Newsflash: The State Investment Council doesn’t know what it’s doing with our money.
In the Rio Grande Foundation’s last report on the State Investment Council (SIC), we asked whether the SIC was really on top of what was being done with our money. We took a close look at one of the SIC’s smallest investments, a $550,000 acquisition of equity in a low-income dental chain called Small Smiles. We chose to investigate this investment for two reasons: (1) it would not be too large to overwhelm us; and (2) if we could get a handle on Small Smiles, then one would think the SIC would also have a full grasp of the facts surrounding this modest investment.
We were able to gather a full range of information about Small Smiles. That information revealed its foreign corporate ownership as well as a raft of scandals about the way Small Smiles mistreats children and bills Medicaid for its services. All of that information came from sources other than the SIC. The SIC could not answer even the question as to how much of the state’s money was invested in Small Smiles. We ended up knowing more about this investment than the SIC itself.
Our suspicions that the SIC does not know what is being done with our money were confirmed in a review of documents recently produced under a Public Records Act inspection.
In late November 2008, we filed a request to inspect every document—every memorandum, e-mail, report and letter—containing any information about Small Smiles. We were able to inspect the documents at the SIC’s offices on Wednesday, January 7, 2009.
For an investment of over half a million dollars that has been its portfolio for nearly two years, the SIC had only 73 pages in its files. Many of those pages were duplicates of the same e-mails. Many were simply lists of companies. Many of the pages were merely cover letters containing no substantive information. Close to half of the pages produced did not mention Small Smiles at all.
Some of the pages simply mentioned the words “Small Smiles” once without providing any information about the company, its finances, or operations. For instance, a list of all the New Mexico companies in which the SIC was invested would merely name Small Smiles, but would say nothing about the company’s affairs. Numerous versions of documents of that nature were among those turned over by the SIC.
The e-mail correspondence conclusively shows that the SIC has been negligent in monitoring this investment. A little over a week after the Rio Grande Foundation began asking questions, an e-mail dated December 5, 2008, was sent from Brian Birk, the managing partner of Sun Mountain Capital, to Bruce Duty, a partner in Red River Ventures. Sun Mountain Capital is the investment firm in Santa Fe that manages the SIC’s New Mexico’s private equity investment program. Red River Ventures is the venture capital firm that made the investment in Small Smiles in 2007.
“Hi, Bruce,” Birk writes, “it’s been a while since we’ve touched base….I was over at the SIC talking to Greg K [Greg Kulka, the SIC’s Director of Private Equity and ETI Investments] and somehow the topic of Small Smiles came up. As I recall, RR [Red River Ventures] has an investment in the company. Was that in the parent company, a subsidiary, or ??? If you could provide a little color that would be appreciated. Also, Greg and I could not remember the last time we received a quarterly report from Red River. Could you e-mail us your latest, and are you current in your reporting?” [Emphasis added]
Several things stand out. First, the SIC and its venture capital manager reveal they did not know where the money for the Small Smiles investment had gone, into “the parent company, a subsidiary, or ???” Yet, in its 2007 year-end report, the SIC touted Small Smiles as one of the “New Mexico companies” in which it had proudly invested taxpayer money. From all the records reviewed, including years of meeting minutes, this is the first time the SIC ever asked where our money went.
Second, the e-mail proves that the SIC and its venture capital manager were not staying on top of this investment. They “could not remember the last time” they had received a quarterly report from Red River. The SIC’s ignorance was so bad it had to ask Red River whether it was current in its reporting, instead of being able to ascertain that information from the SIC’s own files.
Bruce Duty of Red River Ventures answered two days later, December 8, 2008, at 3:06 p.m. All of the deletions were made by the SIC before disclosing the correspondence to us.
“Brian and Greg:
Yes, it has been a while since we’ve spoken.
Unfortunately, every company in Red River’s portfolio is being impacted to some degree by ‘the storm.’ Those suffering the highest stress include Small Smiles and [deleted]. For both of these companies, the story is too much acquisition debt and too little EBITDA [earnings before interest, taxes, depreciation and amortization]. [Deleted] and [deleted] have never been profitable and will need to raise cash to avoid failure….
The situation at Small Smiles is [deleted]. The company has endured a year of adverse publicity that triggered investigations by the DOJ and 16 state AGs. Because of the intense scrutiny, the dentists across the system have significantly reduced the way they practice, resulting in the revenue per patient visit falling from over [deleted] a year ago to [deleted] currently.
