Businesses that gave tens of thousands of dollars last year to Illinois Comptroller Susana Mendoza’s political fund allegedly are “front companies” in an ongoing, multimillion-dollar “sham” involving profits from a state program, according to a pending federal civil lawsuit.

Investors in a Chicago firm called Vendor Assistance Program LLC filed the suit last year in Philadelphia. They claim their partners in VAP hid money in shell companies in Florida and Puerto Rico to avoid giving them their fair share of profits from a highly lucrative arrangement with the state of Illinois.

VAP was started in 2010 by Brian Hynes, a politically connected lawyer who’s now a central figure in a widening City Hall corruption scandal. Hynes is a longtime supporter of embattled Ald. Danny Solis (25th Ward) and co-founded VAP with Solis’ sister Patti Solis Doyle. As Illinois’ fiscal woes have deepened, the company has profited from a state initiative to speed payments to government vendors who are owed money.

Last month, WBEZ reported that Mendoza — who is running for Chicago mayor in the Feb. 26 election — gave away nearly $74,000 in campaign contributions from Solis-controlled political funds and another $67,650 that she got last year from five companies set up by VAP investors, including Hynes.

Her costly move followed the revelation that Solis, a veteran alderman from Pilsen, has served as a mole in a federal investigation of government corruption.

Mendoza, like other candidates in the mayoral race, has sought to distance herself from the burgeoning City Hall scandal, which has already resulted in a federal criminal charge against a longtime Mendoza mentor, Ald. Ed Burke (14th). But the lawsuit raises new questions about the politically connected companies that have helped fuel her re-election last year.

It claims three of the five VAP-linked firms that gave to Mendoza are accused of being part of the “sham” to divert profits from former partners in Pennsylvania.

A spokeswoman for Mendoza’s campaign declined to comment Monday.

The spokesman for the Illinois comptroller’s office, Abdon Pallasch, said in a written statement to WBEZ that the agency “is not required to know about any lawsuit brought against a state vendor before processing a payment to that vendor, nor can it stop a payment because of such a lawsuit.”

Fight for profits from lucrative state program

At the center of the lawsuit is a little-known program that speeds up payments by the comptroller’s office to groups that are owed money by the cash-strapped state.

The program, started under former Gov. Pat Quinn, allows state-certified companies to buy up debt from Illinois’ mountain of unpaid bills. Then companies like VAP give unpaid state contractors most of what they’re owed from state government upfront, and later pocket lucrative late-payment penalties once the state comptroller’s office issues a check for the original obligation, sometimes years later.

VAP is the most dominant company in the program, having already bought up $3.8 billion in unpaid state bills.

The Pennsylvania investors who are behind the lawsuit, operating as Warren Hill LLC, allege that some of the current owners of VAP are scheming to hoard the profits that they are making off the state of Illinois’ financial misery. Warren Hill says the VAP partners have been able to “wrongfully retain Warren Hill’s money, hiding it in front companies based in Puerto Rico and Florida.”

The defendant in the case is yet another Florida entity created by VAP partners, called SFR Equities LLC. SFR bought a 33 percent stake in VAP from Warren Hill for $4 million in 2016, but was obligated to continue sharing VAP profits with Warren Hill under the terms of that sale, records show.

Instead, Warren Hill claims SFR tried to hide its profits in two front companies: Florida-based Bluestone Capital Markets LLC and Blue Stone Finance LLC of Puerto Rico. The two companies allegedly were set up to perpetrate “a sham designed to avoid taxes and to avoid paying Warren Hill what it is owed,” according to court documents.

Tens of thousands of dollars to Springfield politicians

Both companies and their owners have deep connections to Illinois politics.

Bluestone Capital Markets and Blue Stone Finance were major contributors to Mendoza, according to Illinois campaign finance records. The two companies each gave her checks for $11,100 at a political fundraiser on March 15, 2018 and $22,200 more in September. At that March fundraiser, Mendoza also got a $10,000 campaign contribution from SFR.

She later returned the money.

Bluestone Capital Markets, Blue Stone Finance and SFR also made big campaign contributions last year to other Springfield politicians in both parties: Senate President John Cullerton (D-Chicago), Democratic Attorney General Kwame Raoul, Democratic State Treasurer Mike Frerichs and House Minority Leader Jim Durkin (R-Western Springs).

The two alleged front companies were created in 2017 by owners of VAP, including Hynes and former Illinois official Malcolm Weems, according to Florida and Puerto Rico business records.

