382 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA ELOUISE PEPION COBELL, : Civil Action 96-1285 et al. : Plaintiffs : : Washington, D.C. V. : Wednesday, June 11, 2008 : DIRK KEMPTHORNE, Secretary : of the Interior, et al. : : Defendants : AFTERNOON SESSION TRANSCRIPT OF EVIDENTIARY HEARING DAY 3 BEFORE THE HONORABLE JAMES ROBERTSON UNITED STATES DISTRICT JUDGE APPEARANCES: For the Plaintiffs: DENNIS GINGOLD, ESQUIRE LAW OFFICES OF DENNIS GINGOLD 607 14th Street, NW Ninth Floor Washington, DC 20005 (202) 824-1448 ELLIOTT H. LEVITAS, ESQUIRE WILLIAM E. DORRIS, ESQUIRE KILPATRICK STOCKTON, L.L.P. 1100 Peachtree Street Suite 2800 Atlanta, Georgia 30309-4530 (404) 815-6450 KEITH HARPER, ESQUIRE JUSTIN GUILDER, ESQUIRE KILPATRICK STOCKTON, L.L.P. 607 14th Street, N.W. Suite 900 Washington, D.C. 20005 (202) 585-0053 DAVID C. SMITH, ESQUIRE KILPATRICK STOCKTON, L.L.P. 1001 West Fourth Street Winston-Salem, North Carolina 27101 (336) 607-7392 383 For the Defendants: ROBERT E. KIRSCHMAN, JR., ESQUIRE JOHN WARSHAWSKY, ESQUIRE MICHAEL QUINN, ESQUIRE J. CHRISTOPHER KOHN, ESQUIRE GLEN GILLETT, ESQUIRE U.S. Department of Justice 1100 L Street, N.W. Washington, D.C. 20005 (202) 307-0010 JOHN STEMPLEWICZ, ESQUIRE Senior Trial Attorney U.S. Department of Justice Commercial Litigation Branch Civil Division Ben Franklin Station P.O. Box 975 Washington, D.C. 20044 (202) 307-1104 Court Reporter: REBECCA STONESTREET Official Court Reporter Room 6511, U.S. Courthouse 333 Constitution Avenue, N.W. Washington, D.C. 20001 (202) 354-3249 Proceedings reported by machine shorthand, transcript produced by computer-aided transcription. 384 C O N T E N T S WITNESS DIRECT CROSS REDIRECT RECROSS DON PALLAIS By Mr. Smith 386 -- 448 -- By Mr. Siemietkowski -- 430 -- -- MICHELLE HERMAN By Mr. Quinn 453 -- -- -- E X H I B I T S NUMBER ADMITTED (No Exhibits Moved into Evidence.) 385 1 P R O C E E D I N G S 2 COURTROOM DEPUTY: Civil Action 96-1285, Elouise Cobell 3 et al. versus Dirk Kempthorne, et al. 4 THE COURT: All right. Let's see. Who's going to call 5 the next witness? Mr. Smith? 6 MR. SMITH: Yes, Your Honor. 7 THE COURT: All right. 8 MR. SMITH: Good afternoon. 9 THE COURT: Good afternoon. 10 MR. SMITH: Your Honor, our next witness is Mr. Don 11 Pallais. 12 (Oath administered by Courtroom Deputy.) 13 MR. SMITH: Your Honor, you had previously heard from 14 Mr. Pallais at the October trial. Just briefly, he is a 15 licensed CPA. If we could have Exhibit 60, please, and the 16 Exhibit 60 is a copy of his CV. 17 He has approximately 30 years of experience as a CPA, 18 he worked on the audit staff of Coopers & Lybrand, he was a 19 comptroller in the private industry, he also worked on the staff 20 of the American Institute of Certified Public Accountants, and 21 including serving on the Auditing Standards Board. 22 Mr. Pallais will testify about, number one, historical 23 problems affecting disbursements from IIM accounts, including 24 money going out without authority, money going to the wrong 25 people, improper transfers of IIM money, theft of IIM funds, and 386 1 general category of money being caught up in the system and not 2 being disbursed. 3 And secondly he will testify about how these problems 4 affect the government's figures regarding disbursements, and 5 particularly those figures in AR-171. 6 Your Honor, he has previously been tendered as an 7 expert in accounting and accounting principles and procedures. 8 We would tender him for that purpose as well, and I understand 9 the government has no objection to that. 10 MR. SIEMIETKOWSKI: That's correct, Your Honor. 11 THE COURT: Well, he was considered qualified at the 12 last trial. He still is, unless he's lost a step or two, so he 13 can testify. Go ahead. 14 MR. SMITH: Thank you, Your Honor. 15 (DON PALLAIS, PLAINTIFF witness, having been duly sworn, 16 testified as follows:) 17 DIRECT EXAMINATION 18 BY MR. SMITH: 19 Q. Mr. Pallais, would you describe what you have done, the 20 scope of your inquiry in preparation for your testimony today? 21 A. Certainly. You want me to include what I did in October, 22 which set the stage for this? 23 Q. That would be fine. 24 A. Well, starting with the October trial, I reviewed the 25 government's historical accounting plan, their accounting 387 1 manual, I looked at a number of reports by independent auditors 2 and government auditors that critiqued the IIM accounting and 3 control systems, I reviewed some expert reports for the purpose 4 of determining whether the systems used in the IIM system were 5 generally reliable. 6 Since the October trial, I read the Judge's findings in 7 the October trial, I've read the filings in this matter, I read 8 transcripts of hearings and some of the trial testimony here. 9 I've also looked at a document called historical compilation of 10 disbursement issues, or something very similar to that, and 11 looked at a database of reports which was very similar to the 12 one I looked at in October. 13 Q. Back in October, had you been provided with several disks 14 which have been referred to as the meta-analysis documents? 15 A. Yes. 16 Q. And generally what did those documents comprise of? 17 A. The disks comprised a slew of reports. The ones I was 18 interested in were the ones that NORC had characterized as 19 audits, and that constituted about 300 reports. 20 So I read those 300 reports. There was more in the 21 database but they weren't relevant for my purposes. 22 Q. Okay. The audits that you reviewed, would you characterize 23 those as principally internal or external audits? 