Rick Perry's Emerging Technology Political Patronage Fund: "They don't want transparency. People might figure out what is going on."
Graphic: Campaign contributions and tech fund awards
10/3/10
By JAMES DREW, STEVE McGONIGLE and RYAN McNEILL
The Dallas Morning News
Copyright 2010
When Gov. Rick Perry announces that a company will get money from the Texas Emerging Technology Fund, he often describes it as an important investment in the state's future.
Behind the scenes, some of the governor's biggest political supporters have been making investments of their own – in Perry and in companies getting money from the tech fund.
An investigation by The Dallas Morning News found that more than $16 million from the Emerging Technology Fund has been awarded to companies with investors or officers who are large campaign donors to Perry.
The governor denied that politics influence his decisions on tech fund awards.
The fund gives taxpayers' dollars to promising high-tech startups. It is a key part of Perry's economic development program, which he has touted in his re-election campaign against Democrat Bill White.
The governor's office administers the tech fund, and the governor must approve each award – a system that most other states with tech funds avoid to guard against political influence.
The News found that tech fund money has been awarded to companies with which at least eight significant Perry donors are affiliated. Among them:
$2.75 million to Terrabon Inc., a Houston company. Its backers have included Phil Adams, a college friend of Perry's who has given his campaign at least $314,000.
$1.75 million to Gradalis Inc., a Carrollton firm. Among its investors has been Dr. James R. Leininger, who has contributed more than $264,000 to Perry's campaigns.
$1.5 million to ThromboVision Inc., a Houston company. One of its investors was Charles W. Tate, who has donated more than $424,000 to Perry.
$4.5 million to Convergen Lifesciences Inc. of Austin. The company was founded by David G. Nance, a former Perry appointee who has given the governor $80,000.
$2 million to Seno Medical Instruments Inc. of San Antonio. Its investors have included Southwest Business Corp. and its subsidiaries, whose chairman, Charles Amato, gave Perry more than $32,000.
- $975,000 to Carbon Nanotechnologies Inc. of Houston. At the time of the award, one investor was William A. McMinn, who has contributed $152,000 to Perry.
In an interview with The News, Perry said he usually does not know if his campaign supporters have financial interests in the companies that get tech fund money. "From time to time, I may know someone who has an interest in a project. That is a pretty rare occurrence," he said.
However, Perry spokeswoman Katherine Cesinger said in an e-mail that applicants for technology funding must provide full financial disclosure to the governor's staff, including the names of investors.
The governor said he does not look at these disclosures when deciding whether to approve an award. He added: "Whether they contribute to my campaign or not has nothing to do with whether or not the project is appropriate" for funding.
Mark Ellison, a former director of the tech fund, called the involvement of Perry's contributors incidental. "Decisions were based on the quality of the deal, the market and character of the people running the company or the project," he said.
The News reviewed thousands of pages of U.S. Securities and Exchange Commission documents, personal financial disclosures, court filings, contracts and other public records to determine who has invested in companies that were tech fund recipients. Campaign contribution amounts were taken from Texas Ethics Commission filings.
Gauging the degree to which Perry contributors benefit from the tech fund is difficult because most of the applicants are privately held companies, and the fund's proceedings are shrouded in secrecy.
Perry said confidentiality protects companies that "really aren't interested in opening up their books so their competitors can stroll in and write down all of the different business practices, their cash on hand, or even more detailed descriptions of their technology."
Not every state's program is as closed. In Pennsylvania, meetings of the decision-making boards are open and proprietary information is still protected, said Walter Plosila, an architect of that state's Ben Franklin Partnership.
"You can keep intellectual property issues confidential and proprietary while still providing information on what the partnership projects are about and what the public money is being used for," said Plosila, a former Pennsylvania deputy secretary of commerce.
The Texas approach is not the best public policy, he said. "How are citizens supposed to make sure their elected officials are accountable, not just for ideas but their implementation, if they don't know what's going on?"
The lack of transparency fuels the perception among some applicants that politics affects decisions, said the head of a nonprofit group that works with companies seeking tech fund money.
"There's a lot of suspicion that there's more political influence than meets the eye," said Russ Peterman, executive director for the Texas Life-Sciences Collaboration Center in Georgetown. "The process leaves the state open to some cynicism about how it is working."
State Rep. Mark Strama, D-Austin, chairs the House committee that has oversight of the tech fund. If money is going to companies backed by political donors, he said, "it certainly is something that should be investigated."
