Tax credit letter causes public outcry (The Capital West screwup)
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State Whitewashing Letter Exposing Tax Credit Loophole Remains Open

Notes $150 million in investments results in $300 million in tax credits, with the 200% tax loophole in the law.

Article 1 of 2   See 2 of 2

Tax credit letter causes public outcry
Oklahoman, September 22, 2007
Randy Ellis

A letter touting a tax credit program former University of Oklahoma football coach Barry Switzer promoted has created an outcry all the way from the financial community to the state Capitol.

"We did not know about or approve or sign this letter," said Josh Brim, a securities broker with a future minority interest in Foxborough Funding Company LLC, the venture capital fund whose investment program was touted in the letter.

The letter does not fairly and completely describe the program, he said.

Keith Geary, chairman, chief executive officer and president of Capital West Securities, said he regrets mailing the letter.

-

Owl: It seems like the following words on the Capital West Website appear to try convincing all they are professionals that know all about these things.

Statements like the following:

  • 'Our committed staff pays close attention to "the little things"'
  • "adhering to the highest level of ethical standards."
  • 'The preservation of personal and professional integrity.
  • "the little things" that a client was best served.'

Owl: Really committed to those little things, are they?

Then we see their professional credentials:

  1. "Capital West is a member of the National Association of Securities Dealers (NASD) and the Security Investor Protection Corporation (SIPC)"

Owl: Professional accreditation that supposedly certified this folks know what they are doing? Being curious we decided to ask the National Association of Securities Dealers (NASD) and SEC how they felt about Capital West.

The Capital West Securities Website list about 40 professionals, including a compliance officer, in the same office that sent out this mistaken letter. One would think with something 40 "highly qualified" professionals vigilantly watching for the "little things" at least one would have caught a mistake involving something on the order of $100 million plus.

You have to feel for any poor Capital West client with a piddle few $ million. There is a good chance no one every notices or keep record of where chump change like this goes?

Finally, we got to thinking what Capital West is offering sounds a lot better than the stock market. We decided to ask the National Association of Securities Dealers (NASD) and SEC how they felt about Capital West. When we hear their thoughts we will post the answer here for everyone.

"If I had it to do over again, there are certain things I would have changed," Geary told The Oklahoman.

Capital West Securities mailed the letter to Oklahoma bankers in an effort to identify potential investors in Foxborough, an Oklahoma company that is seeking wealthy individuals who want to invest in new Oklahoma businesses, expanding businesses and businesses that want to relocate to Oklahoma.

Background

The letter has created a furor because it described Foxborough's desire to use state tax credit programs using language that was strikingly similar to abuses of a tax credit loophole last year that prompted state officials to temporarily shut down the programs and enact reforms that were supposed to correct the problems.

Prior to the reforms, investment schemes were created using borrowed funds that allowed wealthy investors to obtain $2 (actually $3 see note above) in state tax credits for every $1 invested without any of the borrowed funds being used to help create new businesses and jobs the programs envisioned.

The old law was called a "scam" by former state Sen. Ted Fisher D-Sapulpa, and a "serious threat to the state" by state Treasurer Scott Meacham. The programs had the potential to drain the state treasury of hundreds of millions of dollars without providing comparable economic benefits to the state, he complained.

About the plan

The letter Capital West Securities sent out this month said Foxborough was seeking investors for a program that would be structured using loans so investors could obtain "$2 of tax credits for each $1 invested."

The minimum investment would be $50,000 and the fund was seeking to collect between $5 million and $300 million, the letter said. A fund of that size could generate between $10 million and $300 million in tax credits.

The letter did not identify specific businesses that the fund hoped to help finance. Financial experts often refer to that as a "blind pool" investment.

The letter also raised concerns about whether many jobs would be created, stating targeted companies would be "capital intensive, in contrast with service companies, which are personnel intensive."

Legislators cited job creation as one of the primary purposes for enacting tax credit laws.

Further Investigation

The state treasurer read the letter and said it warranted further investigation.

"This is very concerning to me," Meacham said, adding that he has always favored capping the tax credit programs.

"I think further work needs to be done" to make sure the state isn't "giving up way more than it's getting back," Meacham said.

Brim and Robert S. May, manager of Foxborough, said they were shocked by the Capital West Securities letter and understand why it is creating concern.

The letter, however, doesn't fairly describe the program, they said.

"There is no way it's going to be $300 million," Brim said of the fund. "There are not enough deals out there."

What the experts say  

The fund's private placement memorandum does say it will be between $5 million and $300 million, but the latter figure was picked out of thin air because a maximum amount had to be listed, he said.

Brim said he expects the fund will be around $5 million, or perhaps a little larger if particularly good deals can be put together.

"Right now we have zero dollars," he said.

Switzer told The Oklahoman he is one of the principals in Foxborough and is helping introduce fund managers to potential investors and business owners who might want to participate.

The former football coach said he likes the program because of its potential to aid rural economic development

May said he has been in discussions with businesses many that would bring jobs to Oklahoma and a letter should not have been sent out that gave the impression Foxborough was concentrating on businesses that would create few jobs.

May said he could not name specific companies because of the need for , but oil service companies, an aerospace company, an assisted living center and a company that supplies devices for airplanes are among the companies talking with Foxborough.

Brim said it is true that with some of the deals investors may be able to get $2 (actually $3) in tax credits for every $1 invested, but what investors are being told is that they will get $2 back for every $1 invested  through a combination of tax credits, dividends and other returns on their investment  before operators of the fund will make a penny.

Brim said there is a big difference between the old tax credit laws and the new ones. Now the investment money must actually be spent on businesses or the Oklahoma Tax Commission can recapture the money from tax credits it has granted, he said.

What could happen next

If the Capital West Securities letter hasn't torpedoed Foxborough into the minds of potential investors and businesses, May said he expects to announce the funding of several new businesses in the next few months.

"I expect to be able to show the state what it got for its money and I think everybody will be happy with it," May said.

Brim said he believes Geary's heart was in the right place when he sent out the letter.

"He got a little aggressive and excited and sent out a mailer and we wish he hadn't," Brim said.

Geary said Capital West Securities has a non-exclusive agreement to sell investments in Foxborough.

He said he discussed Foxborough in the letter to give bankers an example of the types of businesses it might be able to help in their communities  businesses that might not be able to succeed on bank loans, alone.

However, Geary said he wishes he hadn't sent out the letter because Foxborough has not identified specific projects to be funded.

Capital West Securities is not going to sell investments in a blind pool, Geary said.

Once specific projects have been identified, Capital West will try to find investors who might want to invest in those projects, he said.

Right now, however, Capital West Securities is not actively soliciting subscriptions, he said.

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