Two months before the start of the Baltimore Grand Prix, the race's organizers, desperate for cash, entered into a $1.1 million loan they believed was necessary to save the event.
But the two-month loan — which allowed the lender to collect more than $500,000 in interest and other charges — ended up draining funds needed to pay city taxes, the former CEO of Baltimore Racing Development says.
Now, with Baltimore Racing Development facing large debts, some are complaining about the loan's terms and asking why the lender was paid while taxes — including more than $450,000 in city amusement and admissions taxes — and other debts were owed. The lender, Virginia-based Thermopylae Sciences & Technology, also received perks such as race-day executive suites and free food and drink for dozens of guests.
"When I left the company, I was assured there was enough money to pay the amusement taxes," said Jay Davidson, former chief executive officer of the company that ran the Grand Prix. "I'd like to know what happened to the money."
Another race organizer says the lender was entitled to the money under terms of the loan agreement.
Details about the loan, contained in documents obtained by The Baltimore Sun, come as Baltimore Racing Development faces more than $12 million in debts to local and state agencies, contractors and investors. The company, which is trying to reorganize under new leadership, has less than $100,000 in cash, officials have said.
Documents for the July loan were signed by Thermopylae president Abraham J. "AJ" Clark and three of the five Baltimore Racing Development managers: Chief Financial Officer Walker Mygatt, a Constellation Energy executive; Mother's Federal Hill Grill owner Dave Rather; and investor William White of Martha's Vineyard. Mygatt, Rather and White declined to comment.
Race executives say they needed the money to pay sanctioning fees to IndyCar and other racing groups. Without those fees, which totaled $2.2 million, racing teams would not have participated in the event held over the Labor Day weekend.
Kenneth R. Banks, another Baltimore Racing Development manager, said that after taking a hard look at company finances in June, he learned that $900,000 was still owed on the sanctioning fee — and the company had only two weeks to pay it.
"We didn't have anywhere near the $900,000," said Banks. "IndyCar was ready to pull the plug. Tens of thousands of people had purchased tickets. People had spent money on airfare and hotels. If the race didn't happen, it would have been catastrophic for Baltimore.
"I called many of my banking friends. Nobody would touch it. Finally, I called AJ Clark. We agreed to pay whatever we had to pay. Really, AJ and I saved the race."
Banks, the president of Banks Contracting Inc., sits on an advisory board for Thermopylae and with Clark is a co-owner of a small investment company that owns a 4 percent stake in the Grand Prix.
Banks said that even though he solicited Clark for the Thermopylae loan, the three other managers negotiated terms of the agreement.
Banks defended the loan's terms, and said of Clark: "He got us out of a hole. We were desperate."
Under terms of the loan, Thermopylae was to be repaid the $1.1 million plus $165,000 shortly after the race weekend. Thermopylae received a 2 percent share in Baltimore Racing Development, about $350,000 in perks, including a suite for more than 10 people for five years, and passes to exclusive receptions and viewing spots. The contract said race officials would promote Thermopylae to the media and identify it and Clark as "substantial contributors/benefactors contributing to the success of the Grand Prix."
The contract also allowed Thermopylae to assess late fees and related penalties.
Clark entertained former Secretary of State Gen. Colin Powell, the race's grand marshal, during the festival.
Baltimore Racing Development gave Clark access to a special account holding about 35 percent of the revenue brought in through ticket sales — some $1.66 million — as a safety net for Thermopylae. After the race was over, Davidson thought Clark would withdraw the company's principal investment, plus $165,000 in interest, leaving about $400,000 that the race company planned to use to pay the city's amusement and admissions tax.
But Banks said the account did not contain adequate funds to repay the loan by the Sept. 6 due date; Davidson does not dispute that.
Clark extracted a series of fees, penalties and other charges, leaving only $22,000 in the account, according to company documents obtained by The Sun and verified by multiple sources.
Clark did not return calls left on his personal and office phones. Banks, his investment partner, said Clark was in Dubai.
