Statement by Ken Alfaro

To Port Oversight Committee

November 17, 2003

Chairman Ravenel and Members of the Committee,

I am a lifelong resident of the Lowcountry and a Pastor at The New Testament Church.

I grew up under very humble circumstances. My family was not part of the moneyed elite or the landed gentry. We were part of the working poor, watched every penny and avoided waste.

It is with this background that I bring to you today my complaints about the attempts by your Committee and by some legislators to interfere with the SPA’s efforts to stop the fraud, abuse and terrible waste of taxpayer monies that evidence shows has been conducted by CIP.

It is critical to understand that under the terms of the CIP-SPA agreement, 50% of the profits of CIP were to be paid to the SPA, for the benefit of us taxpayers. That means that 50% of each dollar spent by CIP in reality was money being spent by the SPA and, therefore, by us taxpayers. It would be irresponsible for the SPA not to scrutinize the propriety and reasonableness of CIP’s expenditures, and I am proud of our SPA for daring to stand up to enormous political pressure to protect the public from continued waste, fraud and abuse by CIP and Lasch. I demand that Charleston legislators, particularly Senators Ravenel and McConnell, stop interfering with the SPA’s managerial and litigation efforts to protect us taxpayers from CIP and Lasch.

Here are a few of many examples of spending by CIP and Lasch that in my opinion is outrageously unnecessary, excessive and/or inappropriate and that should not be paid 50% by the SPA and us taxpayers:

$18,522 for “CIP kick-off dinner” at Brett’s Restaurant
$11,232 for “Admiral Schachte, trip to Corpus Christie – Mayor Summey”
$5,000 for “Sponsorship of Low Country golf event”
$1,000 for Campaign contribution to Chip Limehouse
$500 for Campaign contribution to Mickey Whatley
$1,000 for “Jim Clyburn re-election campaign”
$1,000 for “Palmetto Trust sponsorship” for “S.C. Republican Party”
$100,000 for the North Charleston Youth Endowment for the Arts
$5,000 for “Friends of the Hunley – Donation”
$25,000 for “Greater Charleston Naval Base Memorial – Donation”

The Report of PircewaterhouseCoopers LLP dated April 15, 2003 (“PWC Report”) written at the request of the SPA states that CIP has spent at least $196,727 for “Charities, politician and political parties.” In my opinion, these and other expenditures by CIP, including hiring the son of Mayor Summey, show CIP and Lasch spending money owned 50% by the SPA to buy political influence. During these times of critical budget shortages, requiring the SPA and us taxpayers to pay for such frivolous attempts to buy influence and entertainment is outrageous.

In addition, how can a trip to Corpus Christie, Texas possibly cost $11,232? Why in the world would anyone, much less a company with no equity, pay $18,522 for a dinner? Are the SPA and us taxpayers expected to pay $30,000 to finance this trip and dinner? If so, this is absurd and an outrage.

One CIP dinner for two at the Peninsula Grill cost $338. Another for three cost $476. “Christmas Party expenses” totaled $1,710. Some $80 was spent for wine at the “Wine Shop of Mt. Pleasant.” A three-day car rental cost $326. Lodging for two nights costs $604. Some $526 was paid for a First Class airplane ticket between Charleston and Baltimore. Rep. Mickey Whatley got $500 and Rep. Chip Limehouse got $1,000. The list of excessive or inappropriate spending goes on and on.

These excesses make the wrongful spending at the South Carolina Commerce Department in past years look trivial in comparison. You politicians should be ashamed to be interfering with the SPA’s efforts to stop this kind of waste by CIP.

Have you Legislators even read the PWC Report on CIP’s and Lasch’s money manipulations and abuses of SPA? The Report was written by professionals who have nothing to hide, no prior involvement with CIP or Lasch and no conflicts of interest.

Here are a few of the revelations about Lasch and CIP published in the PWC Report:

Loaned money to Opportunity Research Inc. (“ORI”), a Nevada corporation owned by Lasch. Some of the money was moved from CIP to ORI “supported by no more than handwritten notes.” ORI is estimated to owe CIP about $514,000.
Contributed about $200,000 to political and charitable groups, including the Hunley conservation project, without SPA approval.
Failed to seek prior SPA approval for draws on a $5.75 million line of credit at Carolina First Bank.
Failed to provide complete annual financial records on time.
Sought to handle types of cargo prohibited under the CIP-SPA agreement.
Sublet property without prior approval from the SPA.

