Warnings about broker’s tactics went unheeded

Several state employees openly questioned the business tactics of the real estate brokerage Venture Cos. long before the FBI launched an investigation that led to a criminal indictment against its owner, John M. Bales.

Bales, who brokered office leases for state agencies from 2006 to 2010, is facing charges including wire fraud and mail fraud over a deal he arranged for a building in Elkhart.

He’s accused of secretly taking an ownership stake in the building in violation of his contract with the state. The 14-count indictment in U.S. District Court for the Northern District of Indiana also names Venture chief counsel William E. Spencer and Indianapolis attorney Paul J. Page.

The allegations may be a black eye for the state but they should not come as a surprise, based on an IBJ review of more than 2,000 pages of emails between Venture employees and the state officials who oversaw the firm.

A parade of state officials confronted the firm, including over questionable expenses for which Venture sought reimbursement, the firm’s hardball negotiating tactics with the state’s landlords, and Bales’ reputation for acquiring buildings that wound up with government tenants.

But Venture and Bales continued to do work for the state until 2010—after IBJ reported on Bales’ involvement in the Elkhart property and the FBI began investigating—thanks at least in part to a well-cultivated relationship with the Governor’s Office.

The deputy chief of staff for Gov. Mitch Daniels intervened on Bales’ behalf in late 2009 after officials with the Indiana Department of Administration encouraged the state’s quasi-governmental agencies to hire the real estate brokerage Resource Commercial over Venture.

Venture had offered a lower per-square-foot commission rate, but IDOA officials saw the company's attempts to carve out side deals representing quasi-governmental agencies as a conflict with the state deal. It’s not clear whether Betsy Burdick was aware of IDOA's rationale in recommending Resource.

“I hope what I am hearing is wrong with respect to the way IDOA is doing business here,” Burdick wrote on Aug. 28, 2009. “If this is true it is unacceptable and further discussion needs to take place. If what I am hearing is correct—this is not how we do business.”

Bales’ firm wasn’t bashful about throwing its weight around, either. At one point, a deputy to Bales threatened to call in the chair of the Indiana Republican Party and two partners at the powerful law firm Barnes & Thornburg if the state wouldn’t reimburse Venture for disputed expenses.

Venture ultimately earned about $2.9 million in commissions on lease deals for state agencies and another $270,000 on the sale of surplus state properties.

The emails show Bales also had peripheral connections to other embarrassing episodes for state government, including a lease for a lavish new headquarters for the Hoosier Lottery, a boondoggle that eventually led to the resignation of Lottery Director Kathryn Densborn.

Barnes & Thornburg partner Larry Mackey, Bales’ lead attorney, said in a statement that his client is an ethical businessman who wound up losing money overall on the state contract while saving taxpayers millions.

Dropping names

Not long after Venture landed the state leasing deal in 2006, the firm got into a tussle with its state handlers over expenses.

Kevin Ober, the Department of Administration’s deputy commissioner at the time, pushed back when Venture sought reimbursement for more than $200,000 in expenses not pre-approved by the state, as required by its contract.

That did not sit well with Venture.

The firm’s chief financial officer, Greg Rankin, responded with an email threatening to seek intervention by Barnes & Thornburg partners Brian Burdick and Joe Loftus or even J. Murray Clark, then the chairman of the Indiana Republican Party. All three have close working ties to Gov. Mitch Daniels, whose deputy chief of staff is Burdick’s sister.

Ober bristled at the name dropping by Bales’ top deputy in an email he sent to his boss, IDOA Commissioner Carrie Henderson, and the chief of staff to Gov. Mitch Daniels, Earl Goode.

“I think we’ve worked hard and in good faith on this effort, despite all of the criticism that has been directed my way through a variety of different means John has employed,” Ober wrote on Oct. 23, 2006. “Now I get this email, which has all the subtlety of a sledge hammer to the forehead, attempting to bring a lot of pressure to bear on this outcome.”

He described the “feedback” from Bales and his surrogates as “unwarranted, disconcerting, and completely distorted, and I am very concerned that it could have a long-term negative impact for me.”

Henderson offered to help finish the contract negotiation; it wasn’t clear how the dispute was resolved, and a spokeswoman for IDOA declined to comment.

Two months later, Ober left the state to take over as executive director of the Indiana Republican Party.

Bales also tangled with the state's director of real estate leasing, Bea Tate, in an email exchange on Sept. 11, 2006. Tate had expressed concern over how landlords who had always dealt with the state directly, without paying a broker, could afford to pay a 4 percent commission to Venture without raising the state's rent.

