Click here for Full Issue of EIR Volume 26, Number 29, July 23, 1999

Crony capitalism inVirginia prison scandal
by Edward Spannaus
Virginia’s five-year binge of prison-building, and farming out
the expanding inmate population to private businesses, haveturned out to be a costly failure.
After the 1993 election of Republican George Allen as
Governor, and Jim Gilmore as Attorney General, both running on demagogic “tough-on-crime” platforms, Allen andGilmore made good on their campaign promises to seek
longer prison sentences and the abolition of parole—despite
the fact that Virginia was already infamous for its brutal justice system and draconian prison sentences.
During 1994, the legislature did abolish parole for inmatescoming into the system. To warehouse the expanding prisoner
population, the Commonwealth of Virginia embarked on ahuge prison-building spree—such that state officials admitted
last year that they had spent much more than necessary on
new prison construction.
By last year, Virginia was resorting to two major methodsof keeping its over-built prisons occupied: 1) drasticallyreducing the parole rate for those sentenced prior to 1994
and still technically eligible for parole, and 2) renting outsurplus prison cells to out-of-state inmates. For example, abrand-new maximum security facility in Sussex contains noVirginia inmates at all, but it is filled with prisoners transferred from the District of Columbia. Virginia has also leasedout space for inmates from Michigan, Delaware, Vermont,and Iowa.

Prison labor
After getting parole abolished and sentencing toughenedin 1994, Governor Allen then launched a high-profile advertising campaign offering cheap inmate labor to private businesses in “joint ventures” with the prison-industry program,
Virginia Correctional Enterprises (VCE).
The joint-venture program was riddled with corruption
and cronyism—involving VCE’s Director and Assistant Director, among others—and it has now been shut down afterlosing millions of dollars of taxpayers’ money.
“Virginia prisons. They’re wide open to business,” anAllen administration promotional brochure boasted. With regard to the virtues of cheap prison labor, the brochure offeredsuch inducements as: “There are no employee benefit packages to fund. No pensions, health insurance, vacation or sickleave.”
EIR

July 23, 1999

Coincidentally, Allen conducted a number of trade missions abroad seeking investment in Virginia, and touting Virginia as a low-wage, anti-union state. There are credible rumors that at least one VCE contract came out of a May 1996
trade mission to the Far East.
That particular contract, involving the manufacture offlight suits for foreign customers, was terminated less thanfour months later amidst a criminal probe, and it remains
shrouded in mystery to this day.
The flight suits were being manufactured to military specifications; documents indicate that the destination of the flightsuits included Thailand, Peru, and Spain; Cambodia was also
rumored to be a customer. Work on the project began in August 1996, and lasted only until January 1997 when the prison
factories were raided by State Police and FBI agents. During
the period when the flight suits were being made, a numberof well-dressed oriental businessmen visited the production
facilities, according to inmates.
Both Governor Allen and Attorney General Gilmore werereportedly well aware of the flight-suit deal. A spokesman for
now-Governor Gilmore told the Norfolk Pilot that Gilmore
ordered an investigation of VCE because VCE was manufacturing flight suits “for a company in Massachusetts that wasshipping the flight suits offshore, stamping ‘approved by theU.S. Military’ on them, and then shipping them back to theU.S.”—which violates Federal law.

No contracts, no approval
Another state official told this news service that the flightsuit deal was also “completely illegal” from the standpoint of
Virginia state law. There were no contracts, and the deal did
not go through the approval process required by the Virginiastate code.
Some sources view Gilmore’s ordering of the investigation as purely designed to cover his own rear end—since he
was Attorney General when informal approval was given forboth the flight suit deal and other equally shady deals.
Eddie Dovner, the Massachusetts businessman who arranged the flight-suit deal, also was getting pants and promotional vests manufactured for him at cut-rate prices by theVirginia prison system. The flight suits cost the Commonwealth almost $60 apiece to manufacture, but they were soldto Dovner for $3 each. The pants cost $28 each, and were soldfor $2.50; and the vests (promoting the release of the video
version of H.G. Wells’s “The Island of Dr. Moreau”) cost $13
each to make, and were given away for $1.10 each. There
were many rumors of under-the-table deals made with VCE
officials, but what was under the table, was then quickly swept
under the rug as well.
The only individual prosecuted for any of this wasDovner. Last November, Dovner pled guilty to violating theFederal law which prohibits shipping prison-made goods ininterstate commerce, and in February he was given the extremely lenient sentence of a $40,000 fine and five years’
probation, with no prison time.
Economics© 1999 EIR News Service Inc. All Rights Reserved. Reproduction in whole or in part without permission strictly prohibited.

