Why the Morrison Affair Matters 

[hint: it’s not the adultery]

Earlier this month, newspapers across the state reported that State Auditor John Morrison had a 1998 affair with the wife to be of a man his office later investigated for securities fraud. Superficially, the story is that Morrison, a Democratic U.S. Senate hopeful, once had an extramarital affair, but he says it didn’t influence his work.

But as Morrison rails against incumbent Republican Sen. Conrad Burns for alleged ethical missteps (see the Morrison campaign site www.bootburns.com for example), the affair and its fallout in the Auditor’s office raise questions about Morrison’s own conduct.

Morrison declined repeated requests for an interview by the Independent. “We feel like we’ve already responded to this story,” Morrison campaign spokeswoman Tylynn Gordon told us, referring to a multi-hour sit-down Morrison conducted with Lee Newspapers’ state bureau reporters Mike Dennison, Charles S. Johnson and Jennifer McKee March 31. During that interview Morrison described his marriage, which survived the affair, as a story of redemption, which surely answered someone’s question. But when it came to his handling of a securities fraud case aimed at David Tacke, the husband of Morrison’s former mistress, the auditor has left more than a few questions unanswered.

It was early 2003 when Morrison announced he was issuing a cease-and-desist order forcing Kalispell businessman David J. Tacke to stop issuing, offering and selling stock in his company, Venue Tech, a high-tech firm that planned to install pay-per-use binoculars under seats in sports arenas. Morrison alleged that Tacke, along with other agents of his company, had illegally sold more than $6 million in Venue Tech stock.

Morrison’s office had spent more than a year investigating Tacke, the company’s president and CEO. The cease-and-desist order accused Tacke of, among other things, violating a related 1985 cease-and-desist order, illegally selling unregistered securities, committing insurance and securities fraud and failing to disclose the company’s financial woes or Tacke’s legal troubles to investors.

The allegations were serious, carrying potential penalties of up to $5,000 in fines for each violation of the state securities code. But less than six months after the order was issued, Morrison’s office settled the case. Tacke was allowed to stay on as head of Venue Tech, which was allowed to continue selling securities. Tacke was not fined, and neither he nor the company was compelled to admit any liability or wrongdoing.

For its part, Morrison’s office agreed to terms that barred the auditor’s staff from referring Tacke or Venue Tech to other law-enforcement agencies. (Unbeknownst to Tacke and his lawyers, federal agents had already launched an investigation, and nothing in the agreement prevented the auditor’s office from cooperating with that investigation.)

Within weeks of signing the agreement, Tacke and Venue Tech violated the settlement’s terms, but rather than revoke the settlement and enforce the agreed-upon penalties, the auditor’s office dragged fruitless negotiations on for more than a year.

Then, in January 2005, federal prosecutors stepped in where the auditor had backed off and indicted Tacke on charges of mail and wire fraud, along with 10 counts of money laundering. He was convicted that summer and sentenced in October to 108 months in prison. Tacke, who has since appealed the decision, is currently serving out his sentence in a medium-security federal penitentiary in Sheridan, Ore.

In his statement announcing the 2003 cease-and-desist order, Morrison claimed that Montana investors had not been provided with the disclosure of basic information that would have allowed them to make wise investment decisions. Disclosure is an investor’s most basic right, Morrison said at the time.

Montana citizens have similar rights to accurate information about the conduct of public officials.

In contrast to the auditor’s lax prosecution of Tacke—and failure to recover any money for Montana investors in the process—the U.S. Attorney’s office put Tacke away for nine years on essentially the same charges.

That disparity raises the question of whether Morrison put personal interest in the way of his public duty.

Why the auditor’s office softened its approach, allowing Tacke to continue to operate in violation of its own settlement agreement, is the question at the crux of a story with the potential to make or break Morrison’s senate campaign.

THE CONFLICT

When Jeff Bradford read about Morrison’s affair with David Tacke’s wife, Suzanne Harding, he was furious. Bradford, formerly of Lakeside, says he lost $200,000 investing in Tacke’s company. Bradford was the first to approach the auditor’s office in late 2001 with complaints about Tacke.

“When I read that story, it answered a lot of questions I had in my mind regarding the investigation,” says Bradford, who now lives in Denver. Bradford and his wife, Karen Arnett, had to sell their retirement home in Lakeside after investing almost all their savings in Tacke’s company.

