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Archive for Thursday, April 11, 2002

Venture capitalists reaped state’s windfall, suit claims

April 11, 2002

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The three businessmen hornswoggled the Kansas Legislature and well-meaning investors. They paid themselves $200,000 bonuses, got newly remodeled offices and new SUVs.

The allegations are raised in a lawsuit filed last week against Kansas Venture Capital Inc., an investment firm created in 1976 by the state.




Tru-Circle Corp. is a producer of sheet metal components for the aerospace, telecommunications, medical equipment and computer industries. Its corporate headquarters, in addition to two production facilities, are located in Wichita.According to the company's Web site, the firm employs about 500 people at its five locations, which includes facilities in Washington and California.Company officials did not return phone calls Wednesday seeking comment on the lawsuit against Kansas Venture Capital Inc.

"What happened is both unconscionable and insidious," said Bruce Woner, a Topeka attorney representing Ellyn Tyrell and Carole Ladish, who were KVCI corporate officers until they were fired last week.

The women filed a lawsuit Friday in Johnson County District Court, claiming that their three bosses John Dalton, Thomas Blackburn and Marshall Parker cheated the state of Kansas, which had invested $5 million in the enterprise. Instead of paying dividends to shareholders, including the state, they pocketed the money themselves.

Spokesmen for Kansas Venture Capital strongly deny the allegations.

"These are two disgruntled employees. All of the allegations are false and without legal basis. We are deeply troubled by this lawsuit," said Dalton, KVCI president.

Messages left Wednesday with Blackburn and Parker were not returned.

True or false, the women's lawsuit opens a window on operations at a quasi-state agency that for years escaped scrutiny from the public or state officials.

The firm

Created in 1976 by legislators and then-Gov. Robert Bennett, Kansas Venture Capital gave a 25 percent tax credit to investors who were willing to put money into high-risk, high-potential Kansas companies.

"Then in 1987, it was restructured and the state made an investment in it of $5 million," said Charles Warren, former president of Kansas Inc., the state's economic development think tank. "Essentially the state had $5 million of preferred stock in KVCI."

By 1994, private investment in KVCI had reached about $6.6 million, Warren said, citing a 1996 Kansas Inc. report. At the time, KVCI officials claimed investment in 18 companies that had created 823 new jobs. But Warren said by the time of the report officials were questioning KVCI's effectiveness.

"They (KVCI executives) all got pretty good salaries and did pretty well, but what they've contributed to the Kansas economy has been kind of marginal," Warren said. "I mean 18 firms over seven years? It's been helpful but certainly not very significant."

The executives, however, got six-figure salaries and bonuses.

"They had these huge gains that accrued to these executives," Warren said. "They had in their contracts where they would get a percentage of the profit, a percentage of the gain they realized, which led to some pretty significant windfalls for those guys."

Warren, now a consultant for United Way in Indiana, resigned from Kansas Inc. in December 1997. That was a few weeks before the KVCI executives went to the Kansas Legislature with a proposition that now has at least one lawmaker calling for an FBI investigation.

The claim

According to the lawsuit, Kansas Venture Capital executives in 1998 arranged to buy out the state's stake in its operations for $5 million.

At the same time, Tyrell and Ladish claim, the executives knew the state's share in Tru-Circle Corp., a Wichita-based aviation company then wooing buyers, was likely worth $7.6 million.

After Tru-Circle was sold in 1999, Dalton, Blackburn and Parker allegedly used profits from the sale to give themselves each annual bonuses of more than $200,000 for the next three years. They also are alleged to have raised their $110,000-a-year salaries to $125,000 a year, spent more than $93,000 remodeling and furnishing offices. The women said two of the men also bought $40,000 sport utility vehicles.

Tyrell and Ladish said they questioned but did not object to the bonuses and other spending until Feb. 15, 2002, when they were told to either accept part-time positions or resign so the company could afford to hire a financial analyst. The women in 2001 each received $47,000 in salary and bonuses.

"After all that spending, it didn't seem right that we were the ones to pay the price," Tyrell said.

According to the lawsuit, Tyrell, 59, and Ladish, 58, were fired after they refused to accept the ultimatum. Both seek more than $75,000 in damages.

Tyrell was the corporate treasurer; Ladish, the corporate secretary. Tyrell was with firm since it started in 1976; Ladish since 1988.

Dalton said lawmakers knew of the disparity between Tru-Circle's selling price and what Kansas Venture Capital wanted to pay the state.

"At the end of the day, (lawmakers) concluded Kansas Venture Capital wasn't about making money, it was about economic development," Dalton said. "And in that regard, KVCI had been very successful in 'jobs created' and 'jobs retained.' The record on that is outstanding."

The state no longer has a financial stake in the firm.

Dalton said firm officials, led by Blackburn, conferred with legislators and Gov. Bill Graves' office before the sale.

"This was all done out in the open," Dalton said. "It's part of the public record."

Mike Blumenthal, an attorney for Kansas Venture Capital, said the firm was fair and above-board in its dealings with Tyrell and Ladish.

"Unfortunately, I don't know of anyone affected by a staff reorganization decision who thinks they're the one who should have been let go," he said. "That's what we're dealing with here. This was an honest, up-front, legitimate management decision."

New questions

The 1998 law that allowed KVCI to buy out the state for $5 million started as Senate Bill 487.

Sen. Karin Brownlee, R-Olathe, was the only senator who voted against it.

She said Wednesday that she remembered questioning why the state was not getting interest back. She said that during a hearing on the bill, state officials urged its passage, leaving the impression that the state was lucky to be getting any money back at all.

Brownlee, now chair of the Senate Commerce Committee, said that when she read the lawsuit, "I was rather floored that one entity made so much money."

She said questions surrounding the lawsuit caused her to pull back consideration of House Bill 2505, currently before lawmakers, which would create new tax credits for venture capital investors.

Sen. Paul Feleciano, D-Wichita, said he wants the deal investigated by the FBI.

"Somebody's got to ask the Watergate question," he said. "And that's what did these guys know? When did they know it? Who else knew about this?"

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