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May 19, 2017 06:19 PM

Searing Report Confirms Misdoings, Fraud And Conflicts In GEAR UP Scandal

Published at 1:24 PM | Last Updated: 6:20 PM

A new audit from the Auditor General's office shows that Scott and Nicole Westerhuis took nearly $8 million out of Mid Central Educational Cooperative's bank account without authorization to cover the salaries of their non-profit organizations. While most of that money had been returned to Mid Central, $1.4 million was still missing at the time of the Westerhuis family's deaths.

Six days after the Westerhuis murders, suicide and fire, KELOLAND News Investigates uncovered that Scott Westerhuis was controlling several non-profit organizations that took grant money, while he was serving as Mid Central's business manager.  

The special report by the South Dakota Department of Legislative Audit followed the GEAR UP grant money to Mid Central and beyond and finds that the Mid Central Board and its director, Dan Guericke, didn't have enough oversight over what was going on. Auditors also noted that the board never addressed the risks created by Scott and Nicole Westerhuis having roles in the non-profits that took the GEAR UP grant money. Friday's audit report confirmed that Westerhuis was taking and receiving the grant money, while also accounting for it all.  

Those conflicts of interests were also never disclosed in Mid Central's financial statements. Guericke told auditors he believed that Westerhuis was a financial advisor or consultant to the American Indian Institute for Innovation. Westerhuis was the chief financial officer and Stacy Phelps was the chief executive officer of AIII. However, the audit says Guericke didn't get approval by the board for 17 contracts and payments made without contracts.

According to the audit papers, Mid Central's board is putting the blame back on the South Dakota Department of Education, which was the "lead partner" in the GEAR Up grant and responsible for ensuring the project was carried out in accordance to federal rules and regulations. The board also says that, "no amount of reasonable oversight would have detected the complex scheme of fraudulent and illegal activities conducted by Scott and Nicole Westerhuis."


The state's Department of Education says it did its job of conducting reviews of grant expenses and tightened up its controls when it began noticing issues in 2014. It points to the fact that the lack of controls and oversight as well as conflict of interest led the department to cancel its contract with Mid Central to run the GEAR UP grant program shortly before Scott Westerhuis murdered his family and burned down their home near Platte in September 2015. 

The DOE also says it has made a number of changes, including requiring grant recipients to submit conflict of interest policies and disclose related parties. 

The auditor general's report points to Mid Central's own policies which prohibit employees from having conflicts of interest. KELOLAND News Investigates first told you about Mid Central's policy on that in 2015. 

The audit also shows that Scott and Nicole Westerhuis, along with Stacy Phelps, were compensated not only by Mid Central, but also their various nonprofits, which amounts to double-dipping. 

A chart in the report shows that those three employees made as much as $170,000 a year each, although the chart does not identify which one is the Westerhuises or Phelps:

Auditor General Marty Guindon tells KELOLAND News that's because of confidentiality of employee payroll amounts for private organizations. The audit says Mid Central over billed the DOE by $278,000 for salaries and benefits for various grants. 

The special report also said that Mid Central should also have made sure that the American Indian Institute for Innovation was in compliance with federal laws because it was technically a sub recipient of the GEAR UP grant. The audit says AIII should have been subject to a state audit when it got more than $500,000 in grant money from 2012 to 2014. However, it was not. Guericke and Phelps are accused of altering contracts to help AIII avoid such an audit. The report says AIII had poor financial record keeping and never underwent any sort of financial audit. 

Terry Eckstaine took early retirement from the Tri-Valley School District and is now Ethan's superintendent. According to IRS returns from American Indian Institute for Innovation, Eckstaine was being paid $78,000 a year as a superintendent with AIII. In 2015, Mid Central's attorney told KELOLAND News that Eckstaine's salary as Ethan's superintendent was being paid for by AIII. However, while Eckstaine believed he was being paid by AIII, the auditor's report says the money was actually coming from Mid Central's checking account.

Now the report reveals that Eckstaine told auditors that Guericke suggested the arrangement. The audit report says that because the board knew about Eckstaine's contract, it should have known about Mid Central's role with AIII, as well as with the Scott Westerhuis' and Phelps' roles as CFO and CEO with the organization.

In November of 2015, KELOLAND investigates discovered that the Mid Central Business Manager played three roles in handling the GEAR UP money- all three conflicted with one another.  He was the Chief Financial Officer for the American Indian Institute for Innovation.  The South Dakota Department of Education also knew he was the Budget Specialist for GEAR UP, a full-time position that paid about $50,000 a year.  

But in Friday's report, former Mid Central Director Dan Guericke told auditors that he thought Westerhuis was a consultant or advisor for AIII.  

But according to Federal Compliance Audit findings from 2013 through 2015, the Department of Education knew that key employees of Mid Central were officers of AIII and that there were "significant risks" that needed to be addressed because of that.  The Federal audit says that "procedures implemented by the DOE did not address these risk 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.  
 
Former Mid Central Assistant Business Manger Stephanie Hubers and two other Mid Central employees reportedly received $119,000 in payments from AIII on top of their salaries from Mid Central. The audit says there is no evidence any work actually performed for AIII. Six other Mid Central employees reimbursed by Westerhuis non-profit organizations, but no also had contracts for services. Mid Central says Westerhuis was running its financial affairs "like a pyramid" with Scott Westerhuis as the "ultimate decision maker." And it denies knowing of any of these activities. The board says Scott and Nicole Westerhuis would "blatantly lie" to the board about financial discrepancies.

Hubers is facing trial on charges she helped the Scott and Nicole Westerhuis cover their tracks and took $55,000 in hush money. 

The report also finds that the Microsoft software known as DreamSpark — which was valued at $4 million — was never used in the GEAR UP summer program at the South Dakota School of Mines and Technology, or at the schools where the GEAR UP programs were supposed to be implemented. That $4 million valuation was the state's match for federal dollars in the grant program and now the South Dakota may have to pay the feds back for that amount. The software amount accounted for one-third of the federal funding for two years. The audit also finds that $165,000 in payroll match for teachers isn't allowable because they never worked on the GEAR UP program.

The Department of Education says any amount that can't be documented to the feds will be calculated at the end of the grant program, which runs through 2018. 

The auditor's report also finds that the documentation of the GEAR UP grant was still better than other grant programs being run by Mid Central. For example, the report cites $1.4 million in spending for the Teacher Quality grant that isn't documented and isn't allowed, as well as $200,000 for the Wakan Gli grant that isn't documented. 

Grant evaluator Brinda Kuhn made more than $1 million in salary from the various grants administered by MId Central. Kuhn served as the grant applicant writer, administrator and evaluator of many of those grants, including GEAR UP, which the auditor's report says is a clear conflict of interest. Kuhn never had any contracts for her work and it was never approved by Mid Central's board. The report also says Mid Central didn't have any competition when it came to awarding contracts or services to vendors. 

Guericke, Phelps and Hubers are all set to go on trial later this year in the GEAR UP case. No trial date has been set yet. 






As of June 30, 2017, Mid Central will shut down. 12 of its 13 member have formed Core Educational Cooperative. 

In response to the Department of Legislative Audit report, the South Dakota Department of Education issued this statement: 


We are reviewing the document carefully, and as appropriate, will be working to resolve any outstanding issues. The report shows the lengths to which Scott Westerhuis went to conceal his activities. 

Mary Stadick Smith
Director of Operations and Information
South Dakota Department of Education



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