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L&C could have scrapped bad loan

• Lewis & Clark sent more millions even after company's financial woes had grown

Lewis & Clark College President Michael Mooney called it 'an awful thing to have done' and 'terribly naive of me.'

A national college endowment expert called it a 'bizarre investment É loaded with risk.'

There's no doubt now that Mooney's decision to lend $10.5 million in Lewis & Clark funds to a struggling and now-bankrupt Idaho company was ill-conceived. But, according to federal Securities and Exchange Commission records, Mooney and the college continued to throw good money after bad toward the company Ñ for a period of at least eight months in 2001.

Not only was there ample evidence of Environmental Oil Processing Technology Inc.'s financial problems when Mooney approved the loan in March 2001, but the company's mounting problems throughout 2001 were readily apparent.

For example, in September 2001 the company announced that it was abandoning the electricity-producing project that was supposed to generate the funds to pay back Lewis & Clark. Two months later, Lewis & Clark sent at least another $4 million to the company.

It was unclear Monday when any trustees knew of the loan or whether they knew of the final $4.5 million payment when it was made. Calls to Fred Fields, the chairman of the board of trustees, and several other trustees to comment on the loan were not returned.

It appears likely that Lewis & Clark will recoup little of the $10.5 million it loaned the company Ñ if it recovers any of it. The company, based in Nampa, Idaho, defaulted on the loan last fall and declared bankruptcy last December.

The unusual loan, first reported by Willamette Week last Wednesday, has engulfed Mooney and the private liberal arts college in controversy during the past week. The loan represents about 11 percent of the college's general fund budget and about 9 percent of its endowment.

Mooney said Wednesday that he offered to resign last year when the full board of trustees learned about the loan. But he said most trustees indicated that they wanted him to stay as president. The college's endowment, net assets and reputation have ballooned in the 14 years that Mooney has been president.

The college's board of trustees conducted a telephone conference call Monday morning 'to get all of the trustees updated on the media coverage (of the loan) in the last week,' according to Lewis & Clark spokeswoman Tania Thompson. She declined to comment further on the teleconference.

A national college endowment expert said controversy about the loan would hardly be unexpected.

Most colleges have an investment policy that would preclude a president from making such a risky investment without specific approval from the board of trustees, said Louis Morrell, vice president for investments at Wake Forest University and an advisory committee member of the National Association of College and University Business Officers.

'Some bizarre investment like that É wouldn't happen here,' he said. The president wouldn't recommend it to the board, and the board wouldn't approve it, he said.

The resulting publicity also could be damaging to fund-raising efforts, Morrell said.

Mooney acknowledged during a news conference last week that he had approved the loan in violation of at least three Lewis & Clark investment policies:

The loan was beyond the $1 million limit for short-term investments with any one company; it was beyond the 270-day limit for short-term investments; and it was a far riskier investment than the investment policy calls for.

Mooney said Stephen Persad, a Lewis & Clark alumnus and Portland stockbroker, came to him with a recommendation to make the loan. Persad did not return a phone call made to his home.

Mooney said one other Lewis & Clark executive Ñ former Chief Financial Officer Mervyn Brockett Ñ knew about the loan when Mooney approved it in March 2001.

He said he did not talk to trustees about the proposed loan or get approval for the loan from the board of trustees or the trustees' endowment committee 'because it was presented as a short-term guaranteed investment with funds we had available for that purpose.'

The loan was secured with Environmental Oil assets and a personal guarantee from the company's president, N. Tod Tripple, Mooney said.

Mooney said he did not consider the loan risky Ñ even with the company's promise of paying 12 percent interest when short-term U.S. Treasury bills were offering less than half that Ñ in part because of the guarantee.

'It was terribly naive of me,' Mooney said 'I made a big, huge mistake. É I've made a lot of good decisions. But this one was not one of them.'

Warnings come early on

A look at the documents the public company and its predecessors filed with the SEC before Lewis & Clark's loan reveal reasons for potential investors to be skeptical.

Environmental Oil's primary business was using its Idaho processing plant to clean, or 're-refine,' waste lubricating oil Ñ generally worthless and an environmental problem Ñ into usable and valuable petroleum products such as diesel fuel and gasoline.

SEC records indicate that Tripple, through control of variously named corporations, had been trying to fine-tune the process and make it profitable since at least 1994. By 2000, he still hadn't succeeded.

