The Wall Street Journal - 21.10.2019

THE WALL STREET JOURNAL. Monday, October 21, 2019 |B5

Millions of dollars destined
for federal, state and local
taxes remain stuck in limbo,
more than a month after the
collapse of a New York payroll
processing firm.
The unpaid taxes are the
latest headache for customers
of MyPayrollHR and other
payroll companies tied to Mi-
chael Mann. In a criminal com-
plaint filed in September, fed-
eral prosecutors charged Mr.
Mann with defrauding banks
and other financial institu-
tions of about $70 million.
As Mr. Mann and his busi-
nesses came under scrutiny,
bank accounts tied to his
businesses were frozen. As a
result, an estimated $30 mil-
lion deducted from businesses
that used his payroll firms
didn’t reach employees or tax
authorities in early Septem-
ber. The continuing chal-
lenges highlight the difficulty
of recapturing funds when a
payroll processor collapses

BYRUTHSIMON

SMALL BUSINESS

and of even knowing whether

required tax payments were

made.

An attorney for Mr. Mann

didn’t respond to requests for

comment. He previously said

his client was cooperating

with authorities. Mr. Mann

hasn’t entered a plea in the

case in U.S. District Court in

Albany.

Most employees whose

companies used MyPayrollHR

have been made whole, but

tax payments handled by an-

other of Mr. Mann’s firms re-

main in limbo.

Ed Daugherty, co-founder

of two Fort Lauderdale, Fla.,

staffing companies, hired an

accounting firm to determine

whether taxes had been paid

in the dozen states where

they operate. The current es-

timate: $68,840 in federal tax

payments and more than

$40,000 in state and local

taxes haven’t been paid. “It’s

like a hurricane hit,” said Mr.

Daugherty, who spent most of

September working to recover

employee paychecks.

Sorting things out is par-

ticularly difficult because of

the number of parties in-

volved in payroll processing

and the number of tax author-

ities. “It has become some-

thing of a black hole,” said

James Wright, co-owner of

Bridge Technical Talent ,a

technology staffing company

in North Kingstown, R.I., that

figures about $30,000 in taxes

the firm owed weren’t paid.

National Payment Corp.

said it was unable to access

about $4 million in funds des-

tined for tax authorities be-

cause the account holding

those funds was frozen by Mr.

Mann’s bank, Pioneer Ban-

corp Inc. NatPay is one of the

firms that handles the flow of

tax payments through the

ACH Network , used to move

funds from one bank account

to another.

In some cases, NatPay

made required tax payments

and then pulled back those

payments because funds

weren’t available. “National

Payment has lost money in

this process, as have many

businesses and individuals,”

NatPay Chairman George

Hamilton said.

In an interview, Pioneer

Bancorp CEO Thomas Amell

said the accounts frozen by

the bank aren’t set up as pay-

roll accounts or tax accounts.

“The assumption being made

that Pioneer Bank is in con-

trol of tax payment funds or

payroll funds, that narrative

is misleading,” he said.

Mr. Amell declined to say

how much money has been

frozen or when funds would

be returned. “There is a

whole team of forensic ac-

countants and lawyers trying

to decode this entire inci-

dent,” he said.

In Wisconsin alone, 188

businesses were swept up in

Mr. Mann’s troubles, said Pe-

ter Barca, secretary of the

Wisconsin Department of

Revenue. State officials are

still trying to determine how

many businesses missed Octo-

ber tax payments. The state

has told small-business own-

ers it will waive penalties and

has been able to reverse the

withdrawal of $280,000 in

state income-tax payments.

“There has been very little

information as far as where

we should go” to recapture

money that didn’t make it to

tax authorities, said Shelly

Disterhaft, controller for

Stainless Flow Technologies

Inc., a 30-person manufac-

turer of custom piping and

valves in Ripon, Wis.

Ms. Disterhaft discovered

last month that $19,000 des-

tined for federal, state and lo-

cal taxes was apparently stuck

in a frozen bank account tied

to Mr. Mann. Then, in early

October, she learned that

$6,600 in state taxes had

been paid and then pulled

back. The $6,600 pulled out

of the account at the start of

October was returned last

week.

It could be awhile before

employers are notified that

required tax payments

weren’t made. The IRS gener-

ally matches tax payments

submitted by employers

against quarterly tax returns

and then alerts businesses to

any shortfalls, an IRS spokes-

man said.

