Two elected Kansas officials awarded a total of $495,200 from CARES Act. Did they need it?
As the U.S. economy faltered under the coronavirus pandemic and Congress unleashed a torrent of federal spending to protect businesses and save American jobs, two Wichita elected officials signed up for help.
Michael Capps, a state legislator, and James Clendenin, a Wichita City Council member, appear to have submitted false information to get federal money for their company.
Records indicate they inflated their payroll, asking for money to pay the salaries of workers who did not exist.
Capps also sought a $150,000 disaster loan to cover six months of expenses for another company with annual revenues around $40,000 a year, according to Dun & Bradstreet, suggesting the company applied for far more than its fair share.
Capps did the same thing with a charity he controls. The nonprofit was awarded a disaster loan worth more than triple the revenue it has ever reported to the IRS in a single year. Six months later, Capps dissolved the charity. He told The Eagle that he plans to return the loan.
Capps says he did nothing wrong.
The companies and organizations Capps sought money for — Midwest Business Group LLC, Krivacy LLC and Fourth and Long Foundation — are the same ones used to launch and fund a false attack campaign against Brandon Whipple during the 2019 Wichita mayoral race. Former Sedgwick County Commissioner Michael O’Donnell, who does not share ownership of businesses with Capps and Clendenin, was also involved in the attack ad and subsequent cover-up.
The election-related scandal has led to calls for their resignations and attempts by the Sedgwick County District Attorney to remove them from office. O’Donnell resigned, an ouster of Clendenin is pending and both the Sedgwick County district attorney and Kansas attorney general said they don’t have the authority to remove Capps from his seat in the Kansas House of Representatives.
U.S. Rep. Ron Estes, a Wichita Republican who voted for the CARES Act coronavirus stimulus package, said the apparent abuse is part of a “pattern of bad behavior” by Capps and Clendenin.
In response to the Eagle’s findings, Estes said any fraud committed to receive federal funds as part of the coronavirus relief efforts should be prosecuted.
Applications for the federal loans said knowingly making a false statement on an application to a federally-insured bank and federal government could be punishable by up to 30 years in prison and a $1 million fine.
“These programs were established to help Americans, and anyone fraudulently abusing COVID-19-related relief programs should be prosecuted,” he said. “Unfortunately, these lawmakers have exhibited a pattern of bad behavior, and this is another reminder of why they need to step down from serving the public.”
Transparency concerns
Together, entities controlled by Capps and Clendenin were awarded $495,200. They tapped into CARES Act money at the federal, state and county level. It’s unclear how much money has been dispersed.
They applied for loans through the two primary coronavirus relief programs offered by the U.S. Small Business Administration: the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) and Advance Grant program.
Between the two programs, the SBA awarded $717 billion nationally in loans from March to November.
The SBA initially would not release information on the loans and fought to keep the information private for months after being sued by several news organizations, including the Washington Post, New York Times and Wall Street Journal. Names of entities who were awarded loans and the exact amount each received was not released until earlier this month under a court order.
But state and federal agencies do not make enough information — such as the number of employees on payroll — publicly available on private companies and small charities. That would allow the public to cross-reference claims made by companies to receive the coronavirus relief loans.
Employee data on entities associated with Capps and Clendenin only surfaced in a civil lawsuit brought by one of Capps’ former employers to recover at least $200,000. Capps had to report his business assets in that lawsuit. It wouldn’t have been otherwise publicly available.
Coupled with federal data released last week, an Eagle investigation found three entities connected to a Wichita political scandal benefited greatly from federal coronavirus relief funds.
Among the Eagle’s findings:
▪ Midwest Business Group LLC, the company owned by Capps and Clendenin, claimed eight employees to secure an $80,500 loan through the Paycheck Protection Program. The company had no employees under the program’s definitions in 2019, records show. Besides Capps and Clendenin, it has only one agent, and she works on a commission-only basis, meaning she was potentially ineligible.
▪ Fourth and Long Foundation, a Capps-controlled 501(c)(3) corporation set up in 2013 to raise money for a stadium at Wichita West High School that was never built, was awarded more than triple its annual income through an Economic Injury Disaster Loan. Those funds were supposed to cover six months of working capital. Six months after its first federal award, the Fourth and Long Foundation dissolved.
