THE WESTROCK COLLAPSE
A Summary of
The New York Financial Transaction
1. In 1936, the Secretary of the Interior issued a Federal Corporate Charter to the Lower Brule Sioux Tribe as specified in Section 17 of the Indian Reorganization Act, as amended (IRA).
2. Since that time, Federal funds have been woefully inadequate for the provision of reasonable housing, education, healthcare, infrastructure, and other essential governmental services to the people of Lower Brule.
3. In response to this continuous funding shortage, tribal officials have long tried to develop businesses in order to increase tribal revenue and improve the quality of tribal life. For example, the Lower Brule Farm Corporation (LBFC) [structured under the Federal Corporate Charter] was established in order to raise private capital, from farming, ranching, and gravel mining, for investments on and off the Reservation that would create jobs and revenue. Lakota Foods was set up to turn farm products into marketable food items. The Lower Brule Sioux Tribe also started the Golden Buffalo casino and explored an ethanol operation as well as potential development on the land acquired by Interstate 90 in Oacoma.
4. In 2005 and for several years thereafter, Tribal officials along with Tribal attorneys, consulted with the Bureau of Indian Affairs (BIA) and the Internal Revenue Service (IRS) on the feasibility and benefits of utilizing a Section 17 corporation for off-Reservation investments with the hope of further increasing Tribal revenue. After these consultations, the attorneys recommended that a new Federal Corporate Charter be designed that would be appealing to both outside investors and to a newly designed tribal corporation.
5. In September 2007, the Secretary of the Interior issued a Federal Corporate Charter for the Lower Brule Corporation (LBC), again pursuant to Section 17 of the IRA, as amended, which the Tribal Council ratified.
6. In September 2008, after multiple face-to-face meetings between the IRS and representatives of LBC, the IRS issued a written letter stating the IRS's opinion to the LBC assuring them that the IRS would honor favorable tax treatment features under certain conditions, if investors invested with LBC. The letter also stated that if there were changes in the tax laws after September 2008, the IRS would give LBC sufficient time to make adjustments. This IRS opinion was very crucial to attracting investors.
7. Given this initiative, LBC searched for some new off-Reservation investments. After interviewing numerous prospective investors, LBC found a prospective opportunity for acquisition: The Westrock Group, Inc., a New York based financial organization.
8. LBC and Westrock independently engaged their own individual legal counsels (attorneys) to assist their respective evaluations of a proposed business relationship. Additionally, LBC hired an outside entity to perform due diligence on Westrock prior to the sale.
9. On August 4, 2009, empowered by the 2008 IRS letter, LBC and Westrock (through its affiliate, LBC Western, Inc.), closed the purchase and sale. All parties relied upon the fact that the IRS had given its opinion in writing to an arm of the Tribe, LBC, that had involved investors in the IRS consultation process, and whom the IRS knew would be relying upon their letter of opinion. On September 9, 2009, the acquisition was announced to the investing public.
10. In 2010, the Department of Interior (DOI) extended a loan guarantee to finance the business plan to expanded financial services to Indian Country. No Federal/Tribal money was involved.
11. After the acquisition of Westrock – and unfortunately - the IRS suddenly and arbitrarily changed its opinion without giving LBC the opportunity to adjust the business plan structure accordingly. At this same time, the US economy suffered a serious decline.
12. As a direct result of the IRS action, and the weakness in the economy, Westrock went bankrupt and the financial transaction collapsed.
13. In summary, the development, purchase, operation, and management of Westrock was a business initiative that did not succeed - but LBC is still attempting to hold the IRS accountable for the change in policy that caused this damage to LBC and the Lower Brule Sioux Tribe.
14. In January 2015, a non-governmental organization, Human Rights Watch, published a report containing allegations of substandard living conditions in the Lower Brule tribal community caused by financial mismanagement by the Tribe and tribal officials. This report, in particular, focused on the acquisition and failure of the Westrock investment. The bottom line is that the Human Rights Watch report is wrong for the reasons below.
No tribal member or tribal official received any cash or benefit of any kind in connection with the purchase or after the purchase of Westrock.
The Lower Brule Sioux Tribe had never been at risk for any potential liability arising out of the transaction with Westrock or concerning its operations and it is under no risk now.
No tribal member, no tribal official, and no LBC official received money from LBC or from Westrock or an affiliate related to the DOI loan guarantee or the funds received from the sale of the guarantee.
15. The Westrock investment failed, but Lower Brule leaders and Lower Brule Corporation did not breach their obligations to the Tribe or the people of Lower Brule.
The people of Lower Brule still need additional resources to improve the quality of life and the Tribe’s leaders should continue to be entrepreneurs. Business is always risky, but the Lower Brule Tribe through the LBC still has to strive to create income that will help sustain the Tribe and its people.
The Human Rights Watch claims were false and the report was wrong.