BSU writes off $12.6 million from scam

RICHMOND – A report released Friday by a former federal prosecutor who investigated the Ball State University investment scandal does not include what everybody wants to know:

How did a lone employee, Gale Prizevoits, the former director of cash and investments, invest $13.165 million with two criminals without the knowledge of anyone else at the university?

"There was not a detailed, play-by-play report about what transpired and how these investment frauds were accomplished," Indianapolis attorney Rick Hall, chairman of the BSU board of trustees, told The Star Press on Friday, after he and President Paul Ferguson appeared before the State Budget Committee.

"That information was reviewed by (CPA firm) Crowe Horwath and (former U.S. Attorney) Deborah Daniels," he said, "and we will provide information in that regard to prosecutors, and they will make a decision as to who should be prosecuted."

Hall told the State Budget Committee, meeting in Richmond, that the university doesn't expect to recover any more than half a million dollars of the investments made with two perpetrators of securities fraud, one from Bronx, N.Y., and one from Boynton Beach, Fla. Both pleaded guilty to federal charges.

One of the perpetrators actually made a payment of about $100,000 to BSU after being pressured by Prizevoits, and Ball State has recovered another $417,500 from one of its insurance companies.

"We are looking at this point in time at about a $12.6 million loss," Hall told state lawmakers on the budget committee. "The State Board of Accounts and our internal auditors, based on their assessment of the possibility of future recovery, have told us to value the investments at zero. ... it should not be reflected as having any value on our financial statements."

Asked in an interview whether the two men convicted in federal court in Manhattan might make restitution, Hall said, "At this point in time we are operating under the assumption we have lost $12.6 million."

One of the convicts, Seth Beoku Betts, from Florida, will be homeless and penniless when he is released from prison, his attorney said. However, Betts did forfeit to federal authorities a $1.2-million waterfront house in Palm Beach County, Fla., that he had purchased with money he stole from Ball State University. BSU hasn't yet received any restitution from that forfeiture.

After the State Budget Committee received a new "management action plan" and two reports from Crowe Horwath evaluating Ball State's internal controls and investments portfolio — and after it heard presentations by Hall and Ferguson — the committee was convinced the university has done everything possible to minimize the risk of fraud in the future.

"Thank you, folks, for realizing the problem and stamping it out immediately," Rep. Terry Goodin, D-Austin, told the two BSU officials. "And I think you guys are doing a great job."

Rep. Tim Brown, R-Crawfordsville, said Ball State's transparency "re-establishes and elevates your trust in this state."

"I appreciate your response today," said Sen. Luke Kenley, R-Noblesville, who chairs the committee.

Afterward, Ferguson told The Star Press, "I think we heard a very clear affirmation of their support for Ball State University, for the way that the board (of trustees) has handled it, the due diligence, the thoroughness."

Hall told lawmakers: "We had a single individual, our director of cash and investments, who intentionally decided to circumvent our internal controls. She knowingly entered into investment contracts outside the scope of the investment policy, and subsequently proceeded to try to cover up those efforts."

He added, "We had internal controls in place that should have prevented this fraud. Individuals with responsibility of following those internal controls failed us. Those individuals are no longer with the university, so the personnel has changed. This loss of money was not the result of a flawed system. This was a result of flawed individuals."

In an interview, Hall declined to name any responsible parties other than Prizevoits, saying, "I don't want to dive into the gory details and re-live that. It's important to move forward with best management practices in place."

Prizevoits was fired, but no other BSU employees in the controller's office or business affairs were disciplined.

Bill McCune, who was BSU controller at the time of the fraudulent investments, would have been the proper check on much of the scandal.

But he retired about 1½ months before Ball State officials learned of a $5 million fraudulent investment scheme involving supposed U.S. Treasury STRIPS from federal prosecutors in Manhattan.

A subsequent internal investigation by BSU uncovered a second scheme involving $8.165 million in supposed collateralized mortgage obligations.

Because of retirements and other turnovers, only a couple of the nine people who worked in the controller's office at the time of the investment fraud scheme still works there today.

"Some of the individuals that have left the institution, there was no finding they were criminally involved or they had knowledge of these fraudulent investments," Hall said, adding local prosecutors, not Ball State, will decide how many people will be targeted in the upcoming criminal investigation.

Ferguson, who has only served as BSU president since August, assured lawmakers that the university today has "a healthy portfolio, legitimate and valid, and internal controls are contemporary and best practice."

"In other words," Hall said, "there's not another $5 million shoe that's going to drop."

The new action plan includes best practices for selection of brokerage firms; ensuring that a single safe-keeping firm holds all securities; state of the art investment software; a whistle-blower hotline operated by an independent third party; and greater separation of duties in the controller's office.

"There is no singular control for our investments," Ferguson told lawmakers.

He said the most profound changes have been stronger oversight of investments by the board of trustees and the president; expanding the role of the director of internal auditing, who now collaborates directly with the president and the board of trustees, not just the university treasurer; and more frequent and robust discussion among the president, the board and the director of auditing "so there is no insularity that occurs in the division of business affairs."

Hall told lawmakers, "When I talk about this incident, it's hard for me not to get emotional. When you have $13 million taken from you by criminals, it angers you. When you think about the lost opportunities that that represents for our students, it really makes you sick."

Contact Seth Slabaugh at (765) 213-5834.