This the first time in nearly two years of holding an investment in Small Smiles that the SIC was informed of the scandals entangling company’s operations. A review of the minutes of the SIC’s meetings and the meetings of the New Mexico Private Equity Investment Advisory Council show that Small Smiles was never once mentioned or discussed by the people who supervise investments of state money.
This e-mail sheds light on the problems with Small Smiles’ billing practices. The company is being investigated for overcharging and performing unnecessary procedures. It faces allegations that its dentists worked under billing quotas, and did unnecessary work to hit their numbers. Small Smiles has been suspended from some state Medicaid and private insurance programs because of its unethical billing practices. The fact that Small Smiles dentists “have significantly reduced the way they practice, resulting in revenue per patient falling” lends credence to the allegations against Small Smiles. It indicates that Small Smiles dentists were providing treatment based not on what was medically necessary, but based upon revenue targets.
This time Greg Kulka, the SIC’s Director of Private Equity and ETI Investments, sent the follow-up e-mail to Red River. About one hour after receiving Bruce Duty’s first detailed report on Small Smiles he writes:
“Bruce, My main question is about Small Smiles. I know they have offices here in New Mexico. Are they headquartered here? In other words, are they considered a New Mexico company? Please let me know. Thanks.
Remember: the SIC’s 2007 annual report boasted of its investment in Small Smiles, identified as “a New Mexico company.”
Bruce Duty of Red River wrote back within minutes:
“Greg, the corporate offices of Small Smiles are in Nashville, TN. Small Smiles has three clinics in New Mexico—two in Albuquerque, one in Santa Fe.”
In fact, as Rio Grande Foundation has reported, though Small Smiles has corporate offices in Nashville, it is owned by Arcapita Bank of Bahrain.
What Now for the State’s Small Smiles Investment?
The December 2008 report by Sun Mountain Capital lists 54 New Mexico companies in which the SIC has made investments under its private equity program. Unlike the 2007 annual report, Small Smiles is no longer on the list. But $550,000 of New Mexico taxpayers’ money was invested in Small Smiles on the premise it was a New Mexico company. What has happened to that money? Has Red River been required to return it? Or has the SIC simply written off its investment in Small Smiles?
The Rio Grande Foundation posed to these questions to the SIC. We have received no direct answer, only a retort that we “obviously don’t understand private equity.”
Our research shows it is the SIC that should be asking the questions we’ve been asking. We may not “understand private equity”, but we do understand that taxpayer dollars, unbeknownst to the SIC, were invested in an Arabian owned business that abuses children, and that has been excluded from Medicaid programs because of unethical billing practices and that is under investigation in nearly every state where it operates, We—ignorant as we are about “private equity”—were the ones who brought these facts to the SIC’s attention.
Taxpayers pay the State Investment Officer Gary Bland a salary in excess of $300,000. He has a fiduciary obligation to manage our money prudently. That requires knowing what is being done with that money. In the case of Small Smiles, he has obviously failed to meet his obligations to taxpayers.
The private equity program pushed by the Richardson Administration requires the SIC to pour hundreds of millions of dollars of investments in New Mexico private equity. This has resulted in a rush to get money out the door into the hands of venture capital risk takers. The SIC does not have the staff needed to adequately supervise those investments. Consequently, the SIC has deferred excessively to outside investment firms.
We have not seen any real, traditional investment returns from the quarter billion dollars poured into the New Mexico private equity program. We are, in fact, losing money in many of those investments. The SIC does not reveal these losses in its annual reports. Instead, it continues to paint a rosy picture about its investments. That picture, as demonstrated in the Small Smiles investigation, is misleading and false.
The Legislature needs to take a hard, detailed look at the SIC’s private equity investments. It needs to dig beyond the glossy pages on the annual report. It needs to go over each of the “New Mexico companies” listed and ask of each of them: are they profitable, have they paid us any dividends, have we made any capital gains, and, if not, why in the world are we continuing to lose money in failing companies?
The only defense offered by the SIC of these risky investments is that they “create jobs.” The Legislature should also dig into those claims, and demand a company-by-company accounting of these job-creation claims. The Small Smiles investigation conducted by the Rio Grande Foundation shows that the information in the SIC’s annual report is not reliable. If claims about a small investment are so dramatically false and misleading, it calls into question the validity of claims about larger expenditures, and whether large losses are being hidden in the SIC’s files.
