(The teeth of one of the huge saw bands that once cut through logs at the Rough & Ready sawmill in Cave Junction. Jamie Francis/The Oregonian)

BY GORDON R. FRIEDMAN

Last month, the state forcefully reasserted that a corporate arm of Portland-based Ecotrust unlawfully inflated project costs and omitted material facts to get millions in tax credits it didn’t qualify for.

A question now, some legal experts say: Will the state investigate that as a potential crime?

Officials at state economic development agency Business Oregon used unusually strong language in a memo to Ecotrust managers, characterizing the tax credit deal as built on untrue and incomplete information. The deal, approved in 2014, was intended to throw a lifeline to the Rough & Ready sawmill in Southern Oregon.

The detailed document outlined each element of what the agency says was wrongdoing by Ecotrust in putting together the deal. Yet it has extended the firm an opportunity for a do-over.

Federal authorities have taken notice. Rich Delmar, counsel to the U.S. Department of Treasury’s inspector general, said last week the office of investigations has “received a referral” relating to Ecotrust “which we are reviewing.”

The Oregon Department of Justice said months ago that Attorney General Ellen Rosenblum decided not to investigate the matter. Her office would not say last week whether that had changed in light of the latest Business Oregon findings.

Given the “red flag language” that Business Oregon used to describe Ecotrust’s actions, the situation “certainly warrants a criminal investigation” by state officials, said Josh Marquis, the longtime Clatsop County district attorney who is not involved in the case but who reviewed the state’s findings at the request of The Oregonian/OregonLive.

Ecotrust and the sawmill’s owners maintain they did nothing wrong and that their financial arrangements complied with state and federal rules, but did not go into specifics.

“I still think that it was crafted properly,” said Jennifer Phillippi, who with her husband Link owns Rough & Ready. “I still believe that and I’m certain of that.”

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(The Ecotrust building, shown in downtown Portland in 2013. Ecotrust managers have come under fire for the tax credit deal with the Rough & Ready mill, which was unsuccessful and, state officials found, ultimately unlawful. Oregonian/OregonLive file)

'MATERIAL MISREPRESENTATIONS'

The complicated transaction at issue began in 2013, when Rough & Ready was looking for a bailout and Ecotrust stepped in with the know-how to connect the sawmill to investors via tax credits. The mill owners and Ecotrust executives sought to rebuild the Josephine County economy by restarting the mothballed mill.

To get the $3.1 million in state credits it sought for the Rough & Ready deal, Ecotrust needed to show Business Oregon the mill would spend at least $8 million on qualifying expenses. Its 2013 application promised it would do just that.

However, in its August 16 memo recently released to The Oregonian/OregonLive, Business Oregon said Ecotrust managers made "material misrepresentations and omissions" and failed to "accurately describe" their plans.

The state found Ecotrust failed to disclose that it orchestrated a one-day loan of nearly $5 million from Chase Bank to Rough & Ready. That loan, Business Oregon concluded, did not “represent an arms-length transaction” and was used in essence to let the couple who own the sawmill buy it from themselves.

The transaction was included in the overall budget for the project, which meant it qualified on paper for more credits than it would have otherwise. But Business Oregon determined the transaction should not have been counted and, if it had been disclosed, the deal likely wouldn’t have been approved.

The undisclosed loan “unlawfully” boosted the project budget, and Ecotrust and Chase “improperly benefited” as a result, according to the Business Oregon memo, written by director Chris Harder.

Rough & Ready’s owners and Chase Bank knew the one-day loan was “circular” and was not used to make a valid purchase, Harder wrote. Ecotrust structured the deal so that the loan passed from Chase to Rough & Ready via a second corporate subsidiary of Ecotrust established just for the sawmill deal.

Chase, which provided the loan and then was able to buy the resulting tax credits at a deep discount, declined to comment on the appropriateness of the single-day loan. A Chase spokeswoman said the bank makes investments “supported by economic development authorities that intend to meet local needs.”

The Rough & Ready sawmill went belly up barely a year after the deal closed, erasing all 70 promised jobs. Taxpayers lost at least $7 million in state and federal underwriting on the deal gone wrong.

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(Ellen Rosenblum, the Oregon attorney general, pictured in 2015. Dave Killen/The Oregonian)

POSSIBLE PENALTIES

Business Oregon says it rarely finds that a tax credit beneficiary has broken rules. In the few cases to date, it has allowed the companies to make amends and keep the credits. But it is prepared to claw back tax credits sold by Ecotrust that it says were improperly obtained. It would be the first time the state has done so.

But before it will make such a move, it is allowing Ecotrust to dodge that fate if it invests $3.5 million in a legitimate deal to create jobs in a low-income Oregon community. It first set a May deadline for that to happen, then moved it to November.

Some legal experts say the state should not only seek to claw back the money, but should also seriously consider a criminal investigation.

John Saris, the Business Oregon finance manager, said his agency does not have law enforcement powers or employees trained to investigate crimes.

“What we’re simply saying is these misrepresentations were made in the applications of the program,” Saris said. The agency has kept the state Department of Justice abreast of its findings, he said. “Criminal allegations – that’s not us. … It’s up to the Department of Justice,” Saris said.

