Lower Brule Tribal and Agency Building, South Dakota
In the heady days of 2007, when the financial world was drunk on the no-income/no-asset mortgages that would prove so toxic, the leader of a tiny Indian reservation in South Dakota decided to go where the real money was.
Michael Jandreau, chairman of the Lower Brule Sioux Tribe, wanted his tribe to be a player on Wall Street, while Westrock Group, a Wall Street brokerage, thought it could get rich partnering with some of the poorest people in the United States. The result was that the tribe acquired Westrock in 2009, making it the first Wall Street brokerage owned by a Native American tribe in the United States, and heading toward what could have been a foreseeable collapse: a raft of burned investors, $20 million in still-missing taxpayer-guaranteed dollars, and an ongoing lawsuit against the U.S. government.
The Westrock deal was mostly secret, unknown even to many of the tribe’s members. It went bankrupt soon after the tribe bought it. Jandreau suddenly died last year after defending himself against allegations of mismanagement and possible corruption, leaving tribal members to deal with the legacy of his polarizing leadership.
A tribal election in September 2014 brought three reform-minded council members into office, which led to two years of political gridlock on the six-member council. Now many of the tribal members involved in Westrock and other forms of financial mismanagement are in charge of the government again, having won a majority on the council, while allegations of impropriety swirl around them and federal investigations are underway.
Lower Brule is filled with uncertainty, tinged with fear and frustration.
The tribe’s problems can’t be blamed on just a few bad apples; they owe in part to U.S. legal doctrines meant to ensure tribal sovereignty that have instead left Native Americans with precious little recourse if their tribal governments opt for secrecy and shady deals. Lower Brule is an example of how badly things can go if tribal leaders and their business partners try to take advantage of the understandable deference federal law shows to tribal governments.
The story began in 2005, when R. Dennis Ickes, a Utah-based lawyer then sixty-one years old, approached the leadership at Lower Brule with a revolutionary idea: marry the riches of Wall Street trading to the tax benefits enjoyed by Indian tribes under federal law. He claimed this idea could make the tribe (and its council members) fabulously wealthy, but it had never been done before and there were questions about whether it was permissible under federal rules. Nonetheless, Ickes secured Jandreau’s support.
Jandreau had first become tribal chairman in the late 1970s and had held the position continuously since 1984. His allies on the six-member tribal council during the Westrock period included two nephews and a cousin, ensuring he had a supermajority for anything he wanted to do. And in this tribal government, the tribal council is both the executive and legislative branch. It controls all tribal assets and programs, including those for housing, employment, financial assistance, and schooling.
To the outside world, Jandreau was a soft-spoken, grandfatherly presence who just wanted to do right by his people. He and his allies developed a modest but successful casino, boasted that the tribe was the biggest popcorn producer in the country, and cultivated the reservation’s reputation as the quiet, businesslike, and peaceful home to about 1,600 people. That stood in stark contrast to other South Dakota reservations, including Pine Ridge, which was regularly in the news for government dysfunction, crushing poverty, and conflict. On the reservation, Jandreau’s tenure was far more controversial; many saw him as an autocrat who favored his allies over others.
Ickes, a distant relative of FDR’s legendary Interior Secretary Harold Ickes, already had a long history in Indian Country. In 1973, he co-founded the Justice Department’s first Office of Indian Rights and helped negotiate an end to the American Indian Movement’s occupation of Wounded Knee on the Pine Ridge Reservation. Three years later, President Gerald Ford named him Deputy Undersecretary of the Interior, with special responsibility for Indian relations.
After leaving government service in 1977, Ickes practiced law, representing Indian tribes, and became an entrepreneur. He was a close associate and business partner with Jandreau and integral to several of the tribe’s key businesses, including its farming and popcorn operations.
In 2005, Ickes proposed first to Jandreau’s nephew Boyd Gourneau and later to Jandreau that the tribe set up its own tax-free company under federal law and sell shares to non-Indian investors. The tribe and its investors could make a fortune, all without paying federal taxes. Ickes later told Jandreau he would control “the most powerful company in the country,” modeled after Warren Buffett’s legendary Berkshire Hathaway.
