STATE OF SOUTH DAKOTA IN CIRCUIT COURT :ss COUNTY OF CHARLES MIX FIRST JUDICIAL CIRCUIT STATE OF SOUTH DAKOTA, ICR116-104 El) Plaintiff, MEMORANDUM OCT 25' 20,, -vs- DECISION a (Other Acts Evidence) Faber; taco EH3, STEPHANIE A. HUBERS, glittering Tf?o Ff?? .. Defendant. tr. trim-- The Court, having considered the motion and evidence presented in this matter, enters the following Memorandum Decision. I FACTUAL BACKGROUND In this case the State of South Dakota has charged Stephanie Hubers with the following offenses: 'Connt 1A, Grand Theft - alleging between November 20, 2009, and July 12, 2011, Defendant committed the offense by taking more than $1,000 and less than $100,000 belonging to American Indian Institute for Innovation in the alternative, Count 13, Receiving Stolen Property - alleging the Defendant possessed stolen property from A111 between November 20, 2009, and July 12, .201 1, and the value of the property was more than $1,000 but less than $100,000; Count 2A, Grand Theft by Deception - that between August 8, 2011, and June 13, 2013, the Defendant committed grand theft by deception, by taking from A111 more than $1,000 but less than $100,000; or in the alternative, Count 28, Receiving Stolen Property - that between August 8, 2011, and June 13, 2013, the Defendant did receive stolen property from A111 with a value of more than $1,000 but less than $100,000; and Count 3A, Grand Theft by Debeption - that between the dates of July 1, 2013, and October 13, 2014, the Defendant took property of A111 with a value of more than $5,000 but less than $100,000; or in the alternative, Count 3B, Receiving Stolen Property that between July 1,2013, and October 13, 2014 the Defendant did possess stolen property belonging to A111 with a value of more than $5,000 and less than $100,000. MCEC is an educational cooperative located in Platte, South Dakota, organized under 1, et seq., to enhance services to school districts and other public or Page 1 of9 private entities deemed appropriate by the cooperative board. These cooperatives are established by an agreement among the participating school districts. SDCL 13-5-3211. Mid-Central includes various school districts in south central South Dakota. Dan Guericke is the executive director of MCEC. Scott Westerhuis was the business manager of MCEC. Nicole Westerhuis has been given various titles at MCEC through the evidence with the last title being assistant business manager. Scott and Nicole Westerhuis were husband and wife and both worked at MCEC simultaneously, Scott having started working there many years prior to Nicole?s employment with the entity. Defendant was employed at MCEC and worked directly with Scott and Nicole Westerhuis. is a nonpro?t business organization that was incorporated in 2008 to provide Native American edncational services to school districts. was primarily organized by Scott Westerhuis and Stacy Phelps. Scott Westerhuis held the title of chief financial officer (CFO) and Phelps held the title of chief executive of?cer, (CEO). Stacey Phelps is an educator who has held positions in the past with state government and other entities. He was both an employee of MCEC and CEO of A111. A111 also has three board members who are charged with the oversight of the company, but the testimony provides that they rarely, if ever, met for formal meetings or adopted any speci?c policies concerning the function and operation of the company or with respect to their ?nancial management. The initial board members were Carlos Rodriguez, John Harrington, and Chris Eyre, all who live in other states. Harrington is the Chairman of the Board. MCEC, as an educational cooperative, was selected to administer various federal grants awarded to South Dakota Department of Education (SDDOE). Many of these grants were to be used to enhance the educational Opportunities and outcomes for Native American students in South Dakota. SDDOE then awarded these grants to MCEC for administration and implementation. Although there were several grants involved, the most discussed in the evidence in the present case was the Gear Up grant. MCBC entered into contracts over the years since 2009 with to provide services under the grants as a sub-recipient or sub?contractor, the actual legal characterization being in dispute. Page 2 of 9 MCEC, as a pass~through recipient of the SDDOE grants, was required by the agreement between the two entities, as well as federal law, to annually audit their books and records. MCBC was required to perform a "single audit" if the grant recipient was responsible for a minimum of $500,000 (now $750,000). MCEC had hired Schoenfish and Co. from Parkston, South Dakota, as their auditor almost two decades prior to the acts which gave rise to the present charges. Schoen?sh was also hired to perform the single audit for the MCE grants. The single audit reports prepared by Schoen?sh were submitted to MCEC who would, in turn, submit the same to the MCEC board of directors as well as SDDOE. As part of the single audit reports in 2013 and 2014 Schoen?sh noted de?ciencies and irregularities with respect to the MCEC ?nancial records, with the most signi?cant de?ciency, as related to the present charges, being a large and growing accounts receivable dealing with payroll and other entities, particularly reSpect to Under SDCL 13-5-31 MCEC is allowed to provide payroll services as an educational cooperative. The various exhibits preSented in this case show that MCEC reported on their ?nancial records and in their minutes that they were advancing funds to A111 and other entities, for payroll and other services provided under the grants going back many years According to Randy Schoen?sh, the advancements and accounts receivables with AIH was an ongoing issue and it was no secret MCBC bankrolled them. Schoen?sh also had an audit closing meeting with MCEC each year, where audit ?ndings were discussed with MCEC employees as well as at least one MCEC board member where these issues were discussed. After these audit de?ciencies were noted in the fall of 2014, SDDOE communicated with MCEC that they expected them to take appropriate corrective action concerning the de?ciencies. After the audit report issued in 2015 showed further deficiencies, SDDOE began investigating further. By that time, A111 owed a substantially larger account receivable to MCEC. Defendant was initially an exclusive employee of MCEC. In addition, Catrina Brown and Kourtney DeNeui were also employees at MCEC. Scott Westerhuis, as manager of MCEC, had agreed with all three employees that he would pay them additional compensation from AllI. Ms. Brown and Ms. DeNeui both testi?ed at the hearing in this matter and indicated that each of them were unsatis?ed with the MCEC Page 3 of 9 compensation and were considering other employment. Both of them indicated that Scott Westerhuis encouraged them to stay by offering them additional pay from They accepted and were paid additional compensation from They both testi?ed the payments were not ?hush money? and were never told to keep the payments secret. With respect to the Defendant, she began receiving additional payments from AIH in