Weems was a top aide to Quinn, in charge of the state agency that cleared the way for VAP to do business with the government’s creditors. But Weems left state government and later began working with VAP, and is now a Springfield lobbyist for the company, records show. He’s also been listed as a board member of Bluestone Capital Markets.

A lawyer who filed the case on behalf of the plaintiffs from Pennsylvania declined to comment when reached last week by phone.

Michael Onufrak, the Philadelphia-based lawyer for SFR, said, “We deny all of their allegations,” and declined further comment.

SFR has also declined to produce company financial documents that Warren Hill is demanding, saying their deal with the plaintiffs does not require them to make those disclosures.

But in an interview with WBEZ on Friday, Hynes said it was “absurd” to suggest that he and his partners in VAP had set up front companies.

“We didn’t make decisions to make one guy’s distribution be less than it should be,” Hynes said.

Warren Hill also alleges in the suit that VAP should have informed state of Illinois officials about the involvement of Bluestone Capital Markets and Blue Stone Finance in the program. But Hynes said, “We are 1,000 percent compliant with the program terms.”

He said the suit is nothing but “bickering over what percentage of the profits” the investors should get.

Public program, big private profits

Documents filed in the federal case provide a first-ever glimpse of just how lucrative VAP’s dealings with Illinois have proven. The company’s net income in 2016 exceeded $17.3 million, according to one balance sheet entered as evidence in the suit.

But Hynes said that was an exaggeration. About 75 or 80 percent of that sum must be paid to banks that loan money to VAP, he said.

Now that it holds the IOUs on $3.8 billion in unpaid state bills, VAP is positioned to pocket late payment penalties that accrue as much as one percent of the original obligation each month. For state bills that are years late in being paid, that means taxpayers have been on the hook for late payment penalties that sometimes have exceeded 20 percent on top of what the state originally owed.

At the end of December, VAP had received $201.6 million in late payment premiums from the state and is due another $188.7 million in fees from Springfield, according to the company’s most recent filing on Mendoza’s state website.

Pallasch, the comptroller’s spokesman, said Hynes and VAP pressured Mendoza to speed up payments to the company, before and after the contributions to her re-election campaign.

But Pallasch said Mendoza resisted that pressure and instead “fought to pass legislation” that makes public more information about the program.

Hynes is a former aide to Illinois House Speaker Michael Madigan (D-Chicago) and a veteran lobbyist who now lives in Puerto Rico. His name appeared on files taken during a recent FBI raid at Burke’s City Hall office, records show.

Neither Hynes nor Solis not been charged with wrongdoing. But Solis wore a secret recording device to capture conversations with his City Council colleague Burke — who was charged in January with attempted extortion.

And the Chicago Sun-Times has reported that federal investigators also told a judge that Hynes paid Solis in exchange for the alderman’s support of real estate development proposals.

Hynes says he believes he has nothing to worry about and that federal investigators in the City Hall corruption case have never contacted him.

“I have not retained counsel nor do I think I’ll ever have to,” Hynes said. “I have 100 percent confidence I have no issues whatsoever.”

Hynes said he spoke with Solis’ defense lawyer and she told him, “You have a public relations problem, not a legal problem.” The lawyer, former federal prosecutor Lisa Noller, did not return calls.

Hynes says he and his business partners attended the March fundraiser and made contributions to Mendoza there because they thought she was doing a good job as comptroller. Mendoza won re-election in November, but she promptly announced that she would run for the mayor’s office being vacated by Rahm Emanuel at the end of his term this year.

At the same March event in Chicago, Solis’ 25th Ward Democratic organization contributed $55,400 to Mendoza.

A few months later, the 25th Ward Democrats received almost exactly that amount in total from VAP, Bluestone Capital Markets and Blue Stone Finance. Hynes has said there was no connection between the money that Solis gave to Mendoza and the nearly identical amount given to the alderman’s ward organization later in the year.

When first asked about the contributions last month, Mendoza’s campaign told WBEZ that it would not give the money back because Solis was not charged with wrongdoing. But the next day, she made a rapid about-face, announcing that the money would be donated to an African-American veterans’ group in Englewood.

Hynes says he took no offense.

“I get it, I appreciate what’s going on,” he said, referring to the contentious mayoral race. “I don’t really care who the next mayor is.”

Patti Solis Doyle — who sold her share in VAP in 2016 — was scheduled to host a fundraiser for Mendoza’s mayoral bid last month in Washington. Those plans were canceled after the revelations of Danny Solis’ role in the City Hall corruption probe.

Dan Mihalopoulos is an investigative reporter for WBEZ. Follow him at @dmihalopoulos.

Dave McKinney covers Illinois state politics and government for WBEZ. Follow him @davemckinney.