SDSU Foundation Program Faces Allegations of Fraud

A multimillion-dollar program operated by the San Diego State University Foundation to increase minority involvement in the Los Angeles-area economy has come under fire in a preliminary federal audit alleging that managers engaged in fraud and mismanagement in trying to exaggerate the program’s success.

The audit’s findings, obtained by the San Francisco Chronicle and printed in its Monday editions, were immediately challenged by foundation administrators. They criticized the audit’s unauthorized release, disputed the overall findings and conclusions, and said they suspect the contents result from internal disputes within the federal agency disbursing the funds.

At issue is the largest single program nationwide among almost 100 funded by the Minority Business Development Agency, a Washington-based arm of the U.S. Department of Commerce. The agency provides about $40 million annually to operators of programs aimed at boosting minority participation in business.

A Washington spokesman for the agency, John Winston, said Monday that top administrators “are looking into all aspects of the agency’s operation (in California) and will be taking appropriate action as it is merited.

“If we find there have been areas of poor management, fraud or anything else, we intend to cut it out.” But Winston declined any comment on specific allegations in the audit by the agency’s inspector general’s office, which has not been made public.

The SDSU Foundation has operated three such programs totaling $9 million since 1982--in Los Angeles, San Diego and Tucson--as an outgrowth of the Small Business Institute under the university’s College of Business. Only the Los Angeles component--the largest of the three at $1.6 million during the past two years--is involved in the preliminary audit.

The three-year contracts were originally obtained by SDSU business Prof. Oliver Galbraith under competitive bidding. But day-to-day management has been handled by the nonprofit foundation, which administers all non-state money received through contracts for research and teaching at the campus. The Los Angeles contract has been held by the foundation since 1983.

According to the San Francisco Chronicle, the preliminary audit, which the foundation is preparing to rebut in written documents to the agency, says the foundation misrepresented work performed for minority contractors. In one instance, it said the foundation obtained a $1.4 million airplane parts contract for a Gardena machine shop owned by a Latino, but which the owner said he obtained on his own before ever having contact with the foundation.

The newspaper said the audit also found the foundation filled in client satisfaction forms itself to show that minorities were happy with the work done for them, and that it also placed employees at a bank to provide information about minorities who got loans and then claim credit for arranging the financing.

In total, the audit estimates that as much as 86% of its financial accomplishments over the past two years have been exaggerated, the newspaper reported.

Frea Sladek, the foundation’s associate general manager, called the audit’s contents a complete surprise, saying the foundation had consistently received positive quarterly performance reports for its work. She said the tone of the monitoring from the San Francisco regional office changed in April 1989 after the foundation became concerned about rumors that it would lose renewal of the contract in May due to unfair handling of the bidding process by one or more agency officers in San Francisco.

The foundation complained to the Washington office, and the the bidding process was halted. However, Sladek said that the contract’s monitoring officer then requested the audit from the inspector general. That officer also is the subject now of an inspector general’s investigation for possible conflict of interest, according to the San Francisco Chronicle.

“If there was any problem with our handling, we would have anticipated that it would have been on a quarterly performance report, that we would have been working (with the agency) to improve things,” Sladek said.

Sladek said the foundation will respond “point by point” to the audit. “Some of these things have to do with the regulations that the agency has us do with how to count things, etc. but we’re just not in a position to respond in detail now,” she said.