Ken Hays Says Charges Are Wild, Baseless
posted April 4, 2005
Former mayor candidate Dan Johnson said Monday the RiverCity Company and the Chattanooga Downtown Redevelopment Corporation (CDRC) "may be facing concerns from the Internal Revenue Service" on alleged conflicts of interest.
Mr. Johnson said there were concerns about handling of the sale of the Smokestack Lot where the Kinsey, Probasco, Hays firm built the River Pier Landing. He said the firm "should return to the city profits made on the Smokestack Lot development because of the conflict."
Ken Hays, a former RiverCity Company president who now is a partner in the Kinsey, Probasco, Hays development firm, said, "These are wild accusations that have absolutely no basis in fact."
He said Mr. Johnson "has provided nothing that indicates any wrong doing and as such is attacking many people in this community including Mayors Bob Corker and Claude Ramsey who have been extremely involved in the RiverCity Board."
Paul Brock, current RiverCity Company president, said, "RiverCity is a private not-for-profit entity that has made incredible contributions to the renaissance we are currently enjoying in downtown. Dan knows that our mission limits our activities to the downtown area, and we think our hard work and efforts are paying off in huge ways that will continue to help move our city forward.
"Mr. Johnson met with Board Chairman Charlie Arant and me on March 11. We have had no other contact with him until one hour prior to this morning's press conference. We appreciate Mr. Johnson's vote of confidence in RiverCity's purpose of promoting and facilitating Chattanooga's downtown development. However, we take strong exception to his claim that any improper transactions have taken place. There is simply no substance to Mr. Johnson's allegations.
"As the new President of RiverCity, I have been directed by our board chairman to constantly review the manner in which we conduct business to ensure that it is above reproach and completely free of conflicts of interest. With this in mind, I can tell you with most assuredness that RiverCity conducts its business in an open and ethical fashion and always has.
"As it relates to the smokestack lot, RiverCity Company was requested by the Chattanooga Downtown Redevelopment Corporation (CDRC) to market four different downtown land parcels including the smokestack parcel. Requests for proposals were advertised to both local and national markets and mailed to over 100 potential interested parties. RiverCity received three responses to the RFPs and referred the two finalists to the CDRC board for review. Following extensive interviews and careful consideration, the CDRC selected the Kinsey Probasco firm to develop the smokestack parcel and an Atlanta-based firm, GK Johnson for the adjacent parcel along Riverfront Parkway. At a later date, the other two development parcels were awarded to a Greenville, S.C.. firm, Windsor-Aughtry. The CDRC presentations and deliberations were held in public with members of the news media present. It can't be any more public than that."
RiverCity Board chairman Charlie Arant noted that the RiverCity board comprises both city and county mayors, City Council and County Commission representatives, as well as community business leaders and volunteers. "We are always mindful of the manner in which we do business, and as Mr. Johnson pointed out on one of his own charts this morning, we already have a strong policy in our bylaws regarding any potential conflicts of interest."
County Mayor Claude Ramsey said, "RiverCity was established with the mission of implementing Chattanooga's downtown and riverfront development. No one can deny the success they've had with their mission, and no one can deny the benefits we've felt as a community because of their hard work. It's been a pleasure to work with the professionals at RiverCity through the years and to see the great things they've been able to accomplish."
RiverCity officials noted this section of their by-Laws:
"Section 6. Interested Directors. To the extent and under the circumstances permitted by law of the State of Tennessee, no contract or other transaction between the corporation and one or more of its directors are directors or officers, or are financially interested, shall be either void or voidable for this reason alone, or by reason that such director or directors are present at the meeting of the board of directors, or of a committee thereof, which authorizes such contract or transaction, or that his or their votes are counted for such purpose."
Mr. Johnson, an accountant who finished third in the March 1 voting, held a press conference at the Hilton Garden Inn. Among those attending was Ron Littlefield, who Mr. Johnson is supporting. The other candidate in the mayoral runoff is former RiverCity Company executive vice president Ann Coulter.
Mr. Johnson said, "I want to emphasize that the mission of RiverCity, to assist the city and county governments in promoting and facilitating development, is still valid and worthwhile. Its purpose is sound. The downtown projects and plans for future development will benefit all the citizens of Chattanooga and Hamilton County. These projects should enhance the tourist industry.
"However, companies that have a public and private responsibility, that is 501(c)(3) organizations such as the RiverCity Company and the CDRC, should ensure that all transactions are conducted at arms length and free of conflicts of interest.
"Information has circulated around the city in the last few years about RiverCity operating as a 'closed shop' in its relationship with developers."
Mr. Johnson said on March 1 he made a statement that "the light of day should shine on the transactions of the RiverCity Company." He said he was contacted by RiverCity board chairman Charlie Arant and president Paul Brock, who "took issue with the statement."