approximately November of 2009; however, the purpose and reason for these payments was not presented as evidence. On September 17, 2015, after being noti?ed that SDDOE was cancelling certain grant contracts with MCEC, Scott Westerhuis took his own life, the life of his wife (Nicole), as well as his children, and burned his house down. This incident triggered an investigation by the South Dakota Department of Criminal Investigation (DCI), which included both the deaths of the Westerhuis family and ?nancial irregularities at MCEC. As part of that investigation, DCI agents interviewed the Defendant. The DCI agents were aware of the fact that there were some discrepancies in the beginning and ending balances in the ?nancial records and that MCEC board members would question the discrepancy. The Defendant also explained to DCI agents that she was instrumental in creating Exhibit 1, which was a summary of journal entries that were made at the end of each month in order to reconcile the balances of the MCEC bank account. She told the agents that once this was put into place, the accounts balanced and MCEC board members no longer inquired about the balance discrepancies. Without making any speci?c finding, the Court notes that the State alleges that Hubers did virtually nothing for the additional compensation she was receiving from Alil. 0n the other hand, in reviewing the DCI interview of the Defendant, the Court notes that she claims that she did do work that bene?tted All] during the relevant time period. The State now requests that they be allowed to present other acts or res gestae evidence in this case. The request in the State?s notice is in narrative form. A summary of the evidence in the State?s notice is as follows: 1. That on September 17, 2015, Scott Westerhuis took the lives of his family, committed suicide and burned his house down. Page 4 of9 2. That Scott and Nicole were involved in leadership positions at MCEC and Defendant served as of?cer manager under Scott Westerhuis?s direction. 3. That the Defendant knew that All] was taking money from MCEC and that the use of the money was unauthorized. Further, the State wants to present evidence that Defendant knew that Scott and Nicole Westerhuis were stealing money from A111, which was causing MCEC's accounts receivable not being reimbursed and that did not have suf?cient cash reserves to make their payroll. The State's claim is that only Scott and Nicole Westerhuis and the Defendant knew about MCEC bankrolling payroll and the scheme which Scott Westerhuis used for his embezzlement. 4. That to facilitate Scott and Nicole?s illicit activities, the Defendant created a journal entry invoicing for the money used without authorization. The Defendant would do this by making two withdrawals by from MCEC each month on the 5th and 20th and then adding them up and making ajournal entry in the MCEC accounting system. 5. Defendant was aware that by the end of 201 had owed MCEC between $725,000 and $826,000 for payroll because the Westerhuiscs had not been replacing the money to MCEC. 6. The State claims that because of Defendant's actions in reconciling the MCEC records, neither MCEC's executive director, Dan Guericke, nor the board members know about the Westerhuises' activities. 7. The State wants to present evidence that Defendant conspired with Scott and Nicole Westerhuis to commit the offenses of grand theft. 3. The State also wants to present evidence that when board members of MCEC would ask questions, Scott Westerhuis would advise the board members that the discrepancies in beginning and ending balances were due to void checks and journal entries and that Defendant told investigators that while Scott Westerhuis?s statement was technically not a lie, she "just kept her mouth shut because she knew what was really going on." ANALYSIS This Court noted at the hearing and restates here, that the evidence in question does not involve a prior crime or wrongful act that re?ects upon the Defendant's character as per SDCL 1949-404. In other words, the State is not asking to present Page relevancy is less when the issue is motive and there is an allegation of consPiracy. Admissibility. under Rule 404th} of Federal Rules of Evidence; of evidence of other crimes. wrongs. or acts not similar to offense charged, 41 A.L.R. Fed. 497 (1979). Although the Defendant is not charged in this case with conspiracy, the State's theory is that the Defendant conspired with Scott and Nicole Westerhuis to allegedly steal money from MCBC through a scheme involving the A111 payroll. The Defendant is charged with theft by deception, which requires proof that she created or reinforced a false impression as part of a scheme to steal money. The State's theory is that the Defendant actively participated in the scheme with Westerhuis to embezzle MCEC money, at least at some point in time, and was not merely receiving additional compensation for extra work on behalf of A111. Under the unique circumstances of this case, the Court will allow the State to present conspiracy type evidence as it is part of the res gesture of the case. This is intrinsic evidence and interwoven into the entirety of the transactions which form the basis of the charges. Following the submission of the briefs in this matter, on May 24, 2017, the State submitted a sur-response with an attachment of a recent report from the South Dakota Department of Legislative Audit (DLA) consenting a special review of the MCEC ?nancial oversight. MCEC was afforded an opportunity to respond to the ?ndings of the DLA report. MCEC's re3ponse indicates that MCEC was never aware "of the payroll scheme or payments to Hubers? and that the Defendant as well as the Westerhuises were deceiving the MCEC board. The Defendant has objected to the submission of the DLA report because it lacks foundation and contains hearsay. The Court sustains the objection as far as this report becoming evidence in the trial in this matter. The Court notes that it does lack foundation as well as an opportunity for the Defendant to cross-examine any persons who may have contributed to MCEC's reply. Furthermore, it contains hearsay. Most importantly, some of the MCEC reSponse signi?cantly con?icts with the evidence presented in this Case. When Randy Schoenfish testi?ed he laid the foundation for Exhibits 101 and 102, the audit books from which he did his work. These exhibits were a compendium of records that were submitted to Schoen?sh and Co. for purposes of commencing the audit. These records contained ?nancial information, board minutes and other items necessary for that purpose. During Schoenfish?s Page of 9 testimony, he testi?ed that not only did the records show that MCEC was bankroiling they were also bankrolling another entity called OSEC over a long period of time. He testi?ed that as the auditor, he knew MCEC had advanced money in this manner and it was a practice that he was familiar with during the time he worked with MCEC over a period of time. He testi?ed that it was ?no secret" that MCEC banltrolled these other entities, which he understood to be educational nonpro?t organizations. He testi?ed that at one