http://www.protectingourguardians.org/docs/Memorandum.doc
MEMORANDUM
TO: Democratic Members of the House Oversight and Ethics CommitteeFROM: David Oppliger (3-4827); House Majority Counsel
DATE: September 23, 1998
RE: September 24, 1998 hearing on the sale of MBPI
The following is a summary of the facts concerning the sale of MBPI on September 4, 1998.
FACTS
- The Michigan Biologic
Products Institute (MBPI) was sold to a private entity, BioPort, on
September 4, 1998. The price for the lab was approximately $24 million.
(With a net present value of $17 million). Most of the BioPort bid
represents promissory notes and floating receivables owed to the state.
Much of the debt carries 0% interest.
- The Director of MBPI, Bob
Myers, and his assistant, Rob van Ravenswaay – who was assigned to MBPI to
facilitate its sale – formed a corporation called MBP, Inc. and formed a
partnership with BioPort. MBP, Inc. owns a 32% interest in BioPort. They
are hereafter referred to as "the insiders."
- A cash bid made by another
firm was worth approximately $16.7 million.
- The insiders’ bid was
rejected twice before they partnered with BioPort.
- In November of 1997 the
insiders participated in an appraisal of MBPI which valued it at
"nominal to $10.5 million."
- One of the most highly valued
and highly publicized assets of the Institute was a Department of Defense
contract for the anthrax vaccine. DCH estimated the contract with the
Defense Department to be $130 million. The employees knew of this contract
since at least October 2, 1996.
- On November 30, 1996,
Director Robert Myers told the Lansing State Journal, that he was not
involved in trying to buy the Institute. "I am a state employee and
this would be a conflict of interest."
- In negotiating to buy the lab
did the employees who were part of MBP, Inc. violate state ethics laws by
using insider information for personal gain? The committee obtained a
correspondence from Dr. Myer to an undisclosed losing bidder. The letter
establishes that he was familiar with the terms of at least two bids,
information not available to other bidders. The letter states in part:
I would have liked to have reached an agreement
in principle before your bid was finalized; I accept the fact that we did not.
I believed that you and [redacted] had determined the maximum amount of your
offer based on your analysis of the business, and that you would go no higher.
My judgement was that the state would get a better offer, so I had to also
participate in a better offer. This has proven to be the case.
MBP, Inc. will not – given the totality of what
I state in this letter – assert that you have violated the non-circumvention
clause with your apparent bid. However, should you choose to substantially
alter your bid, without providing me with an opportunity to discuss it with
you, in an effort to win at any price, I will assert you have violated the
agreement.
A complete copy of the letter will be distributed
at the hearing.
- The letter unequivocally
demonstrates that Myers and van Ravenswaay knew the identities of at least
two bidders and the substance of their bids, information not made
available to the general public. The employees also solicited financing
from at least one other bidder. It appears they used information not
available to others to enhance their financial position relative to the
other bidders, a clear violation of the act.
- Mr. van Ravenswaay signed a
confidentiality agreement between MBP, Inc. and the Commission. The
agreement provides in part:
No Disclosure of Negotiations. Neither
you nor your Representatives will disclose to any person that the State is
considering a possible transaction involving the Institute, that the Evaluation
Material has been furnished to you, the fact that discussions or negotiations
involving the Institute are taking place or any of the terms, conditions or
other facts with respect to any such possible transactions including the status
thereof.
The above contractual provision was apparently
violated considering the letter referenced in paragraph A, above.
- There was no documented
oversight or control by the MBP Commission over the insiders to insure
that state ethics laws were not violated. No records exist regarding the
formation of MBP, Inc. or the nature of the agreement with BioPort. A
Michigan law firm is identified as part of MBP, Inc. but the name of the
law firm was not disclosed. The name of the law firm was not even
disclosed to the State Administrative Board when they voted to approve the
transaction.
- The use of the name Michigan
Biologic Products, Inc. established by the insiders may be a violation of
federal trademark law, specifically 25 USC 1007, in that it causes
confusion as to whether MBP, Inc. is in any way associated with the State.
