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.
He said MMG has an obligation to get good returns on its investments so the venture capital fund stays flush.
Tucker said the out-of-state companies initiated the contacts with him about investing in their businesses. Tucker said they learned of MMG because he is on the board of directors of a national association of minority-owned venture capital firms.
Citing privacy restrictions, state officials and Tucker refused to identify the companies in which MMG has invested. "That's confidential," Tucker said. "I'm not going to do that."
Tucker said it was clear when the state put $9.75 million into MMG that federal rules prevented it from restricting its investments only to Maryland businesses. "When you look at the agreement that was signed, we aren't doing anything that was not known or not agreed to, up front, two years ago" by the state, he said.
Robert C. Brennan, assistant secretary of the Department of Business and Economic Development, agreed.
"When we made our investment with MMG Ventures we knew they were not restricted to only making investments in the state of Maryland," Brennan said. "We would prefer that all of their dollars be used in Maryland, but we don't have the ability to tell them how to manage their business. We are a limited partner."
Brennan said the state stands to recoup its money from MMG if the company's investments pay off. The state would be repaid as MMG sells off its interests in companies in which it has made investments, he said.
The possibility of Tucker's group using state tax dollars to invest in companies outside Maryland apparently did not arise in 1994, when the legislature authorized the state to put money into Tucker's venture-capital company.
Del. Michael E. Busch, an Anne Arundel County Democrat, recalled that legislators were told that funding Tucker's private company would enable it to tap "a large pot of money from the federal government" to help small businesses in Maryland.
"The philosophy behind this is that you're trying to help minority businesses within the state get established and to have enough capital and resources to get started," Busch said. "In theory, it's a good program."
Busch, chairman of a legislative committee that introduced the legislation for the Department of Business and Economic Development, expressed surprise when told that part of the state's money had been invested in companies in Texas and California.
Busch said most legislators would have a problem with that practice.
"I think people are under the impression, maybe wrongfully so, that this was either to go directly to small businesses in the state of Maryland, or to people who were going to establish small businesses in Maryland," Busch said.
Brennan said MMG was licensed through the U.S. Small Business Administration as a "specialized small business investment company" so it could qualify for federal funds under an agency venture-capital program.
The state's objective was to use the state's money to attract those federal funds and give MMG an even bigger pool of capital to help more Maryland businesses, Brennan said.
But, once the state put up its money, investment decisions have been left entirely to MMG.
Tucker said MMG has not started receiving federal funds but has applied for them. Under the federal program, the company cannot get federal funds until it establishes more of a track record, he said.
$2 for every $1
Eventually, he said, MMG expects to receive at least $2 in federal funds for every $1 MMG has raised from other sources -- including the state money and any private funds it might attract.
Tucker said his company is working on investment deals with several Maryland companies: "We're going to do everything possible to focus on Maryland businesses, there's no question about it."
He also argued that MMG's out-of-state investments are no different than some of those made by another venture capital program that uses state funds, the Maryland Venture Capital Trust.
However, Brennan said the two programs are different because Maryland Venture Capital Trust is not directly selecting and investing in companies, as is the case with MMG.
Since 1991, Maryland Venture Capital Trust has invested $19 million of state and local funds, mostly pension money, with eight other venture capital firms that were chosen competitively, Brennan said.
The eight firms agreed to use their best efforts to invest in Maryland companies, Brennan said. Within their larger pools of investments, they have invested $50 million in 30 Maryland companies since 1991 -- far more than the $19 million Maryland Venture Capital Trust has received from the state and local jurisdictions, he said.
Del. Howard P. Rawlings, chairman of the House Appropriations Committee, said he does not have a problem with MMG's out-of-state investments if they bring in federal funds, produce a good return and ultimately benefit Maryland businesses.
"If the money from their investment returns is being used to generate business here in Maryland for minority-owned and other disadvantaged businesses, then I don't have a problem with it," said Rawlings, a Baltimore Democrat. "I'd like to see a direct linkage between the two."
However, Rawlings said, he is surprised that MMG has invested in only four companies so far, with more than 50 percent of the money going to two firms in California and Texas.
