to South Dakota law for breach of contract damages against the above-named Defendant. NATURE OF THE CAUSE OF ACTION

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1 STATE OF SOUTH DAKOTA ) :ss COUNTY OF CHARLES MIX ) Alyssa Black Bear, IN CIRCUIT COURT FIRST JUDICIAL CIRCUIT CIV. #16- Plaintiff, v. COMPLAINT MID-CENTRAL EDUCATIONAL COOPERATIVE, a Cooperative Educational Service Unit, Defendant. COME NOW THE PLAINTIFF, Alyssa Black Bear, by and through her attorneys of record, and brings this class action on behalf of herself and all others similarly situated pursuant to South Dakota law for breach of contract damages against the above-named Defendant. NATURE OF THE CAUSE OF ACTION 1. Plaintiff, Alyssa Black Bear, individually and on behalf of all other persons that are intended third-party beneficiaries of the Gaining Early Awareness and Readiness for Undergraduate Program (GEAR UP) grant from the U.S. Department of Education (USDOE) to the South Dakota Department of Education (SDDOE), and the agreement between SDDOE and Defendant Mid-Central Educational Cooperative (MEC) for the latter to administer the grant, hereby state and allege as follows: 2. This action stems from clear violations of the requirements of the GEAR UP grant by Defendant, including: a. SDDOE s failure to maintain adequate controls to monitor compliance with federal regulations, prevent conflicts of interest, evaluate and mitigate risk, and ensure 1

2 compliance with allowable costs and cost principles requirements, resulting in fraud, waste, and abuse of grant funds intended to benefit Plaintiffs. b. Defendant MEC s failure to responsibly administer the GEAR UP grant by failing to comply with matching fund requirements, and by permitting or failing to prevent serious conflicts-of-interest, resulting in fraud, waste, and abuse of grant funds intended to benefit Plaintiff students. PARTIES 3. The Plaintiff was a student at Todd County High School and was a member of the cohort that was to be served by the Defendant and the GEAR UP South Dakota program. The Plaintiffs identifiable class is defined by 34 C.F.R and the terms of the Defendant s contract with the State of South Dakota. The Plaintiff seeks to represent a class of students who were intended to be third-party beneficiaries of USDOE s GEAR UP grant to SDDOE, and SDDOE s agreement with Defendant MEC, whereby the latter would administer the GEAR UP grant. 4. Defendant MEC is a cooperative educational service unit with its principal place of business in South Dakota. JURISDICTION AND VENUE 5. Plaintiff brings this class action for breach of contract pursuant to state law. 6. This Honorable Court has jurisdiction over this action pursuant to S.D. Const. Art. 5 and SDCL Venue is proper within the indicated judicial circuit under SDCL FACTS 2

3 8. Defendant MEC is a coalition of central South Dakota school districts joined together to form an educational service unit pursuant to South Dakota state law. 9. The Gaining Early Awareness and Readiness for Undergraduate Program (GEAR UP) is a USDOE grant created pursuant to Congressional authorization that is intended to accomplish the following: [E]stablish a program that encourages eligible entities to provide support, and maintain a commitment, to eligible low-income students, including students with disabilities, to assist the students in obtaining a secondary school diploma (or its recognized equivalent) and to prepare for and succeed in postsecondary education[.] 20 USC 1070a SDDOE, through its Office of Indian Education, obtained its first six-year, $6.9 million GEAR UP GRANT in The grant was used to fund the South Dakota GEAR UP Program (hereinafter SDGUP). 11. SDDOE obtained a new six-year GEAR UP grant from USDOE in The grant application stated that the grant would be used to fund the renamed GEAR UP South Dakota (hereinafter GUSD) program. 12. According to the plain and clear language of both SDDOE s GEAR UP grant application in 2005 and SDDOE s GEAR UP grant application in 2011, Plaintiff students were to be the beneficiaries of the GEAR UP grant awarded to SDDOE. 13. When applying for the 2011 grant, SDDOE certified that it would establish a proper accounting system in accordance with generally accepted accounting standards or agency directives. 3

