Civitas Sues North Carolina Attorney General

On October 18, the Civitas Center for Law and Freedom (CLF) filed suit against Roy Cooper in his capacity as North Carolina attorney general, alleging he illegally diverted money from public education to special interest groups.

The Bottom Line

The North Carolina Constitution, as well as a 2005 NC Supreme Court decision, require all fines and forfeitures be directed to public schools. The Civitas Center for Law and Freedom lawsuit alleges that Roy Cooper, in his capacity as attorney general, directed funds resulting from a 1999 agreement with Smithfield Foods that appear to be equivalent to fines and forfeitures to favored environmental groups.

One of the environmental groups that received funding under this agreement may have supported political advertising against Roy Cooper’s opponent in the current race for governor, Gov. Pat McCrory. Additionally, the funds were paid out by Smithfield Foods, which is a subsidiary of a Chinese corporation. The Civitas Institute filed a complaint with the State Board of Elections demanding an investigation into the use of those funds and whether they are American in origin.

Case Background

In the late 1990s, Smithfield Foods, Inc., now the nation’s largest hog producer, was on an acquisition spree. In 1999 Smithfield bought Carroll’s Foods Inc., the nation’s second-largest hog production company, for $500 million. In the few years preceding that purchase, Smithfield had bought controlling interests in meat processors in France and Canada and across the U.S. Smithfield already owned an 86 percent stake in Browns of Carolina, and 77 percent stake in Circle Four, a Utah-based hog producer. Also in 1999, Smithfield purchased Western Pork Production Corp. in Colorado.

But Smithfield had its eye on a much larger pork producer: Murphy Family Farms, based in Rose Hill, NC.

Smithfield Food’s acquisition of what appeared to be every pork producer of notable size in the U.S in pursuit of vertical integration and greater control of the hog production supply chain did not go unnoticed by Attorneys General across the country. Both Missouri AG Jay Nixon and Iowa AG Thomas Miller (both Democrats) sued to stop the Smithfield-Murphy merger – ostensibly because of their opposition to the consolidation and monopoly of the hog production industry.

In North Carolina, another Democratic attorney general, Mike Easley – now a convicted felon, disgraced attorney, and former governor – had plenty of political reasons to make a deal with Smithfield Foods rather than joining with other attorneys general in suing Smithfield. By not taking Smithfield to court, he could pressure the company to fork over millions of dollars with an “environmental enhancement agreement,” winning political points among his supporters. Meanwhile, as he looked ahead to running for governor, he would also be keeping Smithfield on his side by not costing the company millions more in legal fees and a possible delay or blocking of the merger. Anything Smithfield could do to prevent more costly litigation and allow the Murphy purchase to go through would surely be more-than-welcome news for all the hog producers involved.

It would also be welcome to others on the state’s political scene. One of the founders and owners of Murphy Family Farms was Wendell Murphy, a former Democratic state legislator who had already been listed on the “Forbes 400” list of the richest Americans.

Smithfield was about to become the largest hog producer in the country, in a deal that would cement Murphy’s status as a billionaire.

Through news reports, it appears that all parties involved reached an agreement requiring Smithfield Foods to pay $15 million to North Carolina State University immediately for the development of “Environmentally Superior Technologies,” and up to $50 million over 25 years for “Environmental Enhancement.”

The agreement was a win-win. It appeared to the public that Easley punished Smithfield for “hurting the environment.” Yet the fine might be considered a slap on the wrist for a multibillion-dollar corporation, and Smithfield got to proceed with the merger without another lawsuit from yet another state attorney general.

Since Civitas filed its lawsuit, Cooper’s spokesperson said “[Smithfield Foods] voluntarily agreed to directly fund water research and water quality projects,” essentially saying that the company agreed to give up to $65 million out of the goodness of its heart.

Based on facts, however, it is not hard to reach a different conclusion: that pressure from the state compelled Smithfield into accepting the “agreement.” Any agreement with government by its very nature carries either an implicit or explicit threat: “comply or else.”  Furthermore, the fact that Smithfield Foods agreed to deliver the money directly to the Attorney General and not the General Assembly strongly suggests a quid pro quo.

Every year since the agreement was signed, Smithfield Foods has given up to $2 million to the North Carolina Attorney General’s Office to give out in the form of “Environmental Enhancement Grants.”

A simple review of the NC Attorney General’s website indicates that after signing the agreement, a grant-making operation that would be undistinguishable from a charitable grant-making foundation was set up in the AG’s office, complete with capacity to receive and review letters of intent and grant proposals. More than $25 million has been granted out to more than 100 projects since the agreement was signed, with nearly $25 million more slated to be doled out in the future.

Looking at everything that was happening around the time the agreement was signed – Easley’s upcoming gubernatorial campaign, the Smithfield-Murphy merger, and the other lawsuits brought by Democratic attorneys general – it seems this agreement was signed under threat. It appears the payout resulting from the agreement is tantamount to a fine or forfeiture, and thus falls under Article IX, Section 7 of the North Carolina Constitution, which states: “all moneys, stocks, bonds, and other property belonging to a county school fund, and the clear proceeds of all penalties and forfeitures and of all fines collected in the several counties for any breach of the penal laws of the State, shall belong to and remain in the several counties, and shall be faithfully appropriated and used exclusively for maintaining free public schools.”

