Once the Government Operations and Audit Committee gets done grilling anyone from Tri-Valley who dares show up to talk about its possibly illegal laptops-for-enrollment scheme, the committee will turn to its most heavily documented and thus far most time-consuming topic, the GEAR UP/Mid-Central scandal. The newest document posted to the GOAC webpage for today’s meeting is this big PDF labeled gently, “Follow-up Information from DLA.” This document, submitted by state government audit manager Tim Flannery from the Department of Legislative Audit, responds to questions offered by GOAC at its August 29 on four topics. In its GEAR UP responses, the Department of Legislative Audit finds Secretary of Education Melody Schopp and her attorney Paul Bachand got a couple points wrong in their summer statements to GOAC.
DLA observes that, contrary to Schopp/Bachand’s statements, the validity of the use of Microsoft software to fulfill the matching requirements for the GEAR UP grant remains in doubt:
DLA noted no records of use for this software in an audit finding in both SFY14 and SFY15, with report dates of 2/25/15 and 3/21/16, respectively. In Paul Bachand’s response to GOAC dated 8/22/17 he indicates that records for use of this software were destroyed in the fire. Since DOE still had no records on file at the time of the fire (9/16/15), it is apparent DOE did not increase monitoring activities in this area after it was noted in DLA’s 2/25/15 report.
In Paul Bachand’s response to GOAC dated 8/22/17 he indicates DOE provided 2015 summer honors program syllabus to USDOE as evidence that the Microsoft software was used. DLA’s special review dated 5/19/17 indicates that, although Microsoft Programming was a part of the summer program, DLA could not verify that this software was used in the program [Paul Flannery, DLA to GOAC, 2017.10.03].
In August, Secretary Schopp told GOAC she did not become aware of the suspicious dual position of Nicole Westerhuis in the GEAR UP management web until she reviewed DLA’s special Report and Audit of Mid-Central in May 2017. DLA says Schopp must not be checking her e-mail:
This was noted in our audit finding 2015-003 of DLA’s FY2015 Statewide Single Audit which was provided to DOE for their response which was received back on 2/8/16 via email with CC to Dr. Schopp, and finally the finding and response was included in the FY2015 Statewide Single Audit with a report date of 3/21/16 [Flannery/DLA to GOAC, 2017.10.03].
To Schopp’s credit, DLA notes that Schopp’s diagram of monitoring procedures imposed on Mid-Central back in 2012 appear to have no inconsistencies with GEAR UP project director Roger Campbell’s April and August 2012 e-mails on the subject.
DLA also appears to suggest Schopp/Bachand may be underplaying the amount DOE and Mid-Central paid Keith Moore for his consulting on federal grants. Bachand’s September response to a question about Mid-Central’s GEAR UP “advisory board” says Moore was paid $36,000 from August 2012 to May 2013. DLA confirms those numbers but provides a fuller list of $68,000 in GEAR UP stipends and $3,881.11 in travel and “laptop presenter stipends” for GEAR UP and College Access grants from 2008 through September 2015, when the whole Mid-Central scheme collapsed.
I’ve just finished reading the 2015 audit. Auditor General Marty Guindon concludes that Mid-Central really, really screwed up. Mid-Central responds by saying the Auditor General is wrong, that they did nothing wrong, and that all blame falls on the dead.
The Auditor General issues adverse opinions—translation: can’t trust them at all—on Mid-Central’s compliance with requirements in running not only the now infamous GEAR UP program but also the Teacher Quality Partnership Grants. Mid-Central gets a qualified opinion—translation: can’t trust some specific statements—on its administration of the Carol M. White Physical Education Program, the College Access Challenge Grant, and the Special Education Cluster Grant. The audit finds “management override of internal controls” took place in all of those programs. It finds errors in “allowable costs/cost principles” and “matching” in GEAR and Teacher Quality Partnership Grants. It finds flawed “subrecipient monitoring” in GEAR UP.
The audit finds Mid-Central had no policies or procedures to identify, stop, or prevent Scott Westerhuis, Nicole Westerhuis, Stacy Phelps, Brinda Kuhn and Lance Witte (not named in the audit, but his conflictual situation is well described on p. 11) from engaging in multiple conflicts of interest that put the integrity of the co-op at risk. Kuhn, for instance, appears to have tens of thousands of dollars for work on GEAR UP and Teacher Quality without any sign that Kuhn’s work was approved by contract by the Mid-Central board.
The auditor identifies numerous questionable costs:
$97,544.14 in GEAR UP salaries lacking proper documentation.
$4,165,185 in undocumented GEAR UP grant-matching costs (most of which consist of Microsoft software that Mid-Central claimed as its grant match but which no one interviewed says was actually used for GEAR UP).