The Legislature created the Emerging Technology Fund in 2005 at Perry's urging. Since then, the state has awarded $173 million under the tech fund to 120 companies, according to the governor's office. An additional $161 million has gone to Texas universities, primarily for research.
At a time when private investment capital is tight, the tech fund has helped many companies get their ideas off the ground, supporters say.
"It's been a real game-changer," said Thomas Kowalski, president of the Texas Healthcare & Bioscience Institute, a nonprofit group in Austin.
There have been about 1,600 applications for funding since 2005, according to testimony at a state Senate hearing in July. Only about 7 percent receive funding.
Under the law, companies that receive tech fund money must have approval from the governor, the lieutenant governor and the House speaker. However, the speaker and lieutenant governor don't act until Perry decides to back an applicant or gives them detailed information prepared by his staff about the recommended firms, aides said.
Max Sherman, former dean of the LBJ School of Public Affairs at the University of Texas, said such decisions should be in the hands of an independent body, not the state's three top elected officials.
"If you were advising those three people that make that ultimate decision," he said, "you would almost say you ought to try to distance yourself from any kind of flak you might get that might be perceived as an improper relationship."
State Sen. Florence Shapiro, R-Plano, was the Senate sponsor of the bill the created the tech fund. She said last week that she would be willing to eliminate the governor, lieutenant governor and House speaker from the decision-making process if politics has infected the tech fund.
"It would be preferable to getting rid of the program as a result of what is being uncovered," she said.
Perry makes his decision on tech fund awards after receiving recommendations from a 17-member advisory committee that he appoints. The advisory committee meets in sessions closed to the public and does not take minutes of its meetings. Its recommendations to Perry are not made public, either.
Before the advisory committee considers applications, seven regional boards and one statewide life science board conduct their own reviews. The boards are private, nonprofit groups, and their meetings also are closed to the public.
Texas is one of more than 20 states that have established economic development funds to nurture start-up technology companies.
Dan Berglund, head of an Ohio-based nonprofit group that promotes technology development, said Texas is distinctive in its tech fund's organization.
Most states, he said, do not have their top political leaders as decision makers. Technical review, he said, is normally done by out-of-state experts.
"It's a safeguard against politics coming into play, and it's a safeguard against conflicts of interest," said Berglund, president and chief executive officer of the State Science & Technology Institute.
The tech fund's advisory committee is a mixture of private investors, entrepreneurs, scientists and academics. Some are also Perry donors.
Because their opinions are advisory and not binding, committee members are not required to file financial disclosures with the ethics commission.
On Friday afternoon, the governor's office gave The News an undated, sixpage "ethics code" for the advisory committee.
The policy says a conflict of interest exists when a committee member has a business relationship that could "reasonably be expected to diminish" his judgment or objectivity.
If a member wants to invest in a company that has applied for tech fund money, he is required to disclose this. A separate committee that includes a member of the governor's staff is then formed to resolve the issue.
Bill Sproull of Richardson, an advisory committee member since the panel's inception, said the governor's staff has often given oral instructions about conflict of interest policies. He said he did not recall a written policy.
"The very first thing we talk about are those recusal policies and other things [related to conflicts of interest]," said Sproull, who was recently named chairman of the tech fund committee. "So that's pretty well engrained."
The regional boards also have conflict of interest policies.
Charles W. Tate, a noted Houston financier, is the head of one of those boards.
Tate was a partner in the investment firm led by Dallas businessman Tom Hicks, former owner of the Texas Rangers baseball team.
In 2006, Tate started the Texas Life Science Center for Innovation and Commercialization. It functions like a regional board, but it has statewide responsibilities for tech fund applicants involved in biotechnology, pharmaceuticals and medical devices.
ThromboVision brought its tech fund application before the board. The firm was developing technology to measure the effectiveness of anti-clotting drugs.
In November 2006, the life science board recommended that ThromboVision get money from the tech fund. Tate said he voted for it. The endorsement was forwarded to the advisory committee in Austin.
Four months later, ThromboVision's CEO, Edward Teitel, approached Tate with an "investment opportunity," Tate wrote in a letter to The News.
"At the time," he wrote, "the [state advisory committee] had already approved the ThromboVision application contingent upon the company's ability to raise matching funds from the private sector."
Tate made two investments in the company, he wrote, in May and August of 2007.
Perry announced in October 2007 that ThromboVision would get $1.5 million in tech fund money.
