Virginia and its Governor’s Opportunity Fund bet $1.4 million on a failed business deal near Lynchburg that exposed the state’s weak control over industrial incentives and the application process for companies seeking grant money.

An investigation by The Roanoke Times found:

  • State analysts relied on a company website produced in China featuring misleading information, including the listing of a North Carolina address where the company never was located and production photographs and text lifted from an unaffiliated American company.
  • Text similar to material on the website appeared in a pre-approval request to the state commerce secretary and a briefing for the governor before his meeting in Beijing with a project principal.
  • Officials also relied on a site consultant who vouched for the company but hadn’t asked basic background questions, such as the company’s address in China, until shortly before the deal was closed.
  • Approached by the same players in 2013, North Carolina officials made checks and asked questions that Virginia officials did not.
  • Only after the project appeared to stall did Virginia officials ask for company financial statements.

Ultimately, the deal fell apart and Virginia demanded the return of taxpayer money granted for the project.

After learning from a reporter about state officials’ reliance on the false website material, Secretary of Commerce and Trade Maurice Jones said he ordered reforms to Virginia’s vetting protocol as a result of the lapses in the evaluation of Lindenburg Industry LLC.

The Virginia Economic Development Partnership will neither take the word again of a site consultant about a business prospect nor fail to do its own homework, according to the secretary.

“We did that here and it hurt,” Jones said. “Now we’re in the phase where we’re trying to get the money back.”

In November 2014, under a white frame tent, state and local leaders announced a 10 percent increase in jobs in Appomattox County, each paying $100 a week more than the average area wage.

All those new paychecks, the public was told, were spawned by the activities of Virginia’s governor during a trade mission to Asia the month before. Terry McAuliffe closed a deal with a Chinese business enterprise planning to invest in Appomattox, a town without an interstate or economic hope after furniture and textile industry layoffs.

It was transformational news for the community of 15,000: 349 new jobs paying an average of $32,000 a year would be filled at a new $113 million factory, using an empty furniture plant and Chinese ingenuity in industrial ceramics.

All the state had to do was write a check, like helping with the down payment on the company’s much larger investment pledge.

Or so officials thought.

This month, 14 months since the tent ceremony, a gate shutters the entrance road at the furniture plant that Lindenburg Industry bought but never used. The company is without its first employee and behind on paying its taxes, water service fees and a contractor’s tab for partial renovations of the factory office. On Dec. 8, Virginia declared the project dead due to a lack of activity at the site, a foreclosure action against the facility, unpaid bills to contractors exceeding $450,000 and lost confidence in the company’s expansion plan.

Virginia had given the firm $1.4 million, a grant from the Governor’s Opportunity Fund. Now, the state is demanding “immediate repayment,” according to a letter mailed to the company’s Appomattox post office box and emailed to China.

Jones said he’s participated in 561 economic announcements during his term as secretary. “This one clearly is the one that makes my stomach hurt,” he said.

Within the crowd under the tent in Appomattox were the Chinese project leaders, Yunshan Li, 31, the CEO of Lindenburg, and Anyuan Zhu, another Lindenburg official. They are the people to whom government officials later looked for answers when building improvements and hiring fell behind schedule early last year and nearly a year after the announcement, whose failure to pay their consultant’s bill caused a foreclosure that led to the project’s collapse.

But on that gray fall day in 2014, they were welcomed with fanfare. They posed behind a cardboard rendition of the governor’s check they would cash about four months later.

“Words cannot express the excitement and anticipation I have regarding the announcement that Lindenburg Industry is locating in the town of Appomattox,” Mayor Paul Harvey said in the governor’s news release. “It is a privilege to welcome a company of the caliber of Lindenburg Industry to Appomattox County.”

In the normal workings of economic development machinery, public officials like Harvey supply their own quotes for the official release and hyperbole is permitted. But official praise has given way to shock and bitterness.

“We’re all ticked,” Jeff Taylor, Appomattox County economic development director, said recently. “There’s an element of trust here that’s gone.”

Money with obligations

Virginia trades discretionary cash grants for new jobs and corporate investment about 25 times a year. The vast majority of recipients build or expand facilities and meet hiring requirements and generate tax revenue that pays for the grants many times over, officials said.

