Auditor General Finds Millions in Stolen or Miscounted Money at Mid-Central

Beleageured Co-op Denies Responsibility, Exits Stage Left

The Department of Legislative Audit has released two important documents: its audit report for the Mid-Central Educational Cooperative for Fiscal Year 2015 and its special review of the scandal-doomed Platte organization.

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:

Auditor General, MCEC audit FY 2015, 2017.05.19, p. 24.
Auditor General, MCEC audit FY 2015, 2017.05.19, p. 24.
Auditor General, MCEC audit FY 2015, 2017.05.19, p. 25.
Auditor General, MCEC audit FY 2015, 2017.05.19, p. 25.

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.


37 Responses to Auditor General Finds Millions in Stolen or Miscounted Money at Mid-Central

  1. How much of this was funneled into the deep pockets of corrupted politicians at the state level?

  2. mike from iowa

    Wasn’t there a Dakota blogger that ran some raw numbers from the reports issued by Mid-Central and found much moola unaccounted for? A Cory someone or other?

  3. this sounds familiar. Regent’s EB5’s Joop whoever: “no amount of reasonable oversight would have detected the complex scheme of fraudulent and illegal activities conducted by THE JOOPSTER.”

    Rounds and Daugaard along w/ Jackley, Tidemann, maybe even Krebbs, dodging oversight responsibility. Instead we elect them to higher office, not asking them the hard questions. Republican oversight means cover-up.

  4. What I like about the whole thing is this, they blame the whole thing on the murdered guys. EB5, Benda, Gear up The Platte Dude. Always the murdered dude gets the blame, with the same investigative team. We need a tee vee series called CSI, South Dakota with that https://www.youtube.com/watch?v=gP3MuUTmXNk thingy. There is plenty of material to last several seasons.

  5. All I can say Cory is that this is not a political problem. It is a criminal problem. This is not going to be solved by a blog or a political party. This state is out of control and we need help and we need to ask for it.

  6. Porter Lansing

    Good one, Jon H

  7. Looks like the MCEC Board attended the Rounds-Jackley School of Scandal Obfuscation and Deniability. Why am I not in the least surprised? This is what happens when one party has complete stranglehold control on an entire state. “Personal responsibility” is for the other guys in the other parties, not them. Ditto for prudence with taxpayer money and small government.

  8. mike from iowa

    Jokely takes your kind words to heart, Laurisa, and kindly reminds all South Dakotans to be sure to vote for him for Guv.

    I’m sure he is just what’s needed to put an end to all the creeping cronyism one sees in South Dakota’s gubmint. If he can’t or won’t do it, maybe the next one or the next one will.

  9. Was this a “forensic” audit like everybody was screeching for, or do we need another one that includes the Education Department and Grants Department?

  10. South Dakota should just be banned from Federal Grant money for a long time until they clean up their act.

  11. Porter Lansing

    Good one, Jenny. Maybe a commission to monitor the top ten most corrupt states access to grant money until they’ve proven they belong with the honest states.

  12. Roger Elgersma

    To many people working together for it to be just on to blame.

  13. Ms. leslie has a fresh new idea…what if Ms. Krebs is involved? I’m not sure how she would be, but let us not put it past those who are in charge to have parties and breakfasts where the Education Department and the Secretaries like Ms. Krebs are all invited and these things are talked about.

  14. South Dakota farmer

    What did lance witte get payed. And did he get payed from aiii and midcentral

  15. There were two audit reports issued on Friday by the SD Auditor General, Marty Guindon and the SD Department of Legislative Audit (SD DLA). One was the 2015 Audit Report for Mid Central, which was prepared at the request of Mid Central. The other was the multi-year “Special Review” on Mid Central’s handling of federal funds, including GEAR UP.

    The “Special Review” appears to be what I’ve hear described as “agreed-upon procedures,” where an auditor focuses on a specific portion of a client’s financial operations in detail. In other words, a forensic audit of part of the records rather than the records of the entire organization.

    Since SD DLA was already doing the Special Review, MCEC requested that it also perform a 2015 audit of all MCEC operations, not just those involving federal grant funds. This was done in a second, separate report.