“I wondered why the investigation took four years. I wondered why federal agencies had to be brought in. I wondered why the settlement agreement was never enforced,” he says. “They spent all that time and taxpayer’s money and accomplished nothing. They didn’t stop Tacke. They didn’t fine him. They allowed him to solicit more securities and Tacke got to keep the money. It doesn’t make any sense.”

Jim Freeman, another former investor, from Morgan Hill, Calif., was similarly upset when he learned that Morrison had a personal relationship with Tacke’s wife. Freeman, who says he lost close to $15,000 in Tacke’s scheme, says he’s long been frustrated with the way the auditor’s office handled the case. Now Freeman believes Morrison’s relationship to Suzanne Harding might have affected the way the auditor’s office pursued Tacke.

“From the start, Morrison’s office didn’t enforce the settlement agreement,” says Freeman. “They dragged this case on for four years.”

Morrison explained to Lee’s reporters that he hired an outside attorney to handle the Tacke securities fraud case because he had personal relationships with people involved in the company, but denied he was influenced in his handling of the case by his affair with Harding. Morrison indicated that he only sat in on discussions about the settlement offers, but made no decisions.

Bradford isn’t buying that line.

“David Tacke knew about the affair, and that gave him the upper hand in the settlement negotiations,” Bradford says now. “It doesn’t have to be said. I think what happened is they created a settlement agreement and then went back and forth. Tacke didn’t want to be found out as a fraud and a con artist, and Morrison didn’t want to be found out as an adulterer.”

As a result of those dovetailing desires, these former investors suspect, Tacke was allowed to continue to operate for more than a year before his subsequent federal indictment, and Morrison was able to launch a strong bid for the U.S. senate without having to disclose his affair with Tacke’s wife. Until now.

THE SCAM

According to state and federal investigators, David Tacke bilked untold numbers of investors in the United States and Canada out of millions of dollars over two decades.

Tacke convinced investors that he was going to put binocular vending units under the seats of major sports arenas and entertainment venues. The idea was that spectators would pay a small rental fee of about $5 to use the binoculars attached beneath the seat by a retractable cable.

But investors in Tacke’s related companies were never told that the stock certificates they were purchasing weren’t registered with the state securities department, and that neither Tacke nor any of his associates were registered to sell such securities.

Why didn’t Tacke just register the securities?

At least in part, according to court documents, because he was taking money from Venue Tech investors and depositing it into a private holding company called Quelle, which owned a majority of Venue Tech’s stock.

But Quelle wasn’t really a holding company, and it was never legally incorporated in Montana. Tacke used Quelle as his personal bank account, on which he drew for such necessities as take-out pizza and a down payment on his car.

According to the auditor’s office, Tacke also lost considerable amounts of investors’ money through illegal speculative stock trading.

As a result, Venue Tech never developed the financial resources to succeed under Tacke’s leadership.

Jay Meyer, a former Venue Tech employee who helped devise the company’s business and marketing plan, told the Daily Inter Lake in 2003 that Venue Tech was constantly struggling financially. But Tacke always had a way to raise more funds.

“They were printing stock certificates off their personal computers like confetti,” Meyer said.

By the time investors began complaining to the auditor’s office, employee paychecks were bouncing. Tacke had also been pocketing employee health insurance premiums. Many employees didn’t find out their health insurance wasn’t being paid until they started receiving cancellation letters in the mail months later.

The majority of the people who bought shares in Venue Tech were not sophisticated investors. Most heard of David Tacke and Venue Tech by word of mouth at Flathead Valley cocktail parties and family get-togethers. Even as investors handed over their hard-earned cash to Tacke, they were convincing friends and family members to do the same. Those with the most to lose tended to be the last to admit they had been scammed.

But staff within the state securities department saw Tacke for the fraud he was later proved to be.

The 2003 cease-and-desist order signed by Deputy State Auditor Jill Gerdrum proposed that the state auditor take “disciplinary action” against Tacke and his cohorts and recommended Morrison fine Tacke $5,000 for each violation of the securities act, force the company to buy back shares from investors, and compel Tacke to pay restitution.

But the auditor’s office never followed that recommendation. Instead, Morrison’s office settled with Tacke, allowing him to continue doing business.

Morrison says his office did everything it could to try to recover money for investors while pursuing Tacke. But disgruntled investors, sources close to the investigation and the public record all suggest that Morrison’s office failed to pursue multiple avenues toward that end. As a result, by Morrison’s own accounting, not a penny was ever recovered for Montana investors. And it was the feds, not Morrison, who finally put a stop to Tacke’s con once and for all.

