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Treasury Department Finds "Intentional Misuse" Of Money Meant For Local Startups

A contractor for the state of Indiana spent $800,000 in federal cash on companies run by the contractor's chairman and his son. It's part of a $1.5 billion national program.

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A U.S. Treasury Department inspector general report has found "intentional misuse" of funds by the state of Indiana, after a state contractor last year was found to have invested federal cash in a startup company run by its own chairman.

The report, triggered by an Indianapolis Star investigation and issued this week, details how a nonprofit called Elevate Ventures gave $500,000 in federal dollars to Smarter Remarketer, a startup run by Elevate's then-Chairman Howard Bates, and $300,000 to MaxTradeIn, run by Bates' son, Justin.

The state of Indiana had hired Elevate to distribute its share of the federal State Small Business Credit Initiative, a program that dishes out $1.5 billion to states and local governments around the country. The Small Business Jobs Act of 2010, signed by President Obama, created the fund. It requires state governments to work closely with private lenders when investing the public money in startups and small businesses. Elevate was created as a nonprofit, in part, with the idea that it would be more nimble in helping to secure private cash to go along with the public money than regular state employees.

Debra Ritt, special deputy inspector general for the Treasury, said the inspector general has done 20 or so audits of various states since the program began. This, she said, was "the first time we found intentional misuse."

The Treasury Department will recoup the $500,000 investment by deducting it from the money Indiana receives going forward. The report found that the $300,000 investment was compliant with federal rules, "but could be construed as nepotism."

The state of Indiana, in its response to the Treasury inspector general, said that it was characterizing a "reasonable interpretation of an ambiguous regulatory requirement" as intentional misconduct. It also said that the report will have a "substantial chilling effect" on the use of the money going forward.

Email messages sent to an Elevate spokesman and to Howard Bates, who has since resigned as chairman, were not immediately returned.

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Here's the full Treasury OIG report on Elevate Ventures

Mike Davidson, board member of Elevate Ventures, has given a written statement, noting that the Treasury Department disagreed with its inspector general's use of the word "intentional." It reads, in part: "Elevate Ventures agrees with the state of Indiana and U.S. Dept. of Treasury that the OIG’s characterization of this investment is inaccurate. Further, the investment has been fully recovered by the state with a 15% return on investment."