Topeka ? Gov. Bill Graves’ office Friday ordered investigation of circumstances surrounding passage of a 1998 bill now at the center of allegations that the state was cheated of millions of dollars in a business transaction.

The allegations concern Kansas Venture Capital Inc., a special corporation created by the state that provided tax breaks to private investors who invested in Kansas companies. The state also invested $5 million in the company.

KVCI, with help from Graves’ office, successfully sought passage of legislation in 1998 that allowed the company to buy out the state’s stake in the firm for $5 million instead of the state portfolio’s higher value.

In a lawsuit filed last week in Johnson County, two fired KVCI employees allege that KVCI officials paid back the state’s $5 million investment when they knew the value of that investment was about $7.6 million.

KVCI partners took the money that was due the state and gave themselves raises, bonuses, expensive cars and bigger offices, the lawsuit contends. KVCI officials have said the allegations are “false and totally without merit.”

News of the lawsuit has shaken many lawmakers and ground to a halt negotiations on another piece of legislation dealing with tax breaks for capital venture investments.

Several lawmakers who were involved in passage of the 1998 bill are requesting records concerning KVCI and the legislation.

“We were deceived,” said Sen. Paul Feleciano, D-Wichita. Sen. Karen Brownlee, R-Olathe, the only senator in 1998 who voted against the bill, has said state officials sought approval of the legislation and gave the impression that the state was lucky to be getting back any money at all.

But Graves’ chief of staff and general counsel Natalie Haag disagreed.

She said that during the 1998 legislative session, Tom Blackburn, executive vice president of KVCI, told lawmakers that the state could make a lot more money on its investment in KVCI.

Because of the risks associated with the investment in KVCI, Haag said, “the public policy decision was made that we just wanted out of this deal.”

Recordings of the legislative committee meetings have been erased, Haag said.

Such recordings are routinely taped over, said Jeffrey Russell, director of the Division of Legislative Administrative Services.

“The tapes are very seldom, if ever, kept,” he said. “They are used to help transcribe minutes, and then when the minutes are approved by the committee, they erase the tapes and use them again. They are used and used and re-used.”

Haag said she thought Graves’ former budget director Gloria Timmer had been involved in negotiations on the bill. Timmer died in 2000 of cancer. Haag said she had not tried to look for any of Timmer’s notes or records on the bill.

“This is not even something that deserves attention,” Haag said.

Nevertheless, Haag told lawmakers that the state was looking into the matter.

In a letter to Rep. Doug Spangler, D-Kansas City, Haag wrote: “Kansas Securities Commissioner David Brant, after consultation with Assistant Attorney General John Campbell, has made a request to Legislative Research for any evidence that legislators were misled or deceived during the 1998 legislative action regarding the Kansas Venture Capital Inc.”

Spangler, in several letters to Graves, has urged investigation of KVCI.

Lt. Gov. Gary Sherrer said he remembered advising Graves to sign the 1998 legislation into law. At the time, the state had been burned on several capital venture investments, Sherrer said, and the thinking was that it was better just to get the money back.

He said the legislation also had got the state off the hook from a requirement to invest another $5 million.

Sherrer said KVCI had told lawmakers that the state’s investment would earn more money.

“They were very bullish on themselves,” he said.

But Sherrer said that, in the final analysis, he had felt it was better for the state to get back its investment and reduce its risk.

Sherrer said he agreed with the decision to have Brant investigate the allegations.

“I think we’re on the right track. I’m comfortable having Brant look into this. I think that’s the way to start. I don’t think we need to have a grand jury summoned tomorrow,” Sherrer said.