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Months after Gov. Scott Walker’s flagship job-creation agency was formed in 2011, it gave a forgivable $686,000 taxpayer loan to a Sheboygan company planning to build a combination helicopter and corporate jet — even though the company had no experience in aircraft manufacturing and underwriters hadn’t reviewed the company’s finances in years.

But Morgan Aircraft hasn’t created the 340 jobs it promised by the end of 2015, did not make the promised $105 million investment and is not expected to repay the loan.

It’s one of three companies the State Journal has identified that received hundreds of thousands of taxpayer-funded loans from the Wisconsin Economic Development Corp. without sufficient financial scrutiny by the agency.

WEDC authorized up to $1 million in federal funds for the company, to be loaned through the state. The Morgan Aircraft loan was one of several aspects of the Community Development Block Grant program that the federal Housing and Urban Development said were not properly handled by WEDC. As a result, Walker’s Department of Administration wrested control of the CDBG program from WEDC.

In addition to the state loan, Sheboygan County spent $157,816 on infrastructure for Morgan Aircraft’s planned manufacturing facility at the Sheboygan County Memorial Airport. The company, founded by engineer Brian Morgan, promised to produce both a drone for military use and a vertical lift aircraft — known as an Extremely Maneuverable Jet — that it promised would “revolutionize air travel for personal and business uses.”

But the project never got off the ground. Now the state is poised to go to court to try to get back the $686,000 loan, plus interest. The current ownership group described Morgan as a “virtual” company with few assets.

Another company that got taxpayer funding without underwriting was Milwaukee-based Building Committee Inc. Last month, the State Journal reported that WEDC gave a $500,000 unsecured loan to BCI, whose owner, William Minahan, had made the maximum $10,000 contribution to Walker’s 2010 gubernatorial campaign. The company never repaid the loan.

A third company to receive funding without underwriting was Gilman USA LLC, a machining company in Grafton.

According to DOA spokesman Cullen Werwie, Gilman repaid its $390,000 loan in 2012 soon after the State Journal revealed that HUD had cited the state for failing to check the financial soundness of the company before making the federally funded loan. A HUD spokesman said the agency is continuing to review Wisconsin’s CDBG program, including the Morgan Aircraft loan.

WEDC was to help Walker achieve his goal — never met — of helping create 250,000 jobs by the end of his first term.

Agency spokesman Mark Maley said since 2011 the agency has put in place policies to ensure awards are reviewed more thoroughly.

Old underwriting

WEDC’s Morgan Aircraft loan relied on out-of-date underwriting from 2007, when the company was seeking assistance from the state Department of Commerce during the administration of Democratic Gov. Jim Doyle, according to HUD.

That underwriting recommended approval of a loan and various tax credits, even though it noted the company had a low net worth and “will be competing with large, global aircraft manufacturers that are established in the industry and have exponentially greater financial, technical and marketing resources.”

Paul Jadin, WEDC’s first chief executive, said he was not aware the 2011 loan to Morgan Aircraft was based on old underwriting. He said the award letter — which would not normally contain detailed financial information on the company — would have been forwarded to him by his management team, and “any time I got a document from them, I would always assume it had been through the (financial) review process.”

Jadin said he was impressed by Morgan Aircraft officials, whom he met with at least seven times. He believed they had the talent and expertise, were honest with reasonable backgrounds and had support from investors and Sheboygan County. Morgan also told Site Selection magazine for its September 2012 edition that he had met with Walker to discuss the project.

Walker’s office declined to comment.

While top Walker aides, including former Administration Secretary Mike Huebsch, pushed for the loan to BCI, Jadin said there was no pressure from above to approve the Morgan Aircraft deal.

“At the end of the day, it was me and only me to make that decision to fund them,” he said.

Werwie confirmed that the company will not meet its job-creation goals and that the state plans to pursue repayment, “including referring the case to the state Department of Justice for collection.”

Rush to fund?

The letter from HUD suggested that at the time, WEDC was in a hurry to hand out incentives.

In the case of Gilman, “WEDC staff indicated that the underwriting process was skipped in order to accommodate the business’ timeline,” HUD said in its 2012 letter to the state.

