SOUTH BEND — An FBI investigation into Venture Real Estate Services and principals John Bales and Bill Spencer had already begun when Matthew Dyer signed on as the company's controller in December 2009.

Bales told him about the federal investigation during the interview process and said the company had done nothing illegal, Dyer testified Wednesday in U.S. District Court for the Northern District of Indiana.

Dyer, who worked at Venture until February 2012, prepared the company's financial statements, cut its checks and managed properties including an Elkhart office building leased by the state's Department of Child Services and owned by Indianapolis attorney Paul Page through a company called L&BAB LLC. Bales provided Page with a down payment to buy the building via a company called BAB Equity LLC.

Prosecutors say the secret arrangement was a violation of a leasing agreement between Venture and the state of Indiana that barred the company from direct or indirect ownership of properties where state agencies leased space. The defense argues the arrangement was a loan and not ownership.

Dyer testified Wednesday that he disagreed with Bales and Spencer about the arrangement being a loan. He recalled three occasions where he discussed the matter with Bales, who never disclosed to the state Venture's involvement in the Elkhart deal outside of brokering the lease.

"Equity means ownership," Dyer said Wednesday. "If it was truly a loan, I would have called it BAB Loan or BAB Mortgage."

Bales' reaction during the conversations, Dyer said, was to blame Spencer, his general counsel and now co-defendant. As Dyer recalls, Bales profanely lamented that he had "trusted" Bill to protect him, and Bill "f--ked" him.

Dyer said he was responsible for managing the Elkhart property on behalf of owner Paul Page. Dyer said he noticed in summer 2009 that Page had withdrawn funds from the building's checking account in violation of an understanding that rent revenue from the state would first go to pay back Bales. There apparently was no pre-arranged payment schedule, as would be typical with a loan.

Dyer said he alerted Bales, who moved to place a mortgage on the property to protect his investment. And Page responded by firing Venture as property manager.

In 2010, Dyer said he realized Venture hadn't paid the state a portion of the Elkhart lease commission, about $22,000, required under the contract. The entire $88,400 commission had gone to Bales to repay part of his $362,000 down payment.

Dyer said he told Bales about the unpaid balance owed to the state. His boss' response, as Dyer recalled it: "F--k them. They owe us money, so I can pay them whenever I want."

A few weeks later, after Dyer completed a full audit and reminded Bales about the outstanding payment, Bales told him to cut the state a check. A portion of the money was routed right back to Venture to cover unpaid commissions on other lease deals.

Bales attorney Larry Mackey noted in his cross examination that Dyer shared more information, including the equity versus ownership conversations, in a follow-up interview with the FBI and federal prosecutors shortly before the trial, than he had during an interview months earlier.

Dyer said he simply was not asked to elaborate during the earlier interview, and he was acting on his attorney's advice "not to volunteer information or go on a tangent."

Mackey also sought to challenge Dyer's credibility by bringing up an insurance claim Dyer filed that was later denied.

Dyer acknowledged during questioning that he had received a letter from Erie Insurance Co. shortly before his follow-up interview with federal authorities notifying him that his claim on a stolen vehicle had been denied. The insurance company determined he had made false statements.

Later, on redirect, Dyer said he had told the insurance company the truth.

"The cops caught the guy who stole my car," he added.

Assistant U.S. Attorney Jesse Barrett has argued Bales and Spencer were well aware their arrangement in Elkhart would not pass the state's smell test.

Former Indiana Department of Administration Commissioner Carrie Henderson testified Tuesday about a conversation in which Bales suggested Venture could provide financing for state-leased buildings to help close deals. She told him he "absolutely couldn't do that kind of deal with the state of Indiana."

Former Indianapolis Deputy Mayor Michael Huber, who oversaw Venture's contract as a deputy commissioner at IDOA under Henderson from 2007 to 2008, added more fuel in testimony Wednesday.

Huber said he asked Bales and Spencer in 2007 to explore options for leasing storage space for the Indiana Stadium and Convention Building Authority, which at the time was leading construction of Lucas Oil Stadium and an expansion of the Indiana Convention Center.

He said Venture informally suggested about a dozen options. Huber asked whether Venture had any ownership position in any of the buildings it was suggesting.

"They identified two or three where they had interests," Huber said. "We agreed that future discussions had to be about properties without ownership of Venture."

Huber acknowledged on cross examination by Bales attorney Jason Barclay that he had no personal involvement in the Elkhart deal. Barclay also introduced records indicating Venture's formal recommendations on buildings to lease for the Indiana Stadium and Convention Building Authority included only one building in which Venture had an interest, and that interest was disclosed.

Also on Wednesday, Barrett asked former IDOA Commissioner Mark Everson and Steve Harless, who handles the state's leasing efforts, to characterize their reaction to a series of IBJ stories that addressed the Elkhart deal. The stories prompted state officials to question Venture employees including Bales and Spencer.

Both men said they were satisfied, to varying degrees, with Venture's claim it had no ownership interest in the Elkhart building.

That apparently changed when an IBJ story in May 2010 revealed several details that were news to state officials. The story, based on a review of dozens of pages of records relating to the Elkhart deal, reported that the Bales-controlled BAB Equity held a second mortgage and that Venture had been paid both a commission and a development fee on the deal.

Venture had told the state the landlord, L&BAB, had not yet paid Venture's commission.

Harless testified Thursday that the IBJ story was the first he heard about the commission or development fee. And his skepticism grew as Venture's principals began ignoring his questions via email. He called the notion that Venture invested in a state-leased building a "significant conflict of interest."

Mackey took a particularly confrontational approach when he cross-examined Harless, questioning his credentials and asking whether Harless had a "hard-on" for Venture, meaning an ax to grind. Harless said no.

By way of example, Mackey noted that Venture had worked for months on a plan to lease offices for the Department of Revenue, but Harless wound up tapping competitor Resource Commercial Real Estate to broker the deal and collect a commission in the neighborhood of $200,000.

Harless gave more testimony Thursday morning, which was expected to be followed by additional government witnesses. The defense is scheduled to make its case next week.

One name that's unlikely to resurface: Carl Brizzi, the former two-term Marion County prosecutor. A couple of witnesses mentioned his name during testimony Wednesday, and defense attorneys promptly objected and asked for the references to be stricken from the record.

At some point after the Elkhart deal closed, Page added Brizzi as a co-owner of the building without requiring him to invest money or take out debt. Brizzi has not been charged with a crime and has denied wrongdoing.

The IBJ is a sister publication of Indiana Lawyer.