the earnings on those investments. The foundation had awarded two rounds of funding totalling about $14 million, and it plans to grant an additional $12 million this year.

At the press conference, Davenport said that after last November’s awards the board discussed making larger contributions to help the state’s economy.

However, a review of minutes from meetings held by Golden LEAF’s board last fall and winter don’t indicate any discussion of increased future investments, or deviation from its normal investment practices. It was not until May 23, when the board of directors met in an emergency meeting, was there any indication of discussion of increased financial outlay from the Foundation.

Please help — or else

Concurrent with the woes of North Carolina’s manufacturing and textiles industry was the state government’s need to close a $1.5 billion budget gap. When the legislature reconvened in May, it began to search for new sources of revenue.

Minutes from Golden LEAF’s May 23 emergency meeting state that three days earlier, Davenport and other Foundation officials met with the co-chairs of the Senate Appropriations Committee, at the senators’ request. Davenport said the chairs “informed the Foundation representatives that they would like to see the Foundation assist the State during the current financial crisis,” according to the minutes. The minutes also state that Davenport asked LEAF board members to “consider the proper course of action…and be prepared to discuss specific options” at a meeting May 30. That followup meeting introduced a plan to create a Special Committee for Economic Development Initiatives, which formally met the first time June 3. The committee would be “responsible for exploring options and strategies for a major economic stimulus package” that Golden LEAF would consider.

Pressure applied

Meanwhile, Basnight and the Senate Appropriations cochairmen apparently increased pressure upon Golden LEAF’s leaders. In a lengthy e-mail message to board members June 12, LEAF President Valeria Lee revealed the demands placed upon the Foundation:

“It will come as no surprise to you that the past 10 days have been especially challenging,” Lee wrote. “At every turn the Foundation is being forced to address the prospects of ‘interception’ of the next [tobacco settlement] payments, making a grant to fill state revenue gaps, offers of special initiatives, and other creative options for using the corpus of the Foundation.”

Lee also reported in the e-mail about meetings she and Davenport had with House and Senate Appropriations co-chairs on the previous day. House leaders told her they might seize all the payments targeted for Golden LEAF this year. She then told of how Senate Appropriations co-chairs said to her and Davenport, as they were departing through the halls of the Legislative Building, that they planned to take $40 million of the Foundation’s funds.

“Before Lawrence could clear the grounds of the General Assembly,” Lee wrote, “he had a call from Rolf Blizzard of Senator Basnight’s staff saying the Senator and the Appropriations co-chairs wanted to talk with us.”

In the meeting Lee and Davenport were told that “we should be investing up to $150 million in ventures to stimulate the biotech sector of North Carolina’s economy.” Lee added that “we were strongly encouraged to act ‘sooner’ rather than later.”

Less than a week after Lee’s e-mail on June 20, a special meeting of the Foundation’s Investment Committee was convened. The group heard presentations from fund managers and discussed possible investments in biotechnology.

On the same day, a special meeting of the entire board convened, in which they adopted a formal position about the legislature’s proposed interception of tobacco funds. The board’s statement said that “the General Assembly has no legal right to intercept new money flowing into the Foundation…therefore, we oppose any such interception or taking.” The position also stated that Foundation members should determine how its own funds are used.

Action on other fronts

Basnight, meanwhile, pushed for Golden LEAF money for other proposals. The Winston-Salem Journal reported June 21 that Basnight also expected Golden LEAF to contribute “$130 million for a new cancer research and treatment hospital” at UNC-Chapel Hill.

He also told the newspaper he wanted the foundation to fund $20 million to $30 million for a biopharmaceutical training center. “The first year, we can put 5,000 people to work,” Basnight said. The numbers reflected what Hamner proposed. The training center would later be added, then removed by the House, from the N.C. Economic Stimulus and Job Creation Act, along with other biotechnology incentive proposals Basnight wanted (and Hamner recommended).

The article illustrated tensions among LEAF board members at the time. “I’m not sure that I would vote for any economic stimulus package if they take our money,” board member Michael Almond told the Journal.

Smaller groups

Despite the frustration, the LEAF board continued to work on a plan to help stimulate the state’s biotechnology sector.

Details are scant about smaller “working group” committee meetings in which pieces of the overall LEAF plan were evaluated and key decisions were likely made. However, Lee’s lengthy e-mail to board members revealed which working group members would have “lead responsibility” for developing aspects of the proposed stimulus package.

John Merritt, senior assistant for policy and communications for Easley and a LEAF board member, led the group studying “biotechnical/biosciences initiatives,” along with Davenport. This apparently was the group with the responsibility for deciding which investment funds would be the vehicle for Golden LEAF’s venture capital.

