'We goofed up'

SHIPROCK, May 22, 2008

BCDS

Manufacturing Inc., the Shiprock-based metal and fiberglass fabrication plant, ended last year $4.7 million in the hole - the result of massive misspending by the former CEO, according to a just-released Navajo Nation audit.

And all the while, neither the BCDS board of directors - which included two high-profile Navajo leaders - nor the Navajo Nation's Division of Economic Development fulfilled their responsibilities to protect the tribe's interests, the report said.

Indeed, the whole misadventure could have been avoided if DED had done basic research on company founder Hak Ghun, a convicted fraudster, the auditors found.

This debt, which was posted Dec. 31, is more than twice the size of the 2006 loan awarded to the company by JPMorgan Chase Bank using tribal funds as collateral.

The report, which was presented to the Budget and Finance Committee during its regular meeting Tuesday, had the delegates deeply concerned.

"This is very disturbing," said Nelson Begaye (Lukachukai/Tsaile/Wheatfields). "It's very awkward where we, the Navajo Nation, had a lot to do with this. Obviously things are messed up here, we goofed up."

The report detailed how mismanagement from both within the company, the tribe and the bank led to the debt, which the tribe must now be address if it does not want to lose its Navajo Dam Escrow Account.

The report was conducted at the request of the committee after several reports of misspending at the Shiprock plant surfaced and after work seemed to slow to a standstill, despite the issuance of the $2.2 million loan. The tribe guaranteed the loan by putting up its escrow account as collateral.

BCDS was established in Shiprock in 2003, in part with a $300,000 investment from the Navajo Nation. In return the tribe received 51 percent ownership with Ghun serving as CEO. The company was to compete for government contracts to construct metal and fiberglass parts.

After a promising start, however, Ghun seemed unable to secure further contracts for government work and other jobs did not materialize either.

He sought the tribally backed loan to retool and expand the facility, he said, to handle contracts that would shortly be signed but never were.

According to the audit, the Navajo Nation was the only one out of the company's four stockholders that contributed any type of financial investment to the venture.

"Bank records show that the Navajo Nation's $300,000 initial investment provided the start-up capital for BCDS," the report states. "We could not identify direct monetary investment from the three other shareholders although they claimed that they made capital contributions to the company."

In an interview with the auditor's office, Allan Begay, director of the Division of Economic Development, said the three other stockholders were issued shares of stock in exchange for their business expertise and connections that could have opened doors to securing contracts for the company. This is a regular practice, he stated in a written response to the report.

The stockholders are, in addition to the tribe and Ghun, two individuals he brought into it, Jerry Dickenson and Ron Fogelman. The report does not specify what services Dickenson and Fogelman contributed in return for their ownership shares.

Dickenson is Ghun's brother and Fogelman is a retired Air Force officer.

Misspending started early

Misspending at the company started almost immediately, according to the auditors.

Of the initial investment by the tribe, auditors could trace $261,817.50 that was deposited into separate BCDS checking accounts. The remaining $38,182.50 was "either cashed out or deposited into another bank account unrelated to BCDS," the report states.

Specifically, $2,000 was cashed out and the remaining amount was deposited into an account unrelated to the company, according to bank records dated December 23, 2003.

The Navajo Nation invested another $11,290 in March 2005, the entirety of which was deposited into a BCDS checking account.

Of the Navajo Dam Escrow loan, the audit reported that only $1.65 million was wired into the BCDS checking account. Most of the remaining amount - $473,000 - was sent to another bank to pay off a BCDS loan. Another $52,500 was sent to BCDS attorney accounts and nearly $17,300 was sent to an interest payment reserve for the loan.

Ghun told auditors that he deposited $1.8 million of his own money, earned in consultant fees, into the company's coffers. However, Ghun could not provide documentation to prove this, the report states.

Still, Ghun "acknowledged treating the corporate bank accounts as his own personal checking account," the report states.

Auditors identified more than $3 million of Ghun's personal expenses that were paid out of the BCDS accounts. This includes $1.5 million in checks made to "cash"; $517,000 spent at casinos; and $434,000 to repay personal loans.

In total, BCDS is almost $4.7 million in debt, though this figure was compiled in December and could be larger now due to interest or penalty fees on unpaid bills.

In addition to the $2.2 million loan, the company owes an additional $2 million to various vendors, $307,000 to the IRS, $57,300 to the Navajo Business Industrial Development Fund and $15,000 for its tribal business site lease.

The IRS has placed a lien on the company for unpaid payroll taxes. The company did deduct such taxes, Social Security and Medicare payments from its employees but did not send them to the IRS, the report states. The lien covers payroll taxes from late 2006 through June 2007.