    KELO-TV made a very important point when it highlighted a paragraph from Appendix B of the SD DLA’s Special Review:

    “Since key employees of MEC were also in compensated officer positions of AIII, a significant subrecipient of GEAR UP pass-through funds, there were significant risks that needed to be addressed by specific subrecipient monitoring procedures at the DOE and MEC. Procedures implemented by the DOE did not address these risks and as a result, the DOE exposed itself to potential violation of federal regulations, and an increased risk of fraud, waste, and abuse of grant funds.”

    This appendix came from the state’s 2015 Single Audit Report, submitted by Jason C. Dilges, Commissioner of the Bureau of Finance and Management and Martin L. Guindon, Auditor General
    Department of Legislative Audit

    In this document, state officials officially criticize the SD Department of Education as well as MCEC for misadministration of SD GEAR UP.

  16. Is this new news or just the old news being reported again, Mr. Wyland? In any case, I am sure the Education Department has learned a good lesson, although somewhat surprised that Mr. H hasn’t interviewed many of their staff. Or maybe he has and he’s waiting to write a blog about the state parts that you point out after this blog about the MCEC parts. There is likely little else to learn about this whole sad tale.

  17. Grudznick:

    It’s both old and new, in that a credible source (SD DLA) gives specifics about problems we already knew about generally and which others (including me) had already been talking abut based on our own review of public documents (and, in my case, making public a key document, the 2005 SD GEAR UP application and the circumstances of its drafting, that no one had been able to find).

  18. mike from iowa

    6 people are dead, Grudz because of what went on behind the scenes. Since none of the deceased were Education Department members what kind of lesson did they learn-that you are an insensitive lout?

  19. mike from iowa

    So the audits basically said it was the lack of oversight of oversightofoversightofoversight……sounds like a South Dakota government broken record.

  20. Mike:

    Yes, but what the reports don’t say is that the federal government should never have awarded the 2005 GEAR UP grant to South Dakota. SD’s application quality was poor, hastily prepared, and noncompliant in the area of matching funds. The 2011 award was made despite the annual evaluations written for MCEC and the state (as grantee) by Brinda Kuhn. There’s more than enough blame to go around to the individuals involved as well as to the state and the feds themselves.

  21. mike from iowa

    Mr Wyland, I have zero doubts that South Dakota should ever receive another grant without wholesale government changes.

  22. South Dakota has continued, and will continue, to receive all kinds of federal grants regardless of what happens with SD GEAR UP. The reasons why could fill a mini-essay and have almost nothing to do with the state of South Dakota; they would apply equally to any other state government.

  23. Hmm… if the current administration can make a case for denying federal funds to local governments for refusing to take on law enforcement duties that the Constitution says belong to the feds, then the current administration could more easily make the case for denying federal funds to a state that has failed to properly execute duties that do belong to the state to oversee grant money.

  24. It would seem so, but remember that the law enforcement restrictions refer to a specific and limited provision of the Code of Federal Regulations (CFR), while what you propose would apply to thousands of programs across all Cabinet departments. Each of those programs has its champions, inside the executive branch, in Congress, and from lobbying interests and stakeholders.

    US Supreme Court precedent (a South Dakota case dealing with the 55 mph speed limit, in fact) prohibits the federal government from broad denial of federal support to states based on a state’s refused to abide with a specific federal demand. It was this precedent that invalidated the compulsory nature of Medicaid expansion in the Affordable Care Act.

  25. So, at peril of dragging my own thread off topic, Michael, does that same precedent block Trump from cutting off aid to sanctuary cities?

  26. Michael L. Wyland

    Cory:

    Yes and no. It stops him from withholding most funds, but he (i.e., the federal government) *can* legally withhold some law enforcement and criminal justice funding directly related to immigration enforcement and federal-local cooperation.

