Attorney General Frank J. Kelley announced the charging of Edward J. Koepel and Clark L. Pellegrini at a press conference in Houghton held during their arraignment. Koepel and Pellegrini were charged for activity they allegedly engaged in while chairman and president, respectively, of The Ventures Group, Inc.
Ventures is the wholly owned, for profit subsidiary of the Educational Support Institute (ESI). ESI is a nonprofit, tax-exempt corporation created in 1986 by the MTU Board of Control and controlled through board members' restricted membership to ESI. The MTU Board established ESI to invest university endowment fund assets for the purpose of economic development.
When questioned regarding the constitutionality of the MTU Board's creation and transfer of university endowment fund assets to ESI and Ventures, Kelley said, "There's nothing illegal with the structure, it's what they did with it after they set it up."
The fraud charges, alleged by Kelley to have occurred between October 1987 and August 1989, stem from incidents involving kickback schemes using two third-party consulting firms. These firms, Centennial Financial Corporation, owned by Steven Cox of Chicago, and Stewart Holdings, Inc., owned by William G. Stewart of Hancock, contracted with Ventures to provide financial services. Ventures paid Cox's and Stewart's companies consulting fees, a percentage of which was agreed to be laundered through a front company, Technology Management Group, Inc., owned by Koepel and Pellegrini. Technology Management then made split payments directly to Koepel and indirectly to Pellegrini through a second front company owned solely by him called Pellberg, Inc., according to Kelley.
Outside the courtroom, after his arraignment, Keopel told reporters, "I look forward to an opportunity to defend myself, and I hope these issues can be fairly evaluated in court." Pellegrini had no comment as he left the court.
Kelley's spokesperson Chris DeWitt declined to comment whether immunity from prosecution was promised to Cox or Stewart in return for their cooperation saying, "It will come out during the trial."
But when contacted by the Lode, Stewart explained that while he could not comment on any deals with the attorney general, he said, "I'm working in cooperation with the attorney general's office and the state police, but they asked me not to comment on matters."
In further developments Thursday, Robert K. Taylor of Eagle Harbor tendered his immediate resignation from the ESI Board, citing the arraignment's direct influence on his decision, in a letter to the MTU Board. Taylor was elected to the ESI Board earlier this year and, subsequently, was appointed to the Ventures Board. Taylor resigned last month from the Ventures Board citing a lack of productive opportunity under the "Gordian knot" circumstances of Ventures financial state.
In his latest announcement, Taylor said "serving as a member of the board of trustees of the Educational Support Institute for the past six months has been difficult because of having to defend the continuing existence of the Ventures Group among my friends and acquaintances while, at the same time, trying to bring about an orderly liquidation of certain of the corporation's assets so that all obligations can be met and the university's reputation protected."
"Today's unfortunate event concerning former Ventures Group officers adds a further negative dimension to the whole situation as it is viewed by university personnel and by the community in general," said Taylor.
Charges against the two men followed from an investigation conducted by the Attorney General's Criminal Division and the Michigan State Police, with assistance from the State Treasurer's office. Kelley said at this time they "don't anticipate anymore indictments, but the investigation is continuing" and that MTU Board members were not under investigation.
University spokesperson Bill Curnow said the university was pleased to hear from Kelley that no further charges are anticipated and the structure of ESI and Ventures were deemed legal.
"Michigan Technological University has cooperated fully and will continue to cooperate fully with any further investigation and prosecution by the attorney general or any other governmental investigative unit. The university will urge ESI and Ventures to pursue all civil remedies against any individual responsible for fraud or other wrongdoing," said Curnow.
Ventures President Jon Marson indicated that pressure to pay property taxes may hold back any civil lawsuits from them regarding activities disclosed in the arraignment. "Until you see the facts and judge possible outcomes, we're waiting to see what happens in the state's investigation," said Marson.
Kelley said he was grateful for the cooperation in the investigation extended by university personnel and former MTU President Dale Stein and State Representative Stephen Dresch, R-Hancock.
Dresch said in a release Tuesday that he "actively assisted in this investigation, briefing the investigators, identifying potential witnesses and passing on information subsequently provided to [Kelley]."
"From our investigation," Kelley said, "we allege that university endowment funds were used to pay exorbitant consulting fees, but the actual consulting services provided were minimal or non-existent. We are continuing our investigation into what appears to be an intricate and elaborate scheme to bleed money from the university."
Kelley said he hoped these charges send a warning signal to the MTU Board of Control and other public universities to "take every precaution possible when funds or assets are transferred out of the control of the university."
"We hear a great deal about the importance of education and the great expense that entails," Kelley added. "We also continue to hear of tuition hikes making a college education unaffordable to a great many of our young citizens. It's time we maximize what the limited dollars can do at these universities. We allege that this situation only maximized the profits for a few well placed individuals."
However, non of the activities alleged of Koepel and Pellegrini in the arraignment are mentioned in a report issued in March 1991 following an internal investigation of ESI and Ventures commissioned by the MTU Board. The board hired attorney Michael B. Lewiston of Bodman, Longley & Dahling, in March 1990, following allegations from the MTU Undergraduate Student Government and community members about Ventures activities.
Former Michigan Tech President Dale Stein, who served on ESI's board during Koepel and Pellegrini's tenure with the company's board, said he was "saddened and surprised" by the news of their arraignment.
He said he did not understand why the information on the kickback scheme was not found in the Lewiston investigation, considering Lewiston had access to a broad range of documents and personnel. "[The kickback scheme was] pretty well buried if something in fact has happened," Stein added.
Alton Berquist, MTU and Ventures Board member and ESI president, commented that Lewiston's charge was looking at the feasibility and viability of Ventures, not any criminal activity that may or may not have been occurring.
For his part, Lewiston told the Lode he could not recall any knowledge of these kickback schemes or interviewing Cox or Stewart. "I interviewed so many people, and it was so long ago," Lewiston said. "If it's in the report, I knew it."
Lewiston found that in 1988 and 1989, Koepel and Pellegrini had misappropriated $63,630 and $27,683, respectively, of Ventures funds on such things as travel and entertainment vouchers, company credit and personnel for improvements to their real property, and personal use of charter airplanes at company expense.
The MTU Board characterized these issues as "unintentional oversights or errors in judgement;" Keopel and Pellegrini promptly paid all of the money back to Ventures; and the board eventually paid Lewiston over $120,000 for his report.
Koepel was employed by Michigan Tech for twenty years as its chief financial officer, until he retired in 1988 when Stein appointed him to work full-time as chairman of ESI and Ventures. Pellegrini worked for seventeen years as the university's internal auditor until 1986, when he resigned and was appointed by Stein to work full-time as ESI and Ventures president. According to ESI's charter, Koepel and Pellegrini were given the power to reappoint themselves to the three member board.
Both men were released on a $50,000 personal recognizance bond by Judge Philip L. Kukkonen on the recommendation of Assistant Attorney General Suzan M. Sanford, who represented the State of Michigan at the arraignment. Preliminary examination is set for August 17. Kelley's spokesperson Chris DeWitt said the preliminary hearing is perfunctory to moving the case venue to the circuit court because the amount of money allegedly defrauded is over $10,000. If convicted, each face a maximum sentence of ten years in prison and/or $135,000 in fines.