During the past two fiscal years, the partnership helped launch 383 business projects in which the companies pledged to invest $8 billion and create 33,710 jobs, said Suzanne Clark, spokeswoman for the Virginia Economic Development Partnership. The state predicts its 10-year return will be $12.57 for every dollar spent on the partnership’s budget and the incentives programs it manages, she said.

“It really is a process that has historically served us well,” said Martin Briley, president and CEO of the partnership.

Each time the state issues a grant, it binds the company in a signed contract to meet hiring and investment targets or repay the money in part or full. Briley said that of 629 companies given Governor’s Opportunity Fund money since 1992, 25, or 4 percent, were told to repay incentives and did not, for a loss of $5.87 million out of total grants of nearly $230 million. In all but four of those cases, the money had been spent on infrastructure or worker training that represented an enduring community asset, he said.

Other than office renovations, Lindenburg did not improve its chosen site before the deal collapsed. Public records don’t show what Lindenburg did with Virginia’s money. Lindenburg officials have not told the state whether they will repay.

Lindenburg officials have said they struggled to get equipment into the United States and arrange top company officers’ immigration clearance. Skeptical state and local leaders are considering whether it might take a lawsuit to recover the state’s money.

The partnership’s work occurred behind closed doors, in private meetings and phone calls, but hundreds of pages of email and other records released under the Virginia Freedom of Information Act give a glimpse into what transpired.

N.C. left hanging

According to records Yahoo submitted to Network Solutions, Li, using a Beijing address, registered a website at the domain catalon.us in August 2012. The site bearing the name Catalon Chemical presented attractive photographs of industrial workers, processes and product and text related to the field of industrial ceramics, specifically devices that scrub automotive and power plant exhaust.

In late 2012 or 2013, Li, using the first name Stella, contacted Rockingham County, North Carolina, about what she said was the possibility of her company establishing a factory in a former textile plant in Eden. Li was working with Anyuan Zhu, also known as Steven Chu. Chinese business people sometimes use an Americanized version of their names when dealing with Americans.

Li gave a Winston-Salem, North Carolina, business address at 90 Piedmont Industrial Drive, said Graham Pervier, who until September 2014 was president of the Rockingham County Partnership for Economic and Tourism Development, a public-private partnership.

Pervier said he couldn’t recall whether she provided the address in an email or by some other means, but “somewhere they used that address with us,” he said.

“I got a call at home on a Sunday,” Pervier said. “They were over in Winston and had found that [Eden] building on a website” and contacted the building owner, who then called Pervier.

When he spoke to Li, “she said they had a Chinese corporation or something to that effect and were looking for a building for a manufacturing operation and had found something that fit the bill. They kind of wanted to get into it right away,” Pervier said.

Pervier said Li cited her affiliation with the University of Southern California and carried a related business card; her business biography says she holds two master’s degrees in engineering from USC. Chu, who seemed the more technically inclined of the two, had a business card in Chinese but later in the courtship carried a card bearing the Eden plant’s address, even though they never located there, Pervier said.

Pervier decided to do some checking. He is the former chief administrator of Forsyth County, the county seat of which is Winston-Salem. He knew the Piedmont Industrial Drive address to be a former brewery converted to multi-tenant industrial space.

“I went over there and I couldn’t find any office” for Catalon, Pervier said. “I could never find that office or anybody that knew of them.”

Pervier said in a recent interview that he knew that deal-making with the Chinese might involve some uncertainty. He sensed that Li and Chu were investors or representing investors shopping for a project location; he wanted Eden to be the place. “There are lots of investors over there with tens, even hundreds of millions of dollars,” Pervier said.

North Carolina estimated how much state and local money might be offered to persuade project officials to choose Eden. But officials told Li, who had proposed a $40 million facility, that North Carolina needed more information about the company’s corporate structure. In addition, North Carolina said it needed details about where the money would come from to further resolve some of the uncertainty about what Li and Chu had in mind.

Catalon never provided those details. “We never got any kind of identifiable corporate entity that we could put in the agreement,” Pervier said. Pervier later learned that Li and Chu began looking in Virginia.

They “never circled back to us,” Pervier said.

Rockingham County elected officials postponed a June 2013 hearing on the Catalon project. It was never held.

Launching ‘Project Honey’

While Li and Chu were working alone when they first contacted North Carolina, when they knocked on Virginia’s door in summer 2013, they were teamed with Development Advisors Inc., a Charlotte business consulting firm familiar to officials in both states.

