Plenty of blame in BCDS boondoggle

WINDOW ROCK, May 29, 2008

T

he council's Economic Development Committee grudgingly voted Wednesday to accept a report from the auditor general that explains how the tribe got taken for close to $5 million by a convicted fraud artist.

But the delegates insisted that blame for allowing the rip-off to occur should be more widely spread.

Committee members said the report - detailing massive misspending by the former CEO of a Shiprock-based manufacturing company - places too much blame on themselves and the Division of Economic Development.

The auditors overlooked the Budget and Finance Committee and the offices of the president and controller, who all played an oversight role as well, they said.

BCDS Manufacturing Inc. is now $4.7 million in debt and is not generating any income, jeopardizing a sizeable tribal trust fund that had been pledged as collateral for $2.2 million of the debt.

"I can't help but wonder why you stopped with the economic development office," Katherine Benally (Dennehotso), EDC vice chair, asked of the auditors. "There are other people and committees just as much at fault, if not more. It's only right if all of us are held responsible."

Benally said she once supported BCDS. However, that has changed in light of the full report.

"I feel ashamed," she said.

The Division of Economic Development and the Economic Development Committee were responsible for the original $350,000 in grants given to start BCDS, a metal and fiberglass fabrication plant that was to employ 30 Navajos and fulfill federal defense contracts.

However, the committee members said neither they nor DED had much to do with the $2.2 million tribally backed loan that was intended to enable the company to expand, and which auditors say was squandered by former CEO Hak Ghun.

According to the report, Ghun admitted to auditors that he used the BCDS checking account for his own personal use, spending more than $3 million on casino gambling and to repay personal loans, among other things.

Ghun, who had served three years in prison on a federal fraud conviction in the 1980s, approached Navajo leaders in 2003 with a proposal to establish a joint venture based on technology he and his brother had developed for military contract work.

The tribe would be majority owner, with 51 percent, and this would enable the company to compete for contracts set aside for businesses owned by disadvantaged minorities. In return, the tribe provided a $300,000 startup grant.

Ghun subsequently sought a $2.2 million loan to expand the business, and asked the tribe to pledge its Navajo Dam Escrow Trust Account as collateral. The BCDS loan obligated almost all of the money in the account, which is intended to fund economic development initiatives on Navajo land.

The auditors found that BCDS earned revenues of a little over $1.4 million during its four years of active operation, which ended in 2006.

The report said tribal officials had failed to perform due diligence before entangling the tribe with Ghun, and that information on his criminal record was easily available on the Internet.

In addition, local newspapers were publishing front-page investigative reports on Ghun's background once he began seeking the expansion loan.

The auditors also faulted JPMorgan Chase Bank, which issued the $2.2 million loan, for not asking more questions.

Bank officials said they looked at the company but did not do a background check on the principal officers. They acknowledged that they relaxed their usual standards because the loan was fully backed by the Navajo Nation.

Allan Begay, Division of Economic Development director, was singled out for criticism by the Budget and Finance Committee when it accepted the same report a week earlier.

Begay said he will take responsibility for his part in the debacle, but said there is plenty of blame to go around.

"I don't mind being held accountable for the mistakes that I and the division staff have made," Begay said. "I have taken a lot of bullets on behalf of Hak Ghun."

According to the report, Begay told an auditor that his office did not thoroughly conduct background research on Ghun because he "did not want to offend a potential corporation that wanted to bring business and jobs to the Navajo Nation."

Begay told the committee Wednesday that Ghun came from "a good family" in Durango, Colo., where Ghun's mother is a long-time restaurant owner.

In addition, Ghun used the tribe's $300,000 investment to transform an unused wool warehouse - another economic initiative of the tribe that fell apart because of incompetent and inattentive leadership - into a fully functioning manufacturing facility.

"The assumption was that he generated funds using his own resources," Begay said. "He lived up to our expectations at that point in time."

Begay also claimed that BCDS was doing fine before it was awarded the $2.2 million loan, although in previous updates to council committees, tribal officials reported that workers had deviated from specifications on one government contract, delaying its completion and potentially jeopardizing future contracts.

In addition, during this time Ghun filed an untruthful application while seeking to qualify BCDS under a program of the Small Business Administration. He left a blank where asked to list any criminal convictions for company officers.

Begay, however, placed the main blame for loss of the $2.2 million on JPMorgan Chase Bank, saying that it should have kept tighter control on the money.

Because there were virtually no strings to that loan, Ghun mismanaged the funds and the business slowly dissolved, he said.

Auditors totaled over $3 million in personal spending by Ghun, but the biggest chunk - nearly $1.5 million - was in cash withdrawals for which there is no clear explanation.

Over $500,000 can be traced to casinos and he also spent $13,494 on golf, the auditors found. He used another $433,526 to repay personal loans.

Ghun was removed as CEO in October and his current whereabouts are unknown.

Auditor General Elizabeth Begay countered that BCDS was not, in fact, doing well before the $2.2 million loan was awarded. The company had all of $790 total in its accounts, she said.

The Economic Development Committee also trained its sights on the people who signed off on using the dam escrow account as collateral for the loan.

It directed DED to determine if the tribal council can remove members of the Navajo Dam Escrow Account Review and Selection Committee, which reviews all proposals to use funds in the account.

"Why should we sit here and say, 'OK, let's let this happen again,'" Benally said. "That body should be reviewed and corrected."

In addition, the committee asked the auditor general to revise the audit recommendation that DED should take the lead in seeking legal advice on liability protection and how to best recover misspent funds. This portion focuses too much on the DED and not enough on other offices, members felt.

"This audit is not correct," said Lawrence Platero (T—hajiilee), committee chair. "It lays all the blame on DED. The division was responsible for $350,000, other folks are responsible for the rest."

Therefore, the recommendations should expand to include these other offices, Platero said.

However, the audit recommendations focus on what needs to be done to correct the governmental systems involved, Begay said. Most of this will fall under the DED.

Begay said her office is currently preparing a corrective action plan that would detail how to fix the problems incurred by BCDS. The report is due June 19.

The committee also met in executive session with lawyers from the Department of Justice, the agency that would advise on any criminal charges to pursue, among other legal matters.