Forbes exploited early inexperience of Virginia’s Tobacco Commission

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Print this page Robert Burke

It’s a pretty safe bet that nobody today could pull the same con that John Forbes II did nine years ago on the Tobacco Indemnification and Community Revitalization Commission.
With little more than big talk and a big reputation — at the time he was the state’s secretary of finance and a commission member — Forbes got a $5 million grant that he was supposed to spend creating new educational options for the depressed regions of Southwest and Southern Virginia.

Instead, he diverted about $4 million for his personal use. After finally being caught, he pleaded guilty in federal court in Richmond to one count of wire fraud and was sentenced in November to 10 years in prison.

Forbes’ crime made a lot of people angry. Media accounts and interviews suggest the commission back in its early years was unprepared and unsuspecting. “The fact that he was a crook never really crossed our minds,” says state Sen. Frank M. Ruff Jr., R-Mecklenburg, a commission member and chairman of its education committee.
In a lot of ways, the Forbes case sounds like an embezzlement, where a trusted employee or partner steals money from a company. Changes since 2001 suggest that the commission — formed in 1999 by the General Assembly to distribute money from a national settlement with major tobacco companies — soon realized that it needed more stringent procedures.

Over the years it has added more staff and changed its grant process. Nowadays the commission doesn’t hand out money the way it did for Forbes, says Stephanie Kim, the commission’s director of finance. Under its current structure, it provides reimbursements to grant recipients after checking to see whether the money was spent appropriately. Those reimbursements go through several layers of review, she says.

That practice started in early 2002, less than a year after the commission approved Forbes’ grant. In the beginning, “the commissioners were very eager to get the money into the community,” Kim says, and most of the early grants went to tobacco farmers.

“At the time we had an executive director and a staff of three, and none of us had grants experience,” Kim says. “When that money started going out the door we said, ‘We really need somebody who is experienced with grants.’” They hired a grants director in late 2002. Still, Ruff defends the commission’s actions. “I don’t know that you really can blame the Tobacco Commission for the fraud of an individual,” he says.

Forbes asked for the grant for his Literacy Foundation of Virginia, which he claimed would tackle a problem the commission wanted to solve. Yet a big reason he got the money was his reputation as a member of the governor’s Cabinet. “There were many people that would have nodded in agreement that he was the proper person,” says Gregory B. Fairchild, associate professor of business administration at the University of Virginia’s Darden School of Business. 

Fairchild compares the effect of Forbes’ reputation to that of Bernie Madoff, the New York investment adviser who ran a huge Ponzi scheme and stole $18 billion from investors before he was caught in late 2008. Madoff was considered such a financial wizard that almost nobody took a close look at what he was doing. The “positive regard by so many makes asking tough questions unthinkable,” Fairchild says.

Kim says the commission staff “is constantly evaluating” how it handles grant requests. “While it’s a whole lot less likely that this would happen now, if somebody wants to lie and defraud and cheat, you can’t completely prevent it. But I think we have staff in place and procedures in place that obviously were not in place in those very early days.”

More review is coming. The Joint Legislative Audit and Review Commission is studying the Tobacco Commission and is expected to deliver a report this summer. And Gov. Bob McDonnell has hinted that he might want changes, though so far he has given no specifics. In late November McDonnell found himself in the position of both criticizing the commission and asking it for money to help lure a California-based biotech company to Virginia.

Any changes to how the commission operates could have broad implications for 41 localities in Southern and Southwest Virginia, where double-digit unemployment figures are common. Even before the recession hit, the region had a tough time attracting private investment, so the commission’s funding has been a critical resource. Since the commission was created, it has made 1,334 grants worth more than $728.7 million, and paid $234 million to tobacco growers and quota holders. Those wanting to correct the Tobacco Commission will need to handle this lifeline with care. 

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