Audit reveals irregularities in GBIC agreement with financial services company

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A performance agreement between the Greater Brownsville Incentives Corporation and a financial services company calling itself 9Point8 Capital, signed on Sept. 29, 2021, was the focus of an audit conducted by the city auditor’s office, which turned up irregularities.

The audit report, released in May, said that hundreds of pages of documentation retrieved by GBIC and reviewed by auditors contained no evidence of an application and screening process for 9Point8 prior to it receiving incentive grant money, or a method of confirming the company’s ongoing compliance with terms of the performance agreement.

GBIC’s then executive director and CEO, Helen Ramirez, now Brownsville city manager, and GBIC staff did accept notarized statements from grant recipients “as evidence of compliance,” apparently in conflict with the agreement’s provision requiring quarterly reports from the company to verify compliance, according to the audit report.

“Before July 27, 2022, GBIC had not clearly documented what the application and screening process should have included at the time of the signing of the 9Point8 Capital agreement,” the report reads, noting that GBIC had application forms on hand though 9Point8 was not required to submit one.

“Internal controls were inadequate because of the lack of policies and procedures and reliance on grantee self-reporting for compliance,” concluded the report.

The Sept. 29, 2021, agreement granted $1 million to 9Point8, which the audit report describes as “an advisory company.” The grant was to be paid in four increments of $250,000 over three years, the first payment due within five days of the signing of the agreement. In return, 9Point8 agreed to create 20 full-time-equivalent jobs, including 15 back-office jobs, at a location the company’s founding partner, J. Brant Arseneau, said would be opened in Brownsville.

The company promised to create five more jobs at a business incubator it said it would create to help start-up companies locate funding, and also “fund space program scholarships at University of Texas Rio Grande Valley and bring capital investment for space startups within the city limits of Brownsville.”

Also, 9Point8 was supposed to bring in $10 million worth of taxable business personal property. The company’s wages were projected to be more than $1.1 million for the first four years, with sales tax revenues estimated at $4,602, while bottom-line revenues were projected to be $74,399 in the first year and $743,990 by year 10, according to the report. None of that happened. As of Sept. 26, 2022, 9Point8 Capital was found to be out of compliance with the performance agreement terms.

“GBIC and the city attorney took action to obtain compliance, call for an audit, and started the process of potentially activating the ‘claw back’ provision in the agreement,” according to the report.

The city attorney gave 9Point8 six months to come into compliance, giving the company until March 26, 2023. 9Point8 passed that deadline for coming into compliance and the GBIC board moved ahead with enforcing the agreement’s “claw back” provision. The city attorney sent Arseneau a Notice of Default and Demand for Repayment on May 11, 2023, according to the report.

Under the report heading “What Went Wrong,” the auditors concluded that GBIC’s “internal controls were inadequate because of the lack of policies and procedures and reliance on grantee self-reporting.”

“Based on the lack of files, prior GBIC management and personnel did not keep files and did not verify (the) existence and registration of the entity called 9Point8 Capital … before signing the Performance Agreement Sept. 29, 2021,” reads the report.

GBIC documented 9Point8 as being incorporated in New York, though it was actually registered in Delaware and “8Point9 Capital” was not its actual name, but rather “9Point8 Inc.” The agreement also incorrectly recorded the company’s legal status of being able to do business in Texas, auditors wrote. 9Point8 did not provide when asked, and auditors were not able to find, evidence that the company had ever filed to do business in Cameron County or Texas, according to the report.

“No background check on (Arseneau) was done or documented and documentation was not kept in entity files,” auditors concluded. “Files were empty, per our discussion with current GBIC staff who recreated the files. We tried to contact former GBIC staff to verify what procedures they had in place during the time of the signing of the 9Point8 agreement, but we were unsuccessful.”

The 9Point8 agreement was actually the second agreement GBIC signed with a space-related company. The audit’s focus on the agreement between GBIC and 9Point8 led it to agreements with other companies, including Spaced Ventures Inc., Expanding Frontiers, Space Channel, and Cosmic Shielding, though the audit only focused on compliance of 9Point8 and Spaced Ventures, a related venture also founded by Arseneau.

GBIC signed the agreement with 9Point8 10 months after the city signed a 380 Economic Development Agreement with Spaced Ventures, a “beta test crowdfunding platform for people interested in investing in space-related start-ups,” which the company on its website conceded was “risky and highly speculative.”

State law allows municipalities to enter into 380 incentive agreements with commercial interests in order to further economic development. Spaced Ventures, like 9Point8, never came into compliance with the terms of its agreement, in which it received $250,000, according to the report, which concluded that the $750,000 in total received by both ventures would have been “put to better use” on other projects.

Spaced Ventures and 9Point8 were introduced to the city and GBIC by Fredrick Jenet, former UTRGV associate professor of physics and astronomy and founder of the nonprofit organization Expanding Frontiers (ExF), whose mission was to “provide training and services that promote commercial space development” in Brownsville, according to the report. ExF appears to be the first space-related entity to receive a grant from the city, $650,000 from the Brownsville Community Improvement Corporation, awarded Oct. 1, 2019, auditors wrote.

The report notes that current GBIC management has “instituted new requirements and built them into the application process.” For instance, the initial application for job-training incentives from GBIC “now requires a letter of intent, historical financial data and principal shareholders and corporate structure, including checking articles of incorporation,” according to the report.

The auditors include a number of recommendations in their report, among them making sure applicants are registered with the IRS, the Secretary of State in the state where they’re incorporated, Texas Securities Commission, Securities and Exchange Commission “or any other applicable regulatory agency that may apply.” The report also includes several recommendations “to improve management and oversight of the processes.”

In response to a request for comment, the city of Brownsville said in a statement that is has initiated legal action to recover the $500,000 in grant funds awarded to 9Point8 in 2022.

“The grant was awarded to 9Point8 Capital with the expectation that the company would adhere to specific rules and regulations outlined in a performance agreement entered into with GBIC to recruit businesses and jobs to Brownsville related to the aerospace industry,” reads the statement. “However, a city audit found that 9Point8 Capital has not complied with these stipulations.”

In recognition of “challenges to this industry nationally,” the city attorney and GBIC twice sent notices to 9Point8 informing the company of its breach of agreement and “inviting them to update their business plan toward compliance.”

“The notices advised that failure to comply with the original terms and conditions of the performance agreement would necessitate the return in full of the $500,000 in incentive funds,” read the statement. “These notices were sent in accordance with the terms set out in the performance agreement, which was executed by J. Brant Arseneau, founder and partner of 9Point8 Capital. As of August 24, 2023, 9Point8 Capital has not responded to either notice or provided any updates or indications of compliance.

The city of Brownsville and GBIC now actively are pursuing the recovery of the $500,000 incentive grant and are considering all legal avenues available and law enforcement as appropriate. Once recovered, GBIC intends to reinvest those funds in new job opportunities across emerging and expanding industries as it relentlessly pursues economic development initiatives in Brownsville.”

The entire audit report can be found at the city website.