Alaska fishery CDQ group suffers as tightly-closed fraternity:

Dear Ted Stevens, How much does a seat on a CDQ group's Board cost today?

By Stephen Taufen

$626,500 might not have been quite enough to get on the board of the Norton Sound Economic Development Corporation (NSEDC), one of six Western Alaska community development quota (CDQ) groups established into fisheries law at the hands of former U.S. Senator Ted Stevens. But that's how much its for-profit subsidiary, the Siu Alaska Corporation donated to two local charitable organizations right before the October 6 election in Nome.

Surprisingly, Siu's chairman Don Stiles, who was running for reelection to NSEDC’s board, may still have come up short of the number of votes required by NSEDC's bylaws — by just a single vote.

Nome voters cast 746 votes on Election Day. In order to meet the plurality requiring more than 40% to avoid a runoff — as specified in the NSEDC bylaws — a candidate would have needed 299 votes. Don Stiles got 298, while Nome resident Tim Smith received 275; in addition, Robin Thomas and Steve Brock got 113 and 31 votes, respectively; and the remainder were write-ins and rejected votes.

Accordingly, Smith is now asking the Nome Superior Court to order a 2009 runoff.

But the concerns regarding such financial giveaways go beyond influencing voters to favor a particular candidate — the one passing out the funds just days before the election. The overriding question is, “Can the Siu subsidiary use such schemes to control its parent, NSEDC, instead of the other way around?”

Siu Alaska Corporation is a for-profit corporation formed in 2008 ( http://www.siualaska.com/ ). As stated in its bylaws, File 1c (PDF) its purpose is to provide dividends (i.e., profits from its fishing operations) to its parent corporation, the Norton Sound Economic Development Corporation.  Siu is not authorized by its corporate charter to make donations to anyone other than NSEDC. NSEDC is Siu's only shareholder; but Siu’s meetings, books and records are closed to the residents of NSEDC's 15 member communities.

The Siu giveaways occurred in separate and well publicized regional media extravaganzas held in Nome on September 18.  First, Stiles posed for photographers while handing out an oversized check from Siu for $200,000 to the director of the Northwestern Alaska Career and Technical Center, at Nactec's dormitory.

( http://www.bssd.org/index.php?option=com_content&task=view&id=132&Itemid=5 ) What Nactec is supposed to do with the money has not been determined.

In a ceremony later that day — that has local observers scratching their heads — at the historic Old St. Joseph's Church in downtown Nome, Stiles posed for a photo-op handing out a similarly oversized Certificate of Ownership purportedly worth $426,500, for 25% of the 105' Bering Sea crab vessel Aleutian No. 1 to the Bering Sea Women's Group (BSWG). ( http://www.siualaska.com/operations.html )

BSWG is a non-profit that provides shelter for women and children who are victims of domestic violence and it has not previously owned commercial fishing vessels that might generate annual profits.  Does this put their tax exempt status at any risk?

According to a June 2009 list of ‘frequently asked questions’ published by NSEDC, Siu's creation was a "tax strategy". In 2008, according to the Nome Nugget, NSEDC paid $12.4 million in back taxes, penalties and interest for tax years 2005-07. In the middle of its 2007 audit, NSEDC terminated its relationship with its long term accounting firm KPMG and turned the audit over to Altman, Rogers and Company.

In NSEDC's 2007 annual report, Altman Rogers reported, "The Company [NSEDC] believes that it has taken the appropriate steps to resolve any potential tax liability for its past year, and the Company is not under either a federal or state audit. The rules regarding the assessment of tax for past years are not certain, however, and no assurance can be given that neither the Internal Revenue Service nor the Alaska Department of Revenue will assert the Company is liable for tax for years prior to 2005."

All six of the Western Alaska CDQ groups are lobbying Congress for legislation that would exempt their for-profit commercial fishing activities from income tax. But reports are that the CDQs will not likely receive special legislation to exempt them from taxes above and beyond other nonprofits.  It is doubtful Congress will modify the tax code to give such a break during these trying financial times, anyway.