The trial leaders enthusiastically embraced the idea, but initial efforts to acquire companies were unsuccessful. Then, in 2007, Anthony Fenton, a business partner of Ickes, ran into a shareholder of a New York-based brokerage firm called Westrock, and the planning for Lower Brule’s ill-fated acquisition of the brokerage began.
Westrock claimed to be a successful Wall Street brokerage and financial advisory firm with $1.4 billion under management and around 150 employees. To tribal leaders, the future looked bright. Buying Westrock would make Lower Brule a financial powerhouse on the Great Plains. The concept was simple: if Lower Brule could acquire Westrock with either investors’ money or some other means, the brokerage would generate tax-free profits for everyone because tribal businesses don’t pay federal taxes.
Westrock liked the idea of being acquired by Lower Brule. Being Indian-owned meant it would get favorable treatment under minority preference rules when local and state governments issued bonds. It could even attract capital from wealthier tribes that might prefer an Indian-owned investment firm.
That was the dream. It proved to be more of a fantasy.
From left, Westrock Group Director of Tribal Services Dennis Ickes, Lower Brule Sioux Tribe Chairman Michael B. Jandreau, Westrock Group CEO Donald H. Hunter, Jr. and Westrock Group Chairman Anthony Fenton mark the acquisition of Westrock Group by the Lower Brule Sioux Tribe on September 9, 2009, in New York City.
While everyone agreed on the terms, the deal took years to complete, mainly because Lower Brule did not have the $17.5 million bargain price for the firm that it had negotiated. At the time, the tribe had about $30 million a year in revenue, and about the same in expenses. Most of its money came from the federal government to pay for schools, infrastructure, health, and social services, along with a few million from its casino and farming operations.
Meanwhile, Westrock was on pretty shaky ground as a stock brokerage firm. Its financial reports from 2003-2008 showed it lost more than $2.3 million during that time. Between 2005 and 2008, key industry watchdogs had repeatedly fined and sanctioned Westrock for breaking industry rules. Connecticut banned the company from selling certain types of securities in the state due to “unethical business practices.” Alabama’s regulators had opened an investigation into the company’s practices. And the Financial Industry Regulatory Authority had begun arbitration proceedings against the company in 2008 because of “fraudulent activity” and other transgressions. Buying this firm was risky from many angles.
A quick Google search or other common-sense due diligence would have revealed these problems to Jandreau and others. But they continued to negotiate.
Ultimately, Jandreau and other members of the tribal leadership struck a deal so that Lower Brule would acquire all of the shares in Westrock in exchange for promissory notes to pay shareholders at a later date. The idea was that once the tribe owned Westrock, its future profits would generate the revenue to pay for the shares they bought. The problem was that Westrock wasn’t profitable, and Lower Brule didn’t have anywhere near the money to pay if things went wrong.
Westrock was eager to complete the deal, but behind the scenes, Greg Martino, the firm’s president and owner of 60 percent of its shares, wanted to cash out first. He wanted the firm to buy him out for around $3 million, about half of the shares’ estimated value. Tellingly, he wanted actual cash, not promissory notes from a tribal company. Westrock ended up taking a loan from Paul Pomfret, a hedge fund manager in Florida, to buy out Martino. Pomfret would later go to federal prison for running his fund as a Ponzi scheme; the Westrock loan was part of that scam. Martino never got the full amount and ended up suing and winning against his former colleagues and the tribe in tribal court, but couldn’t collect.
In 2009, despite all of the backstage drama, Lower Brule and Westrock announced that the tribe had bought the brokerage. The financial media covered the story since it was the first such deal involving a tribe. One interview on CNBC with Westrock CEO Donald Hunter and Chairman Jandreau was particularly memorable. Jandreau said the tribe had done years of due diligence before it bought Westrock and eventually the purchase would alleviate poverty at Lower Brule.
“We created a corporation for the explicit idea of going out and seeking businesses that would be a good fit as capital generators and opportunities for the tribe,” Jandreau said.