In case you have not read it, here are a few examples of CIP’s terrible manipulations and waste and abuse of taxpayer funds documented by the PWC Report and by other evidence:

At least fifteen draws totaling $3.6 million were made by CIP on a bank line of credit without the required approval of the SPA. When asked by the SPA, not even CIP’s President, Duane Grantham, knew when the money was taken or could account to the SPA about how this money was spent. Weeks after being asked by the SPA to account for this money, Grantham told the SPA he still did not know what had happened to $400,000 of this money but was still “tracking down” where the money went.

Neither Lasch, Schachte nor any other person put any capital into CIP. As stated by the PWC Report, “CIP is 100% leveraged and has been since inception.” According to the PWC Report, CIP is 100% leveraged because all of its start-up costs have been paid by unauthorized loans taken by CIP for which the SPA may be liable.

Lasch used these illegal bank draws to make unsecured loans totaling over $600,000 to his personal company, ORI. Some disbursements by CIP to ORI are supported by no more than handwritten notes. Lasch refuses to provide information to the SPA and its accountants about ORI to permit evaluation of these loans. The PWC Report says that it cannot complete its evaluation of CIP without knowing information about ORI that has received loans from CIP--information that ORI and Lasch refuse to provide.

According to the PWC Report, “CIP has borrowed and executed several promissory notes totaling $470,425, payable to Lasch or his related entities. Most of the promissory notes were payable to Lasch and executed by Lasch on behalf of CIP.”

“According to its audited financial statements, CIP operated at a loss from inception through December 31, 2001. While CIP loaned money to ORI, the Company [CIP] simultaneously borrowed under the CFB [bank] line of credit to fund its own operations and some capital improvements.” To put this into plain English, in my opinion Lasch was “robbing Peter to pay Paul.” and in this case Peter was CIP and Paul was Lasch’s wholly owned company, ORI.

CIP contributed $100,000 for the North Charleston Youth Endowment for the Arts for “the personal benefit of Warren Lasch.” In my opinion, it is a ridiculous and absurd outrage for CIP to be making “contributions for the personal benefit of Lasch,” especially if the SPA is paying 50% of this $100,000, or $50,000, during our time of budget crisis. According to the PWC Report, the “question of why CIP would be making contributions for the personal benefit of Lasch has not been explained.”

“Through its practice of reclassifying expenses as a receivable from a related company, CIP has distorted its true financial picture and operations.” To me this sounds like Enron and WorldCom all over again--all would be companies distorting their true financial picture and operations through fraudulent accounting manipulations. The PWC Report points out also that the effect of CIP’s reclassification of its expenses was to help show CIP had a profit with the effect that if the SPA were to terminate the SPA-CIP agreement, the SPA (us taxpayers) might be required to pay CIP millions of dollars of liquidated damages that would not have to be paid if these reclassifications of expenses were not made. The PWC Report points out that these reclassifications were made by a new accountant for CIP and after the SPA had sent CIP written notifications that CIP was in breach of the SPA-CIP agreement. It is obvious to me, as the PWC Report suggests, that these wrongful manipulative reclassifications were for the purpose of trying to get millions of dollars from the SPA and us taxpayers that CIP was not rightfully entitled to receive.

Lasch obtained a $750,000 bridge bank loan for CIP based on CIP’s representation that these funds were to assist with CIP’s short-term capital needs. This bridge loan was combined with a bank line of credit. This line of credit was to be used exclusively to “finance improvements to the licensed premises at the Charleston Naval Complex,” and not for CIP’s operating expenses. Despite all of this, “instead of applying the entire loan draw proceeds to capital improvements of the property, CIP used approximately $736,707 for start-up expenses, and $1.06 million for insurance, marketing and other operating expenses for a total of $1.79 million.” CIP did not spend these loan proceeds only for short-term capital needs or to finance improvements to CIP’s Naval Base property as required, but instead used these funds to reimburse Lasch for all the start-up costs of CIP, “thereby resulting in a 100% leveraged operation” according to the PWC Report. This included reimbursing Lasch personally for operating, extraordinary and long-term expenses that are not short term capital costs as had been represented, including as just a few examples all of the expenses listed above and each of the following:

A. $415,075 for “Agreement fees”

B. $32,588 for “Concept design of rail system”

C. $114,054 for “Attorney layberthing proposal” by “Dyer, Ellis & Joseph” (Schachte’s law firm)

D. $89,546 for “Attorney: Layberthing proposal to Military Sealift Command” by “Dyer, Ellis & Joseph (Schachte’s law firm)

E. $25,451 for “Consulting services” to “John Bourne Co.”

I am outraged that CIP and Lasch, who had no experience or expertise regarding shipping terminals, have gotten away with acquiring property at the Naval Base valued at over $100 million virtually free and with no cash investment by them or by anyone. I am outraged also that the SPA and by extension us taxpayers are paying 50% of ridiculously excessive, frivolous and improper expenditures listed above, including $18,522 for a “kick-off dinner” at Brett’s Restaurant and $11,232 for a trip to Corpus Christie, Texas. Hundreds of thousands of dollars of taxpayer monies have been squandered wrongfully, in my opinion, because of lack of supervision and controls over CIP and Lasch, and because politicians on the Charleston Delegation have been interfering with the SPA’s proper management of its contract with CIP.

Now I want to talk briefly about fraud. These lack of controls on wrongful use of monies by CIP and Lasch might not have occurred, in my opinion, if the CIP-SPA agreement had not been procured through fraud and a conflict of interest whereby CIP’s lawyer--who was an officer of CIP (according to an insurance application by Lasch)--also represented the SPA on the same transaction, enabling CIP’s lawyer to put into the CIP-SPA contract unconscionably one-sided provisions favorable to CIP and unfavorable to the SPA. Some of those provisions have caused the very litigation the SPA must endure to protect us taxpayers from some of CIP’s and Lasch’s manipulations.

Here are examples of what in my opinion is fraud by CIP and/or Lasch regarding the SPA’s property at the Naval Base:

Overstated to the RDA and the SPA Lasch’s net worth in financial statements submitted to the RDA and to the SPA (the CPA firm of an RDA Board member receiving these exaggerated financial statements later is hired by Lasch or CIP);

Induced Grantham to sign the CIP-SPA lease for the SPA by hiring Grantham and more than doubling his income to manage the CIP-SPA lease for CIP;

Reclassified expenses of CIP in an attempt to record profits that do not exist; and

Without proper authority acquired millions of dollars in bank loans secured by the SPA, and used the proceeds from those loans for improper purposes and contrary to what CIP had represented was the purpose of the loans.

The fraud, mismanagement and manipulation being alleged by the SPA by CIP and/or Lasch should not surprise anyone who knows about Lasch’s history, background and activities unrelated to CIP. Here are some examples of alleged fraud, manipulation and mismanagement by CIP or Lasch not directly related to the CIP-SPA dispute that evidences that Lasch is capable of having committed the wrongs alleged by the SPA:

Lasch and two of Lasch’s companies are being sued by attorney Russell Williams, their former full-time investment and financial advisor, and his wife for, among other things, “Breach of Contract Accompanied by Fraudulent Acts.” These fraudulent acts are listed in court documents as including Lasch’s “materially false representation as to the value of the EBITDA [earnings before interest, taxes, depreciation and amortization] of Bavarian Motor Transport and Tri-Star Transport in sale proposal documents which led to the collapse of the sale of those business entities.” If Russell Williams is correct about Lasch’s “materially false” representation about the value of these two companies, in my opinion Lasch would be capable of committing fraud with regard to the SPA and the value of CIP.

In 2001 the Chubb Group of Insurance Companies denied one of Lasch’s companies insurance coverage because of a misstatement by Lasch about prior events on an insurance application signed by Lasch in the year 2000.

