How this fraud works!

Foot print of a brilliant fraud. -

Tax loopholes by intelligent design

The "Capital Formation Incentive Act" is the latest reformulation of a program created, ostensibly, as an inducement for investors to invest in new Oklahoma business ventures. The inducement was to offset risk by allowing investors to get back a much as 30% of their investments in tax credits. For example, the program is presented as rewarding a $100,000 investment up to $30,000 in tax credits, limiting the investor's max risk exposure to no more than $70,000, while holding the full $100,000 upside.

CAPCO the mother of Oklahoma's "Capital Formation Incentive Act" -

CAPCO and the "Capital Formation Incentive Act"

Oklahoma's "Capital Formation Incentive Act" was built around the CAPCO model. A group of small time venture capitalist and insurance companies teamed, in the 1980's, to create CAPCO. Claiming CAPCO would provide risk funding for states in need of economic development capital.

Several states, without understanding the intricacies adopted CAPCO to provide economic development capital. After a few years and forced to dig into the fine print they came to realize CAPCO was a scam.

Oklahoma investment operatives got wind of CAPCO and created their own more lucrative CAPCO. A CAPCO on steroids. Successfully lobbying Oklahoma lawmakers to adopt this even greedier version, while other states were struggling to rid themselves of CAPCO.

Some comments on CAPCO by others state officials and experts that were a well publicized matter of record when Oklahoma was working on the "Capital Formation Incentive Act"

A "raid on state treasuries: George Lipper, who studied similar legislation for the Iowa Department of Economic Development and helped defeat the bill there, called it a "raid on state treasuries." Read complete article

"It's a scam," said Colorado state Treasurer Mike Coffman - "I don't think there's anyone who thinks this is a good deal for Colorado, with the exception of those companies who lined their own pockets." Read complete article

Hiding trees in the forest.

The Oklahoma law was created in such a voluminous and complicated sounding way that while devoting great detail to a wide range of insignificant trivia it gives the impression that no stone was left unturned. A document designed to confuse and intimidate most anyone from devoting the inordinate amount of time required to keep going in circles reaching dead ends and comprehend little of anything of importance. All disguised to mislead the value of seemingly insignificant issues strategically scattered throughout the law. Yet once one knows what to look for, and where, then combine that with the less conspicuous -- what is missing from the law one sees a very well designed scheme. A fraud so well structured that it could only happen by design.

It is that which is missing that has allowed state officials to provide cover without dirtying their hands while this fraud continues scramming $100's millions.

Key elements that when combined leave a wide open and unguarded back door into the state vault. -

The program operates totally outside the checks and balances of government.
A program void of

Oversight.
Monitoring.
Review of the program.
Funding review or approval.
Auditing.
Performance monitoring.
Restrictions on how much can be taken in tax credits.

A Venture Capital Company simply files papers, requiring no review, to notify the Oklahoma Tax Commission who will be taking tax credits and how much.
Note: The sole purpose of this one requirement is for the Oklahoma Tax Commission to officially rubber stamp, validating the document that will be the product sold to and used by those taking the tax credits.

The entire program hidden from scrutiny by both the public and state lawmakers. In a way the public will never know. Ref *

How much the program cost?
What if any business were started.
How many if any jobs were created.
What individuals or entities received the tax credits?
How many business ventures if any survived?
If wrong occurred, how much that cost or who was involved?

* Ref. SECTION 1. AMENDATORY 68 O.S. 2001, Section 205. This part of the law written to prevent access by any including both the public and law makers is the longest section in the law. Capital Formation Incentive Act.

Restricts to a very small preselected few venture capital companies. Ref **

Disqualifies every successful and legitimate venture capital group in the US.
Limiting qualifying to a small group without any known involvement in the successful venture capital community.
Only this same small group is allowed to hold ownership in any business funded under this program.
So called investors are not allowed to hold ownership in any part funded by the state. The investors are only allowed to hold ownership in the pass through entity.
This same small group will be the sole owners of all business interest funded by the state.

** Ref. SECTION 2. AMENDATORY 68 O.S. 2001, Section 2357.7 note ably B.1 and C. Capital Formation Incentive Act.

Example scam for illustration. -

A "qualified" venture capital company finds a business venture and puts together an investment portfolio.