- Administration officials
admitted that the employees’ involvement would constitute a conflict of
interest. On November 10, 1997, the House Oversight and Ethics Committee
met to consider the progress of the sale of the Institute. At the hearing
Carol Isaacs, an attorney and the policy director of DCH, testified that
the bid of Messrs Myers and van Ravenswaay had been withdrawn. She stated,
"[t]he employees’ purchase is no longer being considered. The
Commission is taking their responsibilities very seriously, and….so that
conflict of interest does not exist at this time, so that should relieve a
lot of concerns (sic)."
HOUSE OVERSIGHT AND ETHICS COMMITTEE
HEARING ON THE SALE OF THE MICHIGAN BIOLOGICE
PRODUCTS INSTITUTE
FINANCIAL TERMS
Buyer: BioPort, Inc.President and CEO – Mr. Fuad El-Hibri
As of 4/30/98, 32% of BioPort was owned by MBP,
Inc., a company formed by the present director of the lab, Robert Myers and his
assistant Rob van Ravenswaay.
Terms of the Deal
Sales Price Approximately $17 million (Total value
of $24 million after all loans repaid in 5 years). The deal rests on a series
of loans from the state to the buyers which amount to $13,600,000 (Net present
value approximately $11 million). The balance of the consideration will be paid
to the state in the form of donated products, royalties, rent, etc.
At closing the purchaser is required to pay the state $2.25 million.Terms of the Loans to BioPort
$1,000,000 Due when at least $2 million of the
$4.5 million assigned account receivable presently owed to the state is paid.
No interest accrues.
$4.5 million 8% 5 years$3.15 million 8% one year from closing
$4.5 million Receivables owed to state are
assigned to BioPort for one year to be repaid with no interest.
Second Highest Bid
Bidder: Gruppo Marcucci, a firm also endorsed by
the Department of Defense, but not partnered with the managers of the
Institute.
Price: $16.6 millionTerms of the Gruppo Marcucci Bid
Cash $6.7 million, including $2.7 million in
products purchased by the bidder from the state.
No debt is involved in the Gruppo Marcucci bid. The balance of the payment
would be in the form of royalties, rent and donated products.HOUSE OVERSIGHT AND ETHICS COMMITTEE HEARING
SEPTEMBER 24, 1998
CHRONOLOGY OF SIGNIFICANT FINDINGS
1990
At the start of the Gulf War, Fuad El-Hibri, the CEO of BioPort and the new owner of the Michigan Biologic Products Institute (MBPI), facilitates the purchase of anthrax vaccine for Saudi Arabia who had not been able to obtain it from the US government.
1996
June, 1996: Fuad El-Hibri contacts Dr. Robert Myers regarding the anthrax vaccine.
October 2, 1996: Department of Defense contract with MBPI to vaccinate troops is publicized. The contract is ultimately worth approximately $130 million.
November 12, 1996: KPMG Peat Marwick Preliminary Determination of Fair Market Value, released. The report states that the lab’s value is nominal to $10.5 million.
November 30, 1996: Lansing State Journal article reports that Dr. Robert Myers lacks interest or involvement in purchase of MBPI because he says, "I am a state employee…this would be a conflict of interest."
1997
January 7, 1997: Dr. Robert Myers and Robert van Ravenswaay file Articles of Incorporation under the name of Michigan Biologic Products, Inc. (MBP, Inc.) indicating 60,000 shares.
January 14, 1997: P.A. 522 which authorizes the sale of the lab takes effect.
June 10, 1997: Myers-van Ravenswaay Articles of Incorporation #441-359 amended to increase shares from 60,000 to 1,000,000.
June 16, 1997: Representative Pat Gagliardi appoints Representative Lingg Brewer as chair of the House Oversight and Ethics Subcommittee to study the sale of MBPI.
August 21, 1997: Dennis Schornack testifies before the House Oversight and Ethics Subcommittee and first confirms that there is an insiders’ bid.
