APNewsBreak: Brokerage defaulted on Iowa jobs deal
Jul 16, 2012, 5:18 PM
Associated Press
IOWA CITY, Iowa (AP) – Even before its dramatic collapse last week, an Iowa-based brokerage implicated in a $200 million fraud scandal had defaulted on the terms of a $1.24 million state incentives package that helped the firm build a state-of-the-art headquarters, newly released records show.
The Iowa Economic Development Authority warned Peregrine Financial Group, Inc. in March that it had violated its contract by paying employees lower salaries than promised and must pay back some of its aid immediately, according to a letter released in response to a request from The Associated Press.
But the company asked for time to review the matter, and the agency did not take other steps to get its money back before Peregrine filed for bankruptcy last week, leaving the state’s prospects of reimbursement uncertain, agency spokeswoman Tina Hoffman said.
The company collapsed after its founder and CEO, Russell Wasendorf, Sr., was found unresponsive in his vehicle outside its Cedar Falls headquarters on July 9. Federal investigators said Wasendorf tried to kill himself by hooking up a tube to his car’s tailpipe and left a suicide note in which he admitted embezzling from customers for 20 years and creating false bank statements to hide his theft.
FBI agents arrested him at a local hospital Friday and he was charged with lying to federal regulators, who said his firm was missing $215 million in customer money that it claimed to have. Federal prosecutor Peter Deegan said Wasendorf would likely face additional charges that could land him in prison for decades.
The dramatic developments were a tragic end to what had been hailed as a business success story for Iowa. Wasendorf, who grew up in Marion, often bragged about how he created the firm in the basement of his Iowa home decades ago before growing it into a major player in the commodities trading market in Chicago.
He moved the firm’s headquarters back to Cedar Falls, where he had attended college at the University of Northern Iowa, in 2009 after coming up with plans for a $24 million, three-story glass building that includes a gym, a daycare center, a Montessori school, and a restaurant.
To help the project, Iowa’s economic development agency approved a package in 2007 that included a $175,000 forgivable loan, a $175,000 no-interest loan, a $194,063 refund on sales and use taxes paid during construction, and an investment tax credit of $699,000. An agency newsletter quoted Wasendorf boasting about how his technology “makes the futures markets more transparent for all participants” and how the move to Iowa carried risks but would help his business expand.
The company defaulted on its aid package because its contract called for the company to add 74 jobs in Iowa at an hourly wage of at least $19.74 per hour. Hoffman said the company did add that many jobs, but a state review initiated after a site visit in March 2011 concluded that only 25 of them met the wage threshold.
Even while telling Peregrine that it did not meet the job-creation goals promised in the deal, a state official lavished praise on the firm.
“While the business did not meet the full contract obligations, Peregrine Financial Group, Inc. has still made an in valuable contribution to the Cedar Falls business community and the state as well,” Samuel Burt, a project manager with the agency’s compliance team, wrote to the company in March. “We look forward to working with you on future economic development projects.”
Burt told Petegrine that the company “is unable to cure this default” and must immediately repay a $175,000 forgivable loan, plus penalties totaling $13,376. He said that two-thirds of Peregrine’s no-interest loan _ in which it still owed $90,000 _ was converted into a 6-percent annual interest rate as an additional penalty. Wasendorf had personally guaranteed the loans, records show, but his assets have been frozen.
Hoffman said the default letter took a year for the agency to send following the site visit in March 2011 because the employee responsible for the review left and it was reassigned. The company’s payroll records were also hard to decipher, she said.
“We were slow on that one,” she said. “It’s not typical for us to be that far behind. That was a bit of an anomaly.”
After Peregrine received the default notice, the firm requested additional time to review its payroll records to determine whether the state’s calculations were accurate, Hoffman said, adding that the agency did not see that as a sign of bigger problems.
“There wasn’t any indication that we had that there was anything amiss,” she said. “I think the local community would echo that form everything that I’ve heard. They are a strong community partner, and this is a big surprise to everyone.”
Hoffman said the company also likely defaulted on the $893,000 in tax credits, but the state has not taken any actions to collect them yet because they just were completed last month and have not been reviewed for compliance. The project covering the loans ended in 2010, highlighting a problem that the agency has fixed when awarding incentives.
“We’ve now remedied that so that whenever a company gets an award, the completion dates are the same for all the programs,” she said.
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