Hafez Daraee, a corporate defense attorney who is not involved in the case, said someone who knowingly makes a misrepresentation in the course of receiving public financing could face civil financial penalties.

“The rule of thumb is if you try to fudge your numbers, the government has every right to come after you, as they should,” Daraee said.

Tung Yin, professor of criminal law at Lewis & Clark Law School, reviewed Business Oregon’s findings for The Oregonian/OregonLive. Yin said prosecutors could in this instance investigate potential crimes such as theft by deception, in which a person has intentionally used false pretenses to obtain property, and conspiracy, in which people have agreed to violate a law.

Yin said federal prosecutors may have an interest too, because Ecotrust also obtained federal tax credits for the Rough & Ready project. Kevin Sonoff, a spokesman for the United States Attorney's Office for the District of Oregon said Tuesday that he cannot confirm or deny the existence of an investigation.

Rosenblum, who heads the Oregon Department of Justice, has declined to investigate the Ecotrust deal, spokeswoman Kristina Edmunson said in March. Edmunson said last week that the attorney general is “aware of” Business Oregon’s findings, and that the Oregon Department of Justice has “received new information” about Ecotrust since March. Citing agency policy, Edmunson declined to confirm or deny the existence of an investigation.

Two former Justice Department attorneys say state lawyers or auditors certainly should be taking a closer look.

Keith Dubanevich, an associate attorney general under Rosenblum’s predecessor, John Kroger, said that as a taxpayer he hopes the Department of Justice, Secretary of State’s Office or Legislature will “look at this to figure out what happened.”

“If someone was gaming the system they should be held accountable,” said Dubanevich, who has seen the state memo. “And if no one did anything wrong, we still need to learn what happened so it doesn’t happen again.”

Sean Riddell, the Oregon Department of Justice chief criminal prosecutor during Kroger’s term, agreed. “Whenever the people’s money is misused it deserves the highest level of scrutiny, whether from the Department of Justice or Secretary of State’s Office,” he said.

Andrew Love, the principal auditor at the Secretary of State’s Office, wrote in an April email obtained by The Oregonian/OregonLive that a deep look into Ecotrust’s use of tax credits would constitute “a legal matter” and “would be best handled by Oregon Department of Justice.”

As Oregon’s top law enforcement official, Rosenblum can use her powers to launch investigations. She has been more cautious in the use of her prosecutorial powers than her one-term predecessor, Kroger, whose zealous approach had detractors as well as fans.

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(Gordon R. Friedman/The Oregonian)

STILL IN THE GAME

The quagmire Business Oregon now finds itself in was avoidable. There were clear signs the Rough & Ready project was doomed from the start, The Oregonian/OregonLive first reported in March.

Glaring signals included an overly rosy financial analysis and a hand-written budget proposal in which all expenditures came out to an even $100,000. But the state and federal tax credit programs that financed the project allow for little scrutiny of potential deals and rely heavily on the accuracy of submitted applications.

For years Ecotrust has been federally approved to broker tax credit deals via the New Markets Tax Credit Program.

That approval requires no information about how Ecotrust or similar entities will structure individual projects that receive tax credits. “We don’t vet the deals,” said an official in the U.S. Department of Treasury office that manages the program, who was not permitted to speak on the record.

Until 2016, Oregon had a program that piggybacked on the federal one. If an entity was federally certified, state approval was all but guaranteed, according to Nathan Buehler, the Business Oregon spokesman. The result: Multimillion-dollar tax credit transactions bankrolled by the public were green-lighted with minimal oversight.

For years, state leaders and agency executives have been criticized for gross mismanagement of tax credit programs. The state has consistently shied away from attempting to claw back improper subsidies or hold parties legally responsible for related misdeeds, except in cases of blatant wrongdoing.

The Rough & Ready case appears more of the same.

When Business Oregon first told Ecotrust in February that its deal was improper, the agency offered a mulligan: Ecotrust’s errors could be “cured” if the firm made a by-the-books investment by early May. The agency has to take that route, Buehler said, or the seller of the tax credits is likely to prevail in court. But the director of Oregon’s tax department warned that if Ecotrust didn’t follow through, Chase would have to forfeit the tax credits.

Ecotrust missed the state-set deadline to fix the deal. Rather than crack down, Business Oregon extended the deadline to October. Saris, the agency finance manager, said that was done so Business Oregon could double-check the basis for its decisions and make sure Ecotrust and Chase were given fair due process.

Ecotrust has not indicated it will comply with the state’s directive. A spokeswoman for the outfit said it is still seeking “a mutually-agreed on solution” with the state. Ecotrust chief financial officer Adam Lane, who signed the tax credit application, declined to comment.

Through it all, Ecotrust has remained a prolific user of the federal New Markets program and has structured many deals beyond the millions in state tax credits awarded for the Rough & Ready project. Since 2005, the Treasury Department has granted Ecotrust authority to broker deals with federal tax credits worth approximately $90 million.

Bill Luecht, a spokesman for the Treasury office that runs the program, declined to comment last week, citing what he characterized as an acitve inspector general’s investigation.

Ecotrust most recently qualified for nearly $30 million in federal credits in 2016. And it has applied for another round. How much, if any, it is awarded will be announced early next year.

-- Gordon R. Friedman

GFriedman@Oregonian.com