One of the few things we learned from the Government Operations and Audit Committee’s mostly toothless hearing on the GEAR UP/Mid-Central scandal was that Scott and Nicole Westerhuis apparently effectively hid and destroyed all records of the first six years of their operation of federal GEAR UP money for the Department of Education.
After skipping most of Thursday’s GOAC session in Sioux Falls to watch her boys’ cross-country meet, GOAC chair Senator Deb Peters asserted at Friday’s meeting that no money was missing from the first GEAR UP grant. But as persistent corruption bulldog and complete thorn in Peters’s side Senator Stace Nelson noted, how do we know no money is missing when DLA didn’t check and when the records apparently all went up in flames in the Westerhuis fire (or to an undisclosed location in that missing safe)?
Remember, Office of Indian Education director LuAnn Werdel said she had concerns about corruption in GEAR UP back at the beginning of 2011. Those concerns had to have arisen during the first GEAR UP grant that the Westerhuises were managing through OSEC. But we can’t check those concerns, because somehow, the state Department of Education allowed financial records for a federal government education grant to be held entirely by private contractors who appear to have destroyed the evidence.
It is expected of auditors to ask questions of employees of the organization they are auditing. In addition, we frequently carry this procedure one step further. As a typical procedure, we routinely drive by the key financial person’s residence or farm in most of our audits. We asked about the gym and other improvements on his acreage. He indicated that [his] mother was helping him financially. According to the Charles Mix County directory substantiated in our audit file, his mother owned 760 acres of farmland. This would certainly indicate financial means for contributing to the improvements on his acreage. As indicated in our original response, the gym was never acknowledged to be an asset of Gear-Up or Mid Central Educational Cooperative by any individual, management or in any representations provided to us by management [Schoenfish & Co., unsigned letter to Department of Legislative Audit and Government Operations and Audit Committee, 2017.09.22].
The average cash rental rate for farmland in Charles Mix and Douglas counties topped out at $157.90 in 2014. That’s $120,000 in rent Ma Westerhuis might have made. She’d have paid some property tax and federal income tax and maybe had five figures left to help her son pay the mortgage on his big, big property.
Questions #15 and 16 ask Secretary Schopp when she became aware of the apparent nepotism in GEAR UP grant director Stacy Phelps’s hiring of numerous relatives, including his aunt Alice Phelps. That nepotism has been widely reported, but Secretary Schopp, who should have access to as much information about GEAR UP expenditures as the rest of us and at least as much interest in figuring it all out, can only say she is “generally aware that some Phelps family members were employed” and claims she is not aware that Alice Phelps specifically had such employment. Schopp questions the accuracy of the premise of these two questions, even though she cites the December 2015 Eide Bailly audit that accounts for the direct GEAR UP employment of the Phelps clan to emphasize her preferred talking point that “there was no missing GEAR UP money.”
Question #17 asks when Secretary Schopp became aware of Stacy Phelps’s connection to the web of shell corporations created by Mid-Central scandal kingpin Scott Westerhuis. Secretary Schopp claims ignorance of that corporate web, even though Bob Mercer reported those curious corporate documents on September 22, 2015, just days after the spectacular Westerhuis murder/arson/suicide launched Mid-Central into widespread public awareness. At that moment, a Secretary of Education in crisis mode would surely have had her staff gathering every bit of relevant information they could. That Secretary of Education Schopp would have ignored the publicly documented existence of those suspicious corporations as one avenue to check for the possible disappearance of state or federal funds is simply incredible.
Reporters seeking to get to the bottom of the GEAR UP/Mid-Central scandal have noted the above details. A Secretary of Education committed to getting to the bottom of the scandal would do the same. Secretary Schopp seems less interested in getting to the bottom of GEAR UP and more interested in getting out from under the scandal.
In over three hours of testimony to the the Government Operations and Audit Committee in Pierre yesterday, Secretary of Education Melody Schopp said none of the money that Scott Westerhuis and his helpers stole from the Mid-Central Educational Cooperative before his spectacular murder-suicide in September 2015 was stolen from the feds or her department:
State government’s Department of Legislative Audit determined $1.4 million was missing after finishing a special review of Mid Central Educational Cooperative at Platte.
Auditor General Marty Guindon released the review May 19.
But Schopp said Monday the money didn’t come from Gear Up funds her department oversaw.
“That is the biggest takeaway—there was no Gear Up money stolen,” Schopp said. “They were not from Gear Up funds, as has been promoted in the last couple of years.”
Secretary Schopp also noted that the feds have accepted the valuation of software used to satisfy GEAR UP grant matching requirements and have not asked the state to pay back any GEAR UP money. That puzzles me a bit, since the state last month sued Mid-Central and its members schools for $4.5 million, largely to recover missing matching funds.
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.
New Hope Christian Camp and Retreat Center, located on the former Westerhuis estate, has undergone extensive renovations and its “retreat center” is nearly complete, likely ready for use by the end of May, according to Daum, with the Platte Area Ministerial Association.
…The Ministerial Association hopes the camp will bring healing for Platte residents who were stunned by what authorities ruled as murder-suicide.