Issues surrounding the loan repayment were raised in an internal memo written by Columbia-based accountant Travis Raml, who was contracted to review Baltimore Racing Development's books.
According to the memo, Clark charged the racing company an additional $42,000 in interest, $63,000 in late fees, $50,000 in legal fees, $26,000 in hospitality reimbursements, $82,000 in sanction fees and $32,000 in mobile application fees. He also withdrew $75,000 to give to Banks as repayment for a loan.
In a separate transaction, Raml said, a $25,000 loan was repaid to company manager Rather.
"It has come to my attention that two bank transactions have occurred in the last 45 days that have benefited members of the organization (beyond normal guaranteed payments)," Raml wrote to Mygatt on Nov. 21. "Given that there are tax liens filed ($567,594.19), unpaid loans, and other liabilities, I have become greatly concerned with the possible ramifications of these transactions. … The net impact of these transactions has contributed to BRD's inability to make amusement tax payments."
Raml also warned that the state considers amusement taxes as "trust funds" and the money is not "legally the property of the holder of the funds" to disburse.
"Failure to remit these taxes can cause responsible persons to be personally liable for the amounts owed," he wrote.
Davidson, the former CEO, said he thought the money would go first to pay the amusement tax. He questioned why Banks was repaid before other obligations were met.
"There are lots of people who had loans into the company including other managers and members, including myself and my father-in-law," he said. "I'm curious as to why it made sense to pay that one in front of everybody else."
Banks said the $75,000 was repayment for a personal check he wrote to Dale Dillon, a construction executive Baltimore Racing Development hired in late summer to manage the race.
"I had to give him a check out of my own pocket," Banks said. "But when you're desperate, you have to pay the expert. The race wouldn't have run without Dale Dillon."
Banks said that he and Clark had no idea Davidson and other company officials planned to use the funds from the ticket account to pay amusement taxes.
"There was no mention of there being amusement taxes from that fund," he said. "Davidson said that was all taken care of."
Banks said Clark should be praised for saving the race, and Baltimore Racing Development officials shouldn't complain about the loan contract. He said if race organizers hadn't accepted Clark's terms, the event would have imploded.
He also said Clark was within the rights of the contract to withdraw fees and penalties from the account.
"That's the gamble. You could lose a million dollars. The race could have been stopped," Banks said. "For that high risk, he was awarded appropriately."
The loan terms indicate that race managers were growing increasingly desperate as the event drew near, said John Collard, who specializes in helping financially struggling companies.
"The fact that the interest rate is as high as it is, I think they were in very dire straits," said Collard, chairman of Annapolis-based Strategic Management Partners. "They were probably at the 11th hour and 59th minute."
Collard said Clark was wise to extract such high interest, considering that "there are no guarantees on ticket sales."
The Grand Prix, which featured IndyCar drivers racing on streets around the Inner Harbor, drew 160,000 spectators, generated national television coverage and thrilled racing fans who embraced the event. Mayor Stephanie Rawlings-Blake and other city officials initially hailed it as a success, but revelations about the racing company's troubled finances have caused the mayor to chastise its officials and call for a restructuring.
Maryland Comptroller Peter Franchot has placed a lien against company officials, including the personal belongings of Davidson and his wife, Elizabeth, over $570,000 in unpaid taxes.
The racing company has been sued six times, alleging nearly $1.6 million in unpaid bills. Internal company documents show that the company is past due on more than $5 million in bills.
Councilman William H. Cole IV, who spoke with race organizers each day in the weeks leading up to the Grand Prix, said that he knew the group's finances were tight, but did not realize it lacked money for the full sanctioning fee until Clark's cash infusion.
"I had no reason to believe that they didn't have money for the sanctioning fee," Cole said. He said he also spoke daily with IndyCar officials about concerns regarding the track, but they did not mention that Baltimore Racing Development had not paid the fee.
"I don't know that anybody on the city side even knew that they were having issues with the sanctioning fee," he said. "We're obviously hearing a lot after the fact that wouldn't have come to light if it weren't for the lawsuits."