24 A. I think you would characterize most of them as internal 25 audits. There were only a handful done by independent auditors. 388 1 Q. And when we're talking about internal audits, what are we 2 talking about? 3 A. I think what we mean -- I think what you meant when you said 4 it was audits done by government auditors, either the GAO or the 5 Office of the Inspector General, as opposed to a CPA firm. 6 Q. And were these audits of all of Interior's Trust operations 7 or were they more regional or local in scope? 8 A. There seemed to be a wide range. There were local office 9 audits and there were audits that affected the trust fund 10 overall. There were audits in different parts of the country. 11 There was a fairly wide range. 12 Q. So it's fair to say that a lot of the documents you reviewed 13 in preparation for your testimony today you reviewed back in 14 October as well? 15 A. That's correct. Yes. 16 Q. And to refresh everyone's recollection, what was the scope 17 of your testimony back in October? What were you asked to talk 18 about? 19 A. What I was asked to talk about was whether the government's 20 historical accounting plan could be depended on to achieve the 21 objectives of the plan, which would be a complete and accurate 22 accounting of the transaction histories for the individual 23 Indian accounts. And my conclusion was that based on decades of 24 experience and reports of auditors, it appeared that the system 25 was too unreliable to be used as a basis that way. 389 1 The plan intended to largely use internal documents, 2 and the history of the IIM Trust was that internal documents 3 were notoriously unreliable. 4 Q. Okay. Now, what have you been asked to look at today? 5 A. What I was asked to do for this trial was a similar 6 exercise, except I was specifically asked to look at controls 7 and observations regarding disbursements over the decades. 8 Q. Okay. And based on your examination of those audits, what 9 conclusions have you reached? 10 A. My conclusions are that you cannot depend on disbursement 11 numbers to represent valid disbursements to individual Indians. 12 So to the extent that the disbursements are intended to 13 portray disbursements to IIM account holders, the system is not 14 good enough, not dependable enough that you can be sure that 15 those disbursements represent valid payments to the appropriate 16 recipients. 17 Q. Okay. Have you had an opportunity to look at AR-171, which 18 was part of the administrative record from the October trial? 19 A. Yes. 20 MR. SMITH: If we could have a copy of that, please. 21 BY MR. SMITH: 22 Q. On the screen is a document. Is that what you understand to 23 be AR-171? 24 A. Yes. 25 Q. And looking at that document, there's an evident disparity 390 1 between collections and disbursements. Is that correct? 2 A. Yes, there is. 3 Q. And what is that approximate disparity? 4 A. As near as I can recall, it was about three and a half 5 billion dollars. Collections were three and a half billion 6 dollars more than disbursements. 7 Q. If you look at Column G, is that the disbursement column? 8 A. Yes. 9 Q. And is there any information prior to 1972 on disbursements? 10 A. There's none listed, no. 11 Q. Okay. Have you had an opportunity to compare that to a 12 revised AR-171 provided by the government? 13 A. Yes. 14 MR. SMITH: If we could see that document, please. The 15 first one, yeah. 16 BY MR. SMITH: 17 Q. Is this a copy of the document you've reviewed? 18 A. This is one of the them. This appears to be the May 30th 19 version. 20 Q. So you've seen two different revised AR-171s? 21 A. Yes. 22 Q. And when did you first see the Revision 1? 23 A. Must have been about a week ago. 24 Q. And Revision 2? 25 A. I want to say over the weekend maybe. 391 1 Q. And in revised AR-171, disbursements is now reflected in 2 Column H. Is that correct? 3 A. That's correct. 4 Q. And does it appear at this point that within the past week 5 or two, pre-1972 disbursements have been filled in with some 6 numbers? 7 A. On this version there are now pre-1972 disbursements. 8 Q. Okay. If you could -- on Column H there's a reference to 9 footnote five, and I believe that's on the second page. If we 10 could look at that, please. If we could focus in on five. 11 And what does footnote five indicate Column H 12 represents? 13 A. Column H represents all outflows from the IIM system. 14 Q. Okay. And includes, it says Tribal Trust checks and 15 electronic funds transfers? 16 A. Correct. 17 Q. In your review of documents, did you encounter any documents 18 related to electronic fund transfers? 19 A. I don't recall any. 20 Q. Did you as far as checks and Tribal Trust transfers? 21 A. Yes, there were lots of documents that referred to checks 22 and transfers. 23 Q. And if we could look on the next page. And focus in on item 24 H. And does it appear that the data from 1887 through 1971 came 25 from something called a NORC disbursement estimate? 392 1 A. Yes, that's what it says. 2 Q. And at this point, have you been provided any data regarding 3 that estimate? 4 A. No. 5 Q. Okay. Mr. Pallais, based on the review that you have 6 performed of the audit data over the past 100 years of this 7 Trust, what if any opinions have you developed regarding the 8 ability to determine the propriety of disbursements from the 9 IIM Trust? 10 A. Well, as I mentioned, to the extent that disbursements are 11 supposed to represent valid payments to IIM beneficiaries, the 12 controls and accounting procedures that the IIM used over the 13 decades was sufficiently unreliable that you can't depend on 14 that number being a valid representation of the amounts that 15 actually went to the correct IIM beneficiaries. 