MCAULIFFE-1-articleLargeBy Peter Galuszka

All Virginia’s gubernatorial race needs is another investigation for potential wrong-doing. Yet here’s another and it involves Democratic contender Terry McAuliffe.

The U.S. Securities & Exchange Commission is investigating two McAuliffe-connected firms. They are GreenTech Automotive and a sister firm, Gulf Coast Funds Management, according to the Washington Post.

McAuliffe, a veteran entrepreneur, had set up GreenTech to make small, battery-powered cars. He had considered Virginia as a plant site, but ended up moving to Northern Mississippi, which had offered better incentives. After deploying his high-profile charm to push GreenTech, McAuliffe quietly resigned from it in December. He kept his departure quiet until it was revealed during his gubernatorial run several months later.

The Post reports that the SEC is concentrated on allegations that the company guaranteed returns to foreign investors. It also was involved in a 20-year-old  program that granted visas to high wealth individuals who promised to invest $500,000 or more in U.S. companies.

The GreenTech affair has several links to Bill and Hillary Clinton, close friends and associates of McAuliffe, who helped bankroll their suburban New York City home after they left the White House. The head of Gulf Coast Funds is Anthony Rodham, Mrs. Clinton’s brother. And when the first electric cars rolled off the line, Bill Clinton was there to cheer them. The plant, which cost about $1 billion, has had some production delays and employs far fewer than originally announced.

The GreenTech project has a heavy involvement of Chinese businessmen and many of the visas were intended for them. Although there are no specifics in the McAuliffe case yet, some lawmakers have worried that the visa program might hurt national security by letting suspect foreigners in the U.S. simply because they have money to invest.

Kenneth Cuccinelli, McAuliffe’s opponent, has been quick to point to GreenTech as a nest of corruption. Yet Cucinelli has had his own problems with ethics, namely the gifts and stock he held in Star Scientific, a Henrico County dietary supplement maker that has led to tons of trouble for Gov. Robert F. McDonnell. A local prosecutor cleared Cuccinelli of  legal wrong-doing, but federal and local probes of McDonnell continue.

A wealthy businessman, McAuliffe also has been criticized for his involved in GlobalCrossings, a company created during the IT craze of the late 1990s to link the world with high-speed fiber optic cable. McAuliffe invested $100,000 in the firm and bailed out with a big profit after it went public in 1998. The firm filed for bankruptcy but it later emerged from receivership and an SEC probe of it found no wrong-doing.

So far, McAuliffe has kept a fairly low profile in the campaign. He hasn’t had to do much because of the swarm of negative publicity regarding McDonnell, Cuccinelli, and Jonnie R. Williams Sr., the head of Star Scientific.

But I always wondered what the deal was with GreenTech. When McAuliffe kicked off his campaign last winter, I wanted to tag along, but did not get a warm reception from his staff. I eventually did go on a tour, but McAuliffe seemed reluctant to talk about GreenTech. He hadn’t told the public yet that he had bailed on that one three months before.

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15 responses to “Another Probe: This Time It’s McAuliffe”

  1. It’s pretty disgusting when our choices for Gov are sleaze and sleaze.

    1. FreeDem Avatar

      If Terry is defeated, Democrats are going to be in total disarray trying to explain how Obama could twice win the Old Dominion, both Senators are popular former Governors with wide appeal, and they still managed to throw the election against the most extreme right-wing fanatic ever nominated in the Commonwealth’s history.

      The state party and its networks of privileged, isolated activists drank the Terry Kool-Aid early and often. They bought a “next in time” argument padded with lots of easy cash over giving other candidates like Chap Petersen and Tom Perriello due consideration. The same incompetent state party that brought us the clowns in Richmond gave us the Terry candidacy.

      If Terry manages to win, despite all of this baggage, it’s going to be one hell of a four year term. With Northam the heir apparent, and the GOP still in significant control of the House, watch for a lot of “bipartisan” legislation that infuriates the left. Serves them right.

  2. The two Post reporters better watch their backs. Fred Hiatt will be gunning for them. The “wall” between the reporters and the editorial board does not hold when it comes to Virginia politics.

  3. Peter Galuszka Avatar
    Peter Galuszka

    I really don’t think so. PG

    1. Peter, several years ago, I was interviewed by a Post reporter on an issue that had political implications. After answering the reporter’s questions, we chatted about politics generally. I had known the reporter for a period of time. We were not and are not friends. We discussed the issue of whether the Post seems to take a harder line on GOP candidates and officials than it does on Democratic candidates and officials. During this discussion, the reporter told me in plain English that the reporter received negative pressure from the editorial board whenever the reporter wrote anything negative about the Kaine administration. That despite the “wall” between reporters and the editorial board.

      As I recall, Hiatt has been in charge of the editorial board since 2000. That would make him in charge of, and responsible for, the breach of the Post’s policy against the editorial board influencing reporting. The editorial board attempted to tone down and avoid negative reporting about Democratic Governor Tim Kaine. I’d say that’s pretty unethical as well as plain dishonest.