time OSEC owed MCEC almost $790,000. At the. same time, in 2009, also owed money to MCEC. He agreed that fOr the years 2009 through 201 I both of these entities owed a very large amount of money to MCEC. In addition, minutes of board meetings of MCEC which he reviewed and audited Show that they speci?cally budgeted these funds when they were resolving their annual budget. The evidence also disclosed that board minutes showing these matters were published and available to the public on the MCEC webpage. At the end of each audit Schoen?sh held a closing meeting where board members, the director, Dan Guericke, Scott Westerhuis and others were present. Schoen?sh ?rrther testi?ed that any time you see an account receivable and it grows that is a red ?ag in the audit and it would be discussed with the client at each closing meeting. Consequently, the evidence presented at the hearing in this matter con?icts with the MCEC response to DLA in signi?cant ways. However, it should be noted that although MCEC may very well have been aware that they were bankrolling A111 and OSEC, MCEC may have been unaware of exactly where that money was going. For example, it is plausible that they had no idea that Catrina Brown, Courtney DeNeui, and Defendant were receiving some of the Alli payroll checks. It is also plausible that MCEC was unaware that Scott and Nicole Westerhuis were receiving similar payments. Allowing the State to present evidence that the MCEC board was completely anaware All] payroll and accounts receivable would be contrary to the established unre?ned evidence presented at the hearing in this matter. Consequently, the State can make no such argument or present such evidence at trial. The State may, however, present evidence that the board was not aware of certain items of the accounts receivable being paid to their own employees. In other words, they may Page 8 of 9 present evidence that MCEC knew about the A111 accounts receivables, but did not know the details as to speci?cally who that money was being paid to. Otherwise, all other testimony and evidence set forth on pages 1 through 3 of the State's notice of intent to introduce 404(b) and res gestae evidence will be allowed. The Defendant's motion to exclude such evidence is denied. Based upon the above and foregoing, iT IS HEREBY ORDERED, that the State will be allowed to introduce the evidence in their Notice of 404(b) and res gestate, and it is further ORDERED, that the Defendant?s motion is granted only to the extent that the State will not be allowed to introduce evidence, or otherwise characterize evidence, that the A111 payroll and accounts receivable were secret or unknown to MCEC, and it is futher ORDERED, that the recent DLA report ?led in this matter May 2017 is excluded as evidence. This Memorandum Decision will constitute the Court?s Findings of Fact and Conclusions of Law. Dated this r/Q? day of October, 2017. BY THE T: 24%? Hon. Bruce V. Anderson Circuit Court Judge Page 9 of 9 STATE OF SOUTH DAKOTA IN CIRCUIT-COURT . COUNTY OF CHARLES MIX FIRST JUDICIAL CIRCUIT STATE OF SOUTH DAKOTA, 1 1CR116-103 06' Plaintiff, 7 2,5 20,7 MEMORANDUM 2 DECISION Fig?:- (Other Acts Evidence) ??D?mcfg?iggegm, DANIEL M. GUERICKE, coverage: Defendant. The Court, having considered the motion and evidence presented in this matter, enters the following Memorandum Decision. FACTUAL BACKGROUND In this case the State of South Dakota has charged Stacy Phelps and Dan Guericke in a joint indictment with eight felony offenses. The speci?c offenses against Guericke are: Count 3, Falsi?cation of Evidence .. back dating a contract between MCEC and A111 for services between October 2013 and September 2014; and Count 4, Falsi?cation of Evidence - back dating a contract between MCEC and A111 for services between October 2014__and September 2015; and Count 5, Conspiracy to Offer Fraudulent Evidence - that the Defendant, Stacy Phelps, Scott Westerhuis, and Nicole Westerhuis conspired to offer evidence as genuine in an of?cial investigation knowing it was forged or fraudulent, i.e. the contract alleged in Count 1; and Count 6, Conspiracy to Offer Fraudulent Evidence that Defendant and Stacy Phelps, Scott Westerhuis, and Nicole Westerhuis conspired to offer evidence as genuine in an of?cial investigation knowing that it was forged or fraudulent, i.e. the contract in Count 2; and Count 7, Conspiracy to Offer Fraudulent Evidence - that the Defendant, Scott Weeterhuis, and Nicole Westerhuis conspired to Offer as genuine, in an of?cial investigation by the South Dakota Department of Legislative Audit, a contract allegedly back datedbetween MCEC and Rick Mclmer for service dates between July 2013 and June 2014; and Count 8, Conspiracy to Offer Fraudulent Evidence-that the Defendant, Scott Westerhuis, and Nicole Westerhuis conspired to offer as genuine in an of?cial investigation of the South Dakota Department of Legislative Audit, a back dated contract between Keith Moore and MCEC for service dates between July 2013 and June 2014. MCEC is an educational cooperative located in Platte, South Dakota, organized under -3 1, et seq., to enhance services to school districts and other public or private entities deemed appropriate by the cooperative board. These cooperatives are established by an agreement among the participating school districts. SDCL 1345-311. Mid-Central includes various school districts in south central South Dakota. Dan Gnericke is the executive director of MCEC. Scott Westerhuis was the business manager of MCEC. Nicole Westerhuis has been given various titles at MCEC through the evidence with the last title being assistant business manager. Scott and Nicole Westerhuis were husband and wife and both worked at MCEC simultaneously, Scott having started working there many years prior to Nicole?s employment with the entity. A111 is a nonpro?t business organization that was incorporated in 2008 to provide Native American educational services to school districts. was primarily organized by Scott Westerhuis and Stacy Phelps. Scott Westerhuis held the title of chief ?nancial of?cer (CFO) and Phelps held the title of chief executive of?cer, (CEO). Stacey Phelps is an educator who has held positions in the past with state government and other entities. He was both an employee of MCEC and CEO of A111. A111 also'has three board members who are charged with the oversight of the company, but the testimony provides that they rarely, if ever, met for formal meetings or adopted any speci?c policies concerning the function and operation of the company or with respect to their ?nancial management The initial board members were Carlos Rodriguez, John Harrington, and Chris Eyre, all who live in other states. Harrington is the Chairman of the Board. MCEC, asan educational cooperative, was selected to administer various federal grants awarded to South Dakota Department of Education (SDDOE). Many of these grants were to be used to enhance the educational opportunities and outcomes for Native American students in South Dakota. MCEC entered into contracts with for purposes of providing services under these various grants. Pursuant to federal rules and the