▪ Krivacy LLC, another Capps-controlled entity, was awarded the maximum loan amount of $150,000 under the EIDL program, which was supposed to help businesses and organizations overcome a “temporary loss of revenue due to the coronavirus” and was supposed to be limited to six months of working capital. According to Dun & Bradstreet, the company’s annual revenues are around $41,950 a year.
▪ Fourth and Long and Krivacy LLC were each awarded $10,000 grants that were reserved for businesses and organizations with 10 or more employees. Neither entity had any employees, according to an October court filing listing Capps’ 2019 business interests.
In addition to the federal money, Midwest Business Group and Krivacy were each awarded $20,000 Small Business Working Capital grants through the state’s CARES Act funds in November. Midwest Business Group was awarded a $5,000 Safe Operating Grant by Sedgwick County on Nov. 25.
A growing company
The Paycheck Protection Program was created to help small businesses pay their employees during a worldwide health crisis, especially in industries forced to shut down or severely limit their operations and those suffering catastrophic losses due to shutdowns and travel restrictions. The PPP loans offered payroll loans for companies with as many as 500 employees. The more workers a company had, the more money it could receive.
Midwest Business Group, which brokers business sales, listed eight employees to receive an $80,500 forgivable PPP loan. That number was supposed to be based on its average payroll for 2019.
But the company, which is owned jointly by Capps and Clendenin, didn’t have any employees in 2019, records show.
In recently filed court documents, Capps claimed Midwest Business Group had no employees and only one “agent” who worked on a commission-only basis in the 12 months that ended in November 2019. Payroll costs for commission-only workers are potentially ineligible under the PPP.
Clendenin did not respond to questions about his company. As a City Council member, he receives a $46,026 salary and full health care benefits from the City of Wichita.
Capps, who as a member of the Kansas House gets paid around $20,000 from the state, declined to say how the federal money was spent, other than saying it was “used in accordance with Federal guidelines.”
He also would not discuss the number of employees.
“You do not have a right to private, personnel information from a private company,” he said.
Nor would he discuss the business operations.
“As with all businesses, operations change over time, especially a young company in growth mode,” he said in an email. “We have had numerous new staff, agents and partnerships over the past year and continue to solicit for additional employment vacancies.”
To get the loan, business owners were required to self-certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”
Capps did not explain why a company in growth mode needed money intended for businesses hurt by the coronavirus pandemic.
“A growing company is a relative term,” he said.
Midwest Business Group’s “Meet Our Team” web page shows a team of three: the two officeholders as partners and Vanessa Christophersen, the agent listed in court documents.
The bank that handled the PPP loan and the SBA, which administered the disaster assistance, declined to comment.
“The SBA does not comment on individual borrowers,” SBA spokesperson Carol Chastang said in an email. “Evidence of waste, fraud, and abuse with any of the SBA’s loan programs is not tolerated and should be reported.”
Emprise Bank, a Wichita-based financial institution that serviced the PPP loan to Midwest Business Group, also declined to comment.
“Our privacy policy doesn’t allow us to provide or discuss customer information,” an Emprise spokesperson said.
The SBA paid a 5% processing fee to banks for loans less than $350,000. Unlike previous SBA programs, during the coronavirus pandemic banks were permitted to disperse money based on self-certifications by business owners without verifying their claims. Banks are held harmless if a business doesn’t follow the rules and PPP loans were fully guaranteed by the federal government.
‘A slap in the face to the public’
Capps declined to provide evidence to dispute the Eagle’s findings and said he’s tracking all of his spending in accordance with federal law.
A national nonpartisan watchdog group said Capps seeking federal loans is “a slap in the face to the public.”
“A lot of small businesses and nonprofits applied for these funds and not everyone who needed them to stay afloat received them,” said Laurie Styron, executive director of CharityWatch, a national nonprofit watchdog group and information service.
“Look around,” she said. “Look at all the restaurants and other small businesses that have closed. The people out of work. The working people who are underpaid. The tenants who can’t afford rent, and the home owners who can’t afford to pay their mortgages.”
Particularly alarming to Styron was the money awarded to the Fourth and Long Foundation, given its past involvement in a political campaign.
“A nonprofit acting as a pass-through organization for political funds is not only strictly prohibited by the IRS, it is a slap in the face to the public in cases where that same nonprofit is holding its hand out for tax-subsidized federal grants,” Styron said. “If a nonprofit has the money to violate IRS rules by playing around in political campaigns, it’s not in an ethical position to hold its hand out to taxpayers for government subsidized funding.”