4 14. When applying for the 2011 grant, SDDOE certified that it would establish safeguards to prohibit employees from using their position for a purpose that constitutes or presents the appearance of personal or organizational conflict of interest, or personal gain. 15. The GEAR UP grant requires the grantee to use 50% of the grant to fund and award scholarships. However, the grantee may receive a waiver from the scholarship requirement if the grantee demonstrates that the [grantee] has another means of providing the students with the financial assistance described in this section and describes such means in the [grant] application. 20 USC 1070a-25(b)(2). 16. When applying for the 2011 grant, SDDOE also applied for a waiver from the scholarship requirement of the GEAR UP grant, citing the existence of significant postsecondary financial assistance that is available to Native American students in the state. 17. None of the referenced scholarships were provided directly by SDDOE. None of the referenced scholarships were confined to students who would also be served by the GUSD program and the GEAR UP grant. Nevertheless, the waiver request was granted by USDOE. 18. The GEAR UP grant requires the grantee to match funds, or make an in-kind contribution, to funds provided by USDOE pursuant to the grant. 20 USC 1070a- 23(b)(1). 19. In its 2011 application, SDDOE represented to USDOE that SDDOE and its Office of Indian Education would serve as lead partner and fiscal agent for this program and that the Office of Indian Education would be responsible for implementing program components; managing the budget; developing and maintaining students records and case studies; maintaining communication with federal agencies, participating schools, 4

5 administrators, teachers, parents, and students; and supply significant institutional resources to the program. 20. In its 2011 application, SDDOE represented to USDOE that the GEAR UP grant would be administered by a state employee, the Director of Indian Education, who would devote 25% of his time to administering the project, which time would be an in-kind contribution to the matching requirement. Subsequently, SDDOE reported to USDOE in yearly reports that the Director of Indian Education spent 20% of its time supervising the GEAR UP program. 21. In its 2011 application, SDDOE s proposed budget indicated that $8.3 million of the GEAR UP grant would be spent by SDDOE on personnel and employment benefits for employees administering or working on the GUSD program, and that $12.5 million of the GEAR UP grant would be spent on consultants and contracts with partners to operate the GUSD program. 22. The reasonable inference to be drawn from SDDOE s contract is that SDDOE would be primarily responsible for spending GEAR UP funds and administering the GUSD program. 23. SDDOE contracted with Defendant MEC to administer the GUSD in South Dakota. Under the 2011 GEAR UP grant, SDDOE paid Defendant MEC $50,000 per month in GEAR UP funds, and paid invoices submitted by Defendant MEC. 24. According to the plain and clear language of the agreement between Defendant MEC and SDDOE, the Plaintiffs were to be the beneficiaries of Defendant MEC s administration of the GEAR UP grant and operation of the GUSD program. 5

6 25. Defendant MEC in turn distributed GEAR UP funds to other agencies, including the American Indian Institute for Innovation (AIII), the Oceti Sakowin Education Consortium (OSEC), and the PAST Foundation. 26. Defendant MEC also paid a substantial amount of the GEAR UP grant to individuals who held themselves out as consultants and advisors to the GUSD. 27. Defendant MEC employed Scott Westerhuis as its business manager. 28. Scott Westerhuis was the registered agent for Rock Ranch Consulting, LLC (RRC). 29. Scott Westerhuis used funds from Rock Ranch Consulting to incorporate the American Indian Institute for Innovation (AIII) in 2008 and was listed as its registered agent until his death in Westerhuis was listed as AIII s chief financial officer on AIII s 2014 IRS Form Scott Westerhuis created Oceti Sakowin Distance Education Consortium Incorporated in 2003, but it dissolved in Westerhuis incorporated the Oceti Sakowin Education Consortium (OSEC) in OSEC employed Scott Westerhuis s wife, Nicole, as its business manager. 31. Stacy Phelps was a member of the South Dakota Board of Education until his resignation on October 1, Phelps was also an employee of Defendant MEC, working as the GUSD director. Along with Scott Westerhuis, Phelps was listed as an officer on AIII s 2014 IRS Form Rick Melmer was South Dakota Secretary of Education from 2003 to 2008, when SDDOE applied for the first GEAR UP grant in In 2008, Melmer became the dean at the University of South Dakota School of Education. While at the School of Education, Melmer began drawing a stipend and other financial compensation from Defendant MEC 6