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One indication of the collusion between VCE officials
and Dovner can be found in Dovner’s pre-sentencing report,
which discloses the astounding fact that Dovner had, prior to
the illegal vest contract, “entered into a joint business venturewith David Addington [then Assistant Director of VCE] toprivatize and buy the prison textile industry.”
This deal—never before reported—might help explain
why Addington and other VCE officials allowed Dovner topurchase goods at one-tenth to one-twentieth of their costof production.

More Virginia ‘crony capitalism’
There were other sweetheart deals besides Dovner’s, inwhich prisoners, paid an average of 63¢ an hour, were being
used for the benefit of private businessmen who were friends
and associates of state officials.
As a result of these and other factors, VCE was losing
taxpayer money hand over fist in recent years—and much of
it is now gone for good.
As of March 1998, according to a state audit, VCE had
debts of more than $5 million, with only $3.5 million in assets.
And of those assets, only $148,000 was cash. The audit said
that VCE’s cash-flow problems began seriously in 1996 when
it began entering into the joint ventures with private contractors.
The audit identified the biggest single problem for VCE
as Morton Marks & Sons, a Richmond office furniture dealer,which owed about $1.2 million to VCE at that time. Theaudit noted: “Although VCE could not collect Morton Marks
receivables, VCE continued to make sales to Morton Marks,
increasing the dealers’ receivables and worsening VCE’s
cash-flow problems.”
It so happens that Morton Marks was Gilmore’s secondbiggest campaign contributor in his 1997 gubernatorial campaign. Furthermore, the vice president of Morton Marks, David Jones, had been the Director of VCE from 1992 until
1996, when he left the Department of Corrections to immediately take a position with Morton Marks. (According to a1997 state audit, most of the records of VCE’s joint-venture
deals disappeared when Jones left VCE to go to work forMorton Marks, and there is no indication that state officials
made any effort to reclaim the records.)
After public exposure of the links between Gilmore’s
campaign and Morton Marks, which owed the state morethan $1.5 million, Governor Gilmore bombastically vowed
to collect “every penny” owed to the Commonwealth.
After the publicity around the losses and Gilmore’s conflict of interest, the public dispute between Morton Marks andVCE—which had a large dog-and-pony show element for thegullible—intensified. In June 1998, Morton Marks sued theCommonwealth of Virginia for hundreds of thousands of dollars of unpaid bills, accusing the state of violating its contractand acting illegally.
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Economics

To represent it in this lawsuit, Morton Marks retained thelaw firm of McGuire Woods Battle & Booth—the law firm
which had hired George Allen after he left the Governor’smansion. Later, after Morton Marks filed bankruptcy, thecreditors committee also retained McGuire Woods, but after
the firm’s conflict of interest was disclosed, the creditors hadto find new lawyers.
The biggest creditor by far was the Commonwealth ofVirginia, but the state was not even represented on the creditors committee. And, instead of having the State Attorney
General’s office represent the Commonwealth and VCE,
they hired outside lawyers—who happened to be the law
firm headed by Patrick McSweeney, who was Virginia Republican Party chairman when Allen and Gilmore wereelected in 1993.
In August 1998, the Commonwealth of Virginia in turnsued Morton Marks for $1.7 million. A month later, MortonMarks filed for bankruptcy. In October, Morton Marks filed
another action against state officials in Federal bankruptcy
court, accusing the state officials of “intentional violation ofFederal law.”
Morton Marks has now been almost entirely liquidated,
and the creditors are still fighting over the scraps.

The prison-building boom
The most recent state audit of VCE states that VCE has
terminated all of its joint-venture projects with private businesses, and that it is now strictly back in the business of making license plates, furniture, uniforms, and other products forthe state.
The audit report gives some indication of how muchmoney the state lost on its private-industry “partnership” program of hiring out inmate labor to the outside businesses.
When Morton Marks filed for bankruptcy, it owed VCE $1.6
million. Although various bookkeeping tricks have been applied, it seems clear that none of that will ever be collected.
There is another $260,000 due from other furniture dealers.
Additionally, a sewing project under the Federal Prison Industry Enhancement program left VCE with upaid invoices of$215,OOO, which was determined to be uncollectible. Stillanother failed joint venture apparently resulted in writing off
more than $40,000 of receivables.
After shutting down all of the private-sector joint ventures, VCE actually had record sales in fiscal year 1998 andproduced a net profit. The reason? The audit report says that
“VCE shows significant improvement in profit over recent
fiscal year primarily because of increased sales volume fromthe opening of new prison facilities.” In other words, Virginia’s extravagant prison-building boom has created a temporarily expanding market for the furniture, clothing, and uniforms manufactured by Virginia’s prisoners—an ironic resultof Virginia’s campaign to become the “prison capital” of thenation.
EIR

July 23, 1999