16 Q. And what's the basis for that? 17 A. Looking at 100 to 150 reports over almost 100 years of 18 history. 19 Q. And what are the types of problems that you encountered that 20 led you to that conclusion? 21 A. There are a number of problems. There are lack of 22 authorization for payments, there are recorded instances of 23 payments not going to the right people, there have been 24 instances of fraud, there are a lot of internal control 25 weaknesses, lack of segregation of duties, lack of control over 393 1 the checking account or the checks, there are lack of 2 reconciliations, there are a number of problems that occurred 3 with some frequency for years and years and years. 4 Q. That was my next question. Would you characterize these 5 problems as sporadic or of a more pervasive nature? 6 A. They appear to be fairly pervasive. You see the same 7 observations, comments, and criticisms decade after decade. 8 MR. SMITH: If we could see Exhibit 65, please. 9 BY MR. SMITH: 10 Q. And can you describe for the Court what Exhibit 65 is? 11 A. This is a document that summarizes observations made in 12 roughly 100 to 150 reports, starting from 1905 and goes all the 13 way through 2006 or so. These represent quotes or descriptions 14 of criticisms of internal control regarding disbursements taken 15 from reports that presumably were in the NORC database. 16 Q. Okay. And you have a listing of a year and then a quote or 17 a summary under there. And then can you actually link to the 18 document itself that has that summary? 19 THE COURT: I think you neglected to ask the witness 20 who prepared this. 21 MR. SMITH: Okay. 22 BY MR. SMITH: 23 Q. Can you describe for me who prepared this document? 24 A. I'm not sure who prepared it. 25 Q. Okay. 394 1 THE COURT: Oh. 2 BY MR. SMITH: 3 Q. Have you reviewed this document? 4 THE COURT: I thought he was going to say that he 5 prepared it. So it's just a document? 6 MR. SMITH: It is a document, Your Honor. 7 BY MR. SMITH: 8 Q. Have you reviewed this document? 9 A. I have reviewed the document. I've looked at all of the 10 reports that are referenced, and from what I can tell, the 11 quotes and descriptions are a fair representation of what is 12 actually in the report. 13 Q. And are the quotes consistent with the documents that you've 14 reviewed back in October? 15 A. Yes. 16 Q. And do they fairly reflect your opinions regarding the 17 disbursement issues since 1905 through 2006? 18 A. They fairly reflect the opinions of the people who wrote the 19 reports, I presume. 20 Q. Okay. They fairly reflect the problems that were 21 encountered over the 100 years of the Trust? 22 A. Yeah, this document fairly reflects what the reports written 23 by auditors say. 24 Q. And you indicated the source for the majority of the 25 documents are meta-analysis documents from NORC? 395 1 A. That's correct. 2 Q. Now, in some years there's nothing listed. Is that fair? 3 A. That's true. 4 Q. Were there some years where you had no audit reports at all? 5 A. There were no audit reports in the NORC meta-analysis. 6 That's correct. 7 Q. When performing an audit, what if any importance do you 8 place on identifying internal controls? 9 A. Internal controls is typically an important feature of an 10 audit. Now, there are two kinds of audits we need to keep in 11 mind here, because there are two kinds of audits being done on 12 the IIM Trusts. 13 There are independent audits, what we call GAAS audits, 14 Generally Accepted Auditing Standards, and these are done by 15 independent auditors, CPA firms. And the purpose of the GAAS 16 audit is to render an opinion on whether the financial 17 statements fairly present financial position or results of 18 operations in conformity with generally accepted accounting 19 principles. 20 When we do an independent audit, the auditor is 21 required to understand internal control as part of doing that 22 audit. The auditor has to understand enough about internal 23 control, that is the accounting processing and the disciplines 24 over the accounting system, to understand what kinds of things 25 could go wrong, what kinds of things could be misstated in the 396 1 financial statements. 2 He also has to understand internal controls in 3 sufficient detail to figure out where are the areas of increased 4 risk, where are errors or misstatements more likely to occur, 5 because what the auditor wants to do is focus on the areas where 6 the misstatements are more likely to occur. 7 The auditor also has to understand internal control 8 enough so that he can design the actual tests he's going to 9 apply. You can't test documents unless you know what they 10 represent and where they came from. 11 If controls are effective, if they're really good, the 12 auditor can test their effectiveness and rely on the company's 13 controls to reduce the amount of testing he does. On the other 14 hand, if the controls are not that effective, the auditor can't 15 rely on them, the auditor can still complete the audit, though. 16 Generally we can audit around problems in the internal controls 17 by merely doing more or better kinds of tests. 18 In really egregious cases the controls are so bad that 19 the auditor actually can't do an audit and can't render an 20 opinion. 21 Q. Now -- I'm sorry, go ahead. 