November 13, 2017

DECD to tighten incentive deal oversight for out-of-state companies

Photo | sam rodriguez, all american aerial llc
A proposal to build a 70,000-square-foot office building and parking garage where boarded-up buildings currently sit at the corner of Washington and Jefferson streets in Hartford (shown in the center of the photo) has fallen through.
David Wagner

The state's economic development agency said it has made changes to the way it vets out-of-state businesses that seek economic incentives, following a deal in which it provided $400,000 in loans and grants to a New York-based company whose owner was facing fraud allegations in other states.

The state Department of Economic and Community Development wouldn't elaborate specifically on what changes it's making, but the tighter oversight is in response to an incentive deal it provided to medical-technology investment firm CliniFlow Technologies.

The Hartford Business Journal reported earlier this month that DECD provided CliniFlow with the $400,000 in January in exchange for the company's promise to create eight jobs in Hartford. In a separate deal in February, the state Bond Commission approved an additional $3.6 million for CliniFlow, which planned to move three medical-technology startups to Hartford in a newly built office building and create 195 jobs as part of a $45 million project.

But before those deals were either approved or granted, CliniFlow's CEO and founder David Wagner, and other companies he's associated with, were named in several civil lawsuits in various states. One suit, filed in New York federal court in May 2016, accused Wagner and associated companies of "outright fraud" and running a "Ponzi-like" scheme that used money from new employee-investors to pay back-wages of existing workers, federal court records show.

Wagner — a Trinity College alum who until recently sat on the private school's board of trustees — has denied the allegations in court.

Wagner and his companies have also settled at least one suit brought by a former employee, and another resulted in a $181,480 judgement, court records show.

Meanwhile, two suits are ongoing in New York and a judge overseeing both cases has restricted the assets of an array of Wagner companies, including two that were slated to relocate to Hartford: 3si Systems LLC and Vox MediData, according to court records.

Additionally, the company's website ( doesn't work and in August CliniFlow stopped making rent payments on 4,152 square feet of Hartford office space it leased at 425 Franklin Ave., according to a lawsuit filed in state Superior Court in September by the building's landlord, The Greca Plaza LLC.

As part of its original pitch, CliniFlow planned to relocate three of its health technology companies — 3si Systems, SpearFysh and Vox MediData — to a newly built, 70,000-square-foot office building on properties (at the corner of Jefferson and Washington streets) owned by Hartford Hospital.

In August, however, the state pulled the plug on its $3.6 million in bond funds, which were never distributed to the company, after CliniFlow failed to meet certain project milestones.

Taxpayers, however, are still on the hook for the $400,000 aid package provided to CliniFlow from DECD's Small Business Express program.

In an emailed statement to HBJ earlier this month, Wagner said CliniFlow still plans to bring "high-tech jobs to Hartford," but its business plan has changed somewhat over the past six months.

"CliniFlow now plans to utilize private capital rather than public funding," the email said. "Also, CliniFlow now plans to focus company spending on technology development and customer support rather than funding the development of large new buildings."

HBJ's story highlighted potential weaknesses in DECD's vetting process, mainly that the agency doesn't check federal court databases when vetting potential state-aid recipients.

Bart Kollen, DECD's deputy commissioner, said the agency was unaware of Wagner's past legal troubles before they seeded CliniFlow with Small Business Express funds and the Bond Commission approved the $3.6 million.

However, information on several civil lawsuits filed in federal court against Wagner and companies he's associated with was available online through the federal court system's PACER database.

Kollen said CliniFlow provided DECD limited financial information, which isn't unusual for startups. DECD also reviewed CliniFlow's business plan, conducted a basic Google search, and cross-referenced the company with the state Department of Labor and Secretary of the State's office.

DECD officials also relied on information in CliniFlow's Small Business Express application. However, information in the application, which was submitted in Nov. 2016 and bears Wagner's signature, appears to have at least one inaccuracy. One application question asks if the company or its owners have any "outstanding, pending or anticipated" legal issues. The application said "no."

In a written statement, DECD said: "We continue to review the CliniFlow matter internally and monitor developments. ... The department always welcomes scrutiny of its programs as we take our fiduciary responsibilities very seriously, and management of the (Small Business Express) program is no exception. Although virtually all of the legal issues came up after we completed our due diligence of this company, we have already made changes to our background checks."

DECD also provided information about its CliniFlow deal to the state attorney general's office, which is currently gathering information about it, officials said.

The Small Business Express incentive package, which included a $300,000 loan and $100,000 grant, requires CliniFlow to create eight full-time jobs in the city by Jan. 2018, according to the company's loan application, obtained by the Hartford Business Journal through a Freedom of Information request.

If it fails to adhere to the terms, CliniFlow would be in violation of its agreement and could face penalties.

DECD said it has clawback provisions in all of its agreements "so if it is proven that an applicant has misled the department on an application for assistance, the state has the ability to demand repayment of all funding plus penalties."

"We have successfully recovered funds in the past and will take the appropriate steps to do so in this instance if necessary," DECD said.

Call for stronger oversight

HBJ's story prompted several calls from state officials for tighter oversight of business incentive deals.

Comptroller Kevin Lembo, who sits on the state Bond Commission and approved the $3.6 million aid package to Cliniflow, said: "This case reveals a very serious need for a re-evaluation -- not only of the state's economic development strategy for picking winners and losers, but for vetting corporations that receive state money. As a member of the state bond commission, I need to rely on agencies for adequate vetting -- and I have questions about how allegations against this corporation were undetected."

Earlier this year, Lembo proposed and the legislature passed a bill that expands legislative review of economic development programs.

The law, which has already gone into effect, streamlines incentive-deal reporting requirements and expands the scope of reporting to include all business assistance and incentive programs operated by DECD. The state Auditors of Public Accounts is also tasked with evaluating the performance of economic incentives.

House Speaker Joe Aresimowicz (D-Berlin) said: "We should always look for ways to implement better protections when it comes to investing taxpayer dollars, and vetting for our business incentive programs is an important part of that equation. We passed legislation this session that requires a full evaluation and seeks recommendations on improving their effectiveness, and I expect the lessons of the CliniFlow experience will be considered."

Republican Senate Leader Len Fasano also criticized DECD for not checking legal records more thoroughly, including federal court records in other states.

"I think they need to do more," Fasano said.

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