Bales responded by asking her to "refrain from engaging in individual landlord discussions" since such conversations could put Venture in an "awkward position."

Tate fired back: "As for my long standing relationships with landlords and the innuendo that those relationships are tantamount to sleeping with the enemy I am absolutely insulted," she wrote. "I don't appreciate the tenor of your e-mail and would appreciate if you don't try again to portray me in the light of obstructing your progress."

Bales answered: "I apologize if you misunderstood my email."

Tate resigned that December.

Side deals

The records show former Deputy IDOA Commissioner Michael Huber—who joined Bales for happy hour on several occasions and mostly offered support for Venture in emails—at times had reservations about the company’s methods. Huber oversaw the Venture contract from January 2007 to January 2008.

Huber was not pleased, for example, when he heard Venture was pitching the Hoosier Lottery on a tenant-representation agreement outside the purview of its contract with the Department of Administration. The arrangement ran counter to Huber’s mission of consolidating and simplifying the state’s leasing functions.

“I have tried to give your team maximum flexibility and access to the right people throughout state government and want to continue to do so, but we need to make sure that we are on the same page,” Huber wrote in an email to the principals of Venture on Oct. 27, 2007.

Huber, who is now deputy mayor of Indianapolis, said in an interview that he was “satisfied” with the work Bales provided to the state. In fact, he hired Venture to study opportunities for the city’s real estate shortly after he left the state to work for Indianapolis Mayor Greg Ballard.

Ultimately, the city terminated the deal after Venture failed to do the work it promised. Huber said he hasn’t been in contact with Bales for more than two years. He declined to say whether he’d work with him again.

Bales did not give up on brokering deals for quasi-governmental agencies including the Lottery despite continued objections from IDOA officials.

The department's chief counsel, Anthony Green, explained in a July 28, 2009 email that IDOA needed a landlord-tenant representative that could manage state property on a "strategic level." Allowing Venture to represent other state entities without IDOA's approval would be, he said, "counter productive to what IDOA is trying to achieve, and adversarial to the state's best interests."

The governor's deputy chief of staff, Burdick, sent her email in support of Venture one month later.

In 2010, Venture brokered the deal to move the Lottery into a 35,000-square-foot headquarters at Meridian and 13th streets. Bales earned more than $250,000 in commission on the deal, which ultimately cost Hoosier Lottery Director Kathryn Densborn her job.

She resigned in October amid controversy over lavish fixtures at the new headquarters including an employee gym with $25,000 of exercise equipment.

Bales' commission was based on the project's total value, including the cost of building out the space.

Strategic hiring

The hiring process at Venture could move quickly if you were related to a top state official.

In October 2009, then-INDOT Commissioner Mike Reed sent an email to top officials at the state, including IDOA Commissioner Mark W. Everson, touting his son-in-law Ben Jones as a “quality individual” with “a work ethic, maturity and desire to be successful not often seen in younger people today.”

Deputy IDOA Commissioner Rob Wynkoop on Oct. 19 forwarded the resume to Bales, noting “this is Mike Reed’s son-in-law. Not sure if you are looking for anybody like this. Everson asked me to forward it on.”

That was at 2:21 p.m.

At 2:55 p.m., Bales responded: “Hiring him.. Call me”

At the time, one of Venture’s assignments was working with the Reed-led INDOT on the disposition of the agency’s surplus real estate.

Reed’s penchant for playing job matchmaker wound up costing him his own job a year later.

In June 2010, Reed (who previously led the Indiana Utility Regulatory Commission) left the state to take the helm of Duke Energy in Indiana. He recruited and hired Scott Storms, the sitting general counsel for the IURC, to join him. Two months later, Duke fired them both after watchdog groups decried the cozy, revolving-door relationship.

The scandal also ensnared David Lott Hardy, who led the IURC after Reed. A Marion County grand jury earlier this month indicted Hardy on three counts of official misconduct related to communications he had with executives at Duke Energy.

‘Another breach’

“It would appear that we have another breach in contract on Venture’s part,” wrote Megan Ornellas, then the chief financial officer for the Family & Social Services Administration, in an email to Department of Administration Commissioner Carrie Henderson and other state employees on Oct. 17, 2007.

Her concern: Venture’s small staff was struggling to keep up with the work it had been assigned and was passing off a project to another firm. (The company would balloon from just a few employees to 30 in 2008 as it handled leasing for the state’s new Department of Child Services.)

