Prepared a two pages of memo
Rpsenhztt
memo.pdf
HOC #4 – BSU Investment Fraud
During 2008 to 2011 the Ball State director of cash and investments, Gale Prizevoits, made questionable
investments totaling $13.165 million. The investments resulted in an investments fraud requiring the
University to record a loss of $12.6 million (see the attached articles for additional details of the fraud).
For this hands-on-case, you will prepare a memo to Ball State alumni explaining the investments fraud
and the internal controls that have been implemented due to the fraud. The memo should include three
elements: (1) a brief description of the fraud, (2) a general description of internal controls, and (3) a
description of the internal controls implemented due to the fraud. The description of the internal controls
implemented due to the fraud is the most important portion of the memo. Therefore, be sure to explain
each of the internal controls described in the email from President Ferguson. Additionally, explain to the
readers why each of the controls have been implemented and what function they serve. Keep in mind
that the readers are not familiar with internal controls or financial frauds, so adjust your level of detail
and tone accordingly.
The memo should be in memo format and be a full two pages in length. Please double-space and use 12-
point Times New Roman font with one-inch margins. The points will be allocated as follows:
Description of the fraud 2 points
Description of internal controls, in general 1 points
Description and explanation of the internal controls implemented 3 points
(As described in the email from President Ferguson)
Proper memo format, length, spacing, font size, and margins 1 point
Proper tone for level of reader, grammar, punctuation and sentence structure 1 point
Total Points Possible 8 points
1
Brasel, Kelsey
From: [email protected] Sent: Friday, October 17, 2014 11:31 AM To: Brasel, Kelsey Subject: Findings of university investments review and action plan
October 17, 2014 Dear Friends and Colleagues, Today we presented to the State Budget Committee the analysis, results, and enhanced internal control management action plan related to the Ball State University Board of Trustees-initiated investigation into the investment fraud case. We were pleased to report that the current investments portfolio represents all valid investments and assets to the university. The investigation clearly indicated that this fraud was committed with the intent to circumvent the university internal controls in place at the time. The review also informed us that several of our internal controls must be improved and elevated to current best practices. Through the work of Deborah Daniels of Krieg DeVault with financial audit expertise from Crowe Horwath working with the Ball State administration, a comprehensive management action plan has been developed and will be fully implemented. This plan, which we also presented to the State Budget Committee, represents new controls already instituted since the discovery of the fraud as well as new recommendations from Crowe Horwath. The plan will generally include improved policies and procedures related to:
A new direct report of the university internal auditor to the Board of Trustees Audit and Compliance Committee and the president, beyond the vice president for
2
business affairs.
The Board of Trustees Audit and Compliance Committee will now provide direct oversight of the investment strategy and policy and will review the investment portfolio on a scheduled basis.
The university's whistleblower policy will be supported with a hotline through an independent third-party provider.
Improvements have been made in the selection and authentication of brokerage firms.
All purchased securities are held for safekeeping through a registered third party.
The schedule of reconciliations of accounts has been improved.
External support and expertise will be engaged for the auditing of certain areas, such as information technology.
Although we continue to review our options regarding legal action and potential recovery of the $10,022,705 remaining balance of the fraudulent transactions, the uncertainty of the timeline and outcome of that process has led us to directly address the potential loss in this year's financial accounting. This year, we will "write down" the loss with funds from reserves and grant-derived revenue. The university has worked throughout this process with the State Board of Accounts to ensure that these losses are accurately reflected in our financial statements. We strongly believe that this difficult period in Ball State's long and distinctive history is now at an end. We have fully accepted the facts, issues, and challenges with a new commitment to moving forward together with a stronger financial system and a more collaborative leadership team that pursues excellence in best practices management and accountability as well as strategic thinking and innovation. We are deeply appreciative of the support and encouragement through this time expressed by the Ball State community and value your continued commitment to our excellence and success. With best personal regards,
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Paul W. Ferguson President
Richard J. Hall Chair, Board of Trustees
1 of 1 DOCUMENT
The Chronicle of Higher Education
June 30, 2014 Monday
How One Investment Manager Gambled Away $13.1-Million of Her University's Money
BYLINE: Vimal Patel
SECTION: ADMINISTRATION; News
LENGTH: 1926 words
ABSTRACT
As fraudulent investments are made public, Ball State University creates new safeguards.
FULL TEXT
Lured by promises of quick returns, a midlevel administrator at Ball State University gambled on a series of risky investments. Unchecked and undetected by others, the decisions made by the former director of cash and investments resulted in the loss of $13.1-million of the university's money.
