Exploring Warren County’s EDA financial scandal – How did it happen?

The Warren County Courthouse continues to be ground zero for legal consequences of the EDA financial fraud investigation. Royal Examiner File Photos/Roger Bianchini

As the final weeks of the summer of 2019 arrive in the northwestern Shenandoah Valley, one small-town, rural community remains conflicted, perhaps even collectively traumatized by a financial scandal that has carried the names Front Royal and Warren County across Virginia and occasionally beyond into major media markets across the country.

In September, less than six months after civil litigation was filed seeking recovery of millions of dollars of allegedly misdirected economic development assets there have been:

– forty-one criminal indictments served against five defendants related to alleged financial fraud within the local Economic Development Authority;

– four surviving EDA civil defendants and their companies have been sued for the return of up to $21 million dollars of those economic development assets;

– a long-time, generally well-thought-of sheriff is dead, possibly on the eve of himself being criminally indicted after being named one of the EDA civil suit defendants;

– the Town of Front Royal has filed a civil suit against the EDA and its former executive director that has climbed from an initial $3 million figure to as much as $15 million;

– a Special Grand Jury looking into potential criminality surrounding all of this has asked for a six-month extension to March 31, 2020, to continue its work begun in early April.

We must remember that everyone who has been charged civilly and/or criminally will have their day in court with an opportunity to give their side of the story and claim misunderstanding or innocence. But human nature being what it is, fingers have been pointed – sometimes rationally, sometimes not – and an ongoing, collective query remains on the lips of a community – whoever and however, how and why did it happen?

“We’re here tonight because there was a catastrophic failure that allowed criminal embezzlement and rampant mismanagement to flourish,” recently-elected EDA Board of Directors Vice-Chairman Jeff Browne said on behalf of the EDA to open the August 27 joint meeting of County, Town and EDA boards and staffs.

That is the short answer.

“None of us ever want to see that happen again. The failures can be grouped into two categories … failed procedures and failed oversight,” Browne added of the outline for a path forward.

EDA Vice Chairman Jeff Browne, at far right end of the not-quite-round-table meeting of County, Town and EDA officials on Aug. 27 – Browne’s opening statement outlined the primary institutional failures that facilitated what has developed into a multi-million dollar municipal and economic development scandal.

What led to those catastrophic failures of people and processes will take a bit longer to unravel.

While ultimate legal responsibility will be the province of the civil and criminal court systems, likely even at the federal level on the criminal side, there can be little doubt that large amounts of money designated for public use related to economic development in Front Royal and Warren County were moved haphazardly with little, if any consideration to due diligence.

Criminal and non-criminal dereliction of public duty: Where might they apply in the EDA financial scandal?

One can only wonder where the pertinent question that might have prevented it all was from a total of 19 elected and appointed board members from the Town, County and EDA over the past five-plus years. It wasn’t a difficult question – “Is what I’ve been told to justify a large investment of public funding, let’s say $10 million, verifiably true?”

Oh, that’s right – that question WAS asked three years ago.

In October 2016 Bébhinn Egger, far right, confronted EDA Executive Director Jennifer McDonald about claims being made about the business model of ITFederal and its contract base, as well as the apparent presence of an EB-5 Visa funding stream to ITFederal. McDonald was sparse on detail in response to those questions. However, Egger’s colleagues seemed uninterested in answers.

However when first posed in mid-2016 by a lone municipal voice, Town Councilwoman Bébhinn Egger, as well as the Royal Examiner news staff, it was initially ignored and/or vilified by every other involved public official.

The vilification was that “negative press” was threatening the successful conduct of EDA business, particularly ITFederal business. It is a business now asserted in court filings as having fraudulently received the largest single chunk, $10 million, of EDA assets being sought for recovery in the EDA civil litigation.

But three years ago then Councilman Bret Hrbek, a recent if unsuccessful applicant for a seat on the EDA board of directors, seemed to speak for a distinct town council majority of five and the mayor when he suggested that the question about the truth of what was being presented to this community about ITFederal was counterproductive.