Tate said his vote to recommend funding was proper. "There was no need to recuse myself from [life science board] discussions on ThromboVision as I was not an investor on the date of that meeting," Tate wrote.
Nothing in the rules of the tech fund's state advisory committee, he said, barred him from investing in companies receiving tech fund awards.
"Furthermore," he wrote, "the [life science] board received oral advice from legal counsel at Vinson & Elkins at its first board meeting that there was nothing to prohibit ... directors from investing in ETF-funded companies."
That soon changed, Tate said. "However," he wrote, "in the fall of 2007, Vinson & Elkins reversed its prior opinion and orally advised the ... Board that under federal IRS tax guidelines, [life science] directors should avoid investing in ETF-funded companies."
An attorney who advises the Internal Revenue Service on tax-exempt matters told The News he would counsel board members not to make investments in companies they review.
"You're benefiting from confidential information," said James P. Joseph, who heads the tax-exempt practice at Arnold & Porter LLP in Washington, D.C. "It's just a classic conflict of interest."
The ThromboVision investment was Tate's second in a company that received a tech fund award. In January 2007, Tate bought shares in OrthoAccel Technologies Inc., another Houston-based firm.
Five months later, the life science board recommended that OrthoAccel get money. This time, Tate said he did not vote.
Perry's office announced in early 2008 that OrthoAccel would receive $750,000 from the tech fund.
Records used by the state to monitor the award show that the governor's office was informed that Tate was an investor in OrthoAccel.
Tate said that ThromboVision and OrthoAccel were treated the same as other tech fund applicants.
"My campaign contributions [to Perry] had absolutely no effect on OrthoAccel or ThromboVision receiving funds," he wrote. "Both of these companies were subjected to the same rigorous review and approval process" as other applicants.
Tate's more than $424,000 in donations to Perry's campaigns since 2000 includes travel on Tate's private airplane, he said.
In May, he wrote a $100,000 check to Perry, and is a member of the governor's statewide re-election committee.
Despite support from the state, Tate and other investors, ThromboVision filed for bankruptcy on Sept. 2. Court filings show that Tate owned 200,000 shares of the company's preferred stock.
The filings also revealed that the company had an investment from another Perry supporter: Houston investor Charles Miller, who gave the governor $125,000.
Miller said he's had "virtually no contact" with Perry since resigning from the University of Texas System Board of Regents.
"I didn't support him in the primary," he said. "I supported Kay Hutchison. I don't have an argument or fight with him, but I don't have an ongoing relationship with him."
Some other companies that have received tech fund awards have multiple investors who are big Perry donors.
The News obtained a capitalization table for Gradalis that showed James R. Leininger owning 390,000 shares.
Leininger, a former Army doctor in San Antonio who became one of the wealthiest Texans by developing specialty medical beds, has been a major contributor to Republican candidates for years.
The documents also showed that John McHale, an Austin high-tech millionaire who for several years has contributed to Democratic candidates, agreed to invest $2 million for 200,000 shares in Gradalis.
Perry announced a $1.75 million tech fund award to Gradalis on March 5, 2009. Four days later, McHale signed the stock purchase agreement. McHale made a $50,000 contribution to Perry's re-election campaign later that year.
Neither McHale nor Leininger returned messages seeking comment.
Terrabon is another with multiple Perry donors as investors. In 2008, Texas A&M System regent Adams made a $100,000 loan to the company. It was later converted to equity, Adams said.
Perry announced in July that Terrabon, which is trying to convert landfill waste into fuel, would receive $2.75 million from the tech fund.
One of its founders is Emil Ogden, father of state Sen. Steve Ogden, R-Bryan. The younger Ogden, chairman of the senate finance committee, said he has "no interest and no involvement with Terrabon."
Another of the company's founders is David S. Carrabba. The Carrabba family and their company have donated $23,000 to Perry.
"I never talked to the governor about the company [Terrabon]," Carrabba said. "The [tech fund] process is designed to take politics out of it."
The tech fund is structured so that the state gets the right to buy stock in each company that receives an award. The state can cash in when a company is sold or goes public.
That has happened at least once. CardioSpectra Inc., which was $1.35 million in 2006, was bought by Volcano Corp. in 2007. Perry spokeswoman Cesinger placed the return on the state's investment at $2.2 million.
The governor's office would not reveal how many shares the state owns in any other companies, how many shares the state can buy in each company, and the current value of its portfolio.
