PLATTE, S.D. (CN) - Although the prime suspect in a misappropriations scandal surrounding a South Dakota education program is dead, state prosecutors charged two men and a woman accused of involvement in the scandal and cover-up.
GEAR UP is a national program meant to increase graduation and post-secondary education in impoverished communities by funding middle and high schools as well as college scholarships, according to the U.S. Department of Education.
The $4.3 million in grant money South Dakota received was specifically approved for use on the state's poor Indian reservations.
The program attracted national attention when its administrator, Scott Westerhuis, shot himself on Sept. 17, 2015, after killing his wife and four children and setting their house on fire.
"There has been a tragic loss of a young family and financial decisions made affecting funding set aside for important purposes including Native American children," Attorney General Marty Jackley said in a statement released Wednesday. "As Attorney General, I will continue to address what has happened with state, federal and local authorities and restore the public's trust."
According to an affidavit filed by John Barnes with the South Dakota Division of Criminal Investigation, "A financial investigation ensued after discovering that Scott Westerhuis was the business manager at Mid Central Education Cooperative (MCEC) and [his wife] Nicole Westerhuis was the assistant business manager at MCEC. The timing of the Westerhuis family deaths was linked to departments with the State of South Dakota inquiring into the financial and business practices of MCEC."
South Dakota had awarded a contract to MCEC to administer the GEAR UP program. The MCEC then subcontracted with the American Indian Institute for Innovation (AIII), an organization in which Westerhuis held the position of chief financial officer, with his wife assisting him.
Although the investigation is ongoing, Barnes says that it has revealed that "Scott and Nicole Westerhuis utilized their financial oversight positions in [seven] corporations to conduct illegal activity; specifically, grand theft exceeding hundreds of thousands of dollars and potentially exceeding one million dollars."
An affidavit from special agent Brett Spencer added, "During the investigation, law enforcement learned through interviews, subpoenaed records and records recovered during the execution of search warrants that Scott and Nicole Westerhuis were living outside of their financial means . . . [They] were engaged in fraudulent and illegal business activities utilizing their positions at Mid Central Education Coop (MCEC) and their positions within American Indian Institute of Innovation (AIII)."
Stephanie Hubers, assistant business manager with MCEC, told Spencer that Westerhuis regularly asked her to advance money from MCEC to cover payroll for AIII, unbeknownst to the AIII Board of Directors or staff, his affidavit states. Hubers reportedly confirmed that MCEC was essentially acting as a "bank" for AIII.
But despite the fact that MCEC was covering payroll for AIII, Westerhuis was using AIII to slip under-the-table bonuses back to Hubers from 2009 to 2014, totaling $55,000 in all and invoiced as "grant services," according to Spencer.
Hubers allegedly told Spencer that "Scott Westerhuis believed that she was worth more than MCEC could pay her, so [he] paid her the extra out of AIII finances."
When an assistant working with Hubers asked Westerhuis for more money, "Scott decided to keep paying her so she kept quiet because if he stopped paying her she would go to [MCEC Director Daniel] Guericke and Guericke would come to him and Scott would have to explain it," Hubers reportedly told investigators.
Hubers is charged with grand theft and receiving stolen property for accepting the bonuses, and could face up to ten years in state prison and a $20,000 fine. Her attorney, Clint Sargeant, declined to comment.
MCEC Director Daniel Guericke and AIII Chief Executive Officer Stacy Phelps also face criminal charges for falsifying evidence to be presented to the South Dakota Department of Legislative Audit. They allegedly signed and backdated agreements between the two organizations that Westerhuis told them had been "lost."
Guericke told investigators the Westerhuises had "called him on a Sunday and told him they needed him to sign the documents because they had been asked for the documents but could not find them ..." and that Guericke just "took their word for it so he signed them that day and backdated them."
In all, Guericke and Phelps falsified and backdated at least three agreements, including employment agreements with other employees at the two organizations, prosecutors say.
One employee, Rick Melmer, balked at being asked to sign a backdated agreement, according to Barnes' affidavit.
Melmer sent Westerhuis and Guericke an email on Sept. 14, 2015 - three days before Westerhuis killed himself and his family - that read: "I'm concerned about the fact that MCEC does not have the proper documents in place - signed and ready for review. It will be hard to defend but I think it is important to be honest about what you have and what you don't have in place."
The legislative audit revealed that two of the backdated documents had been "amended" to adjust the relationship between MCEC and AIII.
"The [South Dakota Department of Legislative Audit] reported that the original agreements provide that MCEC and AIII will administer the GEAR Up Grant 'cooperatively', making AIII a 'sub-recipient' of the GEAR UP Grant . . . The amended agreements change the language of MCEC and AIII's agreements to a 'contract' for services making AIII's relationship with MCEC that of a 'vendor,'" according to an affidavit from special agent John Griswold.
This distinction matters because making AIII a "vendor" for MCEC would determine "whether AIII needed to have an audit performed under the federal Single Audit Act," according to Griswold.
MCEC Board Chairman Lloyd Persson said he was also asked to sign backdated contracts just three days before the family's deaths, according to prosecutors.
If convicted, Phelps and Guericke could face up to two years in prison and a $4,000 fine. Phelps and Guericke's attorneys, Dana Hanna and Michael Butler, did not respond to Friday morning voicemail requests for comment.
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