Likewise, Golden LEAF board member Billy Ray Hall headed a working group for a second phase of the Capital Access Program, which creates a loan-loss reserve for lenders so they would be more willing to extend credit to fledgling businesses that might not otherwise qualify for loans. The Golden LEAF board gave the North Carolina Rural Economic Development Center $3.4 million for the Capital Access Program. Hall is the president of the Rural Center, and Lee is the first vice chairwoman on its board of directors.

An Aug. 8 memo from Hall to the Rural Center board of directors invited them to the Golden LEAF announcement of its biotechnology stimulus initiative. “We are very excited about this great news for the state’s economy…” Hall wrote, “…and (are) extremely pleased with the trust placed in us by the Golden LEAF Foundation.”

Hall and R. V. Owens, Basnight’s nephew and a prolific Democratic fund- raiser, also led the information technology working group for the Golden LEAF board. It is not known whether any specific proposals came out of that group.

Final decisions made

On July 10 Golden LEAF’s special investment committee met to hear proposals from three venture capital fund management companies: Intersouth Partners, Aurora Funds, and Tryon Capital. Minutes for the meeting offer in some detail the investment activities of the three companies.

After hearing the presentations, board members decided to commit $10 million to Aurora and $2 million with Tryon Capital. Intersouth was apparently shut out, despite having a strong reputation among experienced investors.

Then minutes of the July 10 meeting turned mysterious. After the detailed description of the previous three funds’ credentials, the minutes note a discussion among committee members about committing $30 million “to the $120-$150 million debt/equity life science infrastructure fund.” The fund is not identified.

This proposal was considered more risky, because it would invest in companies that are ready to manufacture drugs for clinical trials, but aren’t on the market yet. The mystery fund would finance construction of manufacturing facilities and purchasing of equipment for such companies. Banks are reluctant to make loans when those uncertainties are a factor.

“There was general agreement among the committee members that this investment falls outside any area identified currently in the Foundation’s investment policy,” the minutes read. “However, it was the consensus of the committee that the proposal could result in significant economic development and job creation for North Carolina…”

The minutes don’t identify a fund manager. Nevertheless, the committee moved to recommend that the Golden LEAF board commit $30 million to the proposal. In addition, committee member Lisbeth Evans, who is the state’s Secretary of Cultural Resources and reports directly to Easley, moved that the Foundation include “consideration of a preferred position for the Golden LEAF Foundation in exchange for its agreement to be responsible for one-half of the out-of-pocket expenses incurred by the developers of the fund as they attempt to raise additional funds.” The motion was adopted.

The $30 million fund turned out to be BioVista, created specifically for Golden LEAF’s venture by Durham-based management company Catalysta Partners. The move surprised several observers who are experienced in life sciences investments, because Catalysta has fewer resources than other firms, is only two-years-old, and doesn’t have a history in the field. Notes obtained by CJ indicate at least a glance toward other firms by Golden LEAF, but Catalysta won out.

Clay Thorp and John Crumpler were Catalysta’s two key general partners in the deal. They are listed as two of the four principals in BioVista. Handwritten notes of a July 29 meeting with the two discuss possible sources of other investment for the fund, hoping to get to $150 million, but note it is a “tough money raising environment,” characterizing it as a “nuclear winter.”

Thorp, an executive in the pharmaceutical industry, was the founder and president of Xanthon, which is now out of business. He also is on the NC Biotechnology Center board of directors.

Crumpler has worked in several executive positions in government and business. He also is a generous contributor to Easley, having given the maximum-allowed $8,000 to the governor’s 2000 campaign. His wife, Lou Ann, gave Easley’s campaign $2,000 in 2000, and she has given $4,000 so far for the 2004 election. Easley appointed Crumpler to the N.C. Economic Development Board last year.

Notifying state leaders

Once Golden LEAF’s special committee made its investment decisions, Lee moved quickly to inform state leadership of its intentions. On July11 she sent memos to Easley staff member John Merritt and to Blizzard in Basnight’s office, informing them of the “investments and grants” that Golden LEAF’s full board would soon consider, “in response to the State of North Carolina’s current fiscal crisis.”

But other board members were concerned the plan might not be enough to satisfy Basnight. On July 15 Almond e-mailed Lee telling her of discussions he had with Davenport about getting Basnight’s approval.

“Lawrence and I have been discussing how he might present our package (including $42m for biotech) intact,” Almond wrote to Lee, “while also appearing to accommodate the desire of Basnight’s people for a larger and longer commitment to biotech — perhaps as much as $500m over time.”

Almond followed with a suggested public statement, which would emphasize the possibility of Golden LEAF’s $42 million investment leveraging more than $150 million.