Mr. Johnson said he met with them on March 4, then reviewed some RiverCity documents on March 11. He said, "After this review and information from other sources, I can say that I stand by my comments on March 1."
He cited a section of the IRS code dealing with "disqualified persons." He said, "The regulations detail those situations in which individuals will be subjected to penalties on excess benefit transactions entered into between exempt organization managers and other disqualified persons."
Mr. Johnson was armed with a chart labeled "The Shell Game With The Smokestack Lot."
He said it was part of the old Kirkman School property, and he said the city sold it to RiverCity for $2.5 million in 1992. He said in 1997, RiverCity sold it to the Chattanooga Land Company for "an estimated $2 million." He said Chattanooga Land sold it back to RiverCity in 2002 for $2,574,330.
He said in 2004 RiverCity swapped the Smokestack Lot to the city for the Haney Block at an appraisal value of $3.1 million. Later in 2004, the CDRC, through its agent the RiverCity Company, contracted with Kinsey, Probasco, Hays to develop the lot.
Mr. Johnson said in a press release:
"What is wrong with these transactions?
"Conflicts of Interest:
"RiverCity Company -
Jon Kinsey, vice chairman
Ken Hays, president
"Chattanooga Downtown Redevelopment Corporation
Ken Hays, board member
"Kinsey, Probasco, Hays
Jon Kinsey, partner
Ken Hays, partner (2004)
"Conclusion:
"What Ron Littlefield and I have been saying about RiverCity has NOT been about the projects or the purpose of RiverCity. It is not about the projects. But it is about ethics and integrity. It is about conflicts of interest involving certain board members and officers. Since we are dealing with public money, the citizens of Chattanooga have a right to know. That is the light of day to which we have been referring."
Mr. Johnson outlined some steps he said should be taken, including a written conflict of interest policy at RiverCity.
He said RiverCity should set up an audit committee made up of independent members of the board who are not officers. He said they would hire independent auditors and review the financial transactions of the company on a regular basis.
He said, "RiverCity and CDRC should correct their conflicting board arrangements and make sure they comply with IRS Sect. 4958."
Mr. Johnson said there should be a prohibition of 1-5 years for anyone who has served as an employee, member of the board of directors or independent contractor of any capacity with the RiverCity Company and/or the CDRC from engaging in business activities with RiverCity or the CDRC.
He also called for a restriction or prohibition on political contributions from employees, board members and independent contractors of RiverCity and CDRC to any elected city or county officeholder.
Dan Johnson recommendations:
RECOMMENDATIONS
1) There should be a written conflict of interest policy in place that provides for, at least, three protections or precautions:
Disclosure. If a director believes that he or she may be perceived to have a conflict of interest, this should be disclosed to the board. Even if the director's opinion is that there is no conflict, if there could be a perception of such, then disclosure is the best course.
Abstention. An interested director should not participate in discussion (unless necessary) or voting with respect to the conflicted matter. For example, if the board is considering a contract which the director might wish to perform, he or she should recuse themselves from proceedings related thereto.
Fairness. Above all, as stated, the transaction must be fair and reasonable from the association's perspective.
2) RiverCity should also establish an audit committee comprised of independent members of the board who are not officers. The audit committee would hire independent auditors and review the financial transactions of the company on a regular basis.
3) RiverCity and CDRC should correct their conflicting board arrangements and make sure they comply with IRC Sec. 4958.
4) Kinsey Probasco Hays partnership should return to the City profits made on the Smokestack Lot development because of the conflict.
5) A prohibition (one to five years) for anyone who has served as an employee, member of the board of directors or independent contractor of any capacity with the RiverCity Company and/or CDRC from engaging in business activities with the RiverCity Company and/or the CDRC as a member of a legal entity with which the employee, board member or contractor has a financial interest.
6) A restriction or even a prohibition of political contributions from employees, members of the board of directors and independent contractors of the RiverCity Company and CDRC, to any elected officeholder representing the City of Chattanooga or Hamilton County during such officeholders term of service on the RiverCity Board of Directors and/or the Board of Directors of the CDRC.
7) To maintain the trust of the public and of currently elected officials of the City and County, employees, members of the board of directors and independent contractors of the RiverCity Company and CDRC may not seek elective offices for either the City of Chattanooga or Hamilton County until they resign from their current position.
8) The Purchasing Guidelines and Procedures of the City of Chattanooga shall provide the basis and requirements for all purchases and requisitions for the RiverCity Company (as agent for the City) and the CDRC.