Development Advisors told Virginia Economic Development Partnership that Catalon considered the former Thomasville Furniture plant in Appomattox its top Virginia choice for a proposed $40 million plant employing 199 workers. It would manufacture automotive catalytic converters for export to China, Development Advisors said.

“The project is fully approved and funded by a parent company,” Development Advisors consultant Kenan Gay wrote to the partnership’s Warren Hammer, to whom the Catalon project had been assigned.

Gay asked Virginia how much in economic incentives the project might receive, a figure needed by the company to estimate exact project costs. The first mention of a parent company name in hundreds of emails released by the state came just before the project announcement in Appomattox.

Government staffers and the private consultant agreed they would call the initiative Project Honey. But insiders knew it was Catalon Chemical, a name Li and Chu used until just before the Virginia announcement. Hammer found a limited liability company that Chu had registered in North Carolina, Catalon Eden LLC. He emailed the partnership’s senior economist Brian Kroll, saying, “Tell me something good about these guys.”

“No can do,” replied Kroll, who furnished only a link to the catalon.us website.

It bore the Winston-Salem address of 90 Piedmont Industrial Drive.

Government staffers at the state and local level estimated how much up-front money the state and locality might give Catalon and how much more the project could earn as jobs and investment materialized. Through such grants, communities and states compete for corporate expansions. As far as Virginia knew, North Carolina was still in the running.

The usual secrecy about economic development deals still in the making applied. Dianne Jones, a former paralegal who was new to Development Advisors, took over Project Honey from Gay and issued a strict warning to Virginia officials: “Please be sure that in all board meetings the project code name is used and incentives are approved under that code name and the actual company name is NOT used,” her email said.

Bill Gillespie, interim Appomattox town manager, pledged to do his part. “Just to assure you no one knows who the company is or what they do within the ranks of our Town Council,” he wrote to Jones. “The Town Council really has nothing to tell due to their lack of information.”

By summer 2014, Catalon Chemical had submitted the winning bid at a bankruptcy auction for the furniture plant. The proposed project had grown to nearly three times the original proposal. Government representatives, the consultant and company officials had negotiated incentives worth $12.7 million, only $1.4 million of which would be paid at the beginning.

Virginia officials grew hopeful. Just five Appomattox County companies employ more than 50 people and none was comparable in size to the new manufacturing operation being contemplated. The county jobless rate in November 2014 was 5.1 percent, versus 4.8 percent for the state.

In late July 2014, Hammer emailed Appomattox officials to say he had returned from “a great vacation.” He praised the work of Development Advisors and said he saw no urgent need to contact the firm. “If there is news or anything they need from us they will reach out for help,” he said.

A cut-and-paste website

There was news elsewhere in roughly that timeframe, but Virginia officials wouldn’t hear about it for a long time.

John Cochran, president of Ibiden Ceram Environmental in Overland Park, Kansas, had discovered that virtually all the text and several photos on the Catalon site had been taken from his company’s website without permission. Ceram, whose parent company is located in Austria, provides sales and services for the company’s catalyst product line used in emission control at electrical generating plants.

A cease-and-desist letter a company attorney sent to Yahoo, which was hosting the site, says, “Much of Catalon’s website appears copied almost verbatim from Ceram’s website … including even two misspellings.”

In a phone interview, Cochran confirmed details of the letter. Looking at catalon.us, he said he spotted a photo of his parent company’s factory in Frauental, Austria. He saw a photo of a Ceram employee.

“There’s our laser machine adding our serial number to a catalyst that we make for the trucking industry,” he said of another image.

Ceram’s site says it has customers in 38 countries. So did the Catalon website.

“It really upset me,” Cochran said.

Shortly after the complaint to Yahoo, the catalon.us site appeared stripped of most of the proprietary content, according to Cochran. But it reappeared.

Unaware of Cochran’s complaint to Yahoo, Virginia economic developers, relying on the stolen information appearing on Catalon’s website, kept pushing for the company to become one of Virginia’s newest employers.

Within six weeks, McAuliffe and Jones had agreed Virginia would give Catalon incentives to locate in Appomattox, according to an email released by the state. The state’s files also contain a memo to Maurice Jones from Briley, written in his role as the partnership’s top official. Briley relayed the website claim, shot down a year earlier by Pervier’s watch-dogging, that Catalon did business in Winston-Salem. Briley described the planned Appomattox project as an expansion of Catalon’s U.S. operations.