contract between SDDOB and MCEC, any service provider as a sub-recipient of grant funds would be subject to auditing requirements. The allegations here are that after de?ciencies were noted in audits of MCEC ?nancial records in 2013, SDDOE began watching MCEC more carefully and demanding that they cure any such de?ciencies. State alleges that after further de?ciencies were noted in the 2014 audit, that the Defendant modi?ed the contracts between MCEC and A111, as alleged in Counts 1 and 2, for purposes of avoiding an audit of ?nancial records and that the Defendant and others conspired to offer these modi?ed contracts to SDDOE as part of their of?cial investigation into ?nancial irregularities and audit de?ciencies at MCEC. On September 17, 2015, Scott Westerhuis was noti?ed that SDDOE would be cancelling their grant contracts with MCEC. On that same day, Scott Westerhuis took his own life as well as the lives of his wife (Nicole) and their children and burned their house down. This incident caused a criminal investigation to ensue, which investigated the deaths of the Westerhuis family as well as ?nancial irregularities at MCEC. As part of that investigation, the South Dakota Department of Criminal Investigation (DCI) obtained what they considered to be strong evidence of embezzlement of substantial funds by Scott and Nicole Westerh'uis as well as irregularities in the dealings between MCEC and A111. The scheme, scent-ding to the State?s theory, is that the Westerhuises used A111 as a mechanism to complete the theft by use of Intuit accounting software that could access and make payments from the MCEC general fund to for payroll and other services. The State has not submitted any evidence or made any claim that Defendant Guericke knew of the theft of MCEC funds by Scott and Nicole Westerhnis, or that he otherwise participated in the scheme other than the charges here and with respect to "the other acts evidence the present motion addresses. The State moves in this case to allow other acts or res gestae evidence as follows: 1. A report concerning MCEC from the South Dakota Bureau of Finance and Management as well as Department of Legislative Audit for the ?scal year ending June 20, 2014 that contained numerous ?ndings in relation to the Gear Up grant that were unfavorable; 2. That in August cf2015 the Defendant appeared before the Government Operations and Audit Committee (GOAC) to address the audit ?ndings and the Defendant was unable to inform GOAC how many students had utilized certain Microsoft software that was donated as a grant match for the Gear Up grant program and that lack of documentation of this grant match could result in the State of South Dakota heing'required to return $4 million to the federal government; 3. During the August 25, 2015 GOAC hearing, the Defendant informed GOAC members that 300 students attended the summer youth program, that 98 percent of them graduate from high school and 95 percent go on to attend post-secondary education. In the weeks following his testimony at GOAC the Defendant engaged in a series of emails relating to these statics which indicate the Defendant may have provided GOAC inaccurate information; 4. Between 2009 and 2015 the Defendant signed 17 contracts on behalf of MCEC with no evidence that these contracts were presented to the MCEC board for approval as required by South Dakota law. The testimony in this case establishes that the Gear Up grant match from Microsoft remains an unresolved issue. It appears that even. during the hearing on this matter that state and federal of?cials continued to work on deter-mining whether or not the Microsoft match was of adequate value and whether or not the software programs involved were actually distributed and being used by students. During the hearing on the present motion Defendant?s counsel offered Exhibit 124, an email from Richard Reiber, an employee of the Post Audit group of "the U.S. Department of Education. This email was sent on August 28, 2015 and found that the values were suf?cient for the match, but requested data on Gear Up students using the software in the 2015-2016 school year. SDDOE received the email and forwarded it on to others who were tasked with the job of ?nding the student use data. This evidence (Exhibit 124) is received for purposes of the Court determining this motion. ANALYSIS When a party desires to introduce other acts evidence the Court is governed by SDCL 19-19-404 That statute provides: Prohibited uses. Evidence of a crime, wrong, or other act is not admissible to prove a person's character in Order to show that on a particular occasion a person acted in accordance with the character. (2) Pennitted uses; notice in a criminal case. The evidence may be admissible for another purpose, such as proving motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of . If. the Court determines that the evidence is relevant, it must then apply Rule 403, which is codi?ed in SDCL 19-19-403. That statute provides: ?The Court may exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence." In this case the State provided proper notice of their intent to use the items of evidence outlined above. In order for other acts evidence to be admissible it must be relevant. State v. Wright, 593 792 (SD 1999). If the only reason for offering the evidence is to show a defendant?s propensity, then it is clearly irrelevant. ?In this country it is a settled and fundamental principle that persons charged with crimes must be tried for what they allegedly did, not for who they are.? State v. Mueller, 1996 SD 60,1} 6, 548 at 468. Close similarity is not required of common plan or scheme evidence, if it is not used to prove. identity. Unlike evidence of uncharged acts used to prove identity, the plan need not be unusual or distinctive; it need only exist to support the inference that the defendant employed that plan in the charged offense.? Wright, supra, (citing People v. Eweldr, 7 Cal.4th 380, 27 Cal.Rptr.2d 646, 659, 867 P.2d 757, 770 (1994). Once the evidence is found to be relevant to some issue in the case, the balance tips emphatically in favor of admission unless the dangers set out in Rule 403 substantially outweigh probative value. Wright at 1 l4. Mere damage to the Defendant's position is no basis for exclusion; the harm must come not from prejudice but from "unfair" prejudice. Wright at 1 16. In this case the State argues that once MCEC was under scrutiny by State authorities for noncompliance with the various grant requirements that Scott Westerhuis as well as the Defendant were scrambling to locate or generate missing documents to comply with requests of auditors for the various State agencies looking into the grant audit de?ciencies. There is no evidence presented thus far that Defendant Guericke had knowledge as to the existence of prior valid contracts between MCEC and A111, but there is evidence that he at least understood that Scott Westerhuis was attempting to put a backdated contract in place to satisfy auditors. This backdated contract also attempted to change the legal status of from a sub- recipient to a sub?contractor. Presently, there is a lack of