RIVERCITY COMPANY
Board of Directors
County Mayor
City Mayor
Chairman of City Council
Chairman of County Commissioners
One individual appointed by black elected officials
One individual appointed by organized labor
General manager of Electric Power Board
Other members are elected by the board
Three (3) year terms ¡V no limit on terms
Officers (2003-04)
Chairman of Board CEO Charlie Arant
Vice Chairman Jon Kinsey
President COO Ken Hays
One or more Vice Presidents Ann Coulter & Jim Bowen
Secretary Ruth Holmberg
Treasurer Jim Hill
CHATTANOOGA DOWNTOWN
REDEVELOPMENT CORPORATION
Board of Directors
David Eichenthal President
Robert C. Taylor Secretary
Bob Corker/Mike Compton
Ken Hays
Yusuf Hakeem
Excerpts from CDRC minutes of 2/11/04:
A RESOLUTION APPROVING THE FINAL PLANS, BUDGET, SCHEDULE, AND MINORITY PARTICIPATION PLAN SUBMITTED BY KINSEY PROBASCO & ASSOCIATES AS PROVIDED BY THE DISPOSITION AND DEVELOPMENT AGREEMENT FOR THE DEVELOPMENT OF PARCEL 4 OF THE 21ST CENTURY WATERFRONT PLAN.
Action by Board It was unanimously approved.
A RESOLUTION AUTHORIZING THE PRESIDENT OF THE CDRC TO NEGOTIATE AN AMENDMENT TO THE AGREEMENT WITH RIVERCITY COMPANY FOR EARLY TRANSFER OF THE SMOKESTACK LOT AND THE HANEY BLOCK.
Action by Board Upon motion by Mr. Hakeem, seconded by Mayor Corker, and unanimous approval, the resolution was approved.
KIRKMAN PROPERTY
Date Description of Property Cost Income Comments
1/11/1992 Kirkman Property $2,500,000 From City
3/29/1994 IMAX & CDM $895,000 Granted to each
9/28/1995 Residence Inn $453,456 Whelchel for McKibbon Brothers
9/30/1997 Smokestack Lot $2,000,000 Chattanooga Land Co.- part of
larger deal; estimated price
4/5/1999 Kirkman Hill $260,000 Lookouts lease
4/23/1999 Kirkman Tract next to Hwy 27 $305,250 TDOT
9/15/1999 311 Chestnut - Kirkman piece $755,827 Garden Hilton Inn
$2,500,000 $4,669,533
10/11/2002 Smokestack Lot $2,574,330 From Chattanooga Land Co.
3/16/2004 Even swap with CDRC - $3,100,000 Appraised value
Smokestack Lot for Haney Lot
$5,074,330 $7,769,533
Here is the full statement of Dan Johnson:
RIVERCITY A TREASURE TO PROTECT
I want to emphasize that the mission of RiverCity, to assist the City and County governments in promoting and facilitating development, is still valid and worthwhile. Its purpose is sound. The downtown projects and plans for future development will benefit all the citizens of Chattanooga and Hamilton County. These projects should enhance the tourist industry.
However, companies that have a public and private responsibility, i.e. 501(c)(3) organizations such as RiverCity Company and Chattanooga Downtown Redevelopment Corporation (CDRC), should ensure that all transactions are conducted at arms length and free of conflicts of interest. Information has circulated around the city in the last few years about RiverCity operating as a 'closed shop' in its relationship with developers.
On March 1, 2005, I made a statement that "the light of day should shine on the transactions of the RiverCity Company." The Chairman of the Board and the President of RiverCity took issue with that statement. At their request, I met with them on March 4. We agreed at that meeting, I would review some of RiverCity's transactions. On Friday March 11, I met with them at their office to review transactions and procedures. After this review and information from other sources, I can say that I stand by my comments of March 1.
One aspect of the problems RiverCity and CDRC may be facing concerns the Internal Revenue Service (IRS). Let's look at what the IRS may require from directors and officers of non-profit entities.
IRC Section 4958, enacted in 1996 by the Taxpayer Bill of Rights 2, provides for sanctions on the "disqualified persons" and managers of tax-exempt organizations that are subject to the private inurement rules. An organization manager with respect to any applicable tax-exempt organization includes those persons who are officers, directors or any individual having powers or responsibilities similar to officers, directors or trustees.
The regulations detail those situations in which individuals will be subjected to penalties on excess benefit transactions entered into between exempt organization managers and other disqualified persons.
Excess Benefit Transactions
An excess benefit transaction is defined as any transaction between an applicable organization and a disqualified person in which the disqualified person receives an economic benefit that exceeds the value of the consideration provided for the benefit.
Disqualified Persons
Under the statute, a disqualified person is any person who, during the FIVE-YEAR PERIOD ending on the date of the transaction, was in a position to exercise substantial influence over the affairs of the organization. The legislative history makes it clear that a disqualified person need not be a manager or even an employee of the organization. Under the regulations, these categories include any individual who serves as a voting member on the organization¡¦s governing body, any individuals who have the power or responsibilities of President, CEO, COO, CFO or Treasurer of the organization.
