Does New Mexico’s State Investment Council know what is being done with the tens of millions of dollars it has invested in New Mexico venture capital?  That doesn’t seem to be the case, at least in the instance of one curious investment.

In its 2007 annual report the State Investment Council (SIC) reported it had acquired ownership positions in 45 New Mexico companies.  These investments amounted to $141.4 million.  That sum includes the $19 million invested in Eclipse Aviation, which is now in bankruptcy. The report does not disclose how much New Mexico has invested in these  companies or what percentage of their stock is owned by New Mexico state government as the result of these equity acquisitions.

The Rio Grande Foundation has been asking the SIC for that information for two months So far, the SIC has not been able to provide an answer.  It does not seem to be any more readily available to the SIC than to taxpayers who want to know what is being done with their money.

Except for the Eclipse Aviation investment and the millions invested directly in Earthstone, a Santa Fe cleaning products company, the rest of the SIC’s current investments in New Mexico companies have been made in partnership with a venture capital funds that are based in New Mexico or have an office here, though their principal office may be in another state.

As Charles Wollmann, the SIC’s Public Information Officer explains it, the SIC relies on these investment firms to determine how much is invested in each company.  Accordingly, that information is not readily available to the SIC…or New Mexico taxpayers.  Indeed, Wollmann has cautioned that some of this information may be proprietary and not for public disclosure.

The Rio Grande Foundation has taken a closer look at Small Smiles, one of the 45 New Mexico companies identified in the SIC’s 2007 report.  We have learned that Small Smiles is not truly a “New Mexico company” but is a multi-state chain of Medicaid dental clinics owned by out of state interests and managed by a company whose ownership can be traced back to the small Arabian nation of Bahrain. Our investigation also reveals that by investing in Small Smiles the SIC has bought into a company with a record of abusing child patients and engaging in  unethical billing that has put it under government investigation.  And, as we have learned, there are more public relations troubles brewing for Small Smiles.

Small Smiles, a New Mexico Company? Try Colorado, Tennessee or even the Middle East.

Small Smiles operates Medicaid dental clinics for low income children and infants in nineteen states and the District of Columbia.  It began operations in New Mexico in 2007, opening one clinic in Santa Fe, one on Albuquerque’s west side and one in southeast Albuquerque.

Through its partnership with Red River Ventures of Plano, Texas, the SIC acquired equity in Small Smiles in 2007.  Bruce Duty, a director of Red River Ventures, told the Rio Grande Foundation that his company invested a total of about $5.5 million in “Smile Smiles, LLC.”  About 10%, or $550,000 of that investment came from New Mexico’s SIC.  The rest came from other investors, including the United States Small Business Administration.

There is no New Mexico corporation identified in the records of the New Mexico Public Regulatory Commission as “Small Smiles, LLC.” Instead, the Public Regulatory Commission corporations archive reveals three Small Smiles professional corporations corresponding to each of the three clinics.  Each of the Small Smiles dental clinics was incorporated as a separate professional corporation.

None of the directors of the New Mexico Small Smile clinics are New Mexicans.

The director of the Santa Fe clinic and the clinic on Albuquerque’s west side is Kenneth E. Knott.  He is a Senior Vice President of FORBA of Nashville, Tennessee. FORBA is one of the nation’s largest dental clinic chains.  (More on FORBA below). Knott is a busy man.  He is also a dentist, and is licensed in Ohio, the District of Columbia, Connecticut, New Hampshire, South Carolina, Kentucky, Oklahoma, and Virginia.  He also is the director of Small Smiles Clinics in Akron and Youngstown, Ohio, Ft. Wayne, Indiana, the District of Columbia, and Reno, Nevada.

The director of the Small Smiles clinic in southeast Albuquerque is Adolph R. Padula.  He is a retired dentist from Pueblo, Colorado.  He is related by marriage to the DeRose family of Pueblo, Colorado, the founders of the Small Smiles chain of Medicaid dental clinics.

The corporate records of all three New Mexico clinics give either mailing addresses or identify a principal out of state address in Pueblo, Colorado.

So how does this tie Small Smiles to the Middle East?  Follow the thread a little bit further.

First, we have to go through Pueblo.  That’s where Small Smiles began, growing out of the DeRose dental clinic.  The DeRoses once owned a string of dental clinics across the country catering to Medicaid patients.  They sold their interest in Small Smiles to FORBA. Dr. Michael DeRose, one of the founders of the Small Smiles chain, in 2007 agreed to pay the federal government $10 million to settle charges his clinics had charged Medicaid for unnecessary procedures, such as capping children’s teeth.  As reported below, this is an allegation that continues to arise against Smile Smiles clinics even after the DeRoses sold their interest to FORBA.