  4. DJRippert Avatar

    Something doesn’t quite smell right with this. The newest summer intern at a Sand Hill Rd venture capital firm knows that you can’t promise returns to investors. And the dumbest Richmond preppy gambling away his trust fund knows that guaranteed returns from a start up are fraudulent.

    The issue seems to revolve around some kind of promise by the company to buy back preferred shares. Normally, that would represent more of a liquidity promise than a guaranteed return. In other words, the company says that if things are going well then the company will allow preferred shareholders to liquidate their investment through a stock repurchase rather than waiting for the so-called “liquidity event” (usually selling the company or taking it public). That’s a far cry from a guaranteed return since the company needs to have the money required to repurchase the shares.

    Beyond the illogic of even discussing guaranteed returns there is the question of the legal work surrounding the private placement memorandum. I assume that any supposed promise of guaranteed returns would have been made in the private placement memorandum. In my experience, the lawyers who draft such memoranda go out of their way to expose risks rather than cover them up. In fact, most PPMs are almost comical in their disclosure of the many and varied risks facing investors. It would be bizarre in the extreme for a reputable law firm to write or approve a PPM guaranteeing returns.

    Now – don’t get me wrong: I’ve seen some truly deplorable behavior by so-called investors in start up companies. However, a written guarantee of returns from a start up green car company is way beyond the pale.

    1. I’ve had a number of individuals project “likely earnings” outside the official offering statement. Guarantees – no, but very strong predictions.

      1. DJRippert Avatar

        Maybe I am interested in riskier propositions than you are being pitched. I’d laugh anybody pitching “likely returns” of a start-up right out of my office. I would be interested in understanding “potential returns”. In other words, if all goes according to plan (which it invariably will not) – how will I get my investment and a profit back. You’d be surprised by how many entrepreneurs forget that investors want to get their money back with a return in the “angel round” pitch decks.

        I have personally pitched for investments from Boston to Sand Hill Rd (Silicon Valley) to Tokyo. I can’t imagine telling any serious investor about “likely returns”.

  5. so is what McAuliff selling much different than Jonnie Williams?

    and I hate to ask this but if Jonnie Williams were running …would he be any more or less credible than McAuliff or Cucinelli…

    yeah.. I know that’s a bizarre question, right?

    1. DJRippert Avatar

      There is a huge difference. Greentech is a start-up in an immature field. While I haven’t read the private placement memorandum, I imagine that it is a “high risk / high reward” proposition. Anybody investing in Greentech ought to know that the most likely outcome is that they will lose all their money. From there, they must assess the possibilities of “hitting it big”. Imagine a simplified distribution of likely returns:

      Lose everything – 50%
      Get initial investment back – 40%
      Earn 20X initial investment – 10%

      Is this a good investment? If you have plenty of money to try and try again – it’s a very good investment. If you invest $1M, your expected return is $2M. This is true despite the fact that you have a 5 in 10 chance of losing everything and a 4 in 10 chance of getting no profit (but keeping your initial investment).

      Of course, figuring out that distribution of likely returns is a pure art at the “angel investment” phase. Five excellent investors could look at the same private placement memorandum and devise five wildly different distributions.

      The biggest issue with Greentech is the use of the EB-5 visa program. That program, which is as available to the Koch Brothers as Terry McAuliffe, allows foreign investors to get US visas if they are willing to invest at least $500,000 in companies that will create American jobs. Similar programs are in place at many other countries. The problem with these programs is that they skew the return distribution matrix I laid out earlier. Now, there is a line for the value of getting the visa which has nothing to do with the expected return from the investment. All of the sudden, it’s not an “arm’s length” investment decision anymore. So, risky investments which qualify under EB-5 tend to get more money than they should. Beyond that, there is a legitimate question as to whether McAuliffe and Anthony Rodham got preferential treatment in the EB-5 visa process.

      Star Scientific is a failing public company that has been the suspected of slippery behavior (beyond the McDonnell – Cucinelli affair) for years. For example, in 2012 Star Scientific engaged in some peculiar option pricing practices for “select shareholders”:

      In the past year, Star Scientific’s share price has collapsed from $4.50 per share to about $1.90 per share today. And remember – Star Scientific is the only stockholding in Ken Cuccinelli’s personal portfolio. Do you really want a guy who picks this as his only equity investment as your governor?

      There is still some chance that Greentech will pay off for investors. Personally, I think that chance is pretty low but the possibility exists. McAuliffe was trying to convince investors that the payoff was going to be so big that it was worth taking the longshot chance. That is the essence of angel round investing.

      There is also some chance that Star Scientific will pull out of its apparent death spiral and survive. However, Star Scientific is a public company. Investors deserve the protection of the federal government from predatory financing practices. There is a ready market for Star Scientific shares. When “select investors” are allowed to reduce the exercise price of their options from $2.71 to $1.00 they are not investing in a potential outcome. They are immediately adding to their personal net worth by undercutting the other investors (like Ken Cuccinelli) who bought their shares at fair market value.