Applicable Organizations
501(c)(3) organizations, i.e. RiverCity Company and CDRC, and others.
Now let's look at what the public should expect from directors and officers of non-profit entities.
A non-profit director or officer, as a fiduciary, has an obligation to abide by the duty of loyalty. The duty of loyalty "requires the director's faithful pursuit of the interests of the organization he serves rather than the financial or other interests of the director or another person or organization." Under the duty of loyalty, a non-profit director "commits allegiance to the enterprise and acknowledges that the best interest of the corporation must prevail over any individual interest of his own."
Generally speaking, there are two kinds of transactions that directly implicate the duty of loyalty: interested director transactions, and corporate opportunities.
A. Interested Director Transactions
So-called interested director transactions are simply conflicts of interest. They arise when a proposed transaction creates a possible conflict between the interests of the non-profit, and the personal interests of a director. This could include, for example, a business transaction with the director, as well as a transaction with an entity to which the director has a close relationship, such as in the form of ownership or in leadership position.
Conflicts of interest may arise in the relations of directors, officers, and employees with any of the following third parties:
Persons and firms supplying goods and services to the association;
Persons and firms from whom the association leases property and equipment;
Persons and firms with whom the association is dealing or planning to deal in connection with the gift, purchase or sale of real estate, securities, or other property;
Other associations;
Donors and others supporting the organization; or
Agencies, organizations, and associations which affect the operations of the association.
A material conflicting interest may be defined as an interest, direct or indirect, with any persons and firms mentioned above, which might affect, or might reasonably be thought by others to affect, the judgment or conduct of a director, officer, or employee of the association. Such an interest might arise through:
Owing stock or holding debt or other proprietary interests in any third party dealing with the association.
Holding office, serving on the board, participating in management, or being otherwise employed (or formerly employed) in any third party dealing with the association.
Receiving remuneration for services with respect to individual transactions involving the association.
Using association personnel, equipment, supplies or goodwill for anything other than association approved activities, programs and purposes.
Receiving personal gifts or loans from third parties dealing with the association.
Obtaining an interest in real estate, securities or other property which the association might consider buying or leasing.
Many institutions of government have a code of ethics and conflict of interest guidelines to prohibit conflicts of interest. One example is the prohibition of former senior level officials in the Executive Branch of the United States Government to directly lobby the departments they served in for varying periods of time after leaving government. Many state and local governments follow variations of this policy.
The above is not intended to suggest that a nonprofit director and/or staff person can never do business with the organization. In fact, often when a nonprofit organization is in need of an attorney, banker, investment adviser, or other qualified individual, the board may be the best source. However, if a director and/or staff person does do business with the organization, it should be within strict guidelines and with full disclosure which would include, but not limited to, a waiting period after the director and/or staff person leaves the organization.
If we lose the public trust, benefits of many of our public-private partnerships may be jeopardized. If that is the case, the real losers are the citizens of our city. Therefore I am making several recommendations, contained in a separate handout, to ensure that the public trust is maintained at a high level, and thus, Chattanooga will be able to maintain the progress made to date.
SMOKESTACK LOT
Chattanooga is a model for the good things public-private partnerships can bring to a city. I do not want these partnerships tarnished by what many people view as "insider trading" at RiverCity Company. Let me give you an example.
In reference to the above property the following transactions occurred. There is a separate schedule detailing these transactions.
1) RiverCity acquired the Kirkman property form the City in 1992 for $2.5 million.
2) In 1997, the Smokestack Lot was sold to Chattanooga Land Company for
an estimated $2 million.
3) RiverCity buys it back in 2002 for $2,574,330.
4) In 2004, RiverCity swapped the Smokestack Lot to the City (CDRC) in
exchange for the Haney Block at an appraised value of $3.1 million.
5) Also in 2004, Chattanooga Downtown Redevelopment Corporation (a
501(c)(3) organization) through its agent, the RiverCity Company, contracts with Kinsey Probasco Hays to develop the Smokestack Lot.
What is wrong with these transactions?
CONFLICTS OF INTEREST:
RiverCity Company
Jon Kinsey, Vice-chairman
Ken Hays, President
Chattanooga Downtown Redevelopment Corporation (CDRC)
Ken Hays, Board member
Kinsey Probasco Hays (Developer)
Jon Kinsey, Partner
Ken Hays, Partner (in 2004)
CONCLUSION:
What Ron Littlefield and I have been saying about RiverCity has NOT been about the projects or the purpose of RiverCity. It is not about the projects. But it is about ethics and integrity. It is about conflicts of interest involving certain board members and officers. Since we are dealing with public money, the citizens of Chattanooga have a right to know. That is the light of day to which we have been referring.
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