The Office of the Inspector General of the U.S. Treasury Department says Elevate Ventures “intentionally misused” almost $500,000 in taxpayer funds when the state contractor invested in a company run by its board chairman.
The federal funds were invested through a state-managed program designed to spur small business development. Elevate Ventures contracts with the state to manage program's investment fund, the Indiana Angel Network Fund.
In an audit report released Wednesday, the federal office recommended the Treasury withhold $499,986 in funds to compensate for an investment Elevate Ventures made in Indianapolis-based marketing software developer Smarter Remarketer. Elevate’s chairman, Howard Bates, is CEO of Smarter Remarketer.
The investment "constituted a misuse in funds because [Bates] had controlling interest and voting stock ownership of more than 10 percent in the investee, which created a 'prohibited related party interest,'" the audit report said.
Investors concluded the misuse was intentional because Elevate CEO Stephen Hourigan, who certified the investment was compliant, had knowledge that Bates' "ownership interest could exceed the allowable share, and [he] did not disclose the information to Elevate’s Investment Committee, who unanimously approved the investment.”
Officials at Elevate did not immediately respond Thursday afternoon to a voicemail seeking comment.
The Inspector General’s audit contests an earlier review Indiana Gov. Mike Pence ordered after a investigative story by The Indianapolis Star in 2013.
The governor’s review, done by auditing firm KPMG, determined more oversight was needed, but otherwise determined Elevate was “substantially compliant” with requirements.
The inspector general also recommended the U.S. Treasury's State Small Business Credit Initiative determine whether Indiana's funding should be reduced, suspended or terminated and that the Indiana Economic Development Corp. review every investment decision by Elevate Ventures going forward.
Elevate Ventures board member Mike Davidson issued a statement Thursday saying he believes the Inspector General's characterization of the investment was inaccurate. He also said the investment has been fully recovered by the state with a 15 percent return on investment.
Asked if the state was taking any action against Elevate in light of the federal audit, Pence on Thursday said, "The matter is closed."
The Inspector General’s report absolves a second Elevate investment that was under scrutiny—$300,000 that went to MaxTradeIn, run by Bates’ son, Justin. The younger Bates is not an executive for Elevate, making the investment compliant. But the deal, while allowable, “may raise the appearance of partiality,” the audit stated.
The Treasury agreed with the Inspector General’s recommendation to withhold $499,986 in funding, though the Treasury disagreed that Elevate’s actions were “intentional,” the audit says.
The Treasury's State Small Business Credit Initiative awarded Indiana $34.3 million in May 2011. The state allocated $21 million of that money to the Venture Capital Program, which granted $9.5 million to the Angel Network Fund.
Elevate Ventures has approved 15 investments in all, totaling about $2.5 million.