The deal between Lower Brule and Westrock was launched in the wake of the global economic meltdown over subprime mortgages and it wasn’t long before the venture began to sink. By mid-2010, it was heading toward collapse. The tribe and its business partners scrambled to save Westrock, deciding that the federal government would be their lifeline.
The plan was to obtain a federal loan guarantee to cover the purchase of Westrock and then sell that guaranteed loan for cash—much in the same way lenders offloaded mortgages during that period by selling off those debts to others. This money could be used to repay investors, recapitalize Westrock, and repay the loan. Best of all, if the tribe defaulted on the loan, the U.S. government would have to repay it.
The tribe obtained a $20 million loan guarantee in 2010 through an economic development program run by the Bureau of Indian Affairs. It was an unusually large amount—the typical loan guarantee was for about $500,000—and the tribe intended to use it in an unusual way. But Philip Viles, then head of the department that offered these loans, approved it.
There were many odd things about this guarantee. It was a kind of investment a tribe had never made before, for a company in dire financial shape. But the strangest part: neither Westrock nor the tribe had made or received an actual loan worth the amount guaranteed.
Instead, the tribe created a paper loan, through an entity called a Community Development Financial Institution, or CDFI, run by Gavin Clarkson, an enrolled member of the Choctaw Nation and a Harvard-educated lawyer and academic. CDFIs are private institutions authorized by the government to provide financial services in poor, underserved communities, like reservations. Some of the best-known Native American CDFIs are in South Dakota.
But Lower Brule’s CDFI was not set up to help the poor. It was registered in Delaware and there is no evidence it loaned anyone anything at Lower Brule. When I called and visited its address—the striking two-story tribal government headquarters with four large teepees in front that sits on a hill overlooking the Missouri River—no one had heard of it. But it was used to make what, on paper, looked like a loan, and that is what the U.S. government had apparently guaranteed.
At the end of 2010, as Westrock was collapsing, the tribe sought to sell the loan guarantee for cash and cover Westrock’s losses, as well as those of unsuspecting retirees and others who had invested in Westrock. Under Securities and Exchange Commission rules, the Westrock investments were so risky they were only supposed to be sold to “accredited investors”—those with at least $1 million in net worth or who consistently earn at least $200,000 a year. But Westrock sold hundreds of thousands of dollars worth of notes to dozens of people of limited income who could not easily recover from serious losses.
Westrock staff went back to those investors with the approval of its tribal owners, seeking more money to keep the company afloat. Its pitch was that they had already lost their money in Westrock, but if they invested more it would be guaranteed by the federal government and they would get everything back. The tribe and Westrock were able to raise around $3.4 million this way.
Clarkson sold the loan guarantee to Great American Insurance, a subsidiary of the American Financial Group in Ohio, for about $20 million in cash. Then Jandreau and others paid off certain investors, including possibly themselves, according to a New York lawsuit related to the sale of the guarantee. But when Westrock went bankrupt in 2012, some average investors lost out.
The deceptive sale of Westrock’s notes was so egregious that in 2012, the Financial Industry Regulatory Authority banned Hunter, the Westrock CEO and president, from selling securities or working at any firm that sells securities. At least five other Westrock brokers were sanctioned for selling these notes to unsuspecting investors.
Some of those investors were retirees who thought they were making safe investments. Marilyn Desimony, a retired special education teacher in her eighties living in upstate New York, told me she lost her life’s savings of $700,000 and ultimately her home because a broker had invested much of her savings in Westrock. The tribe’s representative then tried to get her to reinvest when Westrock went broke.
“They said I would get all of it back in twenty years,” Desimony said in 2013 with exasperation and frustration. “And I thought in twenty years I’m going to be dead, so I’m not worried about that.” She eventually got a small amount of her money back from an arbitration settlement.
Bertha Mae Clancy, an elderly woman with Alzheimer’s who lived in Cooperstown, New York, was owed about $150,000 when Westrock went bankrupt. She died at age ninety-one in April 2013. Her son Brian says the tribe and Westrock offered to pay him pennies on the dollar for his mother’s investment. He refused.