22 A. The other kind of audit is an internal audit, or what we 23 might call an operational or performance audit. Now, the amount 24 of work you do on internal controls on one of those is entirely 25 dependent on what your goal is in the audit. Often it's the 397 1 case that the whole point of the audit is to look at some aspect 2 of control. You might not be looking at the entire control 3 structure, but you want to see some aspect of control and see if 4 it's working efficiently and effectively. And in that case 5 internal control is obviously of paramount importance, because 6 that's what you're doing. 7 You might also do an internal audit that has absolutely 8 nothing to do with controls, and in that case you wouldn't look 9 at internal control at all and you very well probably would not 10 have any observations regarding internal control, because that's 11 not what the auditor was intending to look at. 12 Q. And when auditing something like the IIM Trust, what kinds 13 of internal controls would you expect to exist? 14 A. If you're looking at the IIM Trust, the kinds of controls 15 you would expect to exist if this were well functioning are ones 16 that ensure that -- and we're talking about now disbursements, I 17 presume, controls over disbursements? 18 Q. That's correct. 19 A. We would expect to see controls that make sure the 20 disbursements are only paid to the right people in the right 21 amounts, and that the system captures all of the disbursements 22 made. 23 So you would expect to see a lot of controls. And 24 although this isn't a comprehensive list, the kinds of controls 25 you would expect to see would be things like disbursements are 398 1 only made if they're authorized, so disbursements should only be 2 made if the beneficiary has specifically requested the 3 disbursement be made to him. And you would expect to see some 4 documentation of that. 5 You would also expect to see that somebody at the Trust 6 ensured that the payments were only being made based on the 7 right documentation, a signed request by the beneficiary, and so 8 you would expect that that person would authorize the actual 9 payment. 10 You would expect controls to make sure that the records 11 are internally consistent and have integrity. So, for example, 12 you would want to make sure that the controlled account that 13 shows the amount owed to all of the beneficiaries agrees to the 14 total of the detail, the total of the individual accounts. So 15 this way you know that if a disbursement has been made, it has 16 been allocated to a particular account. You don't have 17 disbursements made that haven't been allocated to anybody. 18 You would expect to see that the cash account in the 19 general ledger agrees to the cash reflected at the bank, or in 20 this case the Treasury Department, to make sure that all of the 21 disbursements that you have made have actually been recorded. 22 And you would expect a third kind of discipline over 23 this, which is to say you would expect statements to be sent to 24 the account holders so that if there's a problem in the 25 individual account, they would complain and bring it to your 399 1 attention. 2 So you would know, as a result of those three, that all 3 disbursements have been recorded in individual accounts, you've 4 accounted for all disbursements, and the allocation to the 5 individual accounts are correct because the individual Indians 6 would have complained if they were charged for a withdrawal they 7 didn't make. 8 You would also expect to see segregation of duties. 9 What this means is you would have internal checks, one employee 10 checking the work of another. If you have one person doing 11 everything, for example, it would be very hard to catch a 12 mistake, whether it be unintentional or intentional. So you 13 don't want one person writing the checks and accounting for the 14 checks and doing all those other things. 15 You would also expect to see controls over the writing 16 of checks, that only certain people are allowed to sign checks, 17 certain people are allowed to approve them, that there's 18 controls to make sure other people can't write unauthorized 19 checks. 20 And you would expect to see something where there's 21 monitoring of accounts where mistakes could happen. For 22 example, when there are negative balance accounts, you would 23 want somebody looking at negative balance accounts to say, how 24 did that get overdrawn, what's the mistake and how do we fix it. 25 Or if there are dormant accounts, for example, dormant accounts 400 1 are a great place to look if you wanted to misappropriate funds, 2 because there isn't a beneficiary who is on top of it, since 3 it's dormant. So you would want regular reviews of dormant 4 accounts to see if there's any unexpected activity. 5 So those are the kinds of controls you would expect to 6 see. Obviously there are a lot more specific controls, but 7 that's just kind of a summary. 8 Q. When you're talking about statements, are you talking about 9 statements that would be clear and understandable to a 10 beneficiary? 11 A. Yeah, I would presume they would not be useful if they 12 weren't clear and understandable. 13 Q. The types of internal controls that you've identified, were 14 those present based on the audits you reviewed in the IIM Trust? 15 A. There were deficiencies probably in every one of those areas 16 that were referred to in reports over the decades covered in the 17 NORC database. 18 MR. SMITH: If we could look at Exhibit 61. 19 BY MR. SMITH: 20 Q. And is this a summary of some of the major disbursement 21 problems that you identified? 