According to an article on page 1 of the October 12, 2003 Post & Courier, the following occurred:

A. “In 1995, federal authorities in Michigan said they were prepared to indict Lasch on felony criminal charges of embezzling funds from his former company’s 401(k) savings plan before he agreed to plead guilty to a misdemeanor and restore missing money.”

B. “In 1991, Lasch’s first auto-hauling company, Robin Transport, collapsed amid allegations that he misused company and employee funds.”

C. “Lasch . . . set . . . off a chain of events that would result in his company being the subject of a federal criminal investigation.”

D. “By 1989 . . . Robin Transport had sustained operating losses of $15 million, nearly $4 million of it occurring in a single year.”

E. “‘Robin Transport was running into a cash flow problem and . . . began using funds that were supposed to go to the [pension] plan . . . to operate its business,’ assistant U.S. Attorney Daniel Y. Mekaru argued in a 2001 court hearing on Lasch’s request to expunge [Lasch’s criminal] record.”

F. “‘Lasch was mis-billing receivables and inflating the amount of business that was being done by the company because he wanted the books to look better,’ Mekaru told the court.”

G. “From there, the situation only worsened, Mekaru argued in a Western District of Michigan courtroom. ‘Beyond even misusing employer contributions to the pension plan, the company began to misuse employee withholdings,’ Mekaru told the judge.”

H. “Mekaru said in court, ‘When (TNT) realized they were being defrauded by Mr. Lasch, they withdrew his line of credit and they shut him down.’”

I. “‘Mr. Lasch was in a position of authority, a position of trust,’ Mekaru told the judge, according to a transcript of the hearing. “(Lasch) had fiduciary responsibilities to the plan, its employees, and to this company. And what did he do? He violated their trust . . . .”

J. “Mekaru, who is still an assistant U.S. attorney in Michigan, said in a recent telephone interview that he stands by all of his and the government’s statements in Lasch’s case, including his statement in court that his office was prepared to indict Lasch on a felony charge of embezzling funds from Robin Transport’s pension plan.”

K. “The court also barred [Lasch] from holding any fiduciary role with any company pension plan until 2008.”

L. “RDA board members were . . . provided with a list of Lasch’s personal and business assets. . . . Lasch listed the value of his Kiawah Island home at $10 million even though at the same time Charleston County appraised its value at $1.2 million. . . . There were also differences in the value of two of his trucking companies. Lasch said Bavarian Motor Transport was worth $6 million and Tri-Star Transport was worth $2.5 million. Based on information from the companies themselves, financial ratings firm Dun and Bradstreet reported the companies’ values during that same period at $1 million and $76,000, respectively.”

I believe that politicians have gotten us into this CIP-SPA mess and that they are perpetuating the mess by trying to interfere with the SPA’s management of its affairs by running interference for Lasch and CIP. This same Post & Courier article states that:

“ . . . one of the state’s most powerful politicians, McConnell has played a central part in speeding Lasch’s rise in society and business. . . . McConnell was either directly involved in or on the periphery of several efforts that fueled Lasch’s public standing. . . . McConnell’s ties to Lasch also popped up in places where the senator would seem to have had no obvious role. . . . Smith, the SPA chairman, said the agency would have acted sooner in severing its relationship with CIP if not for Lasch’s friendship with McConnell, who has never been shy about leaning on SPA leaders. . . . ‘I just believe he’s as honest as they come,’ McConnell said. McConnell and other lawmakers . . .were waving pom-poms for the proposed CIP/SPA deal. . .”

It is way past time for politicians to step back from and stay out the SPA’s business with CIP and Lasch, and let justice be served through the judicial process instead of through the political process that is fueled by money and power rather than right versus wrong. We trust our judicial and executive institutions far more than we do money and power-hungry politicians to protect us taxpayers from CIP and Lasch. I urge and demand that all legislators keep out of the CIP-SPA litigation and disputes and that they not assume that the one-sided arguments and presentations by CIP’s and Lasch’s attorneys and political friends are accurate, fair or balanced. I believe that all legislators should assume until proven otherwise that the management, lawyers and Board of the SPA, rather than you part-time politicians, are in the best position to judge all of the facts and what is in the best interests of the State of South Carolina to do about the CIP-SPA dispute.