September 2, 1997: Employee Petition circulated, on state paper and on state time, and recirculated by Bill Nummy, assistant to the director Robert Myers, offering MBPI employees another opportunity to consider signing it, and requesting more signatures before Representative Lingg Brewer has another Subcommittee meeting.
October, 1997: MBP, Inc. submits its first bid for the Institute.
November, 1997: MBP, Inc. is instructed by the Commission to redo its bid to provide up-front cash. In conjunction with Intervac and Neogen, MBP, Inc. resubmits its bid.
November 10, 1997: House Oversight and Ethics votes to pass HB 5300 which, among other things, strengthens legislative oversight role. MBPI representative Carol Isaacs attends hearing on behalf of the MBPI Commission, and announces that Myers/van Ravenswaay’s purchase offer had been withdrawn, thereby ending the "conflict of interest."
November 10, 1997: The Commission rejects the MBP, Inc. bid for the second time.
December 16, 1997: U.S. Army announcement that it will require more anthrax vaccine and MBPI announced that it’s ready to supply. Plans to speed up vaccination schedule and inoculate all 2.4 million military personnel, at a cost of $130 million, prompted by problems with Iraq over weapons inspections were announced.
1998
January 3, 1998: Administration announces that bidding will be re-opened. HB 5300 to be amended and re-introduced to reflect changes and need for additional appropriations to support Lab through extended bidding.
March, 1998: Insiders negotiate with at least two bidders to assist them in purchasing the lab in possible violation of state ethics laws and non-disclosure agreement.
June 2, 1998: MBP Commission announces top bidder, BioPort, at $25 million. The cash bid of Gruppo Marcucci is rejected.
June 17, 1998: Representative Lingg Brewer files a lawsuit under the Freedom of Information Act (FOIA) to compel production of documents concerning the insiders’ bid.
July 1, 1998: Judge Giddings grants plaintive Lingg Brewer’s motion to produce documents. Through the FOIA, Representative Lingg Brewer learns of the insiders’ 32% interest in BioPort.
July 7, 1998: State Administrative Board approves BioPort bid.
August 14, 1998: The State of Michigan Ethics Board orders further investigation at its September meeting in the ethics complaint filed by Representative Lingg Brewer against Messrs. Myers and van Ravenswaay for violating the state ethics laws.
September 4, 1998: The deal with BioPort is closed for approximately $25 million with a net present value of approximately $17.4 million.
MEMORANDUM
To: Representative Pat Gagliardi, Chair
House Oversight and Ethics Committee
From: Representative Lingg Brewer, Chair
Michigan Biologic Products Institute (MBPI) Subcommittee
Re: Final Report
Date: September 25, 1997
The investigation into the sale of MBPI, conducted by my subcommittee, has been completed. The summary findings, as documented, are as follows:
- On November 12, 1996, KPMG
Peat Marwick prepared a Preliminary Determination of the Fair Market
Value of the MBPI. The report concluded that the value of the
Institute ranged from nominal to $10.5 million. Only three people provided
data on the Institute’s value to Peat Marwick: Robert C. Myers, Director,
Rob van Ravenswaay, Deputy Director, and Dennis Schornack, Chairman.
According to the report, Peat Marwick relied on information provided
without audit or verification.
- January 7, 1997, Myers and
van Ravenswaay formed a corporation called Michigan Biologic Products,
Inc. for the purpose of buying the Institute. P.A. 522, the Act
authorizing the sale of the Institute took effect on January 13, 1997.
Myers and van Ravenswaay informed the MBPI board of their intent to
purchase on January 14, 1997.
- On August 21, 1997 Dennis
Schornack testified before the committee but he refused to answer
questions about the value Peat Marwick placed on the Institute.
- The Institute produces
vaccines in full compliance with FDA regulations and under FDA licensure.