Note: Qualified venture capital company as per Section 2.B.2 -

SECTION 2.�� AMENDATORY�� 68 O.S. 2001, Section 2357.7, as amended by Section 2, Chapter 181, O.S.L. 2003 (68 O.S. Supp. 2005, Section 2357.7), is amended to read as follows:

B.� For purposes of this section:

1.� "Qualified venture capital company" ; means a C corporation, as defined by the Internal Revenue Code of 1986, as amended, incorporated pursuant to the laws of Oklahoma or a registered business partnership with a certificate of partnership filed as required by law if such corporation or partnership is organized to provide the direct investment of debt and equity funds to companies within this state, with its principal place of business located within this state and which meets the following criteria:

a.�� capitalization of not less than Five Million Dollars ($5,000,000.00),

b.�� having a purpose and objective of investing at least ~~a portion, as specified herein,~~ seventy-five percent (75%) of its capitalization in Oklahoma business ventures.� Such portion shall be at least fifty-five percent (55%) for capitalization occurring before January 1, 1999, and at least seventy-five percent (75%) for capitalization occurring on and after January 1, 1999.� Investment capital received by such venture capital company shall be invested pursuant to said objective within five (5) years after receipt of such capital.� Provided, of the portion of capitalization required to be invested in Oklahoma business ventures, as specified herein, ten percent (10%) of capitalization may be reserved for additional investment, within ten (10) years after receipt of capital, in portfolio companies which are Oklahoma business ventures.� The temporary investment of funds by a qualified venture capital company in obligations of the United States, state and municipal bonds, bank certificates of deposit, or money market securities pending investment in Oklahoma business ventures is hereby authorized, and

c.�� investment of not more than ten percent (10%) of its funds in any one company;

The process

The quasi venture capital company

seeks potentially interested investors who agree (tentatively) to invest in the venture.
takes out an artificial bank loan used to inflate the money at risk.
adds the artificial loan value to the amount investors might put "at risk". and list this total as being at risk on the state application.
immediately receives a state a issued a tax credit qualifying letter.
uses this tax credit qualifying letter to convince potential buyers the tax credits are legitimate and state guaranteed.
Sells tax credits in the form of portions of the qualifying letter.

Important this entire process can transpire in a matter of a few months. Case in point. (Over 20 business ventures accounting for $330 million were processed were initiated, process and tax credit qualifying letters back in the hands of the venture capital companies in the first 4 months following passage of Senate Bill 1577 creating the Capital Formation Incentive Act was passed in the final days of the 2006 legislative session.

At this point there are many options, here is one scenario that illustrates state negligence.

The investors have not given the venture capital company one dime only a signature they tentatively agreed to invest. Yet they can now receive $2 for each $1 dollar. The so called investors money has never been at risk and remained in their possession drawing interest all this time.

At this point the investors have no obligations remaining to the state. The investors are free to reevaluate the business venture, decide they no longer like the opportunity for whatever reason and pocket all the money.

With no oversight and all information about this program secretly locked away this could very well be happening and no one would ever know.

Note: Qualified venture capital company as per Section 2.B.3 -

SECTION 2.�� AMENDATORY�� 68 O.S. 2001, Section 2357.7, as amended by Section 2, Chapter 181, O.S.L. 2003 (68 O.S. Supp. 2005, Section 2357.7), is amended to read as follows:

................

2.� "Oklahoma business venture" means a business, incorporated or unincorporated, which:

a.�� has or will have, ~~immediately after a loan or~~ within one hundred eighty (180) days after an investment is made by a qualified venture capital company, at least fifty percent (50%) of its employees or assets located in Oklahoma,

b.�� needs financial assistance in order to commence or expand such business which provides or intends to provide goods or services, ~~and~~

c.�� is not engaged in oil and gas exploration, real estate development, real estate sales, retail sales of food or clothing, farming, ranching, banking, or lending or investing funds in other businesses.� Provided, however, businesses which provide or intend to provide goods or services, including, but not limited to, goods or services involving new technology, equipment, or techniques to such businesses listed in this subparagraph, and investments in the development of tourism facilities in the form of amusement parks, entertainment parks, theme parks, golf courses, or museums shall not be subject to said prohibition, and

d. �� expends within eighteen (18) months after the date of the investment at least fifty percent (50%) of the proceeds of the investment for the acquisition of tangible or intangible assets which are used in the active conduct of the trade or business of the Oklahoma business venture.� Provided, that the Oklahoma Tax Commission, upon request and demonstration of need by a qualified venture capital company or an Oklahoma business venture, may extend the eighteen-month period otherwise required by this subparagraph for a period not to exceed six (6) months. Provided, the expenditure of the invested funds by the Oklahoma business venture shall otherwise comply with the requirements applicable to the usage of tax credits for investment in the Oklahoma business venture.� As used in this subparagraph, tangible assets shall include the acquisition of real property and the construction of improvements upon real property if such acquisition and construction otherwise complies with the requirements applicable to the usage of tax credits for investment in the Oklahoma business venture and intangible assets shall be limited to computer software, licenses, patents, copyrights, and similar items;

Capital Formation Incentive Act