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Audit blames Westerhuises, Mid-Central board for embezzlement scandal

Nearly $1.4 million in missing money from the Mid-Central Educational Cooperative bank account could have been avoided through better oversight by the co-op’s board, a South Dakota Department of Legislative Audit report stated Friday.

According to the lengthy report, Scott and Nicole Westerhuis made $7,837,967 in unauthorized withdrawals from the Platte-based cooperative’s bank account, which was distributed through three nonprofit organizations. Of the $7.8 million, $1,388,630 was not returned to the Mid-Central (MCEC) account.

And the state Department of Legislative Audit (DLA) put much of the blame on Mid-Central’s governing board consisting of representatives of member school districts and former Mid-Central Director Dan Guericke, who is facing criminal charges for his alleged involvement in the embezzlement scandal.

“Inadequate financial oversight allowed Scott and Nicole Westerhuis to conduct the financial affairs of these organizations in an environment which lacked proper financial controls and accountability,” states the report. “As a result, MCEC suffered significant financial loss and unsupported expenditures for federal programs it was responsible for administering.”

The report comes nearly two years after Scott Westerhuis allegedly killed his wife and four children before killing himself and setting their Platte home on fire in September 2015, mere hours after the South Dakota Department of Education informed Mid-Central it was considering terminating its partnership with the co-op to administer Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP) funding.

To help administer the funding, Mid-Central partnered or contracted to organizations in which the Westerhuises are believed to have funneled money through. The DLA reports again pinned the blame for not identifying the risks on Guericke and the Mid-Central governing board.

“Neither the Director of MCEC nor the Governing Board identified the risks presented by these conflicts of interest and thus failed to provide adequate oversight of the financial affairs of MCEC as it related to money passed through AIII, OSEC and OSDEC,” states the report, referencing multiple agencies that partnered with Mid-Central.

In response to the report, Mid-Central placed all of the blame on Scott and Nicole Westerhuis and their various efforts of “deceiving the Board.”

“Unfortunately, Scott and Nicole Westerhuis were living outside of their financial means,” states the Mid-Central response. “As a result, they engaged in a complex scheme of fraudulent and illegal business activities using their positions at MCEC and AIII.”

While the DLA report offered several recommendations to Mid-Central to improve financial oversight, Mid-Central noted how the recommendations will not be needed, although the response says they take the suggestions “very seriously.”

“However, as of June 30, 2017, MCEC will terminate its provision of educational services to its member schools,” states the Mid-Central response. “Therefore, the DLA’s recommendations for future improvements become moot.”

Who did what?

Mid-Central’s response also indirectly connects the dots between Nicole Westerhuis’ initial employment date in 2009 and the commencement of the alleged fraudulent activities in 2010. And in an attempt to hide their alleged fraudulent activities, then-business manager Scott Westerhuis and assistant business manager Nicole Westerhuis used between $40,000 and $150,000 of Mid-Central money on a monthly basis.

Another Mid-Central employee is believed to have been paid to remain silent on the Westerhuises alleged illegal dealings, although the report doesn’t specify who received the hush money.

“(Westerhuises were) Deceiving the Board by paying an MCEC employee additional income (“hush money”) because Scott Westerhuis feared that the employee would inform the Director and the Board of his fraudulent and illegal activities,” states the Mid-Central response. “At no time did the Board have knowledge of these fraudulent activities.”

Since the death of the Westerhuis family, a long investigation resulted in charges against three Mid-Central employees, Guericke, former assistant business manager Stephanie Hubers and Stacy Phelps, who served as CEO of the American Indian Institute for Innovation (AIII) that helped administer GEAR UP funds. Guericke and Phelps were charged with altering and backdating Mid-Central contracts, while Hubers is accused of accepting more than $50,000 to conceal information about the alleged embezzlement by the Westerhuises.

According to the DLA report released Friday, the Westerhuises and Phelps collectively received $1,490,398 from nonprofit organizations from 2009 to 2010, supplementing the trio’s collective salaries of $1,064,322.60

Despite the evidence highlighted in the DLA report, Mid-Central says its board did all it could to avoid financial misdealings. The cooperative claims its board took every reasonable precaution, including a yearly audit from Parkston-based Schoenfish & Co., to oversee its finances.

“There is no basis to conclude that the Board could have detected the complex scheme of these fraudulent and illegal activities based upon the deceitful conduct of Scott and Nicole Westerhuis and the Board’s reliance on professionals who were retained to annually review MCEC’s financial records,” states Mid-Central’s response.

Scott and Nicole Westerhuis were “well respected” in the community prior to the alleged murder-suicide in 2015, according to Mid-Central’s response, and were trusted overseers of Mid-Central’s finances. But the DLA report states that a board’s trust in its financial overseers should not be “absolute.”

“Governing boards and management of organizations must place a certain level of trust in the people who are employed to administer and provide financial accountability for their organizations. However, this trust cannot be absolute,” states the DLA report.

But the pair are believed to have facilitated millions of dollars worth of grant funding that was unsupported by the federally required 50 percent match in cash or in-kind donations to the accepting organization.

According to the report, $4 million in matching funds associated with software provided by Microsoft were not matched by cash or in-kind donations, and $65,000 in payroll charges to the GEAR UP program were not adequately supported. Another $1.34 million in unsupported funds were funneled through Mid-Central for a teacher quality grant, as well as $221,271 for a Wakan Gli grant from the federal government.

Guericke, Phelps and Hubers now await jury trials in Charles Mix County, although Guericke and Hubers have motioned for a change of venue.

As the lead partner in administering GEAR UP funds, the state Department of Education says it has taken additional precautions to avoid further issues.

“In order to insure that students continue to receive services, the Department is partnering with the South Dakota Board of Regents (BOR) to continue activities under the Gear Up grant and is working closely with the individuals involved to make sure they are aware of all federal requirements and insure they are being followed,” the DOE wrote in its response to the audit.

Mid-Central board members at the time of the Westerhuises death

The DLA report states “inadequate financial oversight” from the Mid-Central governing board resulted in “significant financial loss” for the cooperative. The following representatives served the board at the time of the Westerhuis family’s death, according to the 2015 Mid-Central audit:

  • Tina Westendorf — Armour
  • Brandon York — Burke
  • Pamela Haukaas — Colome
  • Nicole Bamberg — Corsica
  • Tim Neugebauer — Ethan
  • Sharon Pederson — Gregory
  • Todd Reinesch — Kimball
  • Ryan Youngstrom — Mount Vernon
  • David Merrill — Plankinton
  • Tammie Olson — Platte-Geddes
  • Lloyd Persson — Stickney
  • Tonya Aldrich — Wessington Springs
  • Jim Munson — White Lake
  • Richard Peterson — Wolsey-Wessington