In a February 2000 report to the SEC from Environmental Oil's then holding company, the company's independent auditors wrote that 'the company has insufficient working capital to meet its current obligations. This condition raises substantial doubt about the company's ability to continue as a going concern.'

In a third-quarter report to the SEC filed in November 2000, Environmental Oil reported that as of Sept. 30, 2000, the company 'had insufficient cash flow from operations to meet its current cash obligations.'

In that report, Environmental Oil reported that in the first nine months of 2000, it had operated at a net loss of $2 million. It had lost $5.5 million in the first nine months of 1999, according to the report. By November 2000, it had an accumulated deficit of $9.4 million.

But four months later, things suddenly started looking up for Environmental Oil Ñ thanks to Lewis & Clark.

In March 2001, in what appears to be the only major investment in the company from anyone outside the Tripple family since at least early 2000, the private college approved the $10.5 million loan.

According to the company's SEC reports, Tripple and Environmental Oil planned to use the money to build an electrical power plant in Reno, Nev., and to generate electricity for then energy-starved California. The company reported that it was contracting with a Northern California public utility for the purchase of electricity through 2002 and hoped that profits from its electricity sales would repay Lewis & Clark.

With the Lewis & Clark money that it received in March 2001, the company purchased 20 acres of land at a Reno industrial site. It also made a down payment on the $8 million purchase of three electrical generators that would be used at the future Reno plant to produce electricity.

But Environmental Oil didn't get all of the $10.5 million at once. Through the first six months of 2001, according to the company's SEC reports, Lewis & Clark gave the company about $6 million, much of which went directly toward the Reno plant.

If those reports are accurate, Lewis & Clark kept giving the company money over at least eight months, even after increasingly obvious signs that the company was failing.

The company's second-quarter 2001 SEC report reads that after the original $6 million in loan proceeds, the terms of the Lewis & Clark loan allowed the college 'to determine if it will provide the additional $4,500,000 by August 2001 based upon the company meeting certain completion and performance criteria.'

Grand plan abandoned

Environmental Oil continued losing money. And, because of the 1.5 million shares of common stock that the company gave to an engineering consultant in lieu of cash payment in early 2001, the company's accumulated deficit had doubled to almost $20 million by August 2001.

The company made an announcement in September 2001 that underscored the quicksand in which Lewis & Clark had placed its money. On Sept. 20, Environmental Oil announced that it was abandoning its plans for the electricity-generating plant in Reno.

The company said the decision was based on its 'review of the economic feasibility of the construction and operation of the electrical generators in light of the recent action by the Federal Energy Regulatory Commission to cap the prices that can be charged for power.'

The company would continue its plans to develop the Reno property for its core business Ñ building two used-oil refineries similar to the refinery in Idaho that had never turned a profit. But the company was abandoning the project that it had expected would provide the revenue to retire the Lewis & Clark loan.

And six weeks later Ñ on Nov. 9, according to the company's SEC records Ñ Lewis & Clark gave the company the remaining $4.5 million. (Elsewhere in the same report, the company said Lewis & Clark gave $500,000 in October and $4 million in November.)

In any case, the company's third-quarter report said that with part of that final $4.5 million, the company finished the purchase of the 20 acres of Reno land.

By the 'latter part of 2001,' according to the 2001 annual report, the company had shut down its Nampa plant Ñ its only operating refinery Ñ to redesign portions of the plant 'to improve efficiency, continuity and quality of petroleum products.'

Company management expected the plant to resume operations in May 2002, according to the report, but the plant apparently never reopened.

The Lewis & Clark loan required Environmental Oil to pay the college almost $12 million in March 2002 Ñ $10.5 million plus 12 percent interest. But sometime in 2002, the college granted the company a six-month extension on the loan, making it payable in September of last year.

The company's 2001 annual report indicated that 'based upon conversations with the college president,' company officials thought that the loan would be extended.

When the company missed that deadline, Lewis & Clark sued the company in Idaho on Oct. 28, 2002. About five weeks later, the company filed for Chapter 11 bankruptcy.

In its final quarterly SEC report last November, the company said the loan was secured by most of the company's assets. But the real value of the assets Ñ mostly a shut-down refinery and an uncompleted project in Reno Ñ is unclear.