All Small Smile clinics are now managed by FORBA, which also began in Pueblo.  FORBA owns the trademark on “Small Smiles.”  FORBA stands for “For Better Access.”  It has grown into one of the nation’s largest dental care management companies.  It reported revenue of $142.2 million in 2006.  That year it was acquired by a Sanus, a Nashville-based holding company, and then moved its main corporate offices to Tennessee.  It continues to maintain some operations in Pueblo.

Sanus, in turn, was acquired by Small Smiles Holding, LLC, a company formed for the express purpose of acquiring Sanus.

But Nashville isn’t the end of the line.  The terminus is Bahrain.  In January 2007, just before SIC’s investment in Small Smiles, Sanus sold FORBA for $435 million to Arcapita Bank of Bahrain.

In sum, instead of investing in a New Mexico company, the SIC’s partner has invested in a company owned by a bank on the Arabian Peninsula.  The SIC’s 2007 report, claiming an investment in a New Mexico company called Small Smiles, is incorrect.

Grim Smiles

At the time that the SIC’s money was being invested, Small Smiles was the subject of a damning Emmy Award winning expose’ of its medical and business practices in Washington, D.C. area clinics.  WJLA-TV of Washington, D.C. launched its investigative report with film footage of a screaming child being restrained on a “papoose board” while his mother was excluded from the room.  The series of investigative reports also discovered that Small Smiles was using unlicensed x-ray technicians and billing Medicaid for hundreds of thousands of dollars in unnecessary dental work, including pulling children’s teeth without a valid medical reason.

“Drilling for Dollars,” triggered a criminal investigation by the Maryland Attorney General.  Several insurance companies suspended Small Smiles and directed patients to seek dental work elsewhere.   The report elicited complaints from patients and employees around the country that were collected at the television’s website.

In May 2008, New York terminated Small Smiles’ participation in its Medicaid program in response to reports by CBS-6 news of Albany that its Colonie clinic was performing unnecessary procedures such as needlessly crowning teeth.  When Small Smiles challenged these claims, more than one hundred parents came forward with complaints of mistreatment backed by photographs.  As in Maryland, parents were not permitted to be present with their children during examinations and dental procedures.  A dozen parents also reported that their children were restrained on a “papoose board.”  Some parents reported their children screaming in pain because the dentist operated before anesthesia took effect or operated without any anesthesia at all.  Parents also reported the use of dirty dental instruments.  Lawsuits have been filed by several parents against Small Smiles based on these allegations.

Small Smiles has drawn the ire of New York’s United States Senator Charles Schumer.  After the New York Office of the Medicaid Inspector General revoked their Medicaid authorization, he issued a statement saying, “”I’m glad they’re terminating Small Smiles,” said U.S. Sen. Chuck Schumer (D-NY), a staunch critic of the company. “They don’t deserve to be in business and certainly not get any federal money.”  Sen. Schumer says he has seen news reports documenting similar allegations against Small Smiles clinics in Denver, Rochester, and Washington D.C.  “They ought to prosecute some of the people who did this,” he told CBS-6 via satellite from Capitol Hill. “This goes beyond a mistake. This is hurting our children and ripping off the federal government…and I think there ought to be a criminal investigation of this.”

Similar allegations against Small Smiles clinics in Kansas have been reported by The Wichita Eagle and in Colorado by KUSA-TV of Denver.

Debbie Hagan of Owensboro, Kentucky collects complaints from Small Smiles patients and parents at her blog, “Dentist the Menace.”  (www.debbiehagan.blogspot.com).  She also receives reports from dentists who have worked in Small Smiles clinics.  One person identifying himself as a dentist who worked at a Small Smiles clinic wrote, “I was disgusted with the way children were treated.  I wouldn’t take a dead snake to that place.”  FORBA has sued Hagan for defamation and posting what it claims are copyrighted internal company documents.  That has not stopped Hagan from continuing to run her blog.

The bad publicity for Small Smiles and FORBA may be getting worse.  Good Morning America recently aired parents’ complaints against Small Smiles.  Additionally, ABC’s nationally televised investigative news program “20/20” has completed a critical report on Small Smiles.  According to its producer, Glenn Ruppel that report will air very soon.

What Did the SIC Know and When Did It Know It?

The SIC does not seem to have been aware of any problems with Small Smiles while its partner Red River Ventures was investing taxpayer dollars in that troubled company.  A review of all the minutes of meetings from 2007 and 2008 of the State Investment Council and the New Mexico Private Equity Investment Advisers Council, which advises the SIC on private equity investments, did not reveal any discussion of nor any report on Small Smiles.

The SIC had no response when asked if it was aware of the history of problems of Small Smiles’ clinics.  The SIC does say it is no longer categorizing Small Smiles as a New Mexico company.