22 A. Yes. 23 Q. Lack of authorization or support for disbursements, absence 24 of reconciliations, lack of segregation of duties, absence of 25 statements, absence of thumbprints or other identifications, 401 1 problems with supervisory accounts, dormant accounts, negative 2 balance accounts, lack of addresses, failure to safeguard 3 checks, general findings of lack of controls, and then last one, 4 improper distributions and theft. Is that correct? 5 A. Correct. 6 Q. I want to briefly go through some of those items and show 7 you a few examples. 8 Let's focus on the first one, lack of authorization or 9 support for disbursements. What are you talking about? 10 A. Well, as I mentioned, controls you would expect to see 11 include the fact that disbursements are only made when requested 12 by the account holder, so you don't want money being spent out 13 of somebody's account if they didn't ask for it to be done, or 14 if somebody who is unauthorized to ask for it asks for it to be 15 done. 16 You also want controls at the Trust itself to make sure 17 that funds are only being expended based on those requests. 18 MR. SMITH: If we could look back to Exhibit 65, 19 please, and go to item 41, 1954. 20 BY MR. SMITH: 21 Q. And if we could hyperlink on that and if you could tell us 22 what this document is. 23 A. This appears to be a report on an audit at Anadarko done by 24 the Department of Interior in 1954. 25 Q. And is this one of the documents you reviewed in preparation 402 1 for your testimony today? 2 A. Yes. 3 Q. And if we could go back to the actual hyperlink page. If 4 you could focus in on the first paragraph under 13. 5 A. Uh-huh. 6 Q. Can you describe for the Court what the problem is with 7 respect to authorization for disbursements? 8 A. Well, it shows that nearly three quarters of the 9 disbursements were not supported by the proper authorization, 10 and of the ones that were supported, half didn't have the 11 document the Department of Interior required. 12 Where they were on file, almost one out of five were 13 not filled in completely, and more than a quarter were approved 14 by somebody who also prepares and issues the checks. So 15 somebody was preparing, approving, and doing the check, which is 16 a segregation of duties problem. 17 Q. This example, is it an isolated example? 18 A. No. There were examples of unauthorized payments throughout 19 the database through most of the decades. 20 Q. Okay. Would the problems with the lack of authorization 21 include authorizations signed by someone other than the 22 beneficiary? 23 A. Yeah, there would be requests by people other than the 24 beneficiary. 25 Q. What about transfers of funds? What kinds of problems did 403 1 you identify with respect to transfers of funds? 2 A. Well, some of the problems that were identified include 3 transfers to government agencies without what the auditor 4 considered to be appropriate support. 5 Q. How about transfers to third parties or Indian tribes? 6 A. Right. Well, I guess when I said government agencies, what 7 I intended to include was Indian tribes, other people. And 8 there would also be checks made out to third parties who did not 9 appear to be authorized recipients. 10 Q. And again, were these problems isolated or fairly common? 11 A. They occurred across the database. 12 Q. You were looking at the government's disbursement numbers. 13 Why is this important? 14 A. Well, to the extent that we are assuming that the 15 disbursements represent valid disbursements to individual 16 Indians, this calls that assumption into question because we're 17 being told that there are checks being written that people 18 didn't ask for. 19 Q. Now, just because a distribution may not be authorized, or 20 there may not be any documentation of the authority doesn't mean 21 it was not actually received by the correct beneficiary. Is 22 that correct? 23 A. That's correct. 24 Q. What if anything did you see in your examination of records 25 that supported your concerns that money was in fact not being 404 1 received by beneficiaries? 2 A. Well, there were a number of situations where the auditor 3 contacted beneficiaries directly, and the beneficiaries reported 4 that the amounts shown as disbursed to them were not received by 5 them. 6 Q. What is a confirmation or a negative confirmation in 7 accounting terms? 8 A. Well, confirmation is a type of audit test we do. It's one 9 of the strongest kinds of tests we have. In a confirmation, we 10 typically go outside of the audited entity to ask some 11 independent third party to provide evidence about amounts 12 recorded in the financial statements. 13 Typically we see this in accounts receivable in a 14 typical commercial entity. The commercial entity will say, this 15 customer owes us $10,000, and the auditor will send a letter 16 directly to the customer saying, do you owe the client $10,000, 17 please tell us. And the response will come directly back to the 18 auditor. This is very strong audit evidence. 19 Confirmations in general fall into two kinds. We have 20 what we call positive confirmations, in which case we send out 21 the request and we ask the person on the other end, please tell 22 us specifically, do you agree with this number; if yes, tell us 23 yes, if no, tell us why you disagree. If it's a positive 24 confirmation, we expect a response back in either case. 25 Negative confirmation, we send out a letter that says, 405 1 please contact us if you disagree. You don't need to do 2 anything if you agree, but if you disagree, please tell us. 3 Q. In a typical situation where you would send out a 4 confirmation or a negative confirmation, based on your 5 experience, what would be the response? 