The IRS spokesman de-

clined to comment specifically

about matters relating to Mr.

Mann because of federal pri-

vacy rules. Missing tax pay-

ments are generally the em-

ployer’s responsibility, even if

some of the money represents

employee withholding, he

said.

Some businesses that

weren’t MyPayrollHR custom-

ers are having tax issues tied

to Mr. Mann’s frozen bank ac-

counts. That is because Cloud

Payroll, another of Mr. Mann’s

companies, processed tax pay-

ments for other payroll firms

in which he had a financial in-

terest.

For example, Southwest-

ern Payroll Service Inc. esti-

mates that more than $5 mil-

lion in tax payments for its

clients may not have reached

their final destination. The

Tulsa, Okla., company has

about 1,300 customers and re-

mains in business. After Mr.

Mann in 2017 took a control-

ling stake in Southwestern, it

began outsourcing tax pay-

ments to Cloud Payroll, the

company says.

David Rhoades, who was

recently appointed as a re-

ceiver for Southwestern, said

he has made a formal demand

to Pioneer Bank to release

customers’ tax funds. Pioneer

said it is evaluating South-

western’s claim.

“It’s a fairly small window”

of time that the money wasn’t

paid, Mr. Rhoades said, “but

it’s a lot of dollars.”

Payroll Firm’s Collapse Hits Customers

Tax payments that are

stuck in ‘a black hole’

are latest headache

for its clients

Millions of dollars

intended for federal,

state and local taxes

are in limbo.

willing to take risks after
years of low interest rates,
said John McElravey, head of
consumer asset-backed secu-
rity research at Wells Fargo.
Comparable nontraditional se-
curities include aircraft and
railcar leases, which have sim-
ilar credit scores to the shale
securitizations but lower in-
terest rates of around 4.5% or
less.
Raisa, which owns nonoper-
ating interests in wells across
the country, privately offered
its stakes in about 700 wells
across the U.S., according to
its chief executive, Luis Rodri-
guez. He declined to provide
details about the offering, in-
cluding how much it raised,
but said the wells were old
enough that production can be
modeled with relative accu-
racy. “Oil and gas has always
been an intriguing place where
people think there is a return,
but they have a hard time get-
ting their head around the
risk,” Mr. Rodriguez said. “In-
vestors don’t want to own the
companies’ equities, but this is
investment-grade.”
Existing shale investors
have all but cut off new in-
fluxes of cash after producers
burned through more than
$100 billion beyond what they
earned since the beginning of

2014. Shale equity and bond
      issuances are at their lowest
      level in years, and the vast
      majority of companies expect
      banks to lower their revolving
      lines of credit in coming
      months, a survey by law firm
      Haynes and Boone LLP found.
      Securitizing wells may be
      one of the few sources of new
      money available to producers,
      said Jonathan Ayre, a partner
      at law firm Orrick Herrington
      & Sutcliffe LLP. The firm is
      working with Guggenheim Se-
      curities , which also structured
      Raisa’s offering, on a similar
      securitization.
      “The appetite is definitely
      out there,” Mr. Ayre said. “For
      oil-and-gas companies looking
      to monetize their investments,
      there are not a ton of good op-
      tions.” Mr. Ayre said the deals
      have built-in protections for
      investors, including in the
      event of bankruptcy. The secu-
      rities would technically be un-
      affected by the bankruptcy of
      the company operating the
      wells, because the ownership
      interests are transferred to the
      special entity. Still, there could
      be uncertainty if the operator
      goes bankrupt and can no lon-
      ger operate the wells, said Ed
      Hirs, a natural-resources fel-
      low for BDO USA LLP.
      Shale bankruptcies have in-
      creased this year and could
      rise further as many producers
      face large debt maturities.
      Other asset-backed securities
      are easier to foreclose on in
      bankruptcy while wells would
      be difficult to repossess, Mr.
      Hirs said.

Continued from page B1

Frackers

Gamble on

Asset Bonds

BUSINESS NEWS

billion all-share merger with

Randgold Resources Ltd.,

which he helped found in 1995.

Barrick’s gold exports from

Tanzania were stopped after

the country’s President John

Magufuli launched what he

called an “economic war”

against foreign miners that he

alleged weren’t paying suffi-

cient taxes and royalties.

