The thin line separating public, private Money: Auditors are questioning how two private companies use funds from the state.

September 08, 1998|By Greg Garland | Greg Garland,SUN STAFF

When the state put up $9.75 million to fund a new private investment company two years ago, lawmakers' intent was to attract an even greater amount of federal grants and provide a source of venture capital for disadvantaged small businesses in Maryland.

So far, though, the private fund has invested more of the state's money in out-of-state companies than Maryland firms. Of the $3.3 million it has put to work, $2.25 million has gone to two companies in California and Texas.

In addition, the investment company's owners have another company that manages state small business loans and the two firms use funds they receive under state contracts to rent office space from their own top officials.

That second company was recently called into question for using funds from its state contract to make political campaign contributions.

The out-of-state investments, the rental arrangement and the campaign donations appear to be legal, and the private companies' owners say they have done nothing wrong.

But the deals are raising concerns from state auditors, and a leading legislative budget-watcher said he finds them "mind-boggling" and "distressing."

How did it happen?

The answer begins with 1994 state legislation that allowed Stanley W. Tucker and a group of other former state employees working for him to transform their state small-business economic development agency into a private company.

Since 1981, Tucker had been executive director of the Maryland Small Business Development Financing Authority, the MSBDFA, an agency that managed small business loan programs under the state Department of Business and Economic Development (DBED).

Now, Tucker's group manages and markets the loan programs as a private company called MSBDFA Management Group Inc. under a $1.1 million state contract.

The 1994 legislation also authorized the state to invest in a venture capital fund to be set up by the group. Tucker, 51, formed a separate company called MMG Ventures to manage the fund and in 1996 the state invested $9.75 million in it.

Tucker and his partners set up offices for MSBDFA and MMG at 824-826 E. Baltimore St. in Baltimore, in a building they bought through a third company for $163,000 in 1996.

Two sources said MSBDFA and MMG use $48,000 a year in state funds to pay rent for space in the facility. Tucker said he did not know the exact amount used for rent, but did not dispute that figure as inaccurate.

Tucker defended the out-of-state investments, the campaign contributions and the rental arrangement:

"We are not doing anything different from any private company operating as a private entity. We are not a public agency. We are a private corporation that has a contract to manage a state program. My partners and I used to be public employees but we are no longer public employees."

Referring to the venture capital fund, Tucker said, "We were very creative in making this happen. You would think folks would be very proud of what we've done. I'm perplexed by why all these questions are raised now, after the fact."

But the deals are drawing sharp criticism.

State lawmakers and economic development officials say the intent of the 1994 legislation that authorized funding of MMG was to take advantage of new federal economic development grants that were available to such private companies -- and bring that money to Maryland.

Informed of the Tucker group's use of state money to invest in out-of-state companies, state Sen. F. Vernon Boozer said: "That wasn't the intent of the legislature, you can bet on that. That's mind-boggling."

Boozer, a Baltimore County Republican who is the ranking minority member on the Senate Budget and Taxation Committee, said the group's lease is also troubling because it is essentially a "creature of the state" operating almost entirely with state funds.

"It's not that it's illegal necessarily, but how people view it," Boozer said. "It's not an arms-length transaction. It's almost like a self-serving, self-dealing kind of thing. It's distressing."

Legislative auditors also are questioning the propriety of the out-of-state investments and the rental deal.

Further, auditors have raised questions about MSBDFA's use of money it gets under its state contract to make campaign contributions. Tucker has acknowledged that his company contributed about $21,000 to various state and local candidates from 1995 to 1998.

"I'm not sure it is so much a legal issue as a policy question," said Assistant Attorney General Robert A. Zarnoch, who has worked with auditors reviewing the Tucker group's state contracts and its use of funds.

Zarnoch said he could not comment in detail because the audit report is in a preliminary stage and has not yet been released.

Out-of-state investments

Tucker said MMG invested in the businesses in Texas and California because doing so met its objectives of providing capital to "socially or economically disadvantaged businesses," while promising a good rate of return -- which he defined as 30 percent to 40 percent over five years.

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