6 A. Positive confirmations vary all over the lot, depending on 7 the client base, the industry, and that sort of thing. Negative 8 confirmations, there's no predictability at all, and in fact, 9 when I was on the Auditing Standards Board, we issued Statement 10 on Auditing Standards Number 67, which essentially says you 11 can't use negative confirmations for audit evidence. It doesn't 12 say absolutely, but it says most of the time you can't, except 13 in some very specific situations. 14 And the reason for that is, it doesn't provide you a 15 basis to draw a lot of conclusions. If you don't get any 16 responses back on negative confirmations, you don't know whether 17 everybody agrees. People might not agree but they didn't bother 18 to read the confirmation, they just threw it away. The 19 confirmation was sent to the wrong address and the intended 20 recipient never got it. So the fact that you don't get a 21 response back doesn't give you much in the way of audit 22 evidence. 23 On the other hand, when you do get them back, it tells 24 you that you might have a problem. 25 Q. The auditing standard you mentioned, was that subsequent to 406 1 1990? 2 A. That was issued around 1990 or 1991. I think it was 1990, 3 sometime in that range. 4 Q. Okay, good. In the examples that you saw in the audits that 5 you reviewed, were they significant or no? 6 A. The responses were significant. A very large contingent of 7 people wrote back to the auditors saying that the statements 8 they received were not correct, and a large number said that 9 they did not receive the disbursements reflected in the 10 statements. 11 Q. We'll see an example of one. If we could look at 1986, 12 number 261. And if we could go to the first page of that 13 document. 14 And can you tell us what document this is? 15 A. This is an audit report by the Department of Interior's 16 Office of Inspector General. So this was not done by an 17 independent CPA firm, this was done by government auditors. 18 Q. And does it look like it's March 1986? 19 A. It looks like 1986. 20 MR. SMITH: If we could go back to the original page. 21 BY MR. SMITH: 22 Q. And can you describe what is happening here? 23 A. Yes, although if you could scroll up just a little bit, that 24 would be good. Stop. 25 What they did was they selected 1410 disbursements 407 1 posted on ledger cards and they sent confirmations to the 2 account holders. And these went out, and what they got back 3 was, of the 1410, 103 responded that they had not received the 4 IIM checks reflected on the statements, and that totaled 5 $328,000. 6 Q. And it looked like they had about 850 of them returned? 7 A. There were 850 returned for one reason or another, yes. 8 Q. What if any significance is that in terms of an auditor? 9 A. Well, the 103, you have 103 in disagreement based on a 10 sample of 1410. I haven't done the math, but that's got to be 11 an 8 percent problem rate. That's a very high rate. That's an 12 unusually high rate of problems. 13 Q. And 15 to 16 percent of those that actually returned the 14 confirmation? 15 A. Uh-huh. 16 Q. There were subsequent negative confirmations by Arthur 17 Andersen. Is that correct? 18 A. That's correct. 19 Q. And the Court has already heard testimony about those, so I 20 won't belabor those, but can you just generally describe your 21 reaction to the negative confirmations delivered by Arthur -- or 22 received by Arthur Andersen? 23 A. Well, Andersen did negative confirmations not as an evidence 24 gathering tool but to look at this issue. And their results 25 were very similar to the OIG results. They got a lot of people 408 1 writing back, unusually high number of people writing back to 2 say, we never got these disbursements, we never got these 3 checks. 4 Q. In fact, in the case of Arthur Andersen, it would be close 5 to over 30 percent? 6 MR. SIEMIETKOWSKI: Objection, Your Honor, leading the 7 witness. 8 THE COURT: Sustained. 9 MR. SMITH: If we could look at 1988, number 267. 10 THE COURT: Before you do 1988, number 267, go back to 11 that 261, that part that you showed. There's something just 12 underneath the quoted part that said we're going to compare the 13 missing checks to the responses we got. Let me read the rest of 14 that paragraph and then tell me if you know, if either 15 Mr. Pallais, or for that matter Mr. Smith knows, whether that 16 was ever done and whether we have any evidence of the result. 17 MR. SMITH: Your Honor, I can tell you in the documents 18 that we've received, we have not seen any response -- seen that 19 that was ever done. 20 THE COURT: Any follow-up on that. 21 MR. SMITH: That's correct. 22 THE COURT: Do you know of any, Mr. Pallais? 23 THE WITNESS: No, sir. 24 MR. SMITH: Thank you. 25 If we could look at 1988, number 267. 409 1 BY MR. SMITH: 2 Q. And does that refresh your recollection as to the response 3 received by Arthur Andersen? 4 A. Well, it says they got 1249 responses, and of the 12 -- 5 well, it doesn't say what the sample size was, it tells you that 6 30 percent of the responses talked about not receiving the 7 payments. So that would be roughly 400 people said they didn't 8 get payments. 9 MR. SIEMIETKOWSKI: Objection, Your Honor. The 10 documents in the pleading attached to the May 30th response to 11 our motion in limine speak for themselves. While we may not 12 object to Mr. Pallais analyzing the results as an accountant, we 13 do object to him actually just reading from the screen. 