How was Gale Prizevoits, the former director, who was earning $84,000 a year shortly before she was fired, able to sign off on questionable high-dollar contracts with no authorization from higher-level administrators? Why didn't Ball State officials, as well as state and internal university auditors, catch the deals, which enabled a swindler to buy luxury cars and real estate with public funds?
The incidents at Ball State serve as a cautionary tale about what can happen if a university fails to enforce effective safeguards to ensure prudent investing of its money.
Ms. Prizevoits, who was fired by the university in 2011, five years after she began working there, may have been motivated in part by a desire to demonstrate to Ball State officials that they should pursue a more aggressive investment strategy, according to emails provided by the university. In one, she wrote that she had made at least one of the investments with the hope of earning quick returns, to "prove" to the Board of Trustees that a change in the university's investment policy was warranted.
University officials describe their general financial approach as conservative, built around low-risk investments like certificates of deposit and money-market accounts.
Facing dwindling budgets and intensifying revenue pressures, colleges across the country have become more creative over the past decade or so in how they invest, said Antony Page, an Indiana University law professor who teaches courses on contracts and international securities regulation.
These "alternate investments" include foreign markets, commodities, certain kinds of real estate, and what Ms. Prizevoits believed she was buying in at least one of the deals that went wrong-collateralized-mortgage obligations, a type of mortgage-backed security.
Page 1
Eventually, however, Ball State's problem was not the soundness of Ms. Prizevoits's investment strategy but her dealing with people who, the courts have found, committed fraud. Ball State, a 21,000-student institution in Muncie, Ind., also lacked the right kinds of safeguards to detect problematic investments.
"It just seems like there wasn't anybody at Ball State checking," Mr. Page said. "You must make sure there are controls so that one misguided employee can't blow so much money."
'Lack of Due Diligence'
Over a series of three contracts, Ms. Prizevoits signed over more than $8-million of the 96-year-old university's money in 2008 to a Florida-based company called Betts and Gambles Global Equities LLC, to invest in collateralized-mortgage obligations. The founder of the company, federal-court documents state, instead spent part of the money on a Ferrari, a Maserati, and real estate.
By 2010, Ms. Prizevoits had become suspicious of the investments she had made with Betts and Gambles, documents state. Even so, she made another questionable investment on behalf of Ball State, sending $5-million to a California company, Blackhawk Wealth Solutions Inc., to invest in fixed-income securities called Treasury Strips. Much of that money flowed to another company, and was then used to buy a series of real-estate properties in the Bronx, N.Y.
Seth Beoku Betts, founder of Betts and Gambles, was sentenced in June to 51 months in federal prison for securities fraud. A Brooklyn man, George C. Montolio, was sentenced to 36 months in federal prison for wire fraud in March 2013 in connection with the $5-million investment.
Ms. Prizevoits was fired a month after the U.S. Attorney's Office alerted the university to the California investment. Ball State officials didn't publicly reveal the fraud incidents until this June, administrators say, because law-enforcement officials asked them not to disclose the cases as investigations were continuing.
Ms. Prizevoits had the qualifications for the university investment job, according to information about her credentials and work experience that Ball State released in June. Only a bachelor's degree was required for the position, which controls about $270-million to $350-million of the university's unrestricted net assets, although an M.B.A. was preferred. Ms. Prizevoits earned an M.B.A. at Indiana University in 1985.
She owns a home in Palm Coast, Fla., with Lawrence Cistrelli, Ball State's director of risk management, according to records from the Flagler County property appraiser's office.
University officials say that Mr. Cistrelli and Ms. Prizevoits reported to different supervisors, and that their duties did not overlap.
Randall Howard, Ball State's treasurer and vice president for business affairs, said that the university had checks in place, but that Ms. Prizevoits worked around them.
"It was a combination of deceit, concealment, mischaracterization, and, to be fair, probably some lack of due diligence on other folks' part," he said.
Ms. Prizevoits mischaracterized the type of security that was being purchased, concealed information from auditors, and did not show the contracts she had signed to any other university official, Mr. Howard said.
She did not respond to an email from The Chronicle requesting comment for this article.
New Safeguards
Ball State officials learned of the existence of the deals when an investigator from the U.S. Attorney's Office for the Southern District of New York contacted them in September 2011 about the California investment, Mr. Howard said.
Page 2 How One Investment Manager Gambled Away $13.1-Million of Her University's Money The Chronicle of Higher
Education June 30, 2014 Monday
That prompted the university to review all of its holdings, a step that revealed the Betts and Gambles fraud, he said.
