A mysterious "police" force that has one small Montana city on edge apparently is packing its bags and heading home.

The California-based security firm, run by an ex-convict with a history of fraud convictions, is dropping its purported bid to take over a Montana jail — days after state officials launched an investigation and several key participants backed away from the controversial proposal.

American Police Force spokeswoman Becky Shay said Friday the deal with Hardin had "gone sour" after press revelations about the criminal past of company founder Michael Hilton.

The obscure company raised eyebrows last week when two of its new, black Mercedes SUVs bearing a "Hardin Police Department" logo drove through the city — which doesn't have a police department.

Click here for a video.

American Police Force was drafting a contract that would have given it control over a $27 million medium-security prison that was built in Hardin more than two years ago, but has never held any prisoners.

The troubled town, which has a double-digit unemployment rate, was left high and dry last spring when the federal government decided not to use the facility to harbor Guantanamo Bay detainees.

The company faced a Monday deadline from the Montana attorney general's office to demonstrate that it had financial backers.

Hilton has a history of fraud and theft going back at least two decades, including two convictions in grand theft cases, and allegations of being an con-artist who, according to some sources, utilizes more than 20 aliases.

Hilton signed a contract in September to take over the jail and run local law enforcement but it was never ratified.

Hilton acknowledged offering a job to the wife of the executive director of Two Rivers Authority, the city's economic development arm. That official, Greg Smith, resigned Monday.

FOXNews.com's Katie Landan and the Associated Press contributed to this report.