“Actually, the less I have to think about them [Westrock and the tribe], the better I am,” Brian Clancy told me. “Because when I think about them, because with my mother having Alzheimer’s, this money was going to be used for her care in a local nursing home.”
None of this had been public until Human Rights Watch exposed the story in January 2015. Its report, “Secret and Unaccountable,” detailed the Westrock deal and how the tribal government would not account for the $20 million. I found out about Lower Brule while looking into the impacts of predatory lending on reservations in 2012. People told me about happenings under the Jandreau administration, launching a two-year investigation.
The Human Rights Watch report created a firestorm at Lower Brule, throughout South Dakota, and within the federal government. Although Jandreau and others repeatedly refused to speak with me during the investigation, he and others vehemently denied wrongdoing and denounced Human Rights Watch without providing any contrary evidence. But after regional media reported that Jandreau had more than $600,000 in tax liens against him, suggesting an income much higher than a tribal chairman should have, South Dakota’s congressional delegation urged the federal government to investigate. Several agencies did, including the U.S. Department of the Interior’s Office of Inspector General and the Internal Revenue Service.
The slate of tribal council reform candidates elected in 2014 found themselves shut out of power. Jandreau and his supporters ran the government without including them, until a judge ordered the council to meet. Even then, the council remained deadlocked.
I last saw Jandreau at the end of March 2015, at the tribal government building. He looked very frail. When I tried to meet him, his son and assistant, Jerauld, made me wait for hours, while the chairman and his half-brother, Scott Jones, met just a few feet away. Then they refused to speak with me.
About a week later, Jandreau was hospitalized. He died on April 3, 2015, at age seventy-one. Kevin Wright, one of the frustrated reformers, assumed the role of acting chairman of the tribal council. Jandreau’s supporters denounced the move as a power grab. Wright quickly fired Ickes, Jones, and others associated with Jandreau.
Wright also asked the federal government to suspend funding to the tribe until the whole tribal council could show it had oversight over government finances. The Bureau of Indian Affairs decided to provide funds monthly instead of the usual full amount at the beginning of the fiscal year.
On September 6, tribal council candidates associated with Jandreau won a decisive majority, leaving the reformers with only one seat. Effectively, the Jandreau government that had brokered the Westrock mess was back in power, only without Jandreau. Gourneau, his nephew, became chairman.
The IRS and Department of the Interior’s Inspector General continue to investigate Westrock and other matters concerning the tribe. The U.S. Attorney’s office in South Dakota is keeping an eye on those investigations. But the authorities have been tight-lipped about their efforts. Great American Insurance is suing the U.S. government, which refuses to pay it $20 million for the loan guarantee. This lawsuit and the federal investigations may shed more light on what happened, but could also put taxpayers on the hook for this disastrous deal.
Some of the principals in the Westrock deal continue to deny that anything untoward happened. Ickes has insisted no public funds were lost and that Westrock was simply an ambitious, entrepreneurial deal that went sour. Clarkson has repeatedly denounced Human Rights Watch and insists that the $20 million was only used to pay off Westrock’s debts. He blames the deal’s failure on the IRS because it would not endorse the tax-free concept at the heart of it. Ickes, Clarkson, and chairman-elect Gourneau all did not responded to requests to comment for this article.
While politics and mismanagement are not new in tribal government (or government generally), Lower Brule serves as an extreme example.
“It’s fairly common for tribes to have a bad run of a few years where an elected council runs wild, but a sustained one like this is pretty rare,” says Matthew Fletcher, a leading Native American legal scholar.
One test will be whether the new council comprised of the old guard will be open and accountable or revert to past secrecy and attacks against critics. On a divided reservation where one side has just won all the power, under a cloud of controversy, it is hard to predict what will happen.
Arvind Ganesan is the director of the business and human rights division at Human Rights Watch and was the principal investigator into the financial activities of the Lower Brule Sioux Tribe.