HAMPTON — Two City Council members say Hampton's city manager has backed off her prior assertion that a "gift" from a private entity provided funding for an undercover police company created to go after cigarette bootleggers.
In a Sept. 27 email to the Daily Press, City Manager Mary Bunting wrote that no taxpayer funds were used for the Hampton Police Division's undercover firm, Blue Water Tobacco, save for the salaries of the handful of officers involved.
"Instead, donated funds from a private entity were given to us to fund the operation," she wrote.
Bunting went on to cite a city ordinance that gives her, as city manager, the authority to "approve and accept" gifts that "are donated in furtherance of immediate public safety administrative or operational needs."
Money "derived from the use of that gift," Bunting added, "is akin to evidence or fruits of criminal activity," and that she didn't need to inform the City Council about the money's existence or expenditures until later.
She said at the time that the ordinance — which was amended for the purpose of accepting that gift — amounted to the City Council's "prior authorization" to spend it.
Under the ordinance, gifts valued at $5,000 or more are to be reported to the council "as soon as practicable." Bunting said that she and City Attorney Cynthia Hudson jointly determined that it wasn't yet practical to tell the seven-member council about the money.
In bringing up the gift ordinance, Bunting was responding to statements that a state government accounting expert made to the Daily Press.
Virginia Auditor of Public Accounts Walter Kucharski said in an interview that city councils must approve all city spending and that Hampton's council should have been told about the more than $700,000 in Blue Water Tobacco's account at Langley Federal Credit Union.
Two City Council members — Donnie Tuck and Will Moffett — cite problems with Bunting's explanation that a gift from a private firm provided money to Blue Water Tobacco.
The council members are not calling into question Bunting's statement that no Hampton tax dollars were used for the operation, save for the police officer salaries.
But Tuck and Moffett point out that an amendment to the gift ordinance that allows the city manager to accept public safety gifts wasn't passed until April 13, 2011 — more than nine months into the cigarette operation.
By that time, several hundred thousand dollars from the account had already been spent. For example, nearly $400,000 in cars and SUVs were purchased in January 2011, three months before the ordinance was passed.
Second, those council members say, there was never any such gift.
Though the city was expected to get a gift of up to $50,000 from a "security arm" of Philip Morris USA, Tuck and Moffett said that Bunting told council members during a closed session on Oct. 3 that the expected gift never came.
"There was expectation of a gift, but because of an administrative error on Hampton's part, it didn't happen," Tuck said. "There was an agreement in place, but they forgot to fill out some technical paperwork."
"The gift never happened," Moffett said. "I will confirm that as being a fact. What Donnie heard is what I heard."
More than $3 million flowed through Blue Water Tobacco over 19 months, as it advertised tax-free cigarettes online and sold them out of a nondescript industrial warehouse off of Aberdeen Road.
But the investigation — designed to crack down on people evading cigarette taxes and committing other crimes — yielded no arrests before it was shut down in January 2012 following officer misconduct allegations pertaining to spending. The case is now a matter of a police internal affairs investigation.
When asked if the city was officially backing off its claim that a gift from a private entity had provided the cash for the operation, Hudson declined to answer the question, citing a recent City Council decision to release no more statements on the case until the internal affairs investigation is concluded.
"In accordance with the council statement ... the city declines to comment further at this time regarding details of the undercover investigation, including comment regarding the role of private entities in the matter, until after completion of the internal investigation," Hudson wrote in an email.
That is to make sure, she said, "that we are responding on the most fully informed basis possible, rather than in a piecemeal, ad hoc fashion." After the internal investigation is over, she said, the city will provide any relevant detail "that is prudent and lawful to share."
A spokesman for Altria, the Richmond-based parent company for Philip Morris USA, backed Tuck's statement that a gift had been planned but not provided.
"Altria did not provide a financial contribution to the Hampton Police Department," Altria spokesman David Sutton said. "Altria did not receive the required paperwork from the Hampton Police regarding a financial contribution by the company. ... There's a series of paperwork involved, but we just never got it."
So if the initial seed money for the operation didn't come from a gift — and didn't come from Hampton taxpayers — where did it come from?
Most, if not all, came in June 2010 from the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), the federal agency that was once Hampton's partner on the cigarette stings. The agency provided the initial caseloads of cigarettes for the operation and money for a warehouse lease.
It's unclear how many cases of cigarettes the ATF initially provided. It's also unclear how much money the undercover firm had on hand when the ATF backed out of the case in October 2010 when its special agent assigned to the case was found to be selling cigarettes on the side.
Hampton continued the undercover operation, buying and selling cigarettes without the ATF. By the end of 2010, the Blue Water Tobacco account at Langley Federal Credit Union had a balance of about $765,000, and the ATF didn't ask for any of that money.
In a "churning" operation — which has strict rules when under federal authority — money raised from an investigation can be pumped back into the same investigation.
According to the city's legal interpretation, Bunting said, those funds "did not require prior appropriation by Council as they were not 'public funds' in the sense contemplated by the appropriations statute."
"Those were ongoing churning account funds, which — although neither the City Attorney nor I knew about at the time — we believe are the ongoing fruits of the criminal investigation and authorized churning activity," Bunting said of the money.
Tuck, for one, strongly disagrees with Bunting — saying that in his reading of the city charter, the police cannot simply spend money raised from selling cigarettes, or any investigation, without budgetary approval from the City Council.
"It's not just a private operation of the police department," Tuck said. "It's still city money."
And though the gift ordinance was irrelevant in the sense that the gift never came, Tuck expressed concern last week with the way the ordinance was passed in April 2011.
Police Chief Charles R. Jordan Jr. said he approached Bunting and Hudson sometime in 2011 about the expected gift and the need for the ordinance.
Tuck said the reason for the ordinance was not spelled out clearly to the City Council. Instead, he said, it was stuck deep in the council's "consent agenda" — typically a list of noncontroversial items — and staffers did not provide any explanation for it.
"The council was bypassed," Tuck said. "Supposedly it was our fault for not asking."
Tuck said the City Council should have been told that "we're getting a gift of $50,000" for an undercover operation, and that the council should have been provided some idea of what the gift would be used for.
Responding to Tuck's statement, Bunting said in an email "there was no intent to deceive or mislead anyone" about the ordinance.
"The ordinance was on the advertised public agenda and was unanimously approved," Bunting said. "As I have repeatedly stated, operations of the police department — especially undercover operations — are not discussed in advance with council members."