One might ask, if the practice of diverting settlement funds to these kinds of environmental programs is unconstitutional, why has no one taken action to stop it? In a similar case, someone did.

In 1998, the North Carolina Department of Environment and Natural Resources implemented a policy that allowed parties found violating environmental law to direct a portion of civil or criminal penalties to a “Supplemental Environmental Project.” The North Carolina School Boards Association and several individual school boards filed suit against State Treasurer Richard Moore. They demanded that those fines be directed to the public schools as is constitutionally required.

After several years of litigation, in 2005 the state Supreme Court agreed with the School Boards Association that the funds paid for Supplemental Environmental Programs were subject to Article IX, Section 7 of the Constitution and therefore must go to public schools. The Court also held that the previous three years of fines paid that went to SEPs must be recovered.

Roy Cooper was a named party in that lawsuit, and had been attorney general since January 2001, so it stands to reason that he had knowledge of the Court’s ruling.

Enter 2016 and De Luca v. Cooper

Mike Easley arranged the 1999 agreement with Smithfield Foods, but since his election to the Attorney General’s Office Roy Cooper administered the grants resulting from the agreement. As explained above, the state Supreme Court ruled that Supplemental Environmental programs were unconstitutional.

The “Environmental Enhancement” programs administered by Roy Cooper appear to be identical to the Supplemental Environmental Programs set up by DENR in 1998.  As a result, Francis De Luca, a North Carolina taxpayer being represented in court by Paul “Skip” Stam, sued Cooper on the grounds that the funds expended for environmental enhancement should go to the public schools in the future and the past three years of grants should be recovered from their recipients.

Who Received All That Money?

Each year, up to $2 million is given out to, on average, 10 organizations.

There is one grant recipient in particular whose activities are cause for additional concern: the Pamlico Tar River Foundation. In 2014, Roy Cooper announced that the group had been awarded $123,309 “to install and restore wetlands to treat and reduce storm-water runoff on the campus of Edgecombe Community College.” Since 2004, the foundation has received a total of $387,794 from Roy Cooper.

In 2015, the Pamlico Tar River Foundation merged with the Neuse River Foundation to form a new organization named “Sound Rivers.” Sound Rivers, such as it is, is a member of an umbrella organization called the North Carolina Environmental Partnership (NCEP). While the NCEP has never filed a report with the State Board of Elections, the Center for Public Integrity shows NCEP as the largest sponsor of ads by far in the governor’s race – all opposing Gov. McCrory.

The NCEP has spent at least $1.6 million on TV ads opposing McCrory in this election cycle, and spent more than $1.6 million in 2014 to defeat Republican legislative candidates. See Civitas’ SBE complaint on this subject here.

Since there is no public disclosure of the source of funds the NCEP uses for its anti-McCrory ad campaigns, and to date, no evidence of an audit or verification as to what the Pamlico-Tar River Foundation did with the money, it is reasonable to assume that some or all of the money goes directly to the NCEP for ads opposing Republicans, and Gov. McCrory this year.

It appears that Attorney General Roy Cooper is sending Environmental Enhancement Grants to a group that is sponsoring ads attacking his opponent in the race for governor.

But the Story Gets Better

In 2013, Smithfield Foods was sold to a Chinese company, Shuanghui International Holdings, China’s largest meat processor. Since the 1999 agreement between Smithfield and the NC attorney general has not changed and Smithfield is now part of a Chinese corporation, it would stand to reason that the money that funds the AG’s environmental enhancement grants could be Chinese in origin. If this is the case, Cooper’s grants would be a violation of the prohibition of foreign national funds being used in U.S. political campaigns, and the grants are a federal crime that should be referred to federal prosecutors.

An Abuse of Power

The Civitas Center for Law and Freedom’s lawsuit alleges Roy Cooper, in his capacity as attorney general, both knew about legal precedent prohibiting the direction of fines and forfeitures to environmental programs and apparently ignored the Constitutional provision requiring fines and forfeitures to be directed solely to public schools. Cooper directed funds that appear to be equivalent to fines and forfeitures resulting from a 1999 agreement with Smithfield Foods away from public schools and instead diverted them to environmental programs. A related Civitas Institute complaint to the State Board of Elections alleges that a recipient of the diverted funds, the Pamlico Tar River Foundation, may have supported political advertising against Republican Gov. Pat McCrory, Democrat Cooper’s opponent in this year’s gubernatorial race. Smithfield Foods is a subsidiary of a Chinese corporation. It is possible that Chinese money is influencing the 2016 gubernatorial campaign.

The underlying issues here are important and bear repeating: Using the threat of government force, it seems clear that elected officials coerced a private business to give millions to liberal special interest groups. Not only do these groups actively work against the interests of that business, but based on available information, it also looks like they are backing – some monetarily, some otherwise – Roy Cooper’s run for governor. This is but one example of how a massive network of liberal organizations and insiders can use government to their advantage. The next attorney general would do well to stop this practice and ensure that any and all fines and forfeitures go to public education as the Constitution demands and not to favored individuals and organizations.