In an interview, Hammer, who advised Briley, said he relied on the website and believed that Catalon was at least establishing an operation in Winston-Salem.

Ken Millett, a business developer with the city of Winston-Salem, said officials there had never heard of Catalon.

Representatives of CBRE commercial real estate services and Triad Commercial Properties, which handled leasing for 90 Piedmont Industrial Drive, said they also had never heard of Catalon or leased space to a company with that name.

J.J. Rogers, 69, who manages the property for U.S. Realty Management and Investment, a unit of Aetna Realty, said he has worked at the site for more than half his life — from 1969 to 1999 when it was a brewery and from 2003 to 2016 as property manager.

“As far as your chemical company’s concerned, not here,” Rogers said.

Asked whether he believes he was deceived by the Catalon website, Hammer said that in hindsight, he was. Viewing websites is “part of the review that we do,” Hammer said. “We go to websites all the time.”

Asked if he had ever come across a site he thought he could not trust, he said, “not to my knowledge. This is a first.”

Seeking accountability

With the Catalon deal almost ready for a public announcement in Appomattox, Virginia officials prepared for a pivotal meeting in which McAuliffe, during a trip through Asia, wanted to meet Li in China. There was a problem: The partnership’s team didn’t know where Li was located. The partnership asked Development Advisors for Catalon’s China address.

In spite of having vouched for Catalon to Virginia officials, Development Advisors didn’t know either.

“I honestly never asked,” Dianne Jones wrote in an email to Hammer.

She later furnished not Catalon’s address but that of Hong Kong-based Eagle Ride Investment Holdings Limited, which she said was Lindenburg’s parent company. The email is dated 15 months after Development Advisors first approached Virginia and a month before the announcement.

According to its publicly available annual reports, Eagle Ride lost money in 2013 and 2014. Traded on the Hong Kong Stock Exchange, Eagle Ride reported net assets of $17.1 million in 2013, a fraction of the projected Lindenburg project cost. A news release from the governor’s office described Eagle Ride as “one of the world leading investment holdings companies in China,” language submitted by Development Advisors.

Company stock rose sharply from 44 cents on Nov. 5, 2014, the date of the announcement, to $1.13 on Dec. 1, before falling.

A draft of the news release circulated among the project team for additions and corrections and appeared to stir excitement.

In an email signed “fist PUMP!”, Taylor said he would arrange an outdoor cleanup at the old furniture plant, including removal of bankruptcy signs before the announcement gathering. Appomattox County had hired him to a new economic development position to create job opportunities after the Thomasville plant closed in 2011 and it was looking like success was just around the corner.

Catalon had by this point arranged with the owner of the furniture plant to buy it and agreed to a payment date before McAuliffe’s meeting with Li at a Virginia tourism event in Beijing. But Li and Chu missed multiple deadlines to pay, the emails show.

As partnership officials counted down the days until Li’s meeting with McAuliffe, research manager Katherine Goodwin wrote to her colleagues: “Building owners are freaking out.”

Twelve hours before the scheduled meeting in Beijing, Hammer said he was contemplating calling in sick.

“Don’t wig out on me yet,” Goodwin replied.

The project was on the verge of falling apart.

When Li walked into the Beijing reception, the seller of the Appomattox plant still did not have his money, email traffic showed. A short time later, partnership officials who were closely monitoring their phones received an email from China saying that, according to a representative of Development Advisors also attending the event, a deposit of $1 million was “ready” and the rest would be “cleared” in a few days.

The delay was caused by an issue with transferring Lindenburg’s payment, according to Briley, who as partnership chief attended the Beijing gathering.

“Getting the money out of China has been a struggle for many companies whether they are working in Virginia or not,” Briley said. To be sure, American states face challenges when landing business deals with the Chinese, including a language barrier in some cases and the greater extent of government control over industry in China.

Briley said the fact that Lindenburg a short time later paid the bankruptcy trustee of Furniture Brands International $2.09 million in cash for the furniture plant was a major contributing factor to the state’s having confidence in the company. In addition, a Chinese bank issued a $1 million letter of credit on Lindenburg’s behalf to guarantee an incentives payment expected from the Virginia Tobacco Commission that Lindenburg ended up not receiving.