In the meantime, the formation of Siu serves as an attempt to retain NSEDC's tax exempt nonprofit status — while continuing to operate its for-profit fishing businesses.  The real risk to NSEDC is that it and other CDQs have exceeded their stated nonprofit purposes, by taking on substantial for-profit fishing ventures that now dominate their financial returns, that they are unfairly competing against other for-profits, and will lose their tax exempt status altogether.

http://www.adn.com/money/industries/fishing/story/679485.html

That is, Siu's donations may have recklessly derailed NSEDCs tax strategy in creating the for-profit corporation, because under IRS terminology Siu is a ‘feeder organization’. The question is whether or not the stated purpose of Siu — to give money back to its parent, NSEDC — allows for separate giveaways, especially which appear to funnel votes in favor of a particular candidate.  That could risk the entire tax exempt status of NSEDC, and other CDQs (if they acted similarly) as well.

The Internal Revenue Manual states, "A feeder organization operates for the primary purpose of carrying on a trade or business for profit, the income from which is to be turned over or ‘fed’ to an organization [that is] itself exempt from tax." Moreover, the IRS manual also states, "If the Board of Directors has any discretion in choosing the charities to which its funds will be distributed, it will not be considered a ‘feeder’. ( Link: http://www.irs.gov/irm/part7/irm_07-025-025.html )

The Siu donations were not authorized by NSEDC, so were apparently done at the sole discretion of the Siu board and its chairman, Don Stiles.  That gives many stakeholders strong concerns about the recent election, and highlights the seriousness of Smith’s legal challenge of this election, especially because Board of Director elections have been a chronic problem for NSEDC.

In 1994, Smith sued NSEDC, alleging among other things that NSEDC was in violation of its corporate charter and state law by failing to allow its members to elect directors or recognize any rights of members. The Superior Court of Alaska agreed with Smith, ruling that he was a member able to bring the suit; that both the corporate charter and state law had been violated; and that NSEDC at that time had not been properly incorporated. The court ordered NSEDC to reorganize the corporation from scratch and hold referenda in its 15 member communities to let them decide on how to elect board members. As a result, Nome chose to elect directors during regular municipal elections under the same rules used for electing city council members.

In 2003, Don Stiles won the board election by two votes — but the problem was that an unknown number of ineligible voters had been allowed to vote. Then in 2006 things got even more twisted. A dispute occurred regarding the eligibility of one candidate, and Smith and others prevailed when NSEDC threw out the election as inconsistent with municipal code.  Don Stiles, who had been on the rules committee, was not even on the ballot in the October 3 election (which had 5 candidates), but NSEDC threw out the election, held a separate but improperly advertised election (not disclosing who was on the ballot nor where the subsequent election was to take place) and eventually seated Stiles on the board anyway.

Amendments to the Magnuson-Stevens Act submitted by Rep. Don Young through the 2006 Coast Guard Reauthorization Act made substantial changes to the rules governing CDQ groups. The MSA now states that each CDQ eligible community has the right to select at least one director on the CDQ group's board but it does not say how those directors are to be selected. http://www.nmfs.noaa.gov/sfa/magact/magact.html

The National Marine Fisheries Service still has not written regulations to implement the changes made to the MSA in 2006.  In a March 13, 2008 letter, File 1f (PDF) NMFS Alaska Region Acting Director Doug Mecum stated, "...regulations addressing the rights and powers of the governing body for a member village or its residents, the qualifications to serve as a director, rules governing elections for directors, or how to resolve disputes about the board selection process do not appear to be within NMFS's authority under the Magnuson-Stevens Act."

This contrasts with a September 9, 2008 letter File 3c (PDF) from former Senator Ted Stevens in answer to Smith’s concerns about the lack of rules, with confirmation that, “As you know, statutory language does not specifically address many of the issues you have raised. I understand NOAA has been working on regulations to further define eligibility requirements for boards of directors” In a handwritten comment, Stevens says, “I did discuss this briefly when I was in Nome recently.”  Stevens did not disclose with whom that discussion took place.

Stevens also advised Smith, “I will continue to follow this process and I will keep your comments in mind, should Congress modify administrative aspects of the CDQ program.” This is pretty serious unfinished business for the residents within CDQ areas who are watching hundreds of millions of dollars be spent without full accountability and under this “there are no rules” arrangement regarding board elections.

Accordingly, the rules for electing a director to the NSEDC board are found in the 1994 judgment in Smith v. NSEDC, the Nome Municipal Code of Ordinances and the NSEDC bylaws. Given Smith’s latest challenge, it will be interesting to see how the court decides which rules apply in this election.

