A $10 million donation from Uncle Sam to a private venture capital fund in return for a vague promise of eventually investing in new technologies for the U.S. Army — in his time as investment banker between 1995 and 2002, Nashville Congressman Jim Cooper never came across a deal this sweet. Which is probably why an obscure item in the Defense Department’s recent authorization bill piqued Cooper’s interest in the first place. After a week of intense research, Cooper’s D.C. staff discovered that somehow, several businessmen previously unknown in the nation’s venture capital circles, convinced the U.S. Army to hand over $61.9 million in unspent military funds since 2002. Arthur Andersen alum and Harvard MBA Jason Rottenberg set up not-for-profit company OnPoint Technologies, which received an initial donation of $25 million from the Army. As part of the agreement, OnPoint promised to invest the funds in technologies that the Army could use in the future, while the Army agreed that OnPoint would have no obligation to ever return the money to the taxpayers. Since the initial donation, at the behest of an unknown hand in Congress, OnPoint landed a sweep annual arrangement, through which the unspent military funds went directly to OnPoint, which in turn contracted with private venture capital outfit MILCOM Technologies, also run by Rottenberg. In the fifth year of operation, after Rottenberg and team raked in $7.6 million in management fees, Cooper noticed a $10 million request for renewable energy during a hearing of the House Armed Services Committee.

“As a former investment banker and venture capitalist, I have nothing but respect for entrepreneurs who raise and invest private dollars in private projects,” says Cooper, who founded Nashville investment bank Brentwood Capital Advisors in 1999 and previously worked at Equitable Securities. “But as a steward of taxpayer money, I expect transparency and accountability in all government spending. Why give cash to an opaque third-party fund when we could invest directly in technologies that will benefit our military? This was a case of cutting out the middle-man.” Rottenberg defended the legitimacy of his business, which since 2002 invested $16.6 million of the total $61 million under management — an investment his company claims led to the development of a battery charge meter that can be used by soldiers on a battlefield to determine how long their batteries are going to last.

Still, in late May, the U.S. House of Representatives cut the $10 million allocation to OnPoint, leaving questions over the entire system of allocating millions of dollars to obscure projects with little or no oversight. According to Cooper’s office, budget earmarks such as those exploited by OnPoint peaked at 14,000 in 2005, totaling nearly $80 billion. The earmarks have been on the decline since then, but they still appear impossible to audit given that only a few Congressmen are willing — and able — to read the fine print on the hundreds of pages of innumerable appropriations bills. According to one congressional staffer, “I have no doubt that other existing programs would also fail if given the amount of scrutiny [directed at OnPoint].”

It’s not the first time the government has used a venture capital arrangement to interface with the private sector. The Central Intelligence Agency’s venture capital arm In-Q-Tel of Arlington, Va., has invested $150 million in more than 90 companies since its inception in 1999, including satellite-mapping software Google Earth. NASA’s Red Planet Capital fund is yet to announce its initial investments.

It’s not surprising that OnPoint and MILCOM received little oversight from its client, the Office of the Army. According to the Government’s Accountability Office, the U.S. Department of Defense has never undergone a financial audit, and of the 26 “high-risk” areas found by GAO within the federal government, 14 are at the DoD. Given that the Congress approved a $440 billion budget, not including the war expenses, for fiscal year 2007, OnPoint’s $61 million appear to be mere pennies.

Still, “it’s disgusting that the Army is shoveling their resources out the door,” says Beth Daley, director of investigations at the 26-year-old, not-for-profit Project on Government Oversight, “especially in a war time situation, when a number of requests from the front lines were not fulfilled because of bureaucratic inaction and lack of resources.”

However you slice it, defense spending is a big beast that doesn’t lend itself to careful scrutiny, Cooper says. “The real work of Congress is done in committee, and in this case, I think the committee process saved us $10 million.”

(Updated 5:15pm 06/06/07) Shortly after this story was posted, Jason Rottenberg returned BusinessTN's call with assurances that “the Congress directed the U.S. Army to do this” and that OnPoint was selected as a result of an extensive bidding process, although he declined to name other participants and the names of people spearheading the project. “Congressman Cooper is in the position to think what he wants to think,” said Rottenberg, citing a RAND Arroyo report that called upon the Army to set up a private equity venture similar to the CIA’s In-Q-Tel. “Somehow that [report] was the genesis of our company—I’m not sure how.” As to the battery meters developed with the help of OnPoint and MILCOM, Rottenberg said: “And the soldiers love it.”

Feedback: smirnov@businesstn.com

Back to issue home page

Email to a Friend Print-Friendly Format