Why?

Because that “negative press” being generated by Bébhinn Egger and Royal Examiner about the ability of Truc “Curt” Tran and his ITFederal LLC to live up to the promised $40 million investment creating 600 high-paying tech industry jobs in this community had led the ITFed CEO to consider taking his ball and going home – or rather to take his LLC trumpeted as the first commercial redevelopment client at the Avtex Brownfield site, and go elsewhere.

Councilman warns ITFederal CEO may bail over questions

But would that have been such a tragedy – particularly before the Town offered its initial one-month, twice-extended $10-million “bridge loan” that enabled the EDA to finalize its $10-million
loan to ITFederal through First Bank & Trust?

From left, Bret Hrbek, Gene Tewalt and Bébhinn Egger at late November 2016 council meeting; Hrbek was the harshest council critic of Egger’s or media questions about the ITFederal project, warning at that meeting that those questions might cost the town and community the ITFederal project.

According to documentation in the Cherry Bekaert EDA financial fraud investigation, Tran listed ITFederal assets of $2,020,000 as collateral for the $10-million bank loan facilitated through the EDA. But $2,000,000 of that amount was the value of the 30-acre property at the Avtex site/Royal Phoenix Business Park which the EDA “gifted” behind closed doors to Tran for $1 – yes, one dollar American – after public discussion of a $2-million dollar sale price.

Red Flag?

Royal Examiner thought so in its first month of existence when it broke the news of that one-dollar, 30-acre gift to ITFederal leading to a year’s delay in approving the transaction by federal oversight authorities.

Feds OK ‘Dollar Special’ on first Avtex property sale

As noted in the linked October 27, 2016, Royal Examiner story, approval from the U.S. Justice Department to remove the ITFederal parcel from a bankruptcy court-ordered $2.06 million lien on the Royal Phoenix/Avtex property came on September 23, 2016. That was just over a year after the request to allow the one-dollar sale was sent out by then EDA/County Attorney Blair Mitchell on September 18, 2015. The stated rationale was that facilitating the ITFederal project with a give-away of land valued at $67,000 an acre would jump start other full-price purchases at the site.

“This 30 acres has been sold for $1.00 in order to get a developer to come in and begin the process of other buyers,” Mitchell wrote, adding, “The EDA already has a buyer for a 3-acre parcel to sell at $67,000 per acre, so selling this parcel as a way of breaking the ice will pay off in the long run. While the $1 will not be used to pay down the $2,060,000 lien, sales proceeds from future sales will be applied toward the paydown of the secured debt.”

Three years later we see how that plan worked out:
1/ no three-acre sale to CBM Mortgage at Royal Phoenix;
2/ no other land sales at Royal Phoenix;
3/ no $40 million investment or any jobs created by ITFed at the Royal Phoenix site.

Well ITFederal remains on the 30 Royal Phoenix acres gifted to it by the EDA for a dollar, but the $40 million investment and 600 jobs seem to have hit the highway, along with our Sixth District Congressional representative credited with bringing the project here.

In fact per the ongoing sweetheart agreements he was dealt by the EDA, it appears Tran may invest about $2 million to create an unoccupied 10,000 s.f. building at his “get the redevelopment ball rolling” gifted acreage with no further obligations other than that he have a certificate of occupancy issued by the middle of 2020 and continue to make monthly payments for the balance of 30 years on that $10 million bank loan through the EDA.

And the Cherry Bekaert investigation verifies what Royal Examiner and Bébhinn Egger were saying at the time – that there was no evidence the $140-million dollar federal government contract ballyhooed by Tran, his D.C. political sponsor Robert Goodlatte and EDA Executive Director Jennifer McDonald as the basis for ITFederal’s investment here ever existed.

