Entertainment News - BCDS Review Finds Shiprock Company $4.7 Million In Debt
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BCDS Review Finds Shiprock Company $4.7 Million In Debt
By Kathy Helms
SHIPROCK – A special review of BCDS (Biochemical Decontamination Systems) Manufacturing Inc.-Shiprock by the Navajo Office of the Auditor General has found that BCDS is in debt approximately $4.7 million, and that by guaranteeing $2.2 million of the corporate debt with JP Morgan Chase Bank, the Navajo Nation is at risk of losing its personal liability protection.
Alfreda Lee, senior auditor and Angela Witherspoon, associate auditor, presented the special review Tuesday during a meeting of the Budget and Finance Committee in Shiprock.
“Basically we have four findings,” Lee said. The Navajo Nation is the only stockholder that contributed capital; personal funds were intermingled with corporate funds; BCDS is in debt for approximately $4.7 million; and due diligence investigation was not done.
The review evaluated BCDS' financial activities from the opening of the company's bank account on Dec. 26, 2003, through Dec. 31, 2007, when the company depleted its funds.
According to the Finding I, BCDS is authorized to issue 50,000 no-par shares. No-par value stock means there was no nominal dollar amount assigned to the stock at the time of issue.
BCDS has on record four stockholders. The Navajo Nation was issued 25,500, or 51 percent shares in exchange for its $311,290 investment. The Navajo Nation is the only stockholder that contributed capital to BCDS.
Division of Economic Development Executive Director Allan Begay told auditors that the other three stockholders were issued shares of stock in exchange for their business expertise and connections, rather than monetary investments.
Between December 2003 and October 2007, BCDS opened three checking accounts, according to Finding II. BCDS bank transactions revealed that of the $300,000 initial investment by the Nation, only $261,817.50 was deposited into BCDS' checking account; $38,182.50 was either cashed out or deposited into another bank account unrelated to BCDS.
“Furthermore, our analysis of bank activities found BCDS stockholder and former CEO (Hak Ghun) intermingled his personal funds with corporate funds,” Lee said. BCDS board of directors is charged with settling the compensation of its CEO, yet analysis of bank transactions found the former CEO did not get a fixed salary.
“Based on our interviews with the former CEO, he acknowledged treating the corporate bank accounts as his own personal checking account. Over the four year-period, we identified over $3 million of personal expenses paid out of the BCDS checking accounts.
“Personal expenses include casino, golf, vehicles, cash, over-the- counter withdrawals, personal loans repaid, checks issued to relatives, and unknown payees for a total of $3,085,017,” she said.
On Aug. 10, 2006, the Navajo Dam Review and Selection Committee approved the collateralization of $2.2 million from the Navajo Dam Escrow Fund for BCDS. On Aug. 15, the 20th Navajo Nation Council's Budget and Finance Committee chaired by Benny Shelly – now Navajo Vice President – approved the plan. The money was to finance expansion of BCDS.
Navajo Nation President Joe Shirley Jr. signed a pledge agreement with JP Morgan Chase Bank on Sept.. 29, 2006, authorizing collateralization of the $2.2 million loan. That same day, BCDS and JP Morgan signed the loan agreement. The loan will mature on Sept. 29, 2008.
On Oct. 1, 2006, one day after receipt of the JP Morgan loan proceeds, BCDS purchased a reverse osmosis machine costing $900,000 from a vendor in North Carolina. BCDS wire transferred $700,000 into the vendor's bank account, leaving an unpaid balance of $200,000.
BCDS employees stated that the vendor did not deliver the reverse osmosis machine and claim that the machine is in North Carolina. The current BCDS chief financial officer has the machine posted for sale on the Internet, according to the review.
The $2.2 million loan agreement between BCDS and JP Morgan prohibits BCDS from engaging in any business other than manufacturing. Lee said the vendor also submitted an invoice dated Nov. 15, 2007, requesting payment from BCDS for goods and services provided, amounting to $1,414,266.
BCDS also owes the Internal Revenue Service $307,114 in unpaid payroll taxes. Although BCDS has been deducting its employees' federal withholding and their portion of Social Security and Medicare payroll taxes, the company did not remit those taxes along with its employer share to the IRS.
On Jan. 22, 2008, the IRS placed a lien on BCDS for non-payment of $142,442 in payroll taxes. The lien covers the quarters ending December 2006 through June 2007.
On Oct. 25, 2007, the Division of Economic Development, or DED, advanced BCDS $150,000 as an additional investment by opening a checking account on behalf of the company using the Business Industrial Development Fund. The funds were provided to cover BCDS payroll and to bail the company out of paying the interest due on the $2.2 million JP Morgan loan.
Non-payment would result in a default of the loan collateralized by the Navajo Dam Escrow Account.
As a corporation, BCDS is a distinct legal entity and its stockholders are not personally liable for the debts and liabilities of the corporation.
On Oct. 19, 2007, DED hired an appraiser to appraise the property leased to BCDS to obtain an opinion on the market value of BCDS leasehold improvements. The appraiser valued leasehold improvements at $275,000 for real estate only. Overall, the appraised value of the property leased to BCDS was $1 million.
Given the appraised value, the fair market value of the rent was estimated at $112,500. The appraiser compared the estimated fair market value of the rent to BCDS' lease rental agreement and noted it was below market value. The agreement provides that the company pay no rent for the first two years; $11,250 per year in years three to five; and $22,500 per year in years six to 10.
The review found that DED did not conduct due diligence investigation on BCDS before investing into the company and that the Navajo Dam Review and Selection Committee and Budget and Finance Committee did not ensure due diligence investigation report was included in the loan proposal package before approving the loan for BCDS.
Further the administrative reviewers of the pledge agreement between the Navajo Nation President and JP Morgan did not ensure that due diligence investigation report was included in the Signature Approval Sheet package presented for their review.
The Navajo Nation underestimated the risk of guaranteeing a $2.2 million loan and investing more than $300,000 into BCDS by failing to ensure due diligence was conducted on the company and its owner.The Navajo Nation Department of Justice instructed DED to conduct due diligence before investing $300,000 to BCDS. Begay acknowledged he conducted “cursory review” because “he did not want to offend a potential corporation that wanted to bring business and jobs to the Navajo Nation by conducting due diligence.”
“You should have offended,” B&F Chairman LoRenzo Bates told Begay. “The report pretty much speaks for itself. It's disappointing, depressing. ...We didn't protect our assets, we didn't protect the money of the Navajo people.”
The review states that had DED performed due diligence on BCDS, they would have learned that BCDS owner and CEO was one of seven individuals convicted of defrauding 1,200 investors out of $11 million by promising big profits in 1984.
“This information is readily available on the Internet,” Lee said.
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