Tribal officials share blame

Because BCDS is a corporation, a legal entity in itself, normally its stockholders would not be held liable for the company's debts. However, in this case, two stockholders appear to have lost that protection from personal liability, the auditors said.

The tribe is at risk because it guaranteed the loan with JPMorgan Chase Bank by using the Navajo Dam Escrow Account as collateral. Therefore, the tribe is responsible for paying back the bank.

Ghun violated the protection rules by mixing his personal funds with the company's, the report states.

The BCDS board of directors also left itself liable by failing to hold regular shareholder meetings, as mandated by the loan agreement.

The company's 2005 business plan lists the board of directors as Ghun, Dickenson and Fogelman, as well as Economic Development's Begay, Shiprock Chapter President Duane "Chili" Yazzie, and BCDS chief financial officer Lori Todacheene.

In addition to serving on its board, Yazzie has acknowledged receiving at least $20,000 in consulting fees from BCDS for his assistance in setting Ghun up with the Division of Economic Development, but has said he did not see any conflict of interest problems there.

Currently there are two members on the BCDS board, Dickenson and Darrell Smith, according to the auditor's office. The board's acting chair, Ray Benally, resigned last week.

This could all have been avoided had tribal officials properly investigated the background of the BCDS top brass, according to the auditor's report.

Starting with the initial $300,000 investment, the Division of Economic Development did little, if any, research before approving the transaction, the report states.

If the division had performed any type of background check, it would have discovered that Ghun was one of seven individuals convicted of defrauding 1,200 investors out of $11 million by promising big profits in 1984, the report states.

"This information is readily available on the Internet," it states.

Begay points fingers

Begay, the DED director, told auditors that he didn't ask tough questions of Ghun because "he did not want to offend a potential corporation that wanted to bring business and jobs to the Navajo Nation."

In addition, the Navajo Dam Review and Selection Committee also missed its chance to question the three-year gap in Ghun's employment history - during which he was in prison on the fraud conviction - when he and other BCDS officers submitted resumes as part of the loan application process.

That loan package was forwarded to the Budget and Finance Committee, which had a different membership than the current roster, and then to the president's office.

There is no record of anyone in tribal or Shiprock Chapter government challenging Ghun's fitness to handle large sums of the tribe's money until almost all employees had been laid off and signs of life had ceased at the company's Shiprock facility.

JPMorgan Chase Bank did conduct a limited check, but on BCDS as a company, not its individual officers. A spokesperson said the bank considered the loan a low risk because it was backed by the Navajo Dam Escrow Account.

Included in the report are written responses from programs mentioned in the audit, mostly attempting to distance themselves from BCDS.

Most notable was the response from Allan Begay, who questioned why the audit focused on smaller incidents that occurred before the $2.2 million loan was awarded, when the inquiry was spawned by questions about what happened to that money.

The Division of Economic Development had little to do with the loan, but oversaw the original agreement by which the tribe became involved with Ghun and invested $300,000 in BCDS.

Begay accused JPMorgan Chase of ignoring its oversight responsibility. Normally, he said, the bank would set up a controlled account and disburse money based on signed invoices from contractors and owners.

"JPMorgan Chase failed in its fiduciary duty to the Navajo Nation," Begay said. "The bank was lax in its handling of this loan and the reason is that it was completely covered dollar for dollar by the Navajo Dam Escrow Fund."

Begay stated that BCDS was once a growing, thriving Shiprock business that hired 30 people and would still be operating today, "if (Ghun) had not been handed $2.2 million by the bank with no strings attached."

Members of the B&F committee, however, seemed unwilling to let Begay off the hook. The BCDS situation is far from resolved, they noted, as the tribe must repay the loan and also determine what to do with the company.

"I don't think we're ready for a clean slate, we have to clean up this mess first," said Leonard Chee (Birdsprings/Leupp/Tolani Lake). "We have to get away from the person who got us here, I can't even say his name."

Chee suggested the possibility of holding the responsible officials to account, including Begay.

B&F chair LoRenzo Bates echoed the sentiment, particularly attacking the reasoning behind Ghun's assertion that he gave the tribe controlling interest in BCDS in return for start-up money.

"Come on, that was a front," he said. "He was using the Navajo Nation to get government contracts."

The tribe's majority ownership made BCDS eligible for contracts under government set-aside programs intended to benefit disadvantaged minorities.

Bates also targeted Allan Begay, referring to the comment in the report in which he reportedly did not want to offend a potential business partner.

"You should have offended them - we wouldn't be here today," Bates said. "That irresponsibility cost us $4.7 million."

The budget committee requested the Navajo Nation's Department of Justice to draft a written report detailing how the tribe could recoup its losses. Bates said he instructed members not to ask specific questions of DOJ, as that could lead to the need for an executive session.

Bates indicated that he wants discussion concerning BCDS to remain open to the public.

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