In response to a question from The News about a 2009 financial report from the governor's office, a Perry spokeswoman said it referred to the state's right to buy 87,412 shares of Gradalis stock.
The governor's office also did not provide any figures on job creation, one of the stated goals of the tech fund.
"The information is simply not yet available," Perry spokeswoman Cesinger said. "If we had it, we would provide it." Those figures will be included in a report to the Legislature next year, she said.
Perry's office would not allow the tech fund's director, Jonathan Taylor, to be interviewed.
The tech fund has the same disclosure weaknesses as many other government programs that try to mirror the private sector, said James Nolen, a distinguished senior lecturer at the University of Texas at Austin business school.
"Transparency, accountability, measurement: that is what most of these programs lack," said Nolen. "They don't want transparency. People might figure out what is going on."
Strama, the Democratic state representative from Austin, said he questions whether the tech fund is being properly run from the governor's office.
"I think they weren't doing a good job of managing it from the beginning," he said. "They didn't have systems in place to monitor and measure the health of the companies they had invested in and the health of the overall portfolio."
Strama said budget shortfalls may force a cut in the tech fund when the legislature convenes next year. "I can't see any way it's not going to be downsized," he said.
And Republican Shapiro said some lawmakers remain incensed that Perry granted $50 million in tech fund money last year to his alma mater, Texas A&M. The governor transferred the money from the state's Enterprise Fund and largely bypassed the tech fund's advisory process.
"There were many in the legislature following that act that wanted to get rid of the whole program," Shapiro said.
Shapiro said she remains a supporter of the tech fund. But because of continuing resentment, budget shortfalls and the possibility of involvement by Perry donors, she said, the fund could be fighting for its survival next year.
"I would hope that if it is of value we will find a way to cure the ills that have transpired and continue the program at some level," she said.
jdrew@dallasnews.com; smcgonigle@dallasnews.com; rmcneill@dallasnews.com
July 18, 2005: ThromboVision Inc. is incorporated by Edward Teitel. It is based in Houston.
January 25, 2006: Houston investor Charles W. Tate starts Texas Life Science Center for Innovation and Commercialization. It vets applicants for the Texas Emerging Technology Fund.
Nov. 9, 2006: The life science center board recommends ThromboVision to the tech fund's state advisory board. Tate, who is chairman of the life science center's board, votes yes.
March 15, 2007: Teitel makes an investment presentation to Tate.
April 20, 2007: A letter from Gov. Rick Perry, Lt. Gov. David Dewhurst and then-House Speaker Tom Craddick tells Teitel that ThromboVision is the recipient of a $1.5 million award from the tech fund.
May 8, 2007: Tate makes his first investment in ThromboVision.
June 13, 2007: Teitel signs a contract with the governor's office to receive the ETF money.
July 5, 2007: Perry chief of staff Brian C. Newby signs the ETF contract.
Aug. 31, 2007: Tate makes his second investment in ThromboVision.
Oct. 9, 2007: Perry's office announces the ThromboVision award to the public.
Sept. 2, 2010: ThromboVision declares bankruptcy. It reveals that major Perry donors Tate and Houston investor Charles Miller own 200,000 and 250,000 preferred shares, respectively.
SOURCE: Dallas Morning News research
A statewide advisory committee of 17 members, appointed by the governor, must decide whether to recommend a company for Emerging Technology Fund money. The committee passes its recommendations to the governor.
Here are the current members. Two positions are vacant.
•Bill Sproull, Richardson Chamber of Commerce and advisory committee chair
•Aruna Viswanathan, Clear Spring Capital Group and advisory committee vice chair
•Bob Pearson, WeissComm Group
•C. Mauli Agrawal, dean of Engineering, University of Texas at San Antonio.
•Michael Bleyzer, president & CEO, SigmaBleyzer Investment Group LLC
•T. Randall Cain, managing partner, Ernst & Young
•Brett Gilbert, Texas A&M University
•Judy Hawley, Advanced Acoustic Concepts
•Bill Holmes, Datamark
•Rick Ledesma, DataLogic Software, Inc
•William E. Morrow, chairman & CEO, CSIdentity Corp.
•John Schrock Sr., Lifetime Industries
•Max Talbott, principal consultant and owner, Max Talbott LLC
•Richard Williams, head of renewable energy, Energy Future Holdings
•Enrique "Henry" R. Venta, Lamar University College of Business
SOURCE: Governor's office
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