7 as a consultant for GUSD. Melmer left USD in 2013 to begin working for Defendant MEC in connection with non-gear UP activities. From March 2014-August 2015, Defendant MEC business documents reflect monthly cash receipts labeled Fund 13 AIII/BW/MELMER, ranging from $3, to $224, The source of these receipts, purpose of the money, and connection to Melmer is unclear. Melmer resigned from Defendant MEC in July Brinda Kuhn helped prepare the original 2005 GEAR UP grant application for SDDOE. After the grant was awarded to SDDOE, Kuhn relocated to South Dakota and was paid by SDDOE to provide an evaluation of GUSD. In 2009, Kuhn wrote an evaluation of GUSD, stating the program is strong and continues to gain momentum in serving students, parents, and teachers, as well as establishing sustainable activities that create a systemic change within the schools it serves. At the time that Kuhn wrote her evaluation, she was paid a lucrative salary by Defendant MEC to work as a consultant on GUSD. 34. In or about 2015, Dr. Kelly Duncan was a member of the South Dakota Board of Education and an associate professor at the of Counseling and Psychology in Education at the University of South Dakota. 35. In or about 2011 and 2012, Defendant MEC paid Dr. Duncan approximately $51,000 for work on another federal grant, awarded to SDDOE, and administered by Defendant MEC. 36. Despite her previous work for Defendant MEC, and the fact that she was a member of the South Dakota Board of Education, Dr. Duncan was also one of the principal investigators for the South Dakota Government Research Bureau s independent 7

8 evaluation team that prepared the August 2015 SD GEAR UP Program Evaluation which examined MEC s success, or lack thereof, in administering GUSD. 37. As early as 2012, SDDOE noted incompetence in maintenance of Defendant MEC s financial records and offered technical support. The problems persisted, however. 38. The South Dakota Single Audit Report for the Fiscal 2014 (hereinafter 2014 Audit), prepared by the South Dakota Department of Legislative Audit, made the following findings about SDDOE and Defendant MEC s handling of the GEAR UP grant: a. [SDDOE s] [c]ontrols were not effective to ensure subrecipient compliance with allowable cost and matching requirements. b. [Defendant MEC] did not comply with allowable cost and cost principles requirements. c. [Defendant MEC] did not comply with matching, level of effort, and earmarking requirements. SDDOE agreed with the Department of Legislative Audit s first two findings, but concurred with the third finding only to the extent that SDDOE agreed that Defendant MEC had, on at least two occasions, counted a contribution toward two different matching requirements on two different federal grants. 39. On or about August 15, 2015, Defendant MEC s executive director, Dan Guericke, and Tamara Darnall, SDDOE s Director of the Division of Finance and Management appeared before the South Dakota Government Operations and Audit Committee (hereinafter GOAC) to address the findings of the 2014 Audit. Darnall and Guericke reported to GOAC that for the most part, all findings [had] been resolved and assured GOAC that [SDDOE] has increased monitoring and oversight activities with regard to 8

9 GEAR UP and detailed efforts that SDDOE would make to monitor Defendant MEC s federal matching requirements. Darnall also assured GOAC that Defendant MEC was subject to an annual performance report that was submitted to USDOE. 40. Despite the assurances given to GOAC on or about August 15, 2015, less than five weeks later, on or about September 16, 2015, Dr. Melody Schopp, Secretary of the South Dakota Department of Education, telephoned Defendant MEC executive director Dan Guericke, and told him that SDDOE was summarily terminating its partnership with Defendant MEC in administering the GUSD program. 41. On or about September 16, 2015, Guericke notified Scott Westerhuis that the partnership between the Defendant over the GUSD program was being terminated. Subsequently, according to law enforcement authorities, Scott Westerhuis murdered Nicole Westerhuis and their three children in their home, set the Westerhuis home on fire, and committed suicide. 42. After the September 16, 2015 call notifying Guericke of the termination of the Defendant partnership, Schopp sent Guericke a letter dated September 21, 2015, reiterating the immediate termination of the partnership. That letter is attached as Exhibit A. The letter listed eight grounds for termination: (1) Lack of supporting documentation and improper documentation for match, resulting in a significant shortfall in match; (2) Lack of fiscal capacity including lack of fiscal control and improper governmental accounting procedures; (3) Lack of knowledge of Generally Accepted Accounting Principles (GAAP) or failure to implement GAAP procedures; (4) Lack of internal controls; (5) Conflict of interest and failure to disclose related parties; 9