Barrick was served in 2017

with a $190 billion bill for

what Tanzanian authorities

said were unpaid taxes, penal-

ties and interest accumulated

in previous years.

At the time of the shut-

down, Barrick’s majority-

owned African subsidiary Aca-

cia Mining PLC was the

country’s largest gold miner

with $1 billion in annual reve-

nue.

Barrick’s executive chair-

man John Thornton sought to

lift the export ban in late 2017

with a surprise offer to pay

Tanzania $300 million and

other benefits. The overture

hadn’t been approved by Bar-

rick’s board or by directors at

its subsidiary Acacia, trigger-

ing a governance tug of war

that delayed a settlement in

Tanzania.

Barrick overcame the im-

passe by acquiring full control

of Acacia earlier this year.

Barrick Gold Corp. is

poised to restart gold mining

in Tanzania after the company

agreed to pay $300 million to

the African country and share

ownership and other benefits

at its three local mines.

Barrick’s gold exports from

Tanzania have been halted

since early 2017 over tax and

other disputes with the gov-

ernment. Barrick CEO Mark

Bristow said that the agree-

ment marks a new era of part-

nership with a host country

that ends “three years of value

destruction.”

The deal, which is subject

to approval of Tanzania’s at-

torney general, requires Bar-

rick to form a new company,

Twiga Minerals Corp., to man-

age the company’s three gold

mines. Barrick has agreed to

give Tanzania a 16% stake in

each of its three mines and

share half of the mines’ royal-

ties, cash distributions and

other economic benefits with

the country.

Mr. Bristow has promised a

resolution to the complex legal

and political dispute since he

took the helm at the Toronto-

based gold miner in January.

The South-African-born execu-

tive joined Barrick after its $6

BYJACQUIEMCNISH

Barrick Reaches

Deal in Tanzania to

Restart Gold Mining

Ellis LLP for restructuring

help as trade tensions ripple

through the U.S. economy.

Despite recent upbeat signs

on trade talks, the Trump ad-

ministration’s decision last

year to impose tariffs on Chi-

nese steel and aluminum im-

ports has resulted in U.S. man-

ufacturers paying increased

costs for raw materials.

Products sourced from U.S.

metals suppliers are also

more expensive, as the tariffs

have enabled U.S. steelmakers

to raise their own prices in

response.

Smaller manufacturers

such as APC, laden with debt

and dependent on those ma-

terials, have been hard-

pressed to absorb the in-

creased costs, according to

the people familiar with the

matter.

Ratings company Moody’s

Investors Service cited the

tariffs on Chinese imports

when it downgraded APC

deeper into junk territory

earlier this year.

The rising costs from the

trade war resulted in a liquid-

ity crunch for APC Automo-

tive, people familiar with the

matter said.

The company, with roughly

$500 million of debt on its

balance sheet, has less than

$10 million in cash and lim-

ited remaining availability on

its revolving credit line, one

of the people added.

The company’s earnings

before interest, taxes, depre-

ciation and amortization for

the past 12 months amounts

to about $33 million, the per-

son said.

APC Automotive’s roots go

back to 1927 with the cre-

ation of AP Exhaust Technol-

ogies, a maker of mufflers

and exhaust pipes.

Private-equity firm Har-

vest Partners LP acquired

the company in 2017, in a deal

that merged the company,

then known as AP Emissions

Technologies, with a braking

systems manufacturer called

Centric Parts.

Audax Private Equity ,

which had owned AP Exhaust

since 2014, retained a signifi-

cant stake in the combined

business.

Representatives for APC,

PJT, Harvest and Audax

didn’t respond to requests for

comment. Kirkland declined

to comment.

Auto-parts maker APC Au-

tomotive Technologies LLC,

hampered by the Trump ad-

ministration’s trade barriers

on Chinese imports, has hired

advisers to help restructure

its balance sheet, according

to people familiar with the

matter.

The Goldsboro, N.C.-based

company, which makes after-

market auto parts including

brake systems, suspension

parts and mufflers, hired in-

vestment bank PJT Partners

Inc. and law firm Kirkland &

BYALEXANDERGLADSTONE

APC Automotive Hires Restructuring Advisers

CEO Mark Bristow hailed the pact to pay $300 million to the

African nation and share ownership of its three mines there.

MIKE HUTCHINGS/REUTERS

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