Cindy Miles, executive director of the Kansas Nonprofit Chamber, was also critical of Fourth and Long and Capps.
“Capps has committed who knows how many acts of fraud,” Miles said. “And I think it sends a signal to other people that, ‘Hey, Michael Capps got away with starting a fraudulent nonprofit organization and getting grants and that kind of thing, and we can do that, too.”
Questioned about the Fourth and Long Foundation dissolving after taking federal funds, Capps said the charity hasn’t spent any of the money and plans to return it to the SBA — if he can figure out how.
“Fourth and Long Foundation did indeed dissolve and all funds received under the EIDL Loan are being returned to the SBA,” he said. “No funds from the EIDL Loan were spent. We are awaiting instructions from the SBA on processing the loan return.”
Capps dissolved the charity on Oct. 19.
He said it’s standard operating procedure to not disclose information about private businesses and charities.
“Why don’t you inquire to the personnel records of other private companies and see if they disclose their personnel information,” he said in an email. “Why don’t you ask for expenditures from the Kansas Human(e) Society, also a 501c3 (sic) and see if they give you their expenditures.”
The Kansas Humane Society’s expenditures are publicly available and listed on its IRS Form 990. In its most recent filing, it reported expenditures of $4.1 million with more than half — $2.2 million — spent on employee salaries, compensation and benefits.
The Kansas Humane Society was awarded a $333,300 PPP loan to help pay 79 employees. It did not take out a disaster loan.
Because the Fourth and Long Foundation is so small, it annually files a postcard version of the IRS disclosure form for charities, the 990-N. It lists the most basic information about Fourth and Long — the name and address of the organization, Capps’ name, and certification that the charity’s gross receipts were not greater than $25,000 for the year.
Fourth and Long received a $10,000 EIDL Advance Grant and an $85,000 EIDL loan.
Capps would not say what services the charity has provided to the community.
Styron said that money could have been better spent elsewhere.
“Nonprofits play an important role in acting as a last-ditch safety net for people in need,” she said. “Every dollar ... that was misdirected is a dollar that could have gone to a nonprofit in a position to really help people during this time of incredible need.”
Moran promises oversight
Established through the Coronavirus Aid, Relief and Economic Security Act, CARES Act for short, the Paycheck Protection Program was initially seen as a lifeboat for small businesses struggling to pay workers through the pandemic. It provided short-term, potentially forgivable loans to cover payroll at small businesses.
The $670 billion program has since been criticized by a Congressional watchdog agency for its lack of transparency and internal controls to prevent fraud and abuse.
“Given the immediate need for these loans, SBA worked to streamline the program so that lenders could begin distributing these funds as soon as possible,” an October report by the Government Accountability Office said. “For example, lenders were permitted to rely on borrowers’ self-certifications and use of loan proceeds. As a result, there may be significant risk that some fraudulent or inflated applications were approved.”
PPP loans could also be used on mortgage interest, rent, utilities and interest on previous loans, but to be forgiven entirely, at least 60% had to be used on payroll.
Capps applauded the federal response to the pandemic.
“Through the bold leadership of President Trump, with the aid of Senate Republicans, our country answered the call in providing critical relief to unemployed citizens and economically suffering businesses across the country,” he said.
U.S. Senator Jerry Moran, a Kansas Republican, promised oversight and legislative fixes by the Senate to address The Eagle’s findings on Capps and Clendenin.
“Congress provided funding in the CARES Act to support small businesses with emergency resources to pay their employees and keep their doors open during this pandemic,” Moran said. “Anyone who commits fraud should be reported, and there should be a thorough investigation into the use of the federal funds they received or requested.”
Here’s a list of the awards:
▪ Krivacy LLC (owned by Capps): $10,000 EIDL Advance grant; $150,000 EIDL loan; $20,000 Small Business Working Capital grant
▪ Midwest Business Group LLC (owned by Capps and Clendenin): $114,700 EIDL loan; $80,500 PPP loan; $20,000 Small Business Working Capital grant; $5,000 Safe Operating Grant
▪ Fourth and Long Foundation (controlled by Capps): $10,000 EIDL Advance grant; $85,000 EIDL loan
This story was originally published December 13, 2020 at 5:01 AM.