      I think there is a big difference between Greentech and Star Scientific.

      1. pretty good job DJR… I’d say both “investments” are for those who have “extra” money to risk and know they could lose it but even if they do – they’re still okay.

        that’s where great risk and great reward ought to be in the order of things.

        and it’s why some folks who already have money – can .. with a little luck become even more wealthy.

        but it”s not for people like Cucinelli and McDonald .. or Kaine… perhaps Warner….

        Boon Pickens was on 60 minutes the other night talking about losing a billion dollars .. but apparently he’s worth 2 billion and really when you get right down to it – what the heck are you going to do with more than a few million anyhow? more cars and houses ? yachts? at that point – it’s just a hobby though I think the man is toast with the resurgence of shale oil….

  6. Peter Galuszka Avatar
    Peter Galuszka

    McAuliffe and Williams are both excellent salesmen. Cuccinelli isn’t but at least with him it is very clear what you are getting.

  7. Peter Galuszka Avatar
    Peter Galuszka

    Great points. I did a recent backgrounder on Williams in Style and it was picked up by the Hook in Charlottesville and Inside Business in Hampton Roads:

  8. Richard Avatar

    Of course the Cuccinelli will try to equate Greentech with Star, because it’s a favorite and tiresom excuse to say “but he did it too”, but they’re not the same. I agree with DJRippert who provides excellent and detailed explanation of the differences. But I would emphasize that there is a different qualitative difference between the companies that the candidates have decided to associate themselves with: Greentech is a real company; Star is quite literally snake oil.

  9. Two years ago, when McAulife was pitching his GreenTech “MyCar,” and media was buying without bringing their brains, I wrote the comment below. Now it’s come out that GreenTech is an immigration scam, but not likely an illegal one.

    Where has good reporting gone?

    Unfortunately, Brian, you’ve only covered, in effect, the press conference and haven’t asked the probing questions.

    1) This “My Car” is a glorified golf cart and IF there was an American market for any vehicle that tops out at 45 mph (and actually the MyCar web page says 35 mph) and covers only 100 miles when speeds are kept much, much lower, wouldn’t E-Z-GO and Club Car in Augusta GA (another right to work state) have already found it?

    2) What kind of free market investors would have backed a project that “lock, stock and barrel” would move a factory from a low-wage country to a higher-wage country to sell primarily to another higher wage country? The transportation costs themselves are massive but the labor difference between China and even right-to-work Mississippi is much more significant. (According to Mr. McAuliffe, the Danish post office bought the first run BUT across Europe postmen already ride bicycles. The slow speed glorified golf cart decreases postal costs because it expands the potential coverage of any given postman and, therefore, allows Denmark to lay off postmen. And why wouldn’t the Danish post office buy, if glorified golf carts fit their needs — and other European postal needs — from a manufacturer in the lowest-waged country if it possibly could (which of course would be China)? Or buy local, in Denmark, which would develop it’s own electric neighborhood vehicle manufacturer if there was truly a European market.?

    Most of Europe, indeed, isn’t buying electric cars, not even the Nissan Leaf. Europeans are buying electric bicycles and scooters, as single/dual occupancy, short range, slow speed vehicles.

    3) If Americans want two-seater, low-speed vehicles to use primarily as second cars (as that is the market that Mr. McAuliffe said his product would fill in the states), why hasn’t the Mercedes Smart-for-Two (which is as much as $5,000 cheaper than Mr. McAuliffe’s MyCar) been a huge seller? Mercedes already has dealerships to distribute it’s Smart Cars and Mr. McAuliffe has to start distribution from scratch.

    E-Z-Go and Club Car also already have distribution networks.

    4) Isn’t it more likely that instead of “manufacturing,” MyCar is going to be “assembling” these cars in Mississippi because it is cheaper to ship the disassembled parts than the completed cars, yet the financial benefits are still primarily going to where the parts are manufactured, a country which happens to have fewer environmental and safety constraints?

    5) What ancilliary American jobs are created if all/most parts are shipped from China?

    6)And, if there was deep European market, why wouldn’t some European buy this factory and move it to somewhere in Europe?

    4) There is a great reporting concept, Brian, that you’ve neglected. It’s called, “Follow the dollar.” It is hard to imagine that any rational American investor would buy into McAuliffe’s concept UNLESS he or she had some inkling that there were guaranteed dollars and perhaps something that comes from having political influence somewhere in this picture.

    In the early 1990s, America was the center of transportation innovation and, as a huge backer of environmental thinking (and of electric vehicles), I want us to be again. We’ve got to stop hoping and pretending that this is an “easy” concept, however, and the key step in getting the public to understand the depth of this issue is for reporting to do good work; to see beyond the press release.

    Of course, Ms. McAuliffe, regardless of his political persuasion, will tell a great story for a product he wants to sell. Do any salesmen take an hour to tell the downsides of their products?

    The media’s job is to ask the tough questions, the questions where the salesman does not want to go.

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