  27. Porter Lansing

    This Sanctuary City attack has become a paradox. I proudly live in a sanctuary and I’m very close to things on the west coast. Just as SoDak and the red states can stomp their feet and stubbornly refuse to accept the Medicaid expansion, even if it hurts your residents, we in the blue states can stomp our feet and stubbornly raise our own money to offset the loss of fed funds (if necessary) to insure that our residents are taken care of.
    And that’s the difference between social conservatives and liberals, isn’t it?
    Selfish vs Compassionate …

  28. Don Coyote

    @MW: “US Supreme Court precedent (a South Dakota case dealing with the 55 mph speed limit, in fact) prohibits the federal government from broad denial of federal support to states based on a state’s refused to abide with a specific federal demand. It was this precedent that invalidated the compulsory nature of Medicaid expansion in the Affordable Care Act.”

    I believe the South Dakota case was Dole vs South Dakota and it dealt with the minimum drinking age not the 55mph speed limit. SCOTUS established a five-point rule for withholding Federal funds for non-compliance of a Federal statute.

    1) The spending must promote “the general welfare.”
    2) The condition must be unambiguous.
    3) The condition should relate “to the federal interest in particular national projects or programs.”
    4) The condition imposed on the states must not, in itself, be unconstitutional.
    5) The condition must not be coercive.

  29. I agree with most of the comments here except for Grudz! No surprise there!

    I read through pgs. 24-25 posted above. Aside from a basic high school bookkeeping class, I have no special training in accounting. That said, I only had to read a few lines to say they cooked the books! How anyone who had even the most basic knowledge of accounting couldn’t possibly claim that it was some complex, convoluted scheme that no one could have discovered is the most ridiculous, deceitful, self-serving crock I can imagine!

    No wonder the legislature was in such a hurry to repeal IM 22! If the trail of corruption from EB5 and Gear UP and who knows what all else eventually leads to higher ups or other branches of government, other heads could roll. Oh, considering all the dead bodies already, perhaps I shouldn’t use that phrase! But on the other hand, perhaps that’s part of the fear that keeps everyone quiet!

  30. Mr/s. CLCJM, I’m sorry we disagree, but that’s OK. Alternative points of view should be welcomed and embraced, for they can grow your mind wider when you are confronted.

    What “higher ups” might this lead to? I fear outside of the 3 people currently charged and the people who are so unfortunately dead we have heard no names of even “lower downs” in the government that might be into this tightly. Do you have any ideas of the “higher ups” or the “lower downs”?

  31. I just find it odd that so many “higher ups” that should have caught the embezzlement/misappropriation of million$ had no idea! And since yuuuge amounts of the money is still unaccounted for, it makes me very curious where all of it disappeared!! Somebody benefited from it!

  32. I am confused as to who is higher up than the head of the MCEC place? Are there government officials you believe were ordering these perversions and you think they have freezers full of cash in their garages? Who might these government officials be, and why are they “higher up” than the head CEO fellow from MCEC? Just complaining about “higher ups” is like Ms. Hubbel wearing a tin-foil hat complaining that the government is into mind controlling bill boards aimed at babies. It sounds neato, but it’s just insaner than most.

    Who are these “higher ups?”

  33. I have a theory that “lower downs” were in on it and the “higher ups” really have no idea. My theory involves the missing moola being spread across several different families of “lower downs” and used to buy scratch tickets in an organized campaign, but spread across multiple convenience stores so the Lottery Cops don’t catch on. Theory 1B is the money was used by a single, very large extended family to buy up every combination of lottery tickets conforming to a pattern based on horoscopes of the “lower downs” birthdates. This one is still waiting to pay off but is looming out there, and that’s why we can’t find the moola that is missing. The lottery has it and paid it to teachers!

  34. Don Coyote is correct. See: https://en.wikipedia.org/wiki/South_Dakota_v._Dole

    My apologies for the error.

  35. mike from iowa

    I believe the very same case Mangy Coyote sites will determine that Drumpf can’t withhold funds from Sanctuary cities.

  36. mike from iowa

    Oh what a kick in the ass we get
    when Drumpf’s Executive Orders are all wet

  37. ICYMI, I was interviewed by KELO-TV’s Angela Kennecke on Monday about GEAR UP and the Special Review report:

    http://www.keloland.com/news/article/investigates/expert-state-of-sd-should-never-have-received-gear-up-grant-in-the-first-place