"I personally would prefer that state money for economic growth and business expansion, including investments, be targeted almost exclusively to Maryland companies," Rawlings said. "But I also recognize that just as the nation participates a global economy, the state of Maryland is a participant in a national economy."
'Tremendous track record'
He also said Tucker's group has a good reputation in the economic development field. "To their credit, they've had a tremendous national track record as a pace-setter in minority business development," Rawlings said.
Even though Rawlings has received $1,500 in campaign contributions from MSBDFA and its owners since 1995, he has criticized them in the past for poor judgment -- involving a political fete held at its headquarters last fall that turned into a fund-raiser.
"If it continues," Rawlings said, "I think they will probably lose the state contract. I want to make it clear I support MSBDFA in the work it is doing, but I do not support some of these lapses of good common sense and judgment."
Leased office space
The Tucker group's lease also has raised concerns, but Tucker said MSBDFA is getting a better deal by leasing space from one of his companies than when it rented space from DBED a few blocks away.
Tucker said he was told after his agency was privatized that it would have to move from the state building because the space was needed for other purposes. He said his group had been paying the state more than $16 a square foot for 1,300 square feet of space.
By contrast, he said, MSBDFA now pays $8.15 per square foot for 4,600 square feet of space. "You tell me if it made sense to do what we're doing," Tucker said.
The East Baltimore Street building houses MSBDFA, MMG and other entities tied to Tucker.
These include the law offices and title company of Robert F. Dashiell, MSBDFA's attorney and a state Senate candidate this year; the Morgan Advisory Group, an MSBDFA consultant; and Community Development Ventures Corp., a nonprofit company
Tucker recently formed to make loans and investments in city empowerment and state enterprise zones, Dashiell said.
Records show that Tucker and MSBDFA's other owners -- Timothy L. Smoot, Catherine D. Lockhart and Robert R. Croxton, all former state employees -- bought the building through a separate company they formed called CRST Inc.
CRST got two loans from the Baltimore Community Development Financing Corp. for $130,400 and $30,916 to buy the three-story, building in a city empowerment zone, mortgage records show. The lender is a nonprofit agency backed by the city that provides loans at reduced interest rates to renovate vacant properties.
If Tucker and other MSBDFA and MMG owners were still state employees, it would violate the state's ethics laws to use state funds to lease space in their building. But because they now are in the private sector, the restriction does not apply.
Tucker said he sees no conflict of interest in MSBDFA and MMG using part of their state funding to lease space from one of his companies because it's a private -- not public -- deal.
But Zarnoch and DBED Secretary James D. Fielder Jr. have said that Tucker's companies are different from most private companies because they were created as a result of legislation and they receive virtually all of their money from the state.
Political contributions
The same issue arose in a recent controversy over political campaign contributions made by MSBDFA and its owners. Auditors have challenged the company for using part of the proceeds of its state contract to make such contributions.
Separate from MMG's investments, MSBDFA gets $1.1 million a year from the state to manage a portfolio of 40 loans, initially worth about $9.5 million, and additional loan guarantees.
Tucker said that once MSBDFA is paid for this management service, how it uses its money is its own business -- the same as would be the case for a construction company with state contracts.
Tucker has acknowledged that his company has contributed twice the $10,000 allowable amount in the current four-year election cycle, but said the violation was "an honest mistake" that he is correcting by asking for some money back from candidates.
MSBDFA and its owners contributed to numerous candidates between 1995 and 1997 but reported no contributions since Feb. 1, 1998, according to campaign finance reports the group has filed.
Contributions of $500 or more during the period included: $1,935 to Baltimore Mayor Kurt L. Schmoke, $1,650 to Del. Nathaniel T. Oaks, $1,500 each to Rawlings and the Maryland Democratic Senatorial Committee, and $1,270 to U.S. Rep. Albert R. Wynn.
Other large contributions included: $1,000 to U.S. Rep. Elijah E. Cummings; $900 to state Sen. Decatur W. Trotter; $600 each to the Maryland Black Caucus and ex-Sen. Larry Young, prior to his expulsion from the state Senate this year; and $500 each to Dashiell, House of Delegates Speaker Casper R. Taylor, Jr. and Del. Hattie N. Harrison.
Pub Date: 9/08/98