CHICAGO – Missouri economic development officials failed to conduct sufficient due diligence on a number of projects before granting state subsidies, most notably, the bond-financed artificial sweetener plant abandoned last year by a Chinese company, according to a new state audit.
The findings came in an audit of the Missouri Department of Economic Development’s Business and Community Services division conducted by State Auditor Tom Schweich.
The Mamtek US Inc. sucralose manufacturing plant being built in Moberly was awarded about $17 million in state tax credits and other subsidies although they were never actually handed over.
The department also gave the project a $28 million allocation of the state’s recovery zone facility tax-exempt authority under a federal program to be used for the $39 million appropriation-backed revenue bond deal that sold through Moberly’s economic development authority in 2010.
“The BCS, and the city of Moberly along with other entities involved in issuing the industrial development bonds, did not ensure due diligence procedures were adequately designed, performed, and documented to protect the interests of all parties,” Schweich said, adding that while the agency implemented some improvements to its process in February 2011 “due diligence and consistent oversight continue to be challenges for the Missouri Department of Economic Development.”
Local and state prosecutors and federal regulators filed civil and criminal complaints last week alleging theft, fraud and securities violations against Mamtek’s former head Bruce Cole.
Moberly handed control of the shuttered project over to trustee UMB Bank NA after the company failed to make payments last year needed to cover debt service on the bonds and the city in turn reneged on its appropriation pledge to cover debt service.
The trustee and other creditors forced the company into involuntary bankruptcy and various lawsuits and other legal claims have been lodged against Cole and the underwriter Morgan Keegan & Co. and bond counsel Armstrong Teasdale LLP.
State officials who had reviewed the project came under fire during legislative hearings earlier this year on the failed project, but the auditor’s report takes them further to task on a number of fronts.
It raises concerns over BCS’ continued development of an incentive package and increased bond allocation even after questions were raised over the existence and operation of a Mamtek plant in China. The department had information that appeared to contradict Mamtek’s claims about the plant in China yet went ahead and awarded the incentive package in the spring of 2010.
While the city later obtained a valuation of Mamtek’s intellectual property and pending patents, the audit reports that the BCS, the city, bond underwriter, and bond counsel did not adequately question the validity of information used to form the valuation. Mamtek later disclosed the property has little worth.
None of the parties verified information from Mamtek as to its claims of cash on hand or how it would fund its equity contribution or questioned the reasonableness of the company’s financial projections. Some BCS employees did raise questions over the reasonableness of significant changes in the cost and scale of the project but the incentives were still awarded.
In the department’s response included in the audit, officials point out that the incentives were never turned over based on the project’s failure to meet requirements. Officials also cite the financial and other due diligence it did conduct and reliance on certified documents. The response also denies that the state did not share questions it had over the company’s operations in China.
The audit also highlights the difficulty the city would have had in covering $3.8 million in annual debt service with just $6.2 million of general fund revenues.