14 THE COURT: All right. Well, I'm going to overrule 15 that because he's reading at the same time I'm reading, so I 16 don't attach any particular significance to the fact that he's 17 reading it. 18 BY MR. SMITH: 19 Q. Does the Arthur Andersen result confirm your concerns 20 regarding failure to receive funds by beneficiaries? 21 A. Yes, it's clearly a concern. Andersen found it, the 22 Department of Interior found it, so it's clearly a concern. 23 Q. The second item on your list was absence of reconciliations, 24 and the Court has already heard a lot about reconciliations so I 25 don't want to again belabor that point. But when you're talking 410 1 about absence of reconciliations, what are you talking about? 2 A. There are two things that need to be reconciled here. One 3 is that the total of all of the individual Indian accounts 4 should agree with or at least reconcile to the general ledger 5 control total, so you know that everything has been accounted 6 for. 7 The other reconciliation that you need to be concerned 8 with is the cash shown by the IIM Trust agrees with essentially 9 what his bank says, in this case the Treasury Department, so you 10 know that all of the cash transactions have been appropriately 11 accounted for. Or I think appropriately included. 12 Q. Let's talk about the first one, subsidiary to the general 13 ledger. Why is that important when you're talking about 14 accuracy of disbursement data? 15 A. Well, if we are saying that disbursements were made to 16 individual Indian beneficiaries, then each of those 17 disbursements should be reflected in the IIM account. And if 18 the total of the IIM account doesn't agree with the control 19 total, you've got an issue, you've got either something that was 20 paid and not recorded or something that was recorded but not 21 paid, or something that was paid to somebody other than the IIM 22 beneficiary. 23 And unless you can reconcile those two numbers, you're 24 not sure what the right number to use for disbursements is. 25 Q. Okay. If you don't reconcile the subsidiary and general 411 1 ledger promptly, what happens? 2 A. Well, if you're extraordinarily lucky, if you have a 3 problem, it fixes itself the next month, if you're 4 extraordinarily lucky. 5 If the problem with reconciliation is a systemic 6 problem, then over time it just gets worse. More and more 7 errors get made, and the difference between the total of the 8 individuals and the control total can get bigger or it can get 9 smaller, but if it gets smaller, that doesn't mean necessarily 10 the situation is getting better, it just means you -- it might 11 just mean you've got new errors going in a different direction 12 than the original errors were. 13 But generally, over time, if it's a systemic error, it 14 just gets harder and harder to reconcile. 15 Q. In what you've reviewed, is it an isolated problem or a 16 systemic error? 17 A. It appears to be a systemic error because it occurs over 18 decades. 19 Q. This Court has already seen disparities between the 20 subsidiary and general ledger in, let's call it the modern era, 21 subsequent to 1980. Were there problems like that back in 22 earlier years? 23 A. Absolutely. 24 Q. And when the problems were identified, were they corrected? 25 A. Typically there's no indication that they've been corrected. 412 1 I recall one instance where somebody forced an adjustment on the 2 control account to get it to agree to the total of the 3 individual accounts, but that doesn't necessarily mean they 4 corrected the error, that just meant they forced the two to 5 agree. 6 Q. What do you mean, they forced the two to agree? What did 7 they do? 8 A. Well, they looked at the difference between the control 9 account and the total of the individual accounts, and they just 10 adjusted the control account so that it agreed. They changed 11 the number so it agreed with the total of the individual 12 accounts. 13 Q. So there was no indication whether the agreement was proper 14 or not? 15 A. That's correct. It presumed that the individuals were right 16 and the control account was wrong. But from my reading of the 17 report, they really had no evidence that that was the case. 18 Q. Let's talk generally about Treasury. You've mentioned that 19 and the Court has seen imbalances between Treasury and the 20 general ledger. How does that affect your concern about 21 disbursements? 22 A. Well, again, if you can't reconcile your bank account, if at 23 the end of the month I can't reconcile my personal bank account 24 to what the bank shows, I don't have any confidence that my 25 checkbook is right. 413 1 And if I'm reporting to people based on the results in 2 my checkbook, they've got no reason to believe that my 3 disbursements are right. 4 Q. Okay. The next item on your list was lack of segregation of 5 duties. And what is the importance of that? 6 A. Well, segregation of duties is a basic control concept. One 7 aspect, the most obvious is you want people checking each 8 other's work. But you also don't want somebody to have what's 9 called incompatible duties, so you don't want, for example, the 10 same person to approve the checks, write the checks, and do the 11 accounting for the checks. Because if the person makes a 12 mistake, nobody will ever notice it because they're the ones 13 that do the follow-up. 14 If they want to misappropriate funds, that's the 15 position to do it in because you approve it, pay it to yourself, 16 and then bury it in the accounting records. 