Meanwhile, File 1d (PDF) , the Nome Nugget wrote that NSEDC held a secret election at a meeting in remote Unalakleet to elect two members to Siu’s board. Does that once again demonstrate the slim pickings on talent or just more cozy back scratching outside the public’s view? Readers might also want to look over NSEDC’s 2007 & 2008 financials annual financial reports File 3a (PDF) - File 3b (PDF) to learn a lot more about how CDQs have expanded into super-competitors in the North Pacific fishing industry.  Was this really endorsed by Congress — or does it simply demonstrate that Ted Stevens set up a very nice campaign funding bucket for Alaska’s congressional delegates for decades to come?

Given loan guarantees granted through legislative language that Don Young slipped into a U.S. Coast Guard bill, CDQs can leverage buying into more vessels and quota, as their cash reserves are risked on the stock market File 1e (PDF) .  All of this makes nonsense out of the idea that over 1,000 displaced crab crewmembers might somehow compete to buy quotas against such non-profits holding these advantages, or that crew could ever form markets for their own product.

Meanwhile, the general public — constituting actual CDQ memberships — remains closed out from knowing what contracts and deals are cut that might allow partner corporations to market products in ways that keep global profits out of reach of the subsidiaries, and thus from circulating back to parent CDQs.

In any case, there can be no doubt that Tim Smith has continually looked out for the best interests of what should be a list of actual members of the CDQ (NSEDC has no official membership list reflecting community residents as owners).  He’s shown great care for maintaining the tax exempt status by desiring that the board simply run NSEDC openly and properly: with transparency and accountability.  And Smith has sincerely advised Alaska’s congressional delegates about the problems and has suggested improvements and solutions.

Not only should Government Accountability Office (GAO) audits occur to illuminate the actual current ownership structures and marketing scenarios of CDQs, and the quotas they hold, but Senators Lisa Murkowski and Mark Begich should seriously consider the lack of oversight of CDQs and rules about their bylaws, and use this election example as instructive to what can go sour.

They should also reflect on the question of why it is that ‘private attorneys general’ are continually doing the watchdog role for the USA. Performance and results audits are the surest way to convince taxpayers that it’s not all been just a game of golden boondoggles and campaign coffer filling ad infinitum.

Maybe our U.S. Senators are powerful enough to finally get some answers to questions such as, “How can Don Stiles and the Board explain the gifting away of 25% of a for-profit feeder’s income generating assets — the Siu Corporation’s Aleutian No. 1 — and another $200,000, just weeks before the election?” And, “Will the Siu Board or other CDQ subsidiaries continue to have the ability to give away more fishing assets to win future elections and remain closed fraternities?” Otherwise, actual stakeholders in the CDQ will remain locked out.

The U.S. Senators from Alaska should also take a highly concerned look into the well-paid role of Senator Ted Stevens’ former fisheries aide, Trevor McCabe, at the Coastal Villages Regional Fund, another super-competitive non-profit status advantaged CDQ.  He was considerably involved in efforts to place Pollock first over the needs of subsistence salmon fisheries at 2009 North Pacific Fishery Management Council sessions, and the use of CDQ funds toward those purposes needs audit review.

CVRF also reports it paid $529,000 through a fishing subsidiary to Kris Poulson and Associates (including Ed Poulson, who controlled and made most of the crab motions on the NPFMC’s Advisory Panel where he — a vessel owner — strongly worked against crew rights) in crab quota vessel management fees, among other notable oddities in the excerpts from its 2008 financial reports. [File: CVRF-Financials2008] (PDF)

AlaskaReport sources also say that several other CDQ subsidiaries and co-owned ventures should be examined for unjustified management payouts.  New IRS reporting requirements will help reveal more about any potentially illegal ‘private inurement’ or fraternal self-enrichments, but it is important to trace down the money flows in the past, as well.

In addition, by backing a detailed and comprehensive GAO effort, our Senators might go beyond merely keeping Smith’s concerns in mind and finally help taxpayers learn, “Just how much of the multispecies Catch Share quotas are now in the hands of the CDQs?  And isn’t it long past time to stop discriminating and share that with dozens of Gulf of Alaska and other fishery-dependent communities?”

Stephen Taufen - Groundswell Fisheries Movement

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