Those facts, coupled with the endorsement of Development Advisors, “gave us comfort to move forward” at the meeting where McAuliffe closed the deal with Li, Briley said.

Development Advisors has pitched potential deals to Virginia 18 times since 2006; five came to fruition and three are pending, the partnership said. Development Advisors had prior experience closing a deal involving the Chinese, in which Tide & Times Lumber set up shop in Robbinsville, North Carolina. But the partnership said no one at the company who worked on the Lindenburg project had ever closed a deal in Virginia that involved a payment from the Governor’s Opportunity Fund, a grant awarded only at the discretion of the governor.

Patric Zimmer, president of Development Advisors, said his team neither pointed Virginia officials to the Catalon Chemical website nor knew they were relying on it. Early in his dealing with Li, he asked her about the website. She told him her Catalon Chemical had no relationship to the Catalon Chemical described on the site — even though Li had registered it.

A search of more than 2,000 pages of state records shows that Development Advisors did not email the website name or link to state officials.

Li’s Catalon and the Catalon on the web were entirely different enterprises as far as Zimmer knew, he said.

“I know … that’s a bit confusing. But ultimately, the person that really needs to answer the questions for you is Stella,” Zimmer said. “We only know what we were told by company officials.”

He said does his best to vet the information he receives.

Li and Chu had an outstanding bill with Development Advisors of about $859,485 that, when not paid by an agreed deadline, led Development Advisors to record a lien against the Appomattox property, according to court records. Last month, Development Advisors auctioned off the factory. Zimmer said he hopes to close a transaction soon with a Moneta businessman who submitted the high bid of $1 million. George Aznavorian, who is in line to become the plant’s owner, said he expects to sign final paperwork within two weeks.

Late last year, in reply to Virginia’s demand to repay the grant money by March 7, Li emailed Virginia a plea. “We do hope all of you can be more patient and understanding with the company’s effort in making the project happen,” she wrote.

She told The Roanoke Times she resigned from Catalon and referred questions to Chu.

He said by email he hoped a planned meeting Friday with partnership officials would settle unresolved issues between Lindenburg, the state and Appomattox County. Partnership spokesman Vince Barnett said later Friday the agency had nothing new to report.

Chu said a web developer he and Li hired posted the information belonging to Ceram Environmental on Catalon Chemical’s website, but neither he nor Li knew until they were contacted by a reporter. Within three hours of hearing from a reporter, the website had been stripped of Ceram’s information.

“This is a huge flaw for our company, deeply apology to the inconvenience to the public,” Chu said by email.

Chu said few understand how hard he and others have worked to establish an Appomattox production plant for Catalon Chemical’s industrial ceramics, an initiative strengthened in 2015 by Catalon’s purchase by the largest privately held steel company in China. That company, General Steel Holdings Inc., which is publicly traded on the New York Stock Exchange, last summer named Li its CEO.

State lawmakers who represent Appomattox reacted with concern. Sen. Tom Garrett, R-Buckingham County, said an inquiry is in order.

“It looks like the textbook definition of throwing good money after bad. There needs to be some accountability,” he said.

Del. Matt Fariss, R-Campbell County, said he disagrees with the state spending money on a business project before knowing the project is going forward.

In his role as commerce secretary, an overseer of the partnership, Maurice Jones said changes are coming. In hindsight, the partnership, a 20-year-old state authority with 80 to 90 employees and a budget of about $10 million, should have independently researched the project and detected the website issues, which would have red-flagged the project and prompted a deeper examination before the money went out the door, he said.

As part of expanded background checks, Jones said, he already has mandated that the partnership require audited financial statements for international, private businesses seeking state grants. An audit is prepared by an independent accounting firm tasked with verification of company financial information.

“I think we really got, if you will, seduced because we relied on the representations of a reputable consulting firm and did not do the depth of independent, at least, confirmation of those representations,” Jones said. “I don’t care who the consultant is, their work can never substitute for the due diligence that we have to do.”

Staff librarian Belinda Harris and staff writer Alicia Petska contributed to this report.

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Jeff Sturgeon covers business, banking, transportation and federal court. Phone: (540) 981-3251. Email: jeff.sturgeon@roanoke.com. Mail: 201 W. Campbell Ave., Roanoke, VA 24011.

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