10 (6) Lack of project oversight; (7) Lack of oversight on school subgrants; and (8) Lack of documentation for grant activities under [U.S. Office of Management and Budget circular A-87, which sets forth standards and principles for determining allowable costs and promoting effective program delivery, efficiency, and better relationships between governmental units and the Federal Government]. Exhibit A. 43. After the tragedy involving the Westerhuis family, the South Dakota Department of Criminal Investigation began to investigate matters involving Scott Westerhuis and MEC s management of GEAR UP. 44. On or about March 16, 2016, Attorney General Marty Jackley announced criminal charges against Phelps, Guericke, and another employee of Defendant MEC, Stephanie Hubers, alleging embezzlement and fraud. Specifically, the state alleges that Hubers received $55, in misappropriated GEAR UP funds in order to help conceal Scott and Nicole Westerhuis s misappropriation of funds. 45. On or about March 23, 2016, the South Dakota Department of Legislative Audit released the South Dakota Single Audit Report for the Fiscal Year 2015 (hereinafter 2015 Audit). The 2015 Audit made the following findings about SDDOE and Defendant MEC s handling of the GEAR UP grant: a. [SDDOE] did not have adequate controls in place to properly monitor [Defendant MEC s] compliance with federal regulations or evaluate and mitigate risk associated with related party transactions. b. [Defendant MEC] did not comply with matching requirements. 10

11 c. [SDDOE s] [c]ontrols were not effective over proper monitoring of the subrecipient to ensure compliance with allowable costs and cost principles requirements. SDDOE agreed with each of the Department of Legislative Audit s Findings. COUNT 1 BREACH OF CONTRACT 46. Plaintiffs hereby repeat and reallege paragraphs 1-45 and incorporate them as though fully set forth hereinbelow. 47. The agreement between SDDOE and Defendant MEC for Defendant MEC to administer the GEAR UP grant and GUSD constitutes a valid, binding contract between SDDOE and Defendant MEC. 48. SDDOE and Defendant MEC intended that the Plaintiffs would be the express beneficiaries of the contract. 49. SDDOE at least partially performed its obligations under the contract by paying Defendant MEC GEAR UP funds for the intended benefit of the Plaintiffs 50. Defendant MEC breached the contract with SDDOE by failing to maintain adequate controls to monitor compliance with federal regulations, evaluate and mitigate risk, and ensure compliance with allowable costs and cost principles requirements. 51. As the direct and proximate result of Defendant MEC s breach of the contract with SDDOE, Plaintiffs did not receive the intended benefits of the contract, due to fraud, waste, and abuse of the grant funds intended to benefit Plaintiffs. In addition, Plaintiffs have suffered financial damages, and will incur additional damages as a result of Defendant MEC s breach of contract. 11

12 WHEREFORE, Plaintiffs pray for the following relief against SDDOE and Defendant MEC as follows: (1) For Plaintiffs actual, compensatory, and consequential damages in an amount that the jury deems just and proper under the circumstances; (2) For pre- and post-judgment interest; (3) For Plaintiffs costs and disbursements herein; (4) For such other and further relief as the Court deems just and proper under the circumstances, including the costs incurred in the prosecution of this action. Dated this day of May, HEIDEPRIEM, PURTELL & SIEGEL, L.L.P. BY John R. Hinrichs Scott N. Heidepriem Kasey L. Olivier Ashley M. Miles 101 West 69 th Street, Suite 105 Sioux Falls, SD (605) and- Emery Law Firm Steven C. Emery 2419 Sheridan Lake Rd. Rapid City, SD (605) Attorneys for the Plaintiffs 12

13 DEMAND FOR JURY TRIAL Plaintiff hereby demands a jury trial on all issues so triable. John R. Hinrichs 13