In the 1980’s, an expenditure of $270 million was found to be the
industry-wide average cost to develop a new drug and receive FDA approval
for its use. If the Institute is transferred to the private sector for
the amount indicated in the Peat Marwick study, the public will, in
effect, be giving away at least $270 million in good faith investments
made to obtain FDA license for the products it produces. MBPI holds ten
U.S. FDA product licenses.
- The Institute has an
exclusive agreement for anthrax vaccine. In 1993, the revenue projection
under this contract exceeded $15 million. It is expected that
additional production agreements, spanning the next three to seven years,
will be forthcoming but the amount and type of product is yet to be
determined. It should be noted that MBPI is the only facility in the
world licensed by the FDA to produce the anthrax vaccine. Further, the
U.S. Army will require 25 million doses over the next five years. The
price per dose has been estimated from $3.25-$7.00.
- The Army is funding
the licensure process for MBPI to manufacture pentavalent botulinum
toxoid (PBT). If successful, MBPI would be the sole license holder for
this vaccine. Once licensed, the Army has indicated it would administer a
series of up to three vaccinations to 600,000 troops, which equates to
roughly $18 million in revenue annually. It is anticipated that
contracts with SmithKline for the diphtheria and tetanus vaccines
produced at the institute will yield at least $7 million.
Contracts with SmithKline for the rabies vaccine may be worth $2
million. MBPI is one of four subcontractors in a proposed consortium
with Battelle Labs and the U.S. Army. The value of this agreement is
approximately $8 million annually. There are other agreements
between the Institute and private concerns that have value which have not
been fully quantified.
- After Dr. Burgoyne
testified, he received letters from the Office of the Attorney General
demanding that certain documents be returned. I view these communications
as being related to Dr. Burgoyne’s testimony. I raised my concern over
these communications with the Attorney General.
- The issue of royalty
payments to the Institute by the transferee is being ignored. In 1994
Morgan Stanley estimated that the total value of certain pediatric
vaccines alone was $4.1 million.
- Revenue from
agreements with the Michigan and national branches of the Red Cross for
fractionation of human plasma is approximately $2 million
annually.
- MBPI consists of 28
buildings containing 245,606 square feet of laboratory, plus real
property and equipment, with an estimated value of over $12 million.
Additional public dollar investments are being made in infrastructure
replacement.
- Total projected
revenue from the sales of biologic products for FY’97 is $19.7
million.
- State resources have
been expended to coerce MBPI employees into supporting the insiders’
purchase of the Institute. This is contrary to both the state conflict of
interest and ethics laws.
- Present employees have
been excluded from obtaining other employment in state government. It is
my belief that denial of employment opportunities is designed to maintain
the experienced, scientific workforce for the privatized MBPI.
- Dr. Robert Myers,
Robert van Ravenswaay and the authors of the Peat Marwick report were
invited to testify before the committee. They all declined.
- According to the
House Fiscal Agency, as of November 21, 1996, GF/GP contributions to the
MBPI totaled $58 million, since FY ’77.
- The insiders continue
to direct the operations of the Institute, negotiate contracts, hire
personnel, and otherwise influence the value of the Institute. This gives
the appearance that would suggest that they may be using their official
position and/or confidential information for personal profit or financial
benefit.
The role of the insiders in the Peat Marwick report is particularly disturbing, if they are able to buy the Institute for a "nominal amount." They will be able to use the Peat Marwick report, which they, in essence wrote, to justify their low purchase price. Further there are no institutional safeguards in place to prevent public employees who intend to buy the institute from potentially using insider information to gain an advantage over other potential bidders. Without proper safeguards in place the involvement of insiders will distort the market for the facility and the highest possible price will not be paid.
I recommend the full House Oversight and Ethics Committee continue to investigate this issue. I also recommend that Dennis Schornack, Robert Myers, and Robert van Ravenswaay be invited to testify and answer some of the questions that were raised but not answered. I believe that the authors of the Peat Marwick study should be called to explain the basis for their conclusion that the Institute has a nominal value.
Thank you for the opportunity to chair this subcommittee. Also, I thank Representative Wojno and DeVuyst for their contributions to the work of the committee.
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