evidence that Defendant knew of the change in legal status between the contracts. MCEC was also missing employment contracts for Rick Melmer and Keith Moore (Counts 7 and 8). Contracts were prepared by an unknown person, but presumably Scott Westerhuis, for Melmer and Moore during the same timeframe. The State wishes to introduce evidence against the Defendant as to email conversations between himself and Melmer concerning his contract. There is some evidence that Defendant played an active role in getting the various contracts put in place, including backdating them, for the purposes of the various inquiries being made by State authorities. The State argues that the above summarized other acts evidence is res gestate evidence or otherwise relevant to prove motive andlor intent. The Defendant argues that the proposed evidence does not prove intent without conjecture by the jury and that there is no similarity in kind between the audit ?ndings and the charged offenses. He goes on to argue that the State?s Department of Legislative Audit (DLA) witness, Mr. Flannery, testi?ed that the types of ?ndings in the audit are not unusual but rather fairly common. Consequently, since many of the ?ndings are routine, the .DLA report would be insuf?cient as evidence to prove motive or intent. With respect to the GOAC testimony Defendant argues that the same cannot be used to prove motive or intent "because the testimony and emails in question came after the alleged offenses and it cannot be used to prove intent or motive for a crime that allegedly already occurred. He goes on to argue that more speculation that the State could be required to repay 4 milliondollars to the'federal government is insuf?cient to prove motive or intent and is highly prejudicial. Lastly, he argues that the evidence about 17 other contracts that were not approved by board is offered only to prove the Defendant?s shortcomings as leader of MCEC and that there was no evidence presented to show that the contracts were improper or that he otherwise withheld them from the Board. In order for the other acts evidence described above to be admissible it must be relevant. State v. Wright, 593 792 1999). The admissibility of prior acts evidence or other misconduct evidence is governed by the conditional relevance rule in SDCL Huddleston v. United States, 485 US. 681, 108 S. Ct. 1496 (1988). Accordingly, the trial judge does not make a preliminary ?nding that the other not evidence has been proven by a preponderance of the evidence, but only considers whether it has suf?cient probative value to support a permissive inference that the Defendant committed the other bad act. South Dakota Evidence (Second Edition) Larson and Hutton, 2013, p. 184. In addition, the United States Supreme Court has mied that acquittal of a charge of burglary will not bar testimony of a victim of that offense in a subsequent unrelated prosecution for bank robbery. Dowiing v. United States, 493 Us. 342, 110 s. Ct. 668 (1990). in the present case the Defendant is charged with conspiracy. In a conspiracy case, there is authority for the proposition that additional evidence is admissible if it is part of or in furtherance ofa general con3piracy. US. v. Collins, 779 F.2d, 1520 (11th Circuit 1985). In Collins, evidence of the defendant's involvement in a separate marijuana importation scheme was properly admitted for the limited purpose of explaining the extent of the defendant?s involvement, and the evidence showed whether the defendant had completely withdrawn from the drug importation scheme or had simply reduced his level of involvement. Cof?ns at In United States v. Gonzalez, 825 F. 2d 572 (First Circuit 1987}, the defendants were convicted of conspiracy to commit offenses or fraud against the United States. The Court found that evidence of other acts was admissible in a conspiracy case to dispel the inference of the attorney's lack of knowledge of the conspiracy in which he participated, even when the evidence did not directly implicate the attorney in criminal conduct. Moreover, the proponent?s burden on proving relevancy is less when the issue is motive and there is an allegation of conspiracy. Admissibility. under Rule 404%) of Federal Rules of Evidence. of evidence of other crimes, wrongs, or acts not similar to offense charged, 4] ALB. Fed. 497 (1979). in this case the Defendant was either duped by Scott and Nicole Westerhuis into creating the backdatcd or changed contracts or he was a willing participant in doing so with the intent to ward off any further questions or audit of MCEC by SDDOE. The State has the right to present evidence which may convince the jury that the truth lies in the latter theOry. In the present case the Court will address each item of evidence offered separately. The Department of Legislative Audit Single Audit Report. This report was triggered after Schoenfish Co, the auditors hired by MCEC to comply with the grant requirements, found de?ciencies in the ?nancial records. After further inquiry by DLA this report was created. The State claims that it did not re?ect favorably upon MCEC. This evidence does not precisely them other acts evidence as the report is not a ?crime, wrong or other act? re?ecting on the Defendant?s character. it does, however, show that an of?cial inquiry was being made of MCEC by State authorities. In this case the State must prove, as an essential element of the offenses charged, that there existed an official inquiry or investigation authorized by law. SDCL Consequently, it is admissible for that purpose. In addition, the Single Audit Report is relevant as intrinsic evidence as it arose out of the same series of transactions as the charged offense and is necessary to complete the story of the charge on trial. US v. Placios, 677 F3d.234 (tith Cir. 2012). As such, it is res gestate evidence that is admissible because it is part of the events which ?were interconnected and part of the continuing chain of activities on trial, State v, Vania, 659 380 (SD 2003); or is evidence intricately related to the focus of the case. State v. Andrews, 623 78 (SD 200-1). Consequently, the motion to exclude such evidence is denied. Microsoft Gear Up Match Grant and Returnof 4 Million Dollars Assessing this evidence has been difficult for this court on a number of levels. First, the issue as to the Microsoft match grant by donated software seems to be an open unanswered question between State and'Federal of?cials in charge of administration of the grant in question. Exhibit 124 seems to put much of the State?s theory with regard to this evidence in question. Second, it is presently unclear to this Court-who exactly was charged with the responsibility to make sure the appropriate matching funds were obtained. The agreement between MCEC and SDDOE seems to shift that responsibility to MCEC, but SDDOB remains obligated under the federal grant to ensure compliance. Further, it is not clear who at MCEC would have ultimately been delegated that responsibility. Ultimately the buck stops with the Defendant as Executive Director of MCEC, but questions remain as to whether he was derelict in following up or if