New Hope sits on the land formerly owned by Scott and Nicole Westerhuis, a pair of Platte residents allegedly involved in a string of scandals resulting in the termination of an annual $4.3 million management contract held by Mid-Central Educational Cooperative, at which both were employed. In Sept. 2015, Scott is accused of shooting and killing Nicole and the couple’s four kids, setting the family’s home ablaze and killing himself [Caitlynn Peetz, “New Hope Retreat Center Opening Next Month,” Mitchell Daily Republic, 2017.04.12].
Guericke’s defense attorney, Mike Butler, says his client’s only crime was trusting Scott Westerhuis.
“My client is guilty of trusting Scott and Nicole. He worked there for 16 years; I think everybody trusted him. And he exploited it and when he felt he was going to be exposed, he did the ultimate horrible act. The act of a coward. He killed everybody and then he leaves these people standing in the wake and the Attorney General comes in and says, ‘I need a few more people to pay.’ I think it’s just horrible what’s going on,” Butler said [Angela Kennecke, “Defense in GEAR UP Case Claim They Did What Westerhuis Told Them; ‘Everybody Trusted Scott’,” KELO-TV, 2017.03.16].
Attorney General and gubernatorial candidate Marty Jackley argues that GEAR UP can’t fall on one guy:
“It would not have been possible for Scott Westerhuis acting alone to accomplish all that was discussed over the last two days. It took somebody addressing payroll. It took somebody making invoices, it took somebody finding matching grants; it took somebody testifying in front of the South Dakota legislature. There were a lot of things happening beyond just Scott Westerhuis,” Attorney General Marty Jackley said [Kennecke, 2017.03.16].
The defense is arguing that A.G. Jackley is reaching too far in punishing anyone beyond those already dead for the gross abuse of GEAR UP funds. Some of us will argue that as long as Jackley looks no further than Platte, as long as Melody Schopp remains Secretary of Education in Pierre, A.G. Jackley isn’t reaching far enough.
All bids are online and start closing on Monday, September 12 at 10 a.m. However, Wieman is opening the Westerhuis property south of Platte for inspection of the auction items this week on Wednesday, Thursday, and Friday from 1 p.m. to 5 p.m. You can check out all the items, like this hydrotherapy bed (bid at this writing: $110):
Making us pay for these items feels a bit like the Sioux Nation’s having to buy back Pe’ Sla. But lawyers and contractors need to be paid. So swing through Platte, check out the scene of the crime, and see if you can bear to buy any of the remains of the GEAR UP scandal.
The grimmest sale of the year will take place right around the first anniversary of the grimmest murder in South Dakota. Yesterday Judge Bruce Anderson approved an auction of the loot Scott Westerhuis didn’t set on fire before killing his wife, kids, and himself to escape prosecution for embezzling over a million dollars in taxpayer education dollars. Scott Westerhuis took his family’s lives in the middle of the night September 17, 2015; the estate auction will take place the week of September 12.
As tends to happen in such ugly cases, the people cleaning up the mess are getting compensated before the people who got screwed:
Anderson also approved an initial list of creditors set to be paid back first upon the completion of the auction. He said the couple’s funeral expenses along with compensation for estate representatives and attorneys would be repaid first. Then about a dozen other credit card companies, banks and workers would be repaid. Morgan said she wasn’t sure the funds won at auction would cover all the requests.
“I don’t know if there’s enough to go around here to make everybody completely whole,” Morgan said.
Jim Brenner, an electrician from Armour, sat in the courtroom Thursday afternoon waiting to hear whether he would be repaid for extensive work he did on the Westerhuis’s home in Platte.
When Scott Westerhuis’s murder/arson/suicide launched the Mid-Central/GEAR UP scandal to the front pages, I immediately noticed the suspect business manager’s small web of corporate entities. The thinnest strand of that web appeared to be the Chita Corporation, about which I wrote on September 22, 2015, this simple sentence: “Westerhuis formed Chita Corporation in 2012, named himself and his wife Nicole as officers, and filed one annual report, his 2013 report in October 2014.”
Chita Corporation did not pop up in any of other Mid-Central or GEAR UP documents.
But now I’ve found one document—just one, that clarifies two things about Chita Corporation.
First, the spelling is actually ChiTA.
Second, Westerhuis formed this corporation to build man camps in the Bakken oil fields of North Dakota. ChiTA proposed building a 100-unit camp in Watford City, ND, and a 250-unit camp outside of Minot, SD. ChiTA proposed to differentiate itself in a marketplace marked by barracks-style lodging with stick-built modular homes featuring private living quarters and, at the Minot facility, a two-unit automatic truck wash.
To make these two camps happen, ChiTA just needed $18 million.
My humble Googling finds no information indicating that ChiTA Corporation ever obtained funding for or built its man camps. The ChiTA document trail, consisting of no more than the 2013 annual report filed in 2014 with the South Dakota Secretary of State and no business records for ChiTA in North Dakota’s registry, suggest that ChiTA never got into the oil field housing business. If that’s the case, Westerhuis may have spared himself another financial debacle: by September 2015, the crash in oil prices had turned the Bakken man camps to ghost towns.