$213,897.25 in Teacher Quality salaries and expenditures, most of which look like undocumented salary double-dips for Nicole Westerhuis and Stephanie Hubers and inadequately supported payments for the Phelps/Westerhuis American Indian Institute for Innovation and BC Kuhn Evaluation.
$1,262,131.43 in undocumented Teacher Quality grant match, money that apparently should have come from AIII, BC Kuhn, the Rural Learning Center, and Mid-Central. (Interestingly, Mid-Central appears to have squeezed more match than necessary from USD, the Region 3 educational co-op, TIE, and the PAST Foundation.)
$76,208 in unsupported Wakan Gli grant costs.
$277,874 in overstated/miscalculated indirect administrative costs to pay Mid-Central employees for work on multiple grants.
$7,837,967 in illegal withdrawals from Mid-Central’s checking account from January 2007 through September 2015, $1,388,630 of which remains unrestored. Back in Ocotber 2015, shortly after the Mid-Central scandal broke with the Westerhuis murder-suicide-arson, I found the evidence of a fair chunk of those illegal withdrawals in the Mid-Central monthly finance reports from June 2011 through March 2014.
The audit documents on pp. 24–25 the discrepancies in Mid-Central’s FY 2015 annual financial report:
In short, anyone reading Mid-Central’s financials at the end of FY2015 had no idea how much money Mid-Central really had.
The Mid-Central Board of Directors looks at all those findings and says, “Not our fault”:
MCEC takes these allegations very seriously. However, MCEC disagrees with the DLA’s finding of any alleged deficiencies. It is apparent that no amount of reasonable oversight would have detected the complex scheme of fraudulent and illegal activities conducted by Scott and Nicole Westerhuis.
…Scott and Nicole Westerhuis were Platte natives, well respected members of the Platte community, and trusted overseers of MCEC’s financial activities.
Unfortunately, Scott and Nicole Westerhuis were living outside of their financial means. As a result, they engaged in a complex scheme of fraudulent and illegal business activities using their positions at MCEC and AIII. In fact, investigators determined that the scheme devised by Scott and Nicole Westerhuis resulted in them embezzling over $1 million [Mid-Central Educational Cooperative, Response to SDDLA Special Report, 2017.05.17; in DLA audit of Mid-Central FY2015, 2017.05.19, pp. 63–64].
A minor quibble—a lot of the living outside their means was a result of the Westerhuises’ coming up with this brilliant scheme, not the other way around.
The major quibble—Auditor General Guindon isn’t saying Mid-Central needed to engage in fantastic efforts to outfox the criminal masterminds on their payroll. The Auditor General is laying out pretty basic financial expectations: manage conflicts of interest, follow grant rules, make sure every contract and expense goes through the board, and document work and expenses.
But Mid-Central lays out eleven points on the Westerhuises’ masterful, impenetrable deceit to say We didn’t know! We couldn’t know! It’s not our fault! “…[T]here is nothing that the Board could have reasonably done to prevent this complex scheme of fraudulent and illegal activities,” Mid-Central concludes, surely with an eye toward the Black Bear lawsuit seeking to take some money out of their expiring hide.
Just in case anyone still thinks someone should have been able to catch the Westerhuises and Phelps and Huber and Kuhn and other employees in this scam, Mid-Central cites [pp. 60–61the failure of the South Dakota Department of Education to implement proper procedures and controls over GEAR UP identified in the 2014 DLA audit. Mid-Central reminds us that they engaged Schoenfish and Company of Parkston to do their yearly audits (again, with an eye toward that lawsuit and their effort to shift liability to Schoenfish).
And if all else fails, Mid-Central basically shrugs off the Auditor General’s recommendations as moot:
The DLA’s Special Report provides a series of recommendations for MCEC going forward. MCEC and its Board take these recommendations very seriously and thank the DLA for its assistance. However, as of June 30, 2017, MCEC will terminate its provision of educational services to its member schools. Therefore, the DLA’s recommendations for future improvements become moot [Mid-Central, 2017.05.17; p. 67].
Millions of dollars either lost or misaccounted, and Mid-Central says, not our fault, not our problem, we’re outta here.
Remember: our courts wouldn’t be clogged with all this litigation if former Education Secretary Rick Melmer hadn’t farmed GEAR UP out to his friends back home in Charles Mix County over a decade ago. And none of these lawsuits would be happening if current Education Secretary Melody Schopp had acted on the warnings it had of financial misconduct at Mid-Central when she came into office six years ago.
So that’s why Dan and Stephanie never answered my question.
Back in October, I noticed that the monthly balances on the Mid-Central Educational Cooperative financial reports from June 2011 to March 2014 didn’t match up:
In every available financial report from June 2011 to March 2014, the beginning balance does not match the ending balance reported in the previous month’s financial report. For example, MCEC reported an ending balance in January 2012 of $2,396,755.32. MCEC then reported a beginning balance in February 2012 of $2,297,428.29. Apparently, from January 31 to February 1, $99,327.03… moved. Looking at other financial information on the documents available, I can’t tell where.
