Trial records suggest former lawmaker used COVID relief aid for personal investments

Federal prosecutors presented their case against former Kansas Rep. Michael Capps on Wednesday, offering evidence intended to show that COVID-19 relief aid meant to save small businesses from collapse during the pandemic instead funded Capps’ personal, high-risk investments on the stock market.

Defense lawyer Kurt Kerns offered up the possibility that the investment money came from Capps’ inheritance when his mother died in early 2018. The investments were made shortly after Capps received COVID-19 relief money in 2020 and transferred large sums from those businesses to his personal account.

Capps is standing trial on 18 federal charges of COVID-19 relief fraud — including submitting false statements, wire fraud and money laundering. An FBI special agent testified Wednesday that he began investigating Capps after a December 2020 Wichita Eagle investigation found two Capps-owned companies and a nonprofit under his control submitted inflated payroll and revenue numbers to a federally insured bank, federal and state government agencies, and Sedgwick County government to secure more than $450,000 in COVID-19 relief money.

To get the COVID cash, Capps submitted applications claiming that in 2019, Midwest Business Group LLC had eight employees and an average monthly payroll of $32,715 and gross revenues of $252,738; Krivacy LLC had 18 employees and gross revenue of $728,520; and Fourth and Long Foundation had 12 employees with gross revenue of $285,000.

Bank statements, tax records and witness testimony suggest otherwise.

FBI Special Agent Andrew Campbell testified Wednesday he examined internal business documents and bank records for Midwest Business Group, Krivacy, and Fourth and Long as part of a year-long investigation. He found no evidence that Capps’ businesses or nonprofit issued any paychecks to employees or independent contractors in 2019.

Asked whether the company or bank records reflected the gross-revenue totals reported by Capps, Campbell said, “No, and nothing close to that.”

The Internal Revenue Service provided records showing Capps’ businesses paid no income taxes for 2019.

Prosecutors focused on 2019 company data because those were the numbers businesses had to provide to determine how much CARES Act money they could get from lenders, the U.S. Small Business Administration and the Kansas Department of Commerce. None of those agencies investigated Capps’ claims about employees or revenue. They relied solely on his self-certification that the numbers were correct.

The state’s case Wednesday also included revelations about the inner workings of a business partnership between two Wichita elected officials who planned to leverage public office for private gain. But their plans unraveled as they became embroiled in controversy, which scared away clients and drew attention to their private business, according to testimony from former Wichita City Council member James Clendenin.

Clendenin said Capps controlled the company’s bank account and was responsible for all of the loan applications submitted on behalf of Midwest Business Group, one of three entities under Capps’ control that received federal awards.

Under questioning, Clendenin said he was not aware of any facts that would indicate the numbers submitted by Capps were accurate.

Clendenin said his primary role in the company was using his position as an elected official to forge relationships with potential clients within the Wichita business community. When asked what he offered to the company to obtain a 20% ownership interest, Clendenin responded, “My relationships . . . since I was an elected official on the City Council.”

He later testified that one of those relationships with an unnamed “local business guy” helped the company get a start-up loan in 2018.

“I had a relationship with a local business guy who could get us a loan,” Clendenin said.

It does not appear his connections had much effect besides the initial start-up loan.

In 2019, Midwest Business Group brokered two sales of businesses: Derby Donuts south of Wichita and No Bake Cafe, a cookie-dough shop in Wichita. Clendenin said he got a $3,000 commission on the Derby Donuts sale but did not take a commission on the sale of the No Bake Cafe because it was sold to his wife and financed by Capps.

Outside of the $3,000 commission, Clendenin said he did not receive a regular paycheck from Midwest Business Group.

“I was an owner, so I took draws whenever I could,” Clendenin said. “If I had a bill or something that came up, I would go to Michael (Capps).”

Clendenin said the business began to experience problems in 2020 because there was “a lot of controversy swirling around Michael (Capps) and I” and that Midwest Business Group “lost a lot of customers around that time.”

A separate Eagle investigation tied Capps, Clendenin and former Sedgwick County Commissioner Michael O’Donnell to a false 2019 campaign video that accused Brandon Whipple of sexual harassment when he was running for Wichita mayor. They later faced calls for their resignation and ouster after a secret audio recording showed the three Republican officials plotting to cover up their involvement in the smear campaign by blaming then-Sedgwick County GOP Chairman Dalton Glasscock for the video.

Clendenin said Midwest Business Group closed its downtown Wichita office — where the video was produced — in September but the company remains in operation because of a franchise agreement with VR Business Brokers.

“My main source of income is Uber,” Clendenin said.

Clendenin, who resigned in 2020 under an ouster investigation by the Sedgwick County District Attorney’s Office, has for two years declined to comment publicly on the federal money that went to Midwest Business Group. On Wednesday, he said he accepted one payment from the federal awards in 2020 but later refused to take any more money over concerns the company would not be able to pay it back.

As for the eight employees listed in Midwest Business Group’s applications for federal COVID relief money, Clendenin said eight people “have done work” for Midwest Business Group, including Capps; Clendenin and his two daughters, ages 10 and 14 at the time; Capps’ adopted son, Chaz; two Capps political campaign workers, Matthew Colborn and Nathaniel Thomas; and Vanessa Christophersen, an agent at VR Business Brokers who does not get paid an hourly rate or salary but is paid on a commission basis.

Campbell said Thursday that bank records showed no payments to Christophersen, Chaz Capps, Thomas and Colborn from Midwest Business Group in 2019. Clendenin’s daughters, Lily and Eden, did receive checks from the business, usually in amounts of $25 to $50. Some of those checks bounced, he said.

Federal prosecutors said investigators did not examine Capps’ political campaign account.

Capps hired Colborn to produce the video that accused Whipple of sexual harassment in 2019. Records in a civil lawsuit show Capps paid Colborn from the Fourth and Long Foundation’s account. Capps also paid Colborn and Thomas $500 retainers almost monthly out of his Kansas House campaign account in 2019 and 2020. He lost his primary election in 2020.

Clendenin, without giving examples, said Colborn and Thomas took photographs and did some social media work for Midwest Business Group in 2019. He could not explain why bank records did not show any paychecks to them from the company for that work.

Wednesday’s testimony was the first indication of where the federal COVID money could have gone.

Clendenin said Capps returned the money awarded under the Paycheck Protection Program that was meant for Midwest Business Group after he raised concerns. But he said he and Capps decided not to pay some of the money back until the federal government requested it.

Prosecutors said Capps instead invested some of that money through a personal account with TD Ameritrade, an online stock brokerage. In his agreement with TD Ameritrade, he certified that he wanted the money invested in “stocks and options” with the primary investment objective of “aggressive growth” with the highest degree of risk available on the application form: “speculative.”

Copies of checks provided to the jury also appeared to show at least $250,000 in COVID relief money moved from Krivacy, a cyber security business Capps owns, to investment accounts owned by Capps, including TD Ameritrade and Pershing LLC, a stock brokerage based in New Jersey.

The trial is expected to continue until Monday at the federal courthouse in Wichita.

Kerns said Wednesday that Capps may testify in his own defense.