University officials say they have seen no evidence that Ms. Prizevoits personally benefited from the transactions. A federal investigator's report from the -Betts case portrays her as a victim of fraud, and the emails show her as becoming increasingly worried as returns-along with the principal investment, which she eventually requested back-did not materialize.
However, when the U.S. Attorney's Office is done with the case, Ball State officials plan to sit down with a local prosecutor and present information that university investigators have uncovered.
"We will let that person determine whether any state crimes have been committed," Mr. Howard said. "The evidence we have uncovered makes it appear that somebody went to great lengths to conceal information and mischaracterize investments from the very beginning."
Mr. Howard described the new safeguards that Ball State has adopted, which he said would probably have prevented this situation. Investments now can be purchased only through brokers on an approved list, and only Mr. Howard can put brokers on that list. All investments must also flow through a single prime broker, who cross-checks all purchases, he said.
Ultimately, he said, no risk-management strategy is foolproof.
"The several controls we've added would prevent this particular fraud from happening again," he said. "Unfortunately, if you combine at least one person wanting to commit a crime with somebody else who is either helping to conceal the crime or not being diligent in the controls, you can't have enough controls to protect for everything."
Mr. Page, the Indiana University professor, said this type of fraud is uncommon at universities because they have typically done a good job of creating safeguards. He called it "the upside of bureaucracy."
"But there's a trade-off: The more safeguards you put in place, the more costly it is," he said. "Was Ball State in the right place? Probably not. But on the other hand, I'm sure there's a hundred other small colleges that were doing the same as Ball State was doing, and they weren't victimized."
The fraud incidents also pose a public-perception problem at a university that, like many public institutions across the country, has faced state budget cuts in recent years.
The fraud has had no impact on Ball State's day-to-day operating budget, Mr. Howard said. The millions of dollars that were invested and lost are "unrestricted net assets," which are typically set aside for long-term obligations, he explained. This money comes from a variety of sources, including tuition, the previous year's interest earnings, and revenues from housing and dining, parking, and student-services fees. All budget reductions that the university has had to make in recent years can be tied directly to cuts in state appropriations, he said.
The university's explanation is not sitting well with some alumni and others.
"It drives me nuts," said Bobby Ellis, a photographer in Nebraska who graduated from Ball State in 2013. "If you're supposed to get approval from higher-ups, you shouldn't be able to invest the funds until you get it. It's kind of like giving someone a check. You have to sign off on the check for it to be cashed in your name. Why wasn't the university doing that?"
Mr. Howard said the university's priorities have been to make sure this kind of fraud doesn't occur again, catch the guilty parties, and recover as many assets as possible. Federal investigators have seized assets purchased by both of the men who were convicted of using Ball State's money illegally, and the full value won't be known until the government sells those assets. Mr. Howard said his understanding is that most, if not all, of the proceeds from the sale of the assets
Page 3 How One Investment Manager Gambled Away $13.1-Million of Her University's Money The Chronicle of Higher
Education June 30, 2014 Monday
will go to Ball State.
"Right now," he said, "that includes five properties, several automobiles, and some sports memorabilia."
Investments Gone Wrong: At Ball State, a Loss of Millions
The investment deals under investigation by federal officials began two years after Gale Prizevoits began to work for Ball State University. Here are some key events:
March 2006: Gale Prizevoits begins working at Ball State as manager of cash and investments.
July 2008: Ms. Prizevoits signs two agreements-one for $2.5-million and the other for more than $3.1 million-with Betts and Gambles Global Equities LLC. The company's founder, Seth Beoku Betts, says he will invest the money in a type of security called a collateralized-mortgage obligation.
December 2008: Ms. Prizevoits signs a third agreement with Mr. Betts, for $2.5-million. A federal investigator would later write that Betts, that same day, transferred $325,000 of the un1iversity's money to a car dealership to buy a Ferrari and a Maserati.
April 2010: Ms. Prizevoits signs a $5-million agreement with a California-based company, Blackhawk Wealth Solutions Inc., to invest in fixed-income securities called Treasury Strips.
September 2011: Investigators from the U.S. Attorney's Office for the Southern District of New York alert Ball State officials that the institution may have been defrauded as part of the California investment. That leads administrators to examine all of Ball State's investment holdings, and the university discovers the three contracts with Betts.
October 2011: Ms. Prizevoits is fired.