THE SETTLEMENT

Key members of Morrison’s staff wanted Tacke removed from Venue Tech from the start, but in the end the auditor’s office allowed him to stay on, where he remained until his conviction two years later on federal fraud charges.

Betsy Griffing, chief legal counsel for the auditor’s office until September 2003, told the Daily Inter Lake in March of that year that she spent eight months trying to negotiate a consent agreement with Tacke and Venue Tech before the cease-and-desist order was issued. According to Griffing’s statements in 2003, the consent agreement she had originally advocated would have required Venue Tech to provide a 100-percent refund to any investor who wanted it. That agreement would also have required full disclosure of the financial and legal issues eventually outlined in the 2003 cease-and-desist order and barred Tacke from any further involvement with the firm.

“When I was negotiating the settlement, it was important to me to have Tacke out of the picture,” Griffing recently told the Independent. “I wanted to separate Tacke from the company. What we were trying to do was keep the company going if we could, and separate Tacke from that.”

But Tacke and his attorneys “were unwilling to meet those conditions,” Griffing told the Inter Lake in 2003. “They sent back copies of the draft agreement where they’d crossed out all of the most important things.”

In the fall of 2002 a securities investigator uncovered a 1985 cease-and-desist order, which until that point Morrison’s office hadn’t known existed. In 1981 Tacke had started a company similar to Venue Tech, called Sports Eye Systems Corp. That company’s plan was also to install binocular vending units in stadiums across the country. But in 1985 State Auditor Andrea Bennett issued a cease-and-desist order against Tacke for illegally selling unregistered securities in the company. Tacke never challenged the order and it became permanent. Any willful violation of the 1985 cease-and-desist order carried a 10-year prison sentence and a $5,000 fine, but Tacke was never prosecuted for violating it, which he did when he started selling securities in Venue Tech in the late 1990s.

Once the 1985 order was discovered, it became clear to investigators the Tacke had been perpetrating his binocular scam for more than 20 years. Negotiations between Tacke, Venue Tech and Morrison’s staff broke down and the cease-and-desist order was issued.

Soon after, Morrison disclosed his affair in a meeting with key staff members and the decision was made to bring in outside legal counsel. At Griffing’s recommendation Morrison hired Elizabeth S. Baker, a Helena attorney and former deputy state attorney general, to replace Griffing on the Tacke case. According to letters between Baker and Tacke’s attorneys, settlement negotiations began again in earnest in May 2003, and an agreement was reached in early July.

Under the terms of the new agreement, Tacke was allowed to stay on as president of the company and neither he nor Venue Tech was forced to admit any liability for the securities violations. Venue Tech was required to appoint an independent board of directors to approve and oversee any future securities offerings, use of the offerings’ proceeds, and any resale of Venue Tech stock owned by Tacke. Tacke was also ordered to give shareholders a chance to sell back their shares, and was directed to disclose to shareholders Tacke’s past and present legal problems.

The settlement also called for a rescission offering whereby Tacke and Venue Tech would be required to repay any investors who wanted out, with Tacke on the hook for 17 percent of the buyout. Montana investors could have recouped 50 percent of their investment immediately.

“I believed Tacke was a thief and he is perpetrating fraud on people, and I didn’t think he would abide by the settlement agreement,” says investor Bradford. “It seemed like Tacke was controlling that agreement or manipulating it so that he wouldn’t be found out by anybody else, what his scam was.”

The ink was barely dry on the settlement agreement when Tacke started bragging about the outcome. A letter sent by Venue Tech to shareholders in September 2003 asserts, “This agreement contains NOTHING that the Company and its legal team did not propose back in 2002.”

Shareholder Freeman believes if the auditor’s office had stuck to its guns and removed the uncooperative Tacke as president of Venue Tech, the investors would have had a better chance of recovering their money.

“Tacke should have been taken out of the picture,” Freeman says now. “He was skimming money the whole time and spending on his personal affairs.”

The U.S. Attorney’s successful prosecution of Tacke highlights the contrast between the assertive approach taken by Morrison’s office prior to 2003’s cease-and-desist order and the watered-down settlement it reached with Tacke later that year.

Former auditor’s office staffers speaking on background say that Morrison was more involved with that final agreement than he’s letting on.