“If our original investment of $42m in this burgeoning industry in 2002 produces the kind of results we fully expect to achieve…,” Almond’s proposed statement said, “…then I believe that the Golden LEAF Foundation will be prepared to ride this horse just as fast and as far as it can take us into the new global economy of the 21st century.”

`Instructions’ from Basnight

Another part of Golden LEAF’s $85.4 million biotechnology package included $7 million to the state’s public universities and community colleges for worker training and product research and development. However, document requests by CJ turned up no evidence of consultation between Golden LEAF and the state’s higher-education leaders. Both the University of North Carolina System and the North Carolina Community College System had no discussions with Golden LEAF about the schools’ needs.

“Neither President (Molly) Broad nor any representative of the University was asked to develop or critique [Golden LEAF’s proposal],” said Joni Worthington, associate vice president for communications for the UNC System. “She had no advance notice of its content, and learned the specifics of the plan at the public Aug. 14 announcement.”

Likewise, the only documents the NCCCS could turn up about the Golden LEAF initiative was the invitation to the press conference. However, an e-mail message from NCCCS President Martin Lancaster to Steven Burke, vice president of corporate affairs and external relations for the NC Biotechnology Center, offers insight into Basnight’s work behind the scenes.

Lancaster’s message referred to his invitation from Lee to attend Golden LEAF’s biotech announcement. He told Burke in the message, “[Lee] insists that she still has been given no ‘instructions’ from Marc Basnight to fund the initiative that Dr. Hamner has been working on with Marc, us and the folks at NCSU.”

Information obtained by CJ from various agencies give the impression that Golden LEAF and the Biotechnology Center collaborated little, if at all, in developing the Foundation’s initiative. In fact, communication between Biotechnology Center employees suggest apprehension about a July 16 meeting. By then many details of Golden LEAF’s plan were already in place.

Hamner’s work with Basnight on his biotechnology plans may have been a concern, because of the senator’s demands upon the Golden LEAF board for biotech funding. An e-mail from Ken Tindall, a Biotechnology Center vice president, informed Hamner of the meeting between Lee and center representatives.

“It was a very comfortable meeting,” Tindall wrote Hamner. “[Lee] seemed to welcome the fact that we were there.

“We offered the (Biotechnology) Center as a resource to her as she and her board consider what to do in the area of biosciences,” Tindall wrote. “We were careful not to talk about specifics (either approaches or [venture capital] firms).”

A follow-up letter from Tindall to Lee about the meeting reiterated the hope of beginning a working relationship. He also emphasized to Lee what the Biotechnology Center believed were the highest priorities for biotechnology development in the state: “workforce training and assistance to companies working to establish, expand, or relocate.”

BioPharma meeting

In anticipation of Golden LEAF’s announcement, State Commerce Secretary Jim Fain, another Easley appointee, called a meeting of various biotechnology and economic development interests two days before the press conference.

The “BioPharma Team Meeting” included four Biotech Center representatives; two from the N.C. Biosciences Organization, a trade group; eight Commerce Department representatives; Lisbeth Evans of the Department of Cultural Resources and the Golden LEAF board; and Crumpler and Thorp of Catalysta Partners (and the Economic Development Board).

According to a Biotechnology Center spokesman, the purpose of the meeting “was to bring key individuals…together to discuss biomanufacturing and how these entities might best coordinate their efforts to attract biomanufacturing companies to our state.”

Announcing the final deal

Golden LEAF’s board members met Aug. 14 for a special meeting at the N.C. Museum of History in downtown Raleigh. After formally authorizing the biotechnology investment plan, the group moved to the museum’s auditorium for the press conference with Easley and Basnight.

Davenport welcomed dozens of state officials and economic development leaders from across the state, and introduced the plan to the public.

“Because the Foundation is unique,” Davenport said, “it can do things that state government and public agencies cannot do.”

He said Golden LEAF would immediately provide $85.4 million for biotechnology training, facilities, business incentives, and loans. Long term, he said, the Foundation would commit an additional $108 million, if needed.

Davenport continued to detail aspects of the plan, saying Golden LEAF would commit “to an economic stimulus program of targeted investments and grantsthat will be leveraged to $350 million short term…”

Davenport then turned to look at Basnight on the stage to his left.

“…and Senator, $600 million by 2008.”

After Easley spoke, Basnight emphasized the need for economic development in the state’s rural areas. He also said “this” legislature would have to make financial commitments to build biotech training facilities.

“It’s all about jobs,” Basnight said. “It’s all about our families being able to provide for themselves.”

Ending the event, former UNC President Bill Friday said, “This is a remarkable day of celebration.

“We aren’t afraid to try; indeed we aren’t even afraid to fail, so long as the objective redounds to the benefit of our people.”

Chesser is associate editor of Carolina Journal.