A ‘Perfect Storm’ of silence raises questions about 1st Avtex client

The Perfect Storm of Silence, Part 2: a cattle ranch, $10-mil & …

How did it happen – not just the ITFederal and Workforce Housing debacles that first attracted this media outlet and Councilwoman Egger’s attention – but all of it, the 16 specific project allegations cited in the Cherry Bekaert working papers report and summary?

Work on Afton Inn redevelopment across the street from Town Hall stopped after the project was cited as a means of embezzling EDA assets in the March 26 EDA civil suit. Town officials have reported the 2 E. Main St. development group unnamed in the financial scandal, as anxious to get the project going again.

Those projects in order of their listing in the Cherry Bekaert summary are: Workforce Housing Project/Royal Lane Property; Afton Inn Property Improvements; Criminal Justice Training Academy; Bargain Land Sale and Issuance of $10,000,000 Loan to ITFederal; Payments to or on Behalf of ITFederal; Payments to Earth Right Energy; New Market Tax Credit Projects; Leach Run Parkway Easements; Wetland Credits; New Hope Bible Church; 999 Shenandoah Shores Road; Payments to (McDonald) Relatives; USDA Intermediary Relending Program; Stokes Mart/B&G Goods; Payments to Known and Suspected (McDonald) Business Partners; USDA Rural Business Enterprise Loans.

How could personal and procedural checks and balances collapse so catastrophically for such a length of time, in so many directions?

“I had no reason not to trust her,”

If Jennifer McDonald’s late January 2018 story to Royal Examiner about a 3-year run of luck at Charles Town’s Hollywood Casino slots didn’t raise alarm bells with EDA and municipal colleagues, it did among those in the community with some background in the gambling industry. Rather than win about $2 million over 3 years by spending a maximum of around $6,000 annually, Virginia State Police say she netted a three quarters of a million dollar loss.

“I had no reason not to trust her,” is a comment offered by more than one EDA or municipal official in explanation of the lack of due diligence performed on project proposals and financing or the purchase and sale of properties through the EDA on the word of its former executive director.

EDA Director Jennifer McDonald parlays casino winnings into real estate investments

Perhaps it is that personal comfort and familiarity – “I had no reason not to trust her” – born of long-time social, professional and organizational ties that gives us a clue at a root cause of that “catastrophic failure” of procedures and oversight cited at this story’s outset.

It is a familiarity born of business and legal transactions, organizational memberships, not to mention in many cases political party affiliations. In Warren County those political affiliations are almost exclusively on the Republican side of the political aisle, from local to state and federal levels. And that is not to point a finger at one party or the other, but rather just to acknowledge the local political landscape.

Were there to be only Democrats in electoral and judicial office here, the situation would be the same – “I know you; we have common interest and cause, why would I not trust you?”

McDonald did double duty as Front Royal Rotary Club President, circa 2016-17.

It is such personal or professional familiarity that has forced the eventual recusal of all the county’s circuit court judges from hearing EDA legal matters at an evidentiary level. Chief 26th Judicial District Judge Bruce D. Albertson, now hearing EDA civil and criminal cases in place of Judge Clifford L. Athey Jr., has indicated he will soon appoint another judge from outside the county to take over the EDA Special Grand Jury bench as Athey heads to the Virginia State Appeals Court.

It is that small town “everyone knows everyone” personally, organizationally, professionally and politically that can contribute to that apathy toward fundamental organizational due diligence, if not worse.

From left, South River Supervisor Linda Glavis, School Board Chairman Cathy Bower, Warren County Middle School Principal Amy Gubler and School Superintendent and EDA Board Chairman Greg Drescher listen as Robert Goodlatte speaks at the July 31, 2017 WCMS ribbon cutting.

Why would anyone in local elected or appointed office here not trust then-U.S. Sixth District of Virginia Republican Congressman Robert Goodlatte’s 2014-15 assertion that ITFederal would invest $40 million dollars and create 600-plus high-paying jobs here based on a $140-million federal government contract there was no evidence existed?

Why?