something nefarious was at play, The fact that there may be questions remaining-as to the value of the match and the data to show that the Microsoft software packages were actually being used in schools serviced by MCEC does not seem to prove motive or intent to change or offer contracts which may have been the subject of an official inquiry or investigation. There is a logical disconnect between the charges presented here and the remaining unresolved questions with respect to the Microsoft match. Lastly, and most importantly, allowing the State to imply or infer that this unresolved issue could cause the State to repay 4 million dollars to the federal government, all while the Defendant was leading MCEC, is anfairly prejudicial and could persuade thejury by illegitimate means. Consequently, even using a minimal threshold of relevancy as is required, (Huddleston, this Court determines the evidence is not relevant to prove motive or intent with respect to the crimes charged. There is no evidence to show that contracts were changed or backdated with the intent or motive to affect the Microsoft match grant ?ndings. Further, if the evidence could somehow be censidered relevant, that relevance is substantially outweighed by the danger of unfair prejudice, especially when the issue remains unresolved by authorities having jurisdiction over the matter. State v. Wright, 593 792 (SD 1999). The Court further ?nds that the issues with the Microsoft grant and the alleged changing or backdating of contracts are separate issues raised by the audit and are therefore not inextricably intertwined to the degree that the evidence is necessary to complete the story of "the charges on trial and does not amount to res gestare evidence. The evidence may show neglect or dereliction of duty by MCEC and its employees, but it fails to show criminal behavior or wrought] conduct bearing upon intent or motive. Based upon the above and foregoing, the motion to exclude the evidence is granted and the State is prohibited from presenting any evidence or argument on the matter at -.trial The August 25th 2015 GOAC Gear UP Data Testimony. The State 3 theory as to this evidence is that Guericke? testimony was made up or that he pulled the numbersout of thin air ,and that by doing so he gave inaccurate information to GOAC. Thus, the State claims, this evidence is relevant to show intent as- an overall pattern of conduct to deceive State authorities inquiring about MCEC and Gear Up. The Defendant argues that since the crimes charged in Counts 3-6 occurred almost two weeks prior to the testimony on August 20] 5 that it bears no relevance upon intent or motive and that allowing the testimony with regard to Counts 7-8 is based upon speculation, and otherwise that it is not relevant and any possible relevance is substantially outweighed by the danger of unfair prejudice and misleading the jury. The Court notes that even if the-evidence may not be relevant to show motive or intent as to counts 3-6 because those crimes were allegedly committed prior to the GOAC testimony, the same argument would not apply to Counts 7 and 8 which allegedly occurred the following month. The Court has some similar concerns with this evidence as it does with the Microsoft match testimony. The GOAC testimony and the follow up emails indicate that the Defendant did not have actual data to present at the time of his testimony. Consequently, he either did as best he could in summarizing, based upon prior information he had, or he made the data up and then emailed Mr. Phelps to see if he was correct or even close. This resulted in an expanded email thread, including the Secretary of SDDOE and others, where the data collection was discussed. This email thread indicated that Mr. Phelps was working on collecting and organizing the data and prior to resolving the issue he gave a conservative estimate which conflicted with the Defendant?s testimony. Unlike evidence of uncharged acts used to prove identity, the plan need not be unusual or distinctive; it need only exist to support the inference that the defendant employed that plan in committing the charged offense.? Wright, supra, (citing People v._Ewoldt, 7 Cal.4th 380, 27 Cal.Rptr.2d 646, 659, 867 P.2d 757, 770 (1994). Since the Defendant decided to answer a question at GOAC to which he did not know the answer, this evidence is relevant to show he may have employed a plan to deceive State authorities. Since the charges allege he engaged in similar conduct with respect to the various contracts, the evidence is relevant as to intent, motive and plan. The Court further ?nds that the relevancy is not outweighed by the danger of unfair prejudice, misleading the jury or other considerations under rule 403. Seventeen Other Contracts Not Approved By MCEC Board. These contracts were spread out over a timespan of almost six years and were for various entities to provide different services to MCEC. Exhibit 7 provides a list of the contracts involved, some for evaluation businesses, some for Alli, some for Mr. Phelps personally, and at least one to the University of South Dakota. The testimony as to these contracts was that Tim Flannery, Audit Manager of DLA, had reviewed at least 50 service contracts and possibly hundreds of other contracts which MCEC had entered into and found these 17 that lacked board approval. He did not follow up in his investigation (other than the USE-contract) to determine if the contracts were complied with by the services being performed. He did testify that in his investigation that if he would have found a contract that was not performed or indicated illegal activity that he would have noti?ed the Attorney General. He made no such noti?cation. Most of the contracts appear to be typical contracts that an entity such as MCEC would enter into in the normal course of business based upon the limited evidence resented on the issue. Some of them appear to be reoccurring contracts with common vendors of MCEC. Five of the agreements are with A111 and 2 involve payments to Mr. Phelps. There is a lack of evidence presented for the Court to make a determination if similar contracts were made for all of the vendors on the list that were reoccurring or if some of them may have been extraordinary. The last contract on the list (Exhibit 7) is dated a year prior to the offenses alleged in this case, a time when presumably, the Defendant had no knowledge of the embezzlement by Westerhuis. The Court cannot determine, based upon the evidence presented, if the Defendant?s signing of the contracts represents neglect in following up on details or if it was a pattern 0f wrongful behavior under rule 404(k)). The present evidence indicates the lack of board approval on these contracts could be an innocent mistake, especially since it appears most of the contracts were re~occuring. Since there is no de?nitive evidence to resolve that issue, and since the last unapproved contract is dated a year prior to the alleged offenses, the Court determines that the evidence is irrelevant. If the evidence of the seventeen unapproved contracts can be considered relevant to prove intent or motive, the Court