A month earlier, Ornellas had another squabble with Venture.

Her boss, FSSA Chief of Staff Anne Murphy, explained in an email to FSSA Secretary Mitch Roob how Venture was in “deep trouble” with Ornellas: “Megan was in Miami County yesterday and talked to one of the potential landlords who Venture claimed wasn’t interested in leasing us space,” Murphy wrote on Sept. 19, 2007. “Turns out the landlord was very interested but said the problem is our broker won’t split the commissions—Venture wants 100 percent of the commission or they walk away.”

Another landlord, Janice Roeder of Rising Sun, Ind., argued in a January 2008 email that landlords should be able to choose their own broker and not have to pay for the state’s hand-selected firm.

“Requiring us to pay an intermediary that we do not choose or lose the contracts seems like extortion,” she wrote in a 2008 email.

Venture, which was known as Meridian Asset Development prior to March 2007, had a simple response when landlords complained to state officials: It was taking an aggressive stance to encourage competition and get a better deal for taxpayers.

Still, the firm’s hardball tactics did not escape notice in the top levels of state government.

The governor’s senior legislative counsel, H. John Okeson, shared his concern with Daniels’ top deputies about Venture’s “unprofessional” conduct in an email on Oct. 11, 2007.

“I don’t discount the effect hard bargaining can have on one’s perception of the other side,” he wrote. “That said, how any ‘agent’ of the Governor handles a matter reflects directly on him, so I thought it important to forward what I’m hearing to you for consideration.”

On the defensive

In December 2009, after IBJ reported on a series of real estate deals Bales had closed in partnership with Marion County Prosecutor Carl Brizzi, Bales forwarded the link and criticized the story in an email to Daniels’ chief of staff and deputy chief of staff, along with then-IDOA Commissioner Mark Everson.

He scoffed at the notion that he has a “knack” for buying or investing in buildings eventually leased by governmental entities as “untrue and completely unsupported by fact.”

“I have never recommended that the state lease space in any building in which I have an ownership interest,” Bales wrote. “I would be happy to supply you this representation in a sworn form if you would find that of benefit.”

It was not clear whether anyone took him up on the offer.

It’s not surprising to people who know Bales that he went straight to the Governor’s Office to defend himself when ethical questions surfaced.

“John’s relationships seemed to be at the top levels and political levels as opposed to the managerial levels,” said one real estate broker who has done deals with Bales.

Brokers say Bales is smart and creative and earned the trust of top officials including Gov. Mitch Daniels by deploying a mix of good ideas and strong rhetoric about how the old real estate leasing team had been robbing the state blind.

Large political contributions may not have hurt, either. From 2003 to 2008, Bales and his companies gave at least $52,000 to Daniels and state Republican committees, records show.

The Indiana Department of Administration began asking tough questions about the Elkhart deal in particular in March 2010, the same week IBJ was preparing a story that revealed that Bales had approached Page—through Brizzi—to pitch a joint acquisition of the Elkhart building.

In an email to Venture general counsel Bill Spencer, IDOA Director of Real Estate Steve Harless wrote: “I have been asked for a final clarification that none of Venture’s principals have an interest or ownership in any buildings where DCS or other state agencies are tenants.”

According to the indictment, Spencer forwarded the email to Bales, adding: “Maybe they will just keep asking until they get an answer they like.”

‘All the facts’

Bales allies say he structured the deal in Elkhart in an unusual way because the state was applying pressure to find appropriate office space in a market with few options.

They say the company looked at other possible suitors but couldn’t find another way to put the deal together. The deal may be complex, but it doesn’t violate any laws, they say.

Jason Barclay, another Barnes & Thornburg partner who is representing Bales, said in an interview that Bales disclosed his interest in the Elkhart building to the state, and the state blessed the arrangement. Barclay said Bales did not violate his contract with the state.

IDOA spokeswoman Connie Smith said the state “could not and would not” have approved a Bales ownership stake.

The state allowed its contract with Bales to expire in August 2011. But it had stopped using the firm in 2010 after the FBI launched an investigation.

The Department of Administration has referred the matter to the Indiana inspector general for further investigation, Smith said. She declined to answer other questions.

Jane Jankowski, a spokeswoman for Gov. Mitch Daniels, refused to answer any questions involving Bales.•

Editor's note: This story has been updated with additional details from a version that appeared in the print edition dated Dec. 19, 2011.