March 2013: A Brooklyn man, George C. Montolio, is sentenced to 36 months in federal prison after pleading guilty to one count of wire fraud in connection with the unauthorized $5-million investment made by Ms. Prizevoits.
June 2014: Mr. Betts is sentenced to 51 months in prison in connection with the $8.1-million in Ball State investments after pleading guilty in February to one count of securities fraud.
LOAD-DATE: July 3, 2014
LANGUAGE: ENGLISH
PUBLICATION-TYPE: Newspaper
Copyright 2014 The Chronicle of Higher Education All Rights Reserved
Page 4 How One Investment Manager Gambled Away $13.1-Million of Her University's Money The Chronicle of Higher
Education June 30, 2014 Monday
10/22/2014 BSU writes off $12.6 million from scam
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BSU writes off $12.6 million from scam
BSU officials appear before lawmakers.
Seth Slabaugh, [email protected] 7:43 a.m. EDT October 18, 2014
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.
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10/22/2014 BSU writes off $12.6 million from scam
http://www.thestarpress.com/story/news/local/2014/10/17/bsu-writes-million-scam/17449489/ 2/3
THESTARPRESS Attorney linked to BSU scandal prosecuted
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.
THESTARPRESS Figure in BSU investment scandal bankrupt
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,
10/22/2014 BSU writes off $12.6 million from scam
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Rick Hall
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.
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.
“
”
Ward: Millions gone, no one accountable Jeff Ward, [email protected] 5:30 p.m. EDT August 10, 2016
Consider it case closed on the missing millions of Ball State University funds. No one will be charged, according to prosecutor Jeffrey Arnold.
Someone managed to "lose" $13.1 million in university funds and no one is held accountable (/story/news/local/2016/08/05/prosecutorclosesbookbsuinvestmentscam/87968326/). Incredible. Was this the perfect crime or a gross case of incompetence? Maybe a combination of both.
Don't blame Arnold and the prosecutor's office, the last link in a long line of investigations at the federal and state level that also resulted in no charges.
If you recall, the university's former director of cash and investment, Gale Prizevoits, entered into contracts with "investors" in 2008 and 2010 that resulted in the loss of university funds. Some of the money funneled toward the "investors" was used to buy mansions, townhouse buildings, luxury cars and sports memorabilia. All of this happened without the knowledge of Ball State officials. The university has since closed loopholes to make these kinds of actions harder — hopefully much harder — to conceal. Prizevoits entered into the contracts on her own and managed to cover her tracks from university officials.
Of that $13.1 million, only $1.5 million has been recovered. The rest has been written off, lost. No one held accountable.
Don't think of this a victimless white collar crime. Ball State as an institution is certainly a victim. So, too, the students, parents and scholarship providers who paid money to Ball State, without worry the money would be squandered. Sure, they might not have been directly affected by the loss, but their money was taken just the same.
To give an idea of how big this loss is, let's say after $1.5 million was recovered, the realized loss was $11.5 million. That's equivalent to about 620 full time BSU undergraduate students attending for an academic year.
Two of those "investors," Seth Beoku Betts of Florida, pleaded guilty in federal court to securities fraud and George Montolio of New Jersey pleaded guilty to wire fraud. Other players in this saga have pleaded guilty to charges and one lawyer was disbarred.
If someone can make off with more than $13 million and not face charges, that's a clear indication there are major gaps in the legal system. Those gaps ought to be closed. State lawmakers, some of them showing keen interest in a prosecution, should investigate and craft legislation that makes it easier to follow the money and hold people accountable, with severe penalties for breaking the law. If these kind of shenanigans could happen at Ball State, it could happen at other universities or other institutions that use public funds.
It appears all Prizevoits is guilty of is making incredibly foolish investment choices. A flawed person taking advantage of a flawed process.
Some accounts suggest she wanted highyield returns because she thought the university's investment strategy was too conservative.
Ball State said it would be fruitless to pursue Prizevoits, who apparently does not have assets to justify continuing to spend university time and money in attempts to recover lost funds.
That might be true, but it also sets a bad precedent. Maybe a civil case against Prizevoits, where the burden of proof is lower, might result in a verdict that acknowledges wrongdoing. It might also send a message to other potential wrongdoers that actions have consequences.
Collecting damages could be another matter.
To do nothing. To walk away from a loss of more than $11 million, is unconscionable.
It appears someone, maybe several someones, got away with the perfect crime, and the public is left to wonder how it happened.
Jeff Ward is a news columnist for The Star Press. Email him at [email protected] (mailto:[email protected]) with tips, suggestions or story ideas.
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