finds that relevance substantially outweighed by the danger of unfair prejudice, con?ising the issues and misleading the jury. The Court grants the Defendant?s motion to exclude this evidence. The State will not offer any evidence or argument on the excluded evidence at trial. Based upon the above and foregoing, IT IS HEREBY ORDERED, that the Motion to Exclude 404(b) and res gestate evidence is granted in part and denied in part in accordance with this decision. This Memorandum Decision will constitute the Court?s Findings of Fact and Conclusions of Law. Dated this day of October, 2017. BY TH I Hon. Bruce V. erson Circuit Court Judge STATE OF SOUTH DAKOTA IN CIRCUIT COURT :ss COUNTY OF CHARLES MIX FIRST JUDICIAL CIRCUIT STATE or SOUTH DAKOTA, 11cm 6-102 FILED Plaintiff, MEMORANDUM 00; 2 -vs- DECISION 5 20,; (Other Acts Evidence) Mia STACY LEE PHELPS, ?Jaw Defendant. o; The Court, having considered the motion and evidence presented in this matter, enters the following Memorandum Decision. FACTUAL BACKGROUND In this case the State of South Dakota has charged Stacy Phelps and Dan Guericke in a joint indictment with eight felony offenses. The speci?c offenses against Phelps are: Count-1, falsi?cation of evidence involving a contract with Mid-Central cooperative (MCEC) and American Indian Institute for Innovation (Alli), for service dates of October 2013 to December 2014; Count falsi?cation of evidence involving a contract between MCEC and A111 for service dates between October 14 and September of 2015', Count 5, conspiracy to offer forged or fraudulent evidence in attempting to offer the contract in Count '1 as genuine as part of an of?cial investigation; and Count 6, conSpiracy to offer forged or fraudulent evidence in attempting to offer the contract in Count 2 as genaine as part of an of?cial investigation. MCEC is an educational cooperative located in Platte, South Dakota, organized under I, et seq., to enhance services to school districts and other public or private entities deemed appropriate by the cooperative board. These cooperatives are established by an agreement among the participating school districts. SDCL 13-5-32.1. Mid-Central includes various school districts in south central South Dakota. Dan Gueri'cke is the executive director of MCEC. Scott Westerhuis was the business manager of MCEC. Nicole Westerhuis has been given various titles at MCEC through the evidence with the last title being assistant business manager. Scott Page 1 of 7 and Nicole Westerhuis were husband and wife and both worked at MCEC simultaneously, Scott having started working there many years prior to Nicole's employment with the entity. A111 is a nonpro?t business organization that was incorporated in 2008 to provide Native American educational services to school districts. was primarily organized by Scott Westerhuis and Stacy Phelps. Scott Westerhuis held the title of chief ?nancial officer (CF 0) and Phelps held the title of chief executive of?cer, (CEO). Phelps, the Defendant in this case, is an educator who has held positions in the past with state government and other entities. He was both an employee of MCEC and CEO of A111. A111 also has three board members Who are charged with the oversight of the company, but the testimony provides that they rarely, if ever, met for formal meetings or adopted any speci?c policies concerning the function and operation of the company or with respect to their ?nancial expenditures. The initial board members were Carlos Rodriguez, John Harrington, and Chris Eyre. Mr. Harrington is the Chairman of the Board. MCEC, as an educational cooperative, was selected to administer various federal grants awarded to South Dakota Department of Education (SDDOE). Many of these grants were to be used to enhance the educational opportunities and outcomes for Native American or impoverished students in South Dakota. MCEC entered into contracts with Alli for purposes of providing services under these various grants. Pursuant to federal rules and the contract between SDDOE and MCEC, any subrecipient of grant funds would be subject to auditing requirements. The allegations here are that after de?ciencies were noted in audits of MCEC ?nancial records in 2013, SDDOE began watching MCEC more carefully and demanding that they cure any such de?ciencies. State alleges that after further de?ciencies were noted in the 2014/2015 audit, that the Defendant modi?ed contracts between MCEC and A111, as alleged in Counts 1 and 2, for purposes of avoiding an audit of ?nancial records and that the Defendant and others conspired to offer these modi?ed contracts to SDDOE as part of their Official investigation into ?nancial irregularities at MCEC. On September 17, 2015, Scott Westerhuis was noti?ed that SDDOE would be grant contracts with MCEC. On that same day, Scott Westerhuis took his own life as well as the lives of his wife (Nicole) and their children and burned their Page 2 of 7 house down. This incident caused a criminal investigation to ensue, which investigated the deaths of the Westerhuis family as well as ?nancial irregularities at As part of that investigation, the South Dakota Department of Criminal Investigation (DCI) obtained what they considered to be strong evidence of embezzlement by Scott and Nicole Westerhuis as well as irregularities in the dealings between MCEC and A111. The State moves in this case to allow evidence of res gestae or other acts evidence as follows: 1. Numerous expenditures at Alli by Defendant Phelps the State claims were made by that were misspent, misapprOpriated or otherwise improper; and 2. An email exchange between Scott Westerhui's and Stacy Phelps on February 12, 2015 (this conversation was mistakenly identi?ed by the State as December 2, 2015, which would have occurred after the death of Scott Westerhuis, in their notice of their intent to use such evidence). ANALYSIS To determine if other acts evidence is admissible the Court is governed by SDCL 19-19-404 That statute provides: Prohibited uses, Evidence of a crime, wrong, or other act is not admissible to prove a person's character in order to show that on a particular occasion a person acted in accordance with the character. (2) Permitted uses; notice in a criminal case. The evidence may be admissible for another purpose, such as proving motive, opportunity, intent, preparation, plan, knowledge, identity, absence of mistake, or lack of accident." In this case the State provided proper notice of their-intent to use the items of evidence outlined above. In this case the State argues that since there is a strong probability that Scott and Nicole Westerhuis embezzled substantial funds from MCEC, that Westerhuis and Phelps, needed to take action to make sure that the ?nancial records of All] were not audited. They argue that the ?nancial expenditures outlined in the evidence at the hearing in this matter, as well as the email between the Defendant and Scott Westerhuis, are relevant to show the Defendant?s intent and motive to modify the contract so as to avoid such an audit. Page 3 of 7 The Defendant makes a compelling argument that with respect to the expenditures at A111 which form