The beginning balance increases from the immediately preceding ending balance in just one report, June 2012, a gain of $192,442.56. Every other report from June 2011 to March 2014 shows the beginning balance decreasing from the immediately preceding ending balance. The average decrease is $110,807.75. Two discrepancies exceed $400K, in April 2012 and August 2013. The smallest discrepancy is the last, $300, in March 2014, after which these report-to-report discrepancies disappear.
My initial calculation omitted two monthly financial reports that weren’t posted online with the Mid-Central minutes. A month later, when Mid-Central attorney Scott Swier finally responded to my open records request by providing those two missing documents, I found the total balance discrepancies added up to $3,442,649.45.
I sent e-mails to Mid-Central on October 12, October 21, November 13, and November 24, 2015, asking executive director Dan Guericke, interim business manager Stephanie Hubers, and/or counsel Swier for explanations of those balance discrepancies. I received no reply to those inquiries. No one could provide me with any logical explanation for $3.44 million in balance discrepancies other than my conclusion that money went someplace it shouldn’t have.
On February 16, 2016, a month after her resignation from Mid-Central, in an interview with Special Agents John Barnes and Brett Spencer of the Division of Criminal Investigation, Stephanie Hubers confirmed my conclusion. She told Agents Barnes and Spencer that she had overseen unauthorized transfers of Mid-Central funds to cover payroll at the American Indian Institute for Innovation:
Hubers told Agents Barnes and Spencer that she had seen these unauthorized transfers ever since she had begun working for Mid-Central on September 30, 2005. Hubers suspected and Agent Spencer alleges that Scott Westerhuis and his wife and fellow Mid-Central employee Nicole were “skimming off of the funds AIII was taking in to satisfy their own personal needs” (Spencer affidavit, paragraph 69).
Since 2005, the evidence of financial wrongdoing at Mid-Central was right in front of us. It was staring Dan Guericke and board members and Melody Schopp in the face, just waiting for any of them to say, “No, really, Scott, how does this happen every month? Voided checks and journal entries my foot—show us where our money is, now.”
The discrepancies in the Mid-Central financials that I read seemed so big, so blatant, that even I hesitated to post about them when I first noticed them. I thought, “Come on, there must be some simple bookkeeping explanation. Crooks wouldn’t leave evidence this obvious of their crookery.”
I was mistaken. The crooks and their crookery were that obvious. The apparent head crooks are dead and beyond the law, but their assistant Stephanie Hubers now gets a date with the judge.
Related: The AIII website, theaiii.com, is now suspended.
We won’t be hanging GEAR UP on the dead guy. Attorney General Marty Jackley announced this morning in Platte that he has filed charges against and arrested Dan Guericke, Stephanie Hubers, and Stacy Phelps for criminal activity in the GEAR UP/Mid-Central Educational Cooperative scandal. The A.G. lists the following charges:
Daniel Mark Guericke, 58, White Lake, 2 counts of falsification of evidence, class 6 felony, punishable by up to 2 years imprisonment in the state penitentiary and/or $4,000 fine, 4 counts of conspiracy to offer forged or fraudulent evidence, class 5 felony, punishable as a Class 6 felony, with a maximum sentence of 2 years imprisonment and/or $4,000 fine.
Stephanie A. Hubers, 43, Geddes, 1 count of grand theft, class 4 felony, punishable by up to 10 years in the state penitentiary and/or $20,000 fine, 2 counts of grand theft by deception, class 4 felony, punishable by up to 10 years in the state penitentiary and/or $20,000 fine, 3 alternative counts of receiving stolen property, class 4 felony, punishable by up to 10 years in the state penitentiary and/or $20,000 fine,
Stacy Lee Phelps, 42, Rapid City, 2 counts of falsification of evidence, class 6 felony, punishable by up to 2 years imprisonment and/or $4,000 fine, 2 counts of conspiracy to offer forged or fraudulent evidence, class 5 felony, punishable as a Class 6 felony, with a maximum sentence of 2 years imprisonment and/or $4,000 fine [Attorney General’s Office, press release, 2016.03.16].
Information in the probable cause affidavits indicate that former Mid-Central business manager Scott Westerhuis and assistant business manager Nicole Westerhuis stole hundreds of thousands and perhaps over a million dollars from Mid-Central. They died along with their children in a gruesome murder-suicide-arson in the early hours of September 17, 2015, the day after the state canceled the cooperative’s GEAR UP contract.
You can read the full charges and probable cause affidavits detailing the alleged crimes here:
Nicole’s notice appears to have been first published at the end of October, so the four-month window for filing claims closes in late February. Scott’s notice appears to have taken a little longer to hit the papers, so the filing window for claims on his remaining assets appears to be later in March.