FARMINGTON — Turmoil over leadership and finances at Navajo Nation Oil and Gas Company escalated last week on the eve of the new tribal council legislative session, which starts on Monday.

Lennard Eltsosie, the newly reinstated chairman of the company's board of directors, announced in a press release on Thursday that an internal audit revealed the company was in financial trouble caused by improper expenditures by former CEO Robert Joe and former Chief Financial Officer Reuben Mike.

"On June 9, 2014, prior management at (the company) received notice from its banking partners that its borrowing base had been reduced from approximately $170 million down to $110 million," Eltsosie wrote in the release. "As a result, the administrative agent for the banking group demanded that NNOGC repay a 'borrowing base deficiency' of $42.75 million, and prior management committed to satisfy that demand in six equal monthly payments of $7,125,000, plus interest and fees.

He goes on to say the deficiency was caused "primarily by prior NNOGC management failing to keep the company's hedging program active, which required the banks to be more conservative in estimating NNOGC's available cash flow from operations."

In addition to facing the deficiency debt, Eltsosie said he has discovered what he considers improper expenditures, including $17 million transferred without board authorization to a non-interest-bearing, non-rated bank account. He also says almost $1 million was paid to lawyers, consultants and lobbyists in an effort by Joe to unseat a majority of board members, including Eltsosie, with his supporters.

A June 20 Navajo Nation Supreme Court ruling reinstated five board members either suspended or removed by shareholder representatives at a meeting in December. Shortly after that, Eltsosie chaired a meeting of the reconstituted board and fired Joe and Mike, replacing them with Louis Denetsosie as CEO and David Rubenking as CFO.

In June 2013, Joe took over for Denetsosie, then the interim CEO. During that time, the company saw record-breaking profits in its third and fourth quarters, lifting it to a total value of about $458 million.

In a phone interview Friday, Mike refuted Eltsosie's claim, saying the deficiency was caused by three things that preceded his and Joe's management.

"The first was the opening of the Denver office, which the company spent over $30 million and the return was less than $500,000. The company blew through millions at that office. In October 2013, Joe shut down the office. We just couldn't afford to keep it open," Mike said. "The second was production expenses — equipment, operating costs — that we've seen as a trend over the last three years that is out of oil and gas' control."

Most damaging, Mike said, was the political turmoil at the company, whose headquarters are in Window Rock, Ariz. That spelled added risk and frightened the nine banks that loan money to the company to maintain operations.

Mike said the reinstated board majority he called "the Window Rock Five" — board members Diandra Benally, Jennifer Hatathlie, Mae-Gilene Begay, Nelson Toledo and Eltsosie — made a tragic error replacing Joe with Denetsosie.

"I have nothing against Denetsosie," Mike said. "He's a gentleman, but he's a terrible businessman, in my opinion."

Infighting between those five board members and two other board appointees, Perry Shirley and Frances Totsoni, has weakened the company's standing to the banks, Shirley said on the phone on Friday. He defended the nearly $1 million paid to consultants and attorneys as normal business in turbulent times. He also denied Eltsosie's accusation that outsourcing the company's financial department to a Houston firm has caused inefficiencies and made oversight difficult.

"Outsourcing the NNOGC's (oil and gas operation) financials resulted in accurate and timely information, the reporting to federal agencies was improved and it was overall more economical," said Shirley, who was appointed to the NNOGC board in 2003 and was board chairman before Eltsosie was reinstated. "Joe was not the only CEO to utilize consultants. All prior CEOs did. (Eltsosie's) claims are part of a ruthless hunt to discredit all of the positive accomplishments of the company since June when Joe was hired."

Shirley added: "The facts are what they are — they are in the numbers and the bottom-line costs with no returns in investments that cannot be disputed. They're not looking at the big picture. All Joe was doing was addressing these deficiencies and holding people accountable and the result can be seen in the forensic audit when it is done."

For his part, Eltsosie stands by his claims, and, like Shirley, believes the forensic audit, currently in the bidding process, will tell the real story.

He ordered the $17 million be wired back to the company's main bank, Wells Fargo, on Friday, he said.

"This is what I call financial mismanagement and impropriety," Eltsosie said. "The company will not be drilling any new wells or building any new convenience stores for at least another year. The board has acted on a resolution to hire forensic auditors to carefully comb through our finances to see what actually happened."

James Fenton covers Aztec and Bloomfield for The Daily Times. He can be reached at 505-564-4621 and jfenton@daily-times.com. Follow him @fentondt on Twitter.