County says $1.5 million
By JUDITH O. ETZEL
Special Thanks to The Derrick for Allowing this Story to be Posted
An Ohio investment agent is suspected of organizing a massive swindle.
A financial manager from Ohio who has handled Venango County investments for more than 15 years has allegedly swindled $1.5 million from the county's coffers.
That loss, conceivably the first ever fraud-related incident in the county's fiscal history, has torpedoed the county commissioners' extensive economic stimulus package.
In a flurry of activity Thursday, Bob Murray, chairman of the county commissioners, publicly revealed the county is "a victim of fraud" and said the FBI has launched an investigation into the misappropriation of $1.5 million in county funds.
The monetary loss has the immediate consequence of dumping the commissioners' ambitious and far-reaching efforts to use up to $2.3 million of the county's $3.5 million in reserve to fund a range of proposals.
They include doling out a $1 million loan to Two Mile Run County Park, a $1 million allocation to the Venango Economic Development Corp. for a revolving business loan fund, $250,000 for Oil Valley tourism signs and a study to consider building an oil boomtown replica, and $50,000 to Venango Campus.
None of those allocations now appear likely to be made.
"I am devastated. Just devastated. And then I am angry and I remain angry," said a visibly crestfallen Murray at a hastily called interview late Thursday afternoon. "We've known about it for a week or two or three, but we just couldn't say anything for fear of jeopardizing the investigation."
Larry Horn, a first-term commissioner re-elected to a second term, described the situation as "heart-wrenching and so unexpected."
The missing money came to light sometime in late October when the county did not receive a statement of interest or principal on a $1 million investment owned by the county. That investment was considered part of the county's $3.5 million reserve fund and was due to be cashed and deposited in the county coffers.
At the same time, there were apparent discrepancies involving a second investment, this one pegged at $500,000. Those monies are in the county's liquid fuels tax account, filled each year with gas tax receipts from the state and used for bridge and road work throughout the county. It is due to mature on Dec. 15.
Up to that time, regular accounting procedures had been followed for both accounts, and the county was receiving appropriate financial statements.
"The (county) treasurer's office receives the statements, and it is charged with checking on them. The treasurer, though, discovered a problem when no information came in and that office alerted us," said Murray.
The investment of both the $1 million account and the $500,000 account, both invested in certificates of deposit, was handled by Gary Rhoades, owner of what Murray described as "a purported" investment company known as RCM and based in Hilliard, Ohio. Rhoades was handling the county investments through an account at AmeriServ Trust and Financial Services in Johnstown.
The financial consultant has a long working relationship with the county treasurer's office, said Murray, one that "dates back to at least 1989 ... and perhaps even earlier." At one time, he said, the Rhoades-managed account had held as much as $3.5 million, a sum reduced over the years as the county tapped the funds.
When information on the two accounts was not forthcoming, county Treasurer Deb Sharpe repeatedly telephoned and wrote Rhoades to inquire.
Despite that pressure, the investment company owner did not return any telephone calls or respond to written communication, Murray said. That prompted the commissioners to contact the FBI and ask that an investigation be done into the missing money.
"Nothing turned this up before. The county is audited over and over by state auditors, county auditors and more, and none of those audits revealed any shortcomings," said Murray.
It is not known whether Rhoades is the only person suspected in the misappropriation of funds or whether his company has been the target of previous investigations. Rhoades served as investment adviser for only the $1 million account and the $500,000 account for the county and has no association with any other county money fund, said Murray.
The FBI has launched an investigation and has had representatives reviewing files and conducting interviews at the courthouse in Franklin. County solicitor George Thompson said the county has hired Kirkpatrick and Lockhart, a law firm in Pittsburgh, and Gleason and Associates, a forensic accounting firm, also of Pittsburgh, to conduct an investigation.
Two tracks are running simultaneously, said Thompson.
"We want to bring these people to justice. And we want to recover our money," said Thompson.
To that end, Thompson and the two Pittsburgh firms are investigating the money loss as part of a civil litigation while the FBI is pursuing its work on a criminal track.
"What else we can do depends on our investigation. We will file a complaint for the recovery of funds and we hope to do it by the end of this month," said Thompson, adding the lawsuit may be filed in state court, federal court or both.
No arrest warrant has been issued for Rhoades but Thompson said that could come "if the investigation is successful."
Lucas Paglia, an attorney with Kirkpatrick & Lockhart, said his firm's investigation is "active and certainly not yet complete."
"We are looking down every alley, under every blanket, to find this trail of money. And there could be others. We are not ruling that out," said Paglia.
Paglia said the next step is to "interview more people, check more documents ... in such a way as to distract the current (county) commissioners as little as possible."
"We will help them get justice," said Paglia.
Leading the investigation from the Kirkpatrick & Lockhart firm is Mark Rush, former assistant U.S. attorney in the Western Pennsylvania district and now a member of the Pittsburgh law group.
Rush led the investigation into the state's biggest municipal bond fraud several years ago that involved the potential loss of millions of dollars for 55 school districts and municipalities, including several in Clarion County. The financial management company that misappropriated the funds was operated by John Gardner Black of Blair County.
Murray and Horn, glum-faced as they outlined details about the missing money, said the county is checking whether the loss of $1.5 million might be covered by insurance.
"You know, if this had happened eight years ago, when we had such a deficit, we would have been bankrupt," said Murray.
The missing money has sunk Murray's and fellow Commissioner Deb Lutz's far-reaching plan to shake up the local economy by plugging $2.3 million into economic development projects. Horn voted against the stimulus package but had publicly supported portions of it.
"The big ticket economic development issues are dead in the water. I'm just sick about it, and it breaks my heart," said Murray.
The county has to replace the $500,000 in missing liquid fuels tax monies since those are used annually by the county and several municipalities to do needed road and bridge work. In addition, a commitment was made to the new incoming commissioners to keep $1 million in the reserve account.
Murray said there isn't enough left in the reserve account to tackle very much, especially since the investigation into the missing funds will cost money for legal and other help.
"We may be able to nibble at some of the smaller items, like the $50,000 to Venango Campus. But the rest of the projects are probably gone," he said.
Horn was more optimistic, suggesting, "This is still not dead. There is still hope that we can recover some or maybe even all of this money."
There had been some speculation earlier that the commissioners were facing a different stumbling block to handing out the $2.3 million. The county reserve fund is listed as a capital reserve fund, one that is restricted to paying for capital projects such as construction, vehicle replacement and other purchases. Earmarking money for loans may not have been allowed, according to the county code.
"Yes, there was an issue, and we were investigating that to see how the reserve account was originally set up. And we were pursuing it. But that's a moot point now," said Murray.
Aside from the wholly unexpected misappropriation of funds situation, Murray and Horn each emphasized the county's financial health is good. The money loss does not affect the recently passed 2004 budget.
"Except for this, all is fine. Our county finances are very healthy," said Horn.
Murray, too, insists the county "is making progress on a lot of fronts."
"Many of our initiatives - the free trade zone at the airport, the consolidation of economic development agencies - are coming to fruition. Just because we've run into snags, and this is a big one, doesn't mean good things aren't happening," said Murray.