THE SOURCES

Morrison told Lee Newspapers he never made any decisions about the settlement, but sources within the auditor’s office say he was not as distant from the case as he has indicated.

Sources confirm that Tacke’s wife Suzanne Harding contacted Morrison at his office on at least two occasions in 2002, soon after the securities department began its investigation, though those same sources decline to comment on the nature of the calls.

Morrison didn’t reveal his affair with Harding to his staff until the spring of 2003, more than a year after the auditor’s office launched its investigation.

Former staffers confirm that they repeatedly advised Morrison to stay out of the case entirely to avoid the appearance of conflict of interest.

“He did not do that,” says one former staffer.

Instead, Morrison remained an “active participant” in the negotiations, one source says.

“He was more than a bystander,” says another.

Multiple sources agreed to speak to the Independent on the condition that they remain anonymous for fear of retribution. Where sources have insisted upon anonymity, the Independent has confirmed the substance of those sources’ statements with additional sources.

Attorney Baker, the ostensibly independent counsel brought in to avoid any potential conflict of interest, says she and Morrison had several meetings regarding the settlement in the months leading up to the document’s signing.

David Hunter, a veteran Democratic political operative hired as deputy auditor in July 2003, says Morrison conferred with him in the spring of 2003, seeking his opinion on how to handle the Tacke case in light of Morrison’s affair with Harding. Hunter recalls that the auditor’s office was looking for outside advice, but says he doesn’t remember if there was ever a conversation about Morrison recusing himself. Morrison was upfront about the affair, Hunter says.

“To John’s credit, he was forthright in his acknowledgment of a conflict of interest due to his relationship with Suzanne and investors on both sides of the case,” says Hunter of the spring 2003 meeting at which Morrison revealed his affair.

Sources say Morrison was then advised to remove himself from oversight of the Tacke case, but Morrison’s actions indicate he didn’t heed that advice.

In the end, the decision was made to hire Baker to head up negotiations.

Hunter himself claims responsibility for final approval of the settlement agreement; it’s his signature alongside David Tacke’s on the final document.

But sources in the auditor’s office and Baker herself tell a different story.

Baker tells the Independent she met mostly with securities staff during her handling of the case, but “When we were in the final stages of negotiation there was no deputy securities commissioner,” Baker explains. “[Morrison] is the securities commissioner, so I wanted to make sure he gave final approval to the final details of the agreement.” Contrary to Morrison’s insistence that he was uninvolved, Baker says he gave her the final approval she requested.

Baker says it was her recommendation to settle with Tacke and Venue Tech rather than take the case to the next stage: an administrative hearing. Had the case gone to a hearing, an examiner would have decided if a securities violation had occured. If so, the securities commissioner (Morrison) could have recommended fines up to $5,000 for each instance and recommended that Tacke and Venue Tech be required to pay restitution to the investors and make a rescission offer.

Had the matter gone to an administrative hearing, Morrison would have been forced either to publicly decide a case involving his former lover’s husband, or to recuse himself and risk having to explain why. But the case never went to administrative hearing and the settlement reached in its stead has never—to this day—been enforced.

THE FAILURE

Bradford says he knew there was something wrong with the settlement agreement from the beginning.

“There were too many deadlines and loopholes that Tacke could slide through,” Bradford recalls.

Karen Powell, deputy auditor and deputy securities commissioner, expressed her frustration with Tacke and Venue Tech’s failure to comply just months after the agreement was signed. In a letter to Tacke and Venue Tech attorneys dated Oct. 8, 2003, Powell wrote that the securities department was committed to the settlement agreement, but that “the actions to date have not demonstrated that Venue Tech and Mr. Tacke have the same commitment.”

Still, the auditor’s office agreed to give Tacke and Venue Tech an eight-week extension to fulfill the department’s request for the financial audits required by the settlement agreement.

According to Powell’s letter, Morrison had a direct role in that decision. Her letter states that she “met yesterday with Commissioner Morrison and Beth Baker” and discussed the “failure of Venue Tech and David Tacke to meet the time lines…We agreed at that time to grant the eight week extension…”

By May 2004, Tacke and Venue Tech had received two deadline extensions and still hadn’t appointed an independent board, delivered required audits or so much as provided the auditor’s office with assurances that a rescission/repurchase offer was in the works.

Powell went back and forth with Tacke and Venue Tech for more than a year regarding their violations of the settlement agreement, but no enforcement action was ever taken.