“In the case of Morgan Aircraft,” HUD said, “WEDC staff indicates that an updated underwriting was performed, but not placed in the file. HUD staff requested a copy ... but it has not been provided.”

An open records request by the State Journal to DOA produced the 2007 underwriting but no staff review related to the 2011 loan.

DOA’s Werwie said in the case of Morgan Aircraft, the Walker administration was following the lead of WEDC’s predecessor, the Department of Commerce, under Doyle. That agency offered Morgan Aircraft up to $30 million in incentives in exchange for creating 1,700 jobs. But all of the money was contingent on the company making investments and hiring and training employees, and no taxpayer money was provided.

While Morgan Aircraft came away empty-handed from Commerce, it got $686,000 from WEDC. The amount represented $1 for every $2 the company reported it had raised.

Funds maintained staff

In its required annual reports, Morgan Aircraft reported creating no jobs and retaining just four jobs in 2012. In that year’s report, the company said it paid one employee $70 an hour, or a $145,600 annual salary; two employees earned $60 an hour or $124,800 each; and a fourth employee received $55 an hour, or $114,400 annually. All were listed as having benefits.

Morgan said most of the money was used to “maintain the current employees and staff” and advance the technology.

Company officials, who have removed Brian Morgan as head of the company, say they are working hard to line up money to repay the taxpayer loan and trying to form “strategic partnerships” to develop the vertical takeoff and landing aircraft similar to the military’s V-22 Osprey.

Gary Ginter of Chicago, one of three people serving as an interim CEO committee for Morgan Aircraft, said the company had raised $11 million over the years in private and public funds, although it was able to qualify only for $686,000 in state matching funds. By 2013, the company reported to the state that it was “mothballed.” Repayment of the loan is due in December.

“We became a virtual company; virtual staff, virtual offices, virtually broke!” Ginter wrote in response to questions posed by the State Journal. “But we keep trying! That’s why we have real hope of being able to repay those loans within the contractually defined time frame.”

Ginter said his company spent the money “hiring world-class aeronautical consulting teams” including “one such very highly paid group (that) worked for a couple of years on our project.”

He said the company also spent a “significant amount of money” to build and test eight models of the airplane.

Asked to provide the names of any of the experts it hired, Brian Morgan declined, saying all, including NASA scientists, had “non-disclosure agreements.” He said the company had worked with numerous aviation consultants at a cost of more than $75,000 per month.

Ginter also wrote that the company had paid for legal help and spent “a lot of money to try to raise money: air fares and local travel, lodging, entertainment/meals, trade show attendance, etc.”

The company has closed its office in Sheboygan County and now lists an address in Milton. But a visit to that office on Thursday revealed the location is occupied by a landscaping company with no Morgan Aircraft signs in sight.

Little experience

David Hagen of Goshen, Indiana, the co-inventor and a scientific adviser to Morgan Aircraft, said that although no one in the company had worked in the aerospace industry, it brought together “leading aerospace experts” in designing the aircraft. “Most innovation comes from small companies … at the edges from people working in different industries.”

Morgan Aircraft fits that description.

Brian Morgan, who invented the vertical takeoff and landing plane, has a background as an engineer for companies that make sanitary napkin holders, cookware, garage doors, farm equipment, construction equipment and electronic darts and games. He said he is “frustrated” by the way things turned out but grateful for the financial support the company got from WEDC and Sheboygan County.

“I personally feel a huge burden and indebtedness to them,” he said.

Sheboygan County Administrator Adam Payne said the county came into the project with “eyes wide open” knowing there was a chance it may not work out. Because of its $157,816 investment in infrastructure, Payne said, the county now has a site for a business to locate at the airport.

Dane Checolinski, chief executive of the Sheboygan County Economic Development Corp., said local officials had great hope for the company whose owners “put everything they had into it.”

“I think this was a very real project back in 2011 or 2012,” Checolinski added. “Unfortunately, they simply could not get the equity they needed to launch the project.”

Contact reporter Matthew DeFour at mdefour@madison.com or 608-252-6144.

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Matthew DeFour covers state government and politics for the Wisconsin State Journal.