BCDS: What went wrong?
Close look at $4.6 million loss
shows warning signs were there

By Kathy Helms
Diné Bureau

WINDOW ROCK — A special review of BCDS Manufacturing Inc.’s financial activities by the Navajo Nation Office of the Auditor General found that nearly everyone responsible for overseeing investment of the Nation’s money into BCDS failed to exercise due diligence before investing in the company.

In addition, JP Morgan Chase Bank conducted limited due diligence on the company only, and not on the owners prior to approving the initial $2.2 million loan to BCDS. Because the Navajo Dam Escrow Account was pledged as collateral, the loan was considered low risk.

Despite publication of numerous articles by local newspapers detailing past fraudulent activities by BCDS’ former CEO Hak Ghun, the Division of Economic Development, the Office of the President/Vice President, and the Economic Development Committee continued to vocalize support for BCDS because of the 30 jobs it was to provide for the Navajo people.

The Office of the Inspector General for the Small Business Association was notified June 13, 2007, of possible fraudulent activity by Ghun. In addition, at least one Shiprock resident spoke with the Assistant U.S. Attorney in Albuquerque and the FBI office in Farmington regarding concerns.

Senior Auditor Alfreda Lee said Friday that her office has not been contacted by those offices regarding the matter.
In forms submitted to SBA, Ghun failed to mention that as owner and operator of the Wall Street firm, Nelson, Ghun & Associates, he and six others were charged on May 14, 1984, in a 46-count indictment which included mail and wire fraud, commodity theft and perjury. He spent three years in prison.

In a statement of personal history to SBA, he checked “No” in response to a question inquiring whether he had ever been charged, arrested or convicted for any criminal offense other than a minor motor vehicle violation.

The 2005 business plan for BCDS listed the board of directors as Ghun, his brother Jerrry Dickenson, retired Air Force Gen. Ron Fogleman, Division of Economic Development Director Allan Begay, Shiprock Chapter President Duane “Chili” Yazzi, and former BCDS Chief Financial Officer, Lori Todacheene, daughter of EDC member GloJean Todacheene.

Yazzie was retained as a consultant by BCDS to help acquire the $2.2 million from the Navajo Dam Escrow Fund to be used as collateral on the JP Morgan loan. In August 2006, Yazzie and Ghun made a presentation to the Navajo Dam Escrow Fund Project Review and Selection Committee.

At that meeting the recommendation was made to request the 20th Navajo Nation Council Budget & Finance Committee approve the use of $2.2 million from the Escrow Fund. The recommendation passed.

One document regarding the project stated that BCDS had arranged for a loan package with JP Morgan in Phoenix and had received a conditional commitment from Vice President Derrick Watchman, hinging on approval from B&F for utilization of the $2.2 million as collateral for the loan.

According to the review, once approved, JP Morgan wired $1.6 million of the $2.2 million into BCDS’ checking account. Another $473,337 was wired to a bank to pay off a BCDS loan, $52,500 was wired to BCDS attorney accounts, and $17,260 was placed in JP Morgan interest payment reserve.

Division of Economic Development’s Begay, in response to auditors’ findings, said JP Morgan Chase did not place controls on the funds so that they were used for their intended purpose, that the bank did not follow normal procedures and therefore failed in its fiduciary duty to the Navajo Nation.

“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 said. He added that the Division of Economic Development had no control over the loan administration.

JP Morgan also agreed to back a $100 million line of credit to finance Navajo gaming, but when it insisted on collateral which could have jeopardized the Permanent Trust Fund and other assets, that deal went south.

Regarding BCDS, Begay said, “The single most important question that should be asked is about the means by which the Navajo Nation is going to recoup its $2.2 million, to meet its other obligations to suppliers, and to sell a reverse osmosis system ($900,000) that was bought with the loan proceeds.”

At Tuesday's meeting B&F's Lorenzo Curley asked the Navajo Department of Justice to look into possible recourse against JP Morgan as well as board members of BCDS. “The main focus at this point is to determine a course of action to recoup the money. If nothing else, we will go into default.”

DOJ's Latonia Becenti told the committee that the loan document is between JP Morgan and BCDS. “Within the loan document there provides numerous clauses as far as default goes. One of the concerns of the committee and the Navajo Nation is ensuring that the $2.2 million is not taken by JP Morgan.”

“Anything that negatively affects paying off the loan will most likely cause a default of the loan. If we want to start with a clean slate we need to do that within the confines of ensuring that we do not go into default status pursuant to the loan document,” she said.

Recovery of the $4.7 million the Nation now owes due to its majority stock in BCDS is going to be a slow process,” Becenti said. “To be quite honest, I don't know if there is a best way.”

Arthur Allison, chairman of Diné Development Corp., established by the Division of Economic Development, also made several recommendations regarding the findings. Allison said the Nation should investigate the possible liability of JP Morgan and its attorney as well as BCDS’ attorney.

Additionally, he said the Nation should: investigate potential civil claims for embezzlement against Ghun; request the U.S. Attorney for New Mexico investigate claims of criminal embezzlement against Ghun, as well as consider seeking damages against former and/or present members of BCDS Board of Directors in their individual capacities for breach of their fiduciary duties.