G.E.R.S. Loaned Carambola Resort $15 Million Without Proper Due Diligence; Total Expenditures Over $27 Million As Of June, 2015

ST. CROIX — The findings of a Government Employees’ Retirement System (G.E.R.S.) audit, performed by the Virgin Islands Office of the Inspector General (O.I.G.) — which The Consortium has been reporting on all this week — has left residents of the territory astonished as to the carelessness of G.E.R.S.’s Board of Trustees, which, according to the audit findings, has inadequately protected the pension funds of government employees by making glaringly bad investments through the system’s Alternative Investment Program (A.I.P.), some of which have resulted in millions lost, and other funds yet to be accounted for.

We’ve reported that G.E.R.S. could lose $40 million on a speculative deal; that it has made illegal investments; approved a loan totaling $8.2 million for the development of a local grocery store, even after being advised not to by an outside financial consultant; and granted a $5.7 million loan to the local owner of the Kentucky Fried Chicken fast food chain, Kazi Food, LLC, and have failed to give an account of how the money was used. All these are the findings of the O.I.G.’s report, made available in full here.

Today’s story is even more alarming, and it concerns Carambola Beach Resort & Spa, which G.E.R.S. was forced to take ownership of after loaning the faltering establishment $15 million on December 8, 2009, for the purposes of paying off an existing mortgage that had been in default, and to fund renovation costs. According to the audit report, the financial consultant hired by G.E.R.S was pressured to submit incomplete work, and therefore critical financial and legal paperwork that are used to determine an entity’s ability to pay, were not included in the final binder of documents.

According to the report, the $15 million loan wound up in default when Carambola experienced cash flow problems and had only made two principal payments in the amounts of $62,500 in March 2011 and June 2011, respectively. This event forced G.E.R.S. to fund activities and eventually took ownership of the establishment by May 2012. The audit report also noted that G.E.R.S. had to pay a hotel room tax liability in January 2013, amounting to $1 million for periods from 2005 to 2012. This liability was not disclosed in the December 8, 2009, closing documents.

“In our opinion, if the financial advisor was not pressured to submit incomplete work, issues regarding unpaid taxes, future repayment ability, and character of the proposer(s) would have surfaced during the due diligence research. The results of such efforts would have allowed the Board of Trustees to make a more insightful decision regarding this investment,” reads the audit report. And with Carambola being a struggling resort, G.E.R.S. has been seeing frequent, unexpected expenditures that could occur up to four times per month.

“In fact, G.E.R.S. has made hundreds of additional disbursements directly to the hotel or on behalf of the entity totaling more than $12 million. Accordingly, G.E.R.S. has expended more than $27 million for this hotel establishment (a $15 million loan and $12 million in additional funding), as of June 2015,” the audit report says.

Aerial view of Carambola Beach Resort & Spa (Ernice Gilbert, VIC).

As already noted, G.E.R.S. took over the resort in May of 2012. On December 24, 2013, an accounting firm issued a forensic audit report on the resort for G.E.R.S., which identified several high-risk transactions including, payments for $1.2 million for a fire detection and sprinkler system in 2010 that was not operational; twelve payments totaling $83,626 from the then hotel owner to three other entities also owned by the individual; and goods supplied to the hotel that were not in the line of business of the items supplied; including an electronics shop supplying towels. The audit also noted instances where landscaping services totaling $23,843 were procured from service providers in Florida and the invoices included travel costs from Florida to St. Croix, and a custom waterfall for $8,195 that could not be located.

According to the O.I.G. audit, the forensic report also noted significant scope limitations, including no supporting documents for a sample of 23 wire transfers totaling almost $7.6 million; no aged accounts receivable listing from December 2009 to December 2010; financial statements not certified accurate by senior management between December 2009 and March 2013; and no documentation on journal entries relating to G.E.R.S. wire transfers from December 10, 2012 to August 26, 2013.

The O.I.G. said these scope limitations questioned whether funds were expended on behalf of the hotel for their intended purposes, and whether journal entries complied with Generally Accepted Accounting Principles (GAAP).

Yet, even with all the aforementioned findings, “we found no evidence that G.E.R.S. took steps to address the concerns,” reads the O.I.G. audit report. “Instead, G.E.R.S. continued to fund various operations at the hotel and invested an additional $12 million, through June 2015, without ensuring that basic internal controls were developed and implemented to reduce or eliminate questionable transactions, minimize the risk to members, and maximize the rate of return on the investment.”

The report revealed further that G.E.R.S. lacked an organized system to monitor their investments under the A.I.P. They also lacked a designated employee to oversee the operations and effectiveness of the A.I.P.

“For example, during the audit, we had to obtain the basic information such as folders, letters, and payment information regarding the investment from the Administrator. There was no central repository of information, and additional basic information had to be obtained from several different employees with no clear designation of who was responsible for what functions,” reads the report.

It added: “G.E.R.S. did not maintain records to determine the accurate cost of each investment and the correct rate of return of each investment under the A.I.P. We found that requests made to determine the costs associated with projects under the A.I.P. revealed a lack of an organized, uniform, and reliable control system to track and monitor each loan and investment. For example, G.E.R.S. did not allocate fees that were charged for financial consultants, attorneys, other professional fees, surveys, appraisals, etc. to each investment. They also did not allocate the time expended by their personnel to each investment.”

In response, G.E.R.S.’s Board of Trustees — the group responsible for administering the pension system’s investments and other operations — said it disagreed that its investments under the A.I.P., bar the $5.7 million fast food chain loan, were inadequately monitored. It also indicated that it conducted due diligence evaluations on all agreements and investments prior to making decisions. The board further stated that the A.I.P. policy provides for the due diligence procedure, assessment and evaluation of potential investments. However, the policy would be reviewed and amended as necessary, and documentation of the due diligence process will be kept.

But the board’s response elicited a rebuttal from Inspector General Steven van Beverhoudt, who noted in detail where the O.I.G. audit found multiple cases of insufficient due diligence.

“We disagree with the G.E.R.S. Board of Trustees statement that they conducted due diligence on all agreements and investments prior to making decisions. As noted in this section of the report, our inspection found several instances where the G.E.R.S. Board of Trustees did not conduct sufficient due diligence on its investments including the loan provided to the owner of the hotel. Their lack of due diligence is what has caused G.E.R.S. to now own the hotel and continue to invest millions of its members’ funds in the hotel to maintain the operations,” Mr. van Beverhoudt said.

“In addition, we identified four instances were adequate due diligence procedures and controls, to include the advice of financial advisors and GERS management, would have prevented the GERS Board of Trustees from granting the illegal loans. Included in the lack of proper due diligence is the viatical investment discussed in the previous finding,” he added.