Investors Bradford and Freeman aren’t the only ones dumbfounded by the auditor’s office’s apparent unwillingness to enforce its own agreement.

Art Otto, a Kalispell veterinarian and former Venue Tech investor, says he was happy when he first heard about the settlement because he expected to get money back. But as time passed and Tacke and his lawyers missed nearly every deadline and continued to fail to abide by the terms of the agreement, he began to wonder why the auditor’s office wasn’t doing anything about it.

“I called them [the auditor’s office] several times and talked to one of their lawyers but I was unable to get straight answers,” Otto recalls. “I wanted to know why this agreement that was made wasn’t taking place. Why did that fall apart? It looked like it was a done deal.”

Powell says it’s more complicated than that.

“We worked for quite a long time to resolve that process,” says Powell. “In fact, up until the point that Mr. Tacke was indicted [on federal fraud and money-laundering charges], the company was moving forward with the discussions and negotiations.”

Tacke and his lawyers first learned of an ongoing federal investigation in the spring of 2004; Tacke was indicted in December of that year.

Powell says once Tacke was indicted by the feds, Venue Tech and Tacke walked away from negotiations with the state.

But the indictment didn’t preclude the auditor’s office from pursuing enforcement of its agreement, as Powell stated herself in an e-mail to Bradford’s wife, Karen Arnett: “The action taken by the U.S. Attorney’s office is an entirely separate action from the enforcement action taken by this Department.”

Powell explained to the Independent that there was no point in implementing fines if the company was no longer financially viable—a determination the auditor’s office has yet to make even now.

But Bradford isn’t convinced the auditor’s office ever intended to enforce the agreement.

“If it weren’t for the federal agencies getting involved, I believe Tacke would have gotten away with it,” Bradford says. “If the objective was to help Montana citizens and Montana investors, what did [Morrison] accomplish? Nothing.”

THE ETHICS

Morrison maintains that by disclosing his affair with Tacke’s wife to his staff and hiring Elizabeth Baker to handle the case, he properly distanced himself from it.

It’s not uncommon for elected officials to be called upon to decide matters that may affect them, or someone close to them, personally. In a state with fewer than a million people it’s almost inevitable that conflicts interests will arise from time to time.

The Montana Code of Ethics provides guidelines for lawmakers and government officials on how to handle conflicts of interest when they arise. According to that code, when a public official is required to take official action on a matter in which he has a personal conflict that would give rise to the appearance of impropriety, “the public employee shall disclose the interest creating the conflict prior to participating in the official action.” The code also states that “a public officer or public employee shall, prior to acting in a manner that may impinge on public duty…disclose the nature of the private interest that creates the conflict.” The code goes on to say that the public officer must disclose the conflict in writing to the commissioner of political practices.

Gordy Higgins, the commissioner of political practices since 2004, says Morrison never made such a disclosure as far as he can tell.

“I don’t know if it’s clear that it would have been [required of him],” Higgins says.

The ethics code doesn’t specifically address issues as complex as those surrounding the Morrison/Tacke affair. It primarily deals with conflict of interest in which a government official or his family stands to reap personal financial gain from a decision or action.

But Higgins says public officials who aren’t sure if they have a conflict should disclose it anyway. “If there is a mechanism for making a determination about a conflict of interest, then you use it. If there isn’t, then you still have the knowledge that you at least made a public notification,” says Higgins. Such public disclosure allows people to make judgments about whether or not there really is a conflict of interest. “It’s wise…to disclose the issues that you have, just so that you’re not caught down the road with an allegation that you’ve somehow failed in your public duty,” says Higgins.

The chance that anyone will file an ethics complaint against Morrison are slim. A complainant would have to show that Morrison violated a specific ethics code. Higgins says that could be tough to do given the nature of this particular conflict.

But Morrison may have a larger audience to answer to come June’s primary election, where he faces fellow candidates Jon Tester, Paul Richards and Clint Wilkes for a chance to battle Conrad Burns in November’s general election.

Though Morrison declined our interview request, an official statement issued by his campaign quoted the candidate as follows: “The news story said I handled this case completely appropriately.”

But that’s ultimately not a judgment left to newspapers to make. It will be up to the public, namely voters, to decide if John Morrison handled the Tacke case appropriately, or if he let his relationship with the wife of his target impair his ability to protect Montana investors from fraud. Then they can decide if they want him representing them.

jadams@missoulanews.com

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