The investigatory branch of the Department of Commerce has begun an inquiry into dealings involving Washington-area entreprenuer Jack R. Taub and Commerce's Economic Developemnt Development Administration.
The investigation, still in a preliminary stage, is focusing on two EDA loans -- a $750,000 direct loan and a $6 million government-guaranteed loan -- in which Taub was involved, sources said. In both cases, the loans went into default.
The investigation so far does not center on any one individual but is a general inquiry to determine if there were any improprieties in connection with the transactions.
The loan that triggered the investigation went to a company called Digital Broadcasting Corp. (DBC). That loan has figured in a rapidly building controversy involving an array of Taub-dominated firms and a home computer network called The Source. The service or an interest in it is being claimed by a number of competing parties which hope its development will prove valuable -- including Readers Digest.
"At the end of September, I was requested by EDA to initiate an investigation into the DBC loan," said the Commerce Department's Inspector General Mary Bass. Although Bass would not comment further on the investigation, other sources said that it had lead investigators to look at another EDA loan to a company called Percy Williams Ltd.
The loans have several things in common besides the fact that they ended up as bad debts and that Taub played a role in both -- although the extent of that role in the Percy Williams loan is disputed. Both loans were sold to EDA as ventures that would create jobs in inner-city areas, but both apparently fell short of this goal.
The first was a direct loan of $750,000 to Percy Williams Ltd. which was supposed to serve as the Washington-area distributor for pre-wrapped gift boxes produced by a company controlled by Taub. Who actually engineered the loan is the subject of some dispute.
Whoever originally sought the loan, it was made in August 1977 to provide working capital for a minority venture that was supposed to produce jobs in the inner city. An agreement signed by Taub and Williams provided for Taub to get $396,000 of the funds almost immediately in return for his guaranty for delivery of goods and services.
What is undisputed is that the venture was a bust.
Instead of projected first-year sales of $2 million, total sales over the entire life of the project were about $100,000, according to EDA files. And the jobs never materialized. Instead of a projected full-time employment for 281 workers (at an EDA "job-cost ratio" of $2,491), the venture ended with EDA out of pocket $823,762. At its peak, Percy Williams Ltd. employed 14 workers, according to EDA records. In other words, EDA spent nearly $60,000 for each short-lived job created.
"The prospect of excellent economic benefit to inner-city residents caused EDA to make this admittedly risky investment," noted an EDA report on the loan, which two banks had previously refused to make.
Risky is a fair description. Although the agency got all boiler plate assurances such loans require -- including assurances that the business would not be located in a flood plain, that it would not pollute and that it would not require knocking down any historic landmarks -- EDA records indicate that at the time the loan was negotiated, Percy Williams had a "negative net worth" of $22,500.
But the EDA took steps to protect its money. As collateral, it took a first lien on the company's accounts receivable, inventories and furniture and fixtures. EDA also took assignment rights to the firm's lease and a pledge of Williams' stock -- and his personal guaranty.
"Although Mr. Williams has no net worth at present, his guaranty establishes his full commitment to the project," said an EDA memo prepared shortly before the loan was closed.
Williams not only had no assets, he had no experience in the type of business he was about to begin, although he had experience in business. Weighing against that was the fact that "the venture was backed by an experience entrepreneur with a strong commitment to helping the enterprise succeed," an EDA document noted.
In another EDA discussion of the project and "what went wrong," the conclusion reached was that "this is a somewhat speculative matter." But, the memo notes, "it is apparent that startup problems for this new venture, including display rack and product sealer problems, were exacerbated by the early deteriorating personal relationship between the principals of Percy H. Williams and Patented/Consolidated, two Taub firms.
"This project necessitated a close working relationship between these two parties, and the obvious lack of such a relationship undoubtedly contributed to the failure of this project," the EDA paper said.
Taub has blamed Williams. Williams family blames Taub.
EDA's records suggest that it had a hard time figuring out what was going on, in part, the agency said, because the company didn't have coherent records. o
In the long run, the government auctioned off goods owned by Percy Williams Ltd., realizing little gain (approximately $2,000) on the sale. EDA records include a reference to $32,000 in "services not provided" by Taub "but covered by the $396,000 paid him by percy," but available EDA records do not indicate what happened to that money.
Taub referred questions to his attorney, Henry Fitzgerald, who did not return a reporter's telephone calls. A reporter reviewed parts of an EDA file on the Percy Williams loan -- 10 days after information was requested under the Freedom of Information Act. Thursday afternoon questions about the Percy Williams and DBC loans were submitted to EDA by telephone. Friday they were submitted again in writing at EDA's request.
An EDA spokesman said that the agency would have no immediate reply but might respond by next Wednesday.
As Percy Williams Ltd. was failing, Taub was involved in negotiating an EDA-guaranteed loan for another venture in which he had become involved.In fall of 1977, a few months after EDA provided funds for Percy Williams, Taub read about DBC and a man named William Von Meister -- the man who devised the concept of The Source.
In the fall of 1977, Taub met with Von Meister and talked about providing the funding that the company needed. Taub introduced Von Meister to EDA officials and, ultimately, the company got an EDA-guaranteed $6 million loan from North Carolina National Bank.
DBC defaulted on the loan and the government paid $3.2 million to make good the guaranty. In an effort to recover the money, EDA asserted that it has a security interest in The Source and said it would take steps to recoup. Last week Taub and EDA reached an agreement that provides for Taub and his brother to pay $300,000 by Nov. 21 and for DBC to repay $2.9 million over about 22 years at an interest rate of 2 percent.
Taub took control of DBC in October 1979. In the long run, a new Taub controlled company called Source Telecomputing Corp. ended up claiming The Source as its chief asset. The Readers Digest Asociation brought majority control of Source Telecomputing in September, believing that it was buying control of the company that owned The Source.
The picture has been clouded by a variety of claims from other interests that The Source was not properly Source Telecomputing's or that they have an interest in the home computer network. Lawsuits have sprung up all around. a
Timothy May, attorney for Readers Digest, said that he had heard nothing about the investigation involving DBC."I don't know whether I'm surprised or not," he said. No one at Source Telecomputing had been contacted about the investigation as far as he knew, he said.
"But our position is that STC has nothing to do with the loan or DBC and we wouldn't expect [anyone from STC] to be contacted," he said.