September 27, 2012

By Elise Schmelzer

According to the state audit released Tuesday, the costly Mamtek U.S. investment could have been avoided and millions of dollars saved if Missouri’s Department of Economic Development had performed more fact checking and followed a more stringent screening process.

“The Department of Economic Development and the Division of Business and Community Services, as well as other parties involved in the Mamtek U.S. project, failed to perform adequate due diligence on the start-up company, its officials, and information provided by the company,” the audit said.

Beginning April 2010, the Department of Economic Development and the city of Moberly worked to bring Mamtek U.S., a sugar replacement manufacturer, to Moberly.

Moberly offered $39 million in municipal bonds, and the state offered $17.6 million in tax credits and other incentives to the fledgling company, in hopes of bringing more than 600 jobs to the area.

But in August 2011, Mamtek missed the first payment on its $3.2 million interest payments on the bonds, and all progress on construction of factory halted. The company was forced into bankruptcy in January 2012. Mamtek CEO Bruce Cole was charged with five felonies, including four counts of fraud and one count of theft.

The audit cites many red flags that were seemingly ignored, including Cole’s financial difficulties, false addresses provided for company affiliates and doubts surrounding Mamtek’s Chinese partner.

Mamtek claimed to have a Chinese affiliate already producing the sucralose product. However, when research was made into whether the Chinese associate existed, there were no factories at the factory addresses.

The Department of Economic Development responds to these allegations in the audit, affirming that lawyer Michael Wise personally visited and photographed the Chinese facilities. The department does not mention Michael Wise was Mamtek’s patent lawyer.

The Department of Economic Development took information provided by Mamtek as sufficient evidence to its validity, without researching the issue itself.

According to the audit, “Neither the BCS nor any of the other parties involved in the project verified Mamtek U.S.’s claims regarding a bank account or cash-on-hand of $7.2 million reported in the company’s pro forma financial statements, (whether) ‘company equity’ from its own funds would be used to provide for the remaining cost of the project, or whether the company had means to acquire such funds.”

The audit also claimed the Department of Economic Development could not provide adequate documentation of its due diligence procedures. Although new procedures were put into effect in February 2011, the audit claims many projects proceeded without having completed and documented every step in the process.

Although the department has responded critically to the audit, the auditor’s office stands firm in its critique.

“We feel it reflects the nature and quality of the work being done,” said Spence Jackson, media director at the state auditor’s office. “We hope they will take the recommended procedures to heart and this problem won’t happen again with other municipalities and projects.”

Although the $17 million in state incentives was not paid because Mamtek never fulfilled the criteria necessary, Moberly lost $39 million in bonds and had its credit downgraded three steps from an “A” to a “B” grade.

“The credit downgrade hasn’t affected our operations as of now,” Moberly city manager Andy Morris said. “The credit rating is what it is, and the best we can do is just keep making the payments.”

Moberly must make a bond payment of $3.8 million every year, more than 60 percent of their annual general fund revenue. In 2010, when the city issued the bond, the $39 million bond was 27 percent of Moberly’s assessed value of $143.8 million.

Due to Moberly’s loss, the audit suggests all municipal bonds are voted on publicly.

“What we’re suggesting is to make things more transparent,” Jackson said. “We just raise that as an option for the legislation to discuss.”

Along with the Mamtek issue, the audit also criticizes other procedures, including allowing businesses to claim multiple tax credits under different programs for the same service provided or product made.