the basis of the State's request here, that they are reasonable and legitimate business expenses of the Defendant as CEO of A111, especially when considering that these exPenditures accumulated over the course of many years. The Defendant further argues that there has been no evidence presented to show that the expenditures were. illegal, inappropriate or exorbitant. The State makes the counterargumentthat the testimony of John Harrington, a board member of A111, indicates that the board was completely unaware of the actions Phelps and Westerhuis had taken in operating A111 and that the numerous contracts they signed and the funds they handled through the company were all done in secret and without the Alli boards knowledge. The evidence establishes that there were no policies or guidelines established by A111 with regard to bank accounts or ?nancial matters in any manner. Mr. Herrington-testi?ed that he was surprised to learn, after the death of the Westerhuis family, that the company owned vehicles and other assets or that they otherwise had 35 employees or even bank accounts. In order for the other acts evidence described above to be admissible it must be relevant. State v. Wright, 593 792 (SD 1999). .The admissibility of prior acts evidence or other misconduct evidence is governed by the conditional relevance rule in SDCL Huddlesron v. United States, 485 US. 681, 108 S. Ct. 1496 (1988). Accordingly, the trial judge does not make a preliminary ?nding that the other act evidence has been proven by a preponderance of the evidence, but only considers whether it has suf?cient probative value to support a permissive inference that the Defendant committed the other bad act. South Dakota Evidence (Second Edition) Larson and Hutton, 2013, p. 184. The United States Supreme Court has ruled that acquittal ofia charge of burglary will not bar testimony of a victim of that offense in a subsequent unrelated prosecution for bank robbery. Bowling v. United States, 493 US. 342, 110 S. Ct. 668 (1990). Consequently, it is not required that the State actually prove that-the expenditures of A111 were criminal or otherwise wrongful in order for them to be considered relevant as admissible evidence. Furthermore, in the present case the Defendant is charged with conspiracy. in a conspiracy case, there is authority for the proposition that additional evidence comes in if itis part of or in furtherance of a general conspiracy. US. v, Collins, 779 F.2d, Page 4 of 7 1520 (1 1th Circuit 1986). In Collins, evidence of the defendant's involvement in a separate marijuana importation scheme was properly admitted for the limited purpose of explaining the extent of the defendant?s involvement, and the evidence showed whether the defendant had completely withdrawn from the drug importation scheme or had reduced his level of involvement. Collins at 1l18. In United States v. Gonzalez, 825 F. 2d 572 (First Circuit 1987), the defendants were convicted of conSpiracy to commit offenses. or fraud against the United States. The Court found that evidence of other acts was admissible in a conSpiracy case to dispel the inference of the attorney's lack of knowledge of the conspiracy in which he participated,.evcn when the evidence did not directly implicate the attorney in criminal conduct. Moreover, the preponent?s burden on proving relevancy is less when the issue is motive and there is an allegation of conspiracy. Admissibility. under Rule 404th) of Federal Rules of Evidence, of evidence of other crimes. wrongs,_or acts not similar to offense charged, 41 A.L.R. Fed. 497, 1979, In this case the Defendant was either duped by Scott and Nicole Westerhuis into signing the changed contracts or he was a willing participant in doing so with the intent to ward of an audit of A111 by SDDOE. The State has the right to present evidence. which may convince the jury that the truth lies in the latter theory. In the present case the Court ?nds that the evidence preposed by the State is relevant to intent and motive with respect to the signing of the contracts alleged in Counts and 2 as well as the conspiracy counts. After the Court has determined that the evidence is relevant, it must then apply Rule 403, which is codi?ed in SDCL 19-19-403. That statute provides: ?The Court may exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence,? The Defendant here argues that the evidence is unfairly prejudicial, especially since the State has not proven that any of the expenditures at were illegal, criminal, or otherwise inappropriate. He also argues that the presentation of this Page 5 of 7 evidence would confuse the issues, mislead the jury, and cause undue delay and a waste of time. The State argues that the evidence tends to disprove the Defendant's theory that he mistakenly relied upon Scott Westerhuis by demonstrating an independent motive on the Defendant?s part to participate in a common scheme with Westerhuis to ward off questions. State further argues that the evidence would not persuade by illegitimate means or impermissible considerations, but rather, is part of the res gestae of the case. Once the evidence is found to be relevant to some issue in the case, the balance tips emphatically in favor of admission unless the dangers set out in Rule 403 substantially outweigh probative value. Wright at TI 14. Mere damage to the Defendant's position is no basis for exclusion; the harm must come not from prejudice but from ?unfair" prejudice. Wright at 11 16. After carefully balancing the probative value against the danger of unfair prejudice here, the Court ?nds that the balance weighs in favor of admitting the evidence, especially as it applies to the conspiracy counts and because it is res gesture to all the charges. The Defendant also makes a compelling argument that the evidence may confuse the issues, mislead the jury, or cause undue delay and waste of time. This is a significant issue as this Court is concerned the trial could turn into a trial within'a trial err-collateral issues; however, the allegations presently before the Court claim an alleged conspiracy involving claims of signi?cant corruption involving State funds. The two items of other acts evidence the State wishes to produce are relevant on that issue. In order to reduce any potential prejudicial effect as far as this evidence confusing the issues or misleading the jury, the Court must allow the Defendant wide latitude in refuting the State's theory that the ABI expenditures were illegal or otherwise improper. Furthermore, this Court is allowed to take measures to protect the Defendant against con?ision of the issues and misleading of the jury. Wright at 1] 26. In addition, under Wright, the Court will give the proper cautionary instruction to the jury with regard to this evidence. Wright at 1] 26. Based upon the above and foregoing, IT IS HEREBY the State will be allowed to introduce the two items of other acts evidence set forth in their Notice. Page 6 of 7 This Memorandum Decision will constitute the Court?s Findings of Fact and Conclusions of Law. Dated this day of October, 2017. BY THE COURT: Hon. Bruce V. Anderson Circuit Court Judge Page 7 of 7