FARMINGTON — Directors of the defunct Diné Poultry Products Inc., a proposed egg farm industry that was a joint economic venture for the Nageezi and Huerfano chapters, poached $1.25 million from the Navajo Nation, an audit found.

The Navajo Office of the Auditor General filed its report on the audit and made it available Wednesday.

Diné Poultry Products was established as a for-profit corporation in 2004, with the purpose of producing more than 145 million marketable table eggs per year. Company stakeholders, entrepreneurs from the two communities, including those appointed to serve on the board of directors, planned to distribute eggs to federal government entities in western states.

The company never produced a single egg.

In fact, the company never even had a physical address. It broke ground off U.S. 550 in the Huerfano Chapter, but it failed to move forward.

The company needed $12.2 million in capital to cover the construction and start-up operations of the egg plant.

It secured a $3 million loan from Native American Bank and collaterized that loan with the Navajo Dam Escrow Account, a fund established through a settlement between the Nation and the city of Farmington.

Diné Poultry Products defaulted on the loan, and when the Native American Bank called for the collateral in December 2008, the Nation repaid $1.25 million from the escrow account.

"This was the Navajo people's money," Nageezi Chapter President Ervin Chavez said Wednesday. "It makes you wonder if the tribe is going to get some of this money back."

Chavez faulted the egg farm, claiming owners used the Nageezi and Huerfano chapters to get funding, then pushed the liability back onto chapter members when the farm failed.

"We, as chapters, are advocates of any type of community or economic development," he said. "These people used the chapters to benefit from it. When they found out they were in trouble, they pushed the liability onto the chapters."

The audit, released March 7, reviewed the $1.25 million loan. It found the company spent 50 percent of the loan on professional consulting services, including a $565,000 payment to one entity, Native American Development, of Alabama.

This entity, hired to design structures, supply equipment and building materials, construct buildings, test-run equipment and provide training, was contracted to deliver to the egg farm a $10.7 million working poultry complex.

Other expenditures include $341,000 the Diné Poultry Products board of directors paid themselves in wages, stipends and reimbursements, the audit found. Reimbursements included pre-incorporation costs "supposedly incurred by the DPPI board before it received its loan," the audit states.

According to incorporation records, the board of directors comprised at least seven members, including Huerfano and Nageezi chapter presidents, with Wilson Ray serving as board president. Ray was joined by former Nageezi Chapter president Calvert Garcia, Nelson Toledo, Daniel Lopez and George Werito on the board.

The audit also found that funds disbursement could have gone to personal expenses. More than $190,000 was spent in debit transactions, including about $26,000 from debit cards held by the board president and secretary, the audit found. Meals alone totaled more than $6,000, spent at restaurants in Farmington and Bloomfield.

Yet the board did not comply with the audit or provide documentation of its expenses, the audit found. The board could not provide receipts for meals to verify they were for legitimate business meetings.

"Since DPPI did not provide supporting documentation, the propriety of the expenses could not be substantiated," the audit states. "Therefore, the expenses incurred by DPPI with the $1.25 million loan collaterized by the Navajo Dam Escrow Account were deemed questionable."

Memos distributed prior to the tribe's authorization of collateralization with the escrow account state at least seven potential legal problems with the egg farm project, the audit found.

A former chief legislative counsel in August 2005 wrote a memo to sponsors of the legislation to allow collateralization stating that he could not draft a bill until the legal problems were addressed.

Those issues include a lack of due diligence, conflicts of interest, unclear ownership of the corporation, unclear beneficiaries of the corporation, questionable fund proposals, failure to address tax implications and confusion with the review and selection committee.

The Tribal Council's Budget and Finance Committee approved the collaterized loan in December 2005, one day after the Economic Development Committee tabled the legislation because of incorrect paperwork.

With collateral approved, Diné Poultry Products, Inc. secured a loan for $3 million from Native American Bank. The company also planned to get funding from a Bureau of Indian Affairs loan guarantee and state capital outlay.

Budget and Finance, following default of the loan, called for a special review of the failed business endeavor, a request that prompted the audit.

"It's as expected," LoRenzo Bates, chairman of the Budget and Finance Committee, said of the audit report. "We had already been given the numbers when we started questioning it. All this did was confirm that the money was spent."

Bates said the Budget and Finance Committee received political pressure to approve the loan collateral, and that "not enough questions were asked."

"The project was probably a good project," he said.

It is unclear where the investigation, or a call for accountability, goes from here. An investigation will be forwarded to the White Collar Crime Unit, Bates said. That unit will determine whether to pursue criminal charges.

"It is somewhat water under the bridge," Bates said. "At the end of the day, the Navajo Nation is out $1.2 million."

The original business plan called for three phases: produce as many as 157 million eggs per year, increase layer bird capacity to 1 million layer birds, and establish a facility to produce egg cartons, containers and cases.

Revenues would be earned through the sale of shell eggs, poultry manure and spent hens. The business plan also proposed employment opportunities for plant workers and managers.

Alysa Landry:

alandry@daily-times.com