17 So in a good control structure, you want segregation of 18 duties to separate those functions, so if somebody does 19 something wrong, somebody else can catch it. 20 MR. SMITH: Let's look at 1953, number 35. If we can 21 go to the document itself, the first page. 22 BY MR. SMITH: 23 Q. And can you describe for the Court what this document is? 24 A. This is a report done by the Bureau of Indian Affairs, 25 June 1953. It's apparently a GAO document. 414 1 Q. And is this one of the documents that you reviewed in 2 preparation for your testimony today? 3 A. Yes. 4 MR. SMITH: And if we could go to the actual hyperlink 5 page. And if we could focus on the first full paragraph, under 6 "inadequate internal control." 7 BY MR. SMITH: 8 Q. If you could read that, and it goes on to the next page? 9 A. In this case what it's saying is one person receives cash, 10 prepares official receipts and schedules of collections. So 11 they're receiving the cash, accounting for the cash. Enters the 12 receipts in a cash receipt book, makes the deposit -- I can't 13 make out the first word. Totals the cash receipts book, makes 14 postings to the individual accounts. 15 So they're accounting for the cash coming in, taking it 16 to the bank, and making the entries into the individual ledger 17 cards for the individual Indian accounts; sends the statements, 18 prepares the disbursements, and if statements come back, this 19 person gets them. 20 So this one person takes care of all the receipts, does 21 the disbursements, does the accounting for them, and is in 22 charge of correspondence with the individual Indian 23 beneficiaries. So if this person wanted to misappropriate 24 funds, nobody would ever find it, unless they were particularly 25 poor at what they did. 415 1 Q. And in this particular example, again, is it an isolated 2 occurrence or is it fairly routine? 3 A. There are comments criticizing the lack of segregation of 4 duties across the decades. 5 Q. And again, how does that impact your evaluation of the 6 disbursements by the government? 7 A. Well, that tells you that if this situation exists, there is 8 a substantial risk that the disbursements being reflected in 9 individual Indian accounts actually didn't go to those people, 10 they might have gone to the person who wrote the checks. 11 Q. The next item you mentioned was absence of statements, and 12 you talked a little bit about the importance of statements. Let 13 me show you an example. 14 MR. SMITH: If we could turn to 1954, number 48. If we 15 could link on the document and show the first page. 16 BY MR. SMITH: 17 Q. And can you describe what this document is? 18 A. This appears to be a 1955 audit done by the GAO. 19 Q. And is this again one of the documents you reviewed in 20 preparation for today? 21 A. Yes. 22 Q. And if we could go back to the link page and focus in on the 23 first full paragraph. 24 A. What this is saying is that statements -- that procedures 25 called for statements to be sent semiannually, but the Fort Peck 416 1 Agency was not doing that. People only got statements if they 2 specifically asked for them. And the reason they didn't, 3 according to this, is that when they did send statements out, so 4 many people disagreed with them that they came in and filled the 5 office. 6 Q. And again, we just looked at one example, but how common was 7 this problem? 8 A. There are comments across the database indicating that 9 statements weren't being sent. 10 Q. Next item, you had thumbprints or other identification. Can 11 you describe for us what those concerns were? 12 A. Well, this is something that primarily affected earlier 13 years, and apparently was not unusual for Indian beneficiaries 14 not to be able to write. So to transact business, they provided 15 a thumbprint rather than a signature, and to make sure that the 16 appropriate person was receiving the cash, the policy was that 17 people were supposed to witness the thumbprint to attest to the 18 fact that this is the right person. 19 And there are comments in many years, many audits 20 indicating that this witnessing was not going on. 21 Q. Next item, you have three entries, supervisory accounts, 22 dormant accounts, and negative balance accounts. What are 23 supervisory accounts? 24 A. Supervisory accounts are those accounts where the person who 25 owns the account is not judged capable of taking care of their 417 1 own business. It might be a minor or it might be an 2 incompetent. So somebody has control over the account for them. 3 Q. And what kinds of problems did you see with supervisory 4 accounts? 5 A. For supervisory accounts, for minors, for example, you might 6 see -- or they did see disbursements going out for things that 7 were not apparently for the benefit of the minor, things like 8 pawn tickets, purchases of vehicles. There were other problems 9 with minor accounts in that once the minor had aged out, they 10 did not inform them that the money was available to them. 11 Typically -- or not typically, but often the supervisor 12 was somebody who worked for the Trust, so an employee actually 13 had full authority over the beneficiary's account. 14 MR. SMITH: If we could look at 1986, number 259, and 15 go to the first page of that document. 16 BY MR. SMITH: 17 Q. And can you identify for us what this document is? 18 A. This is an OIG audit report dated March 1986. 19 MR. SMITH: And if you could go back to the link page 20 and link on it. 21 BY MR. SMITH: 22 Q. And if you could review that and tell generally what the 23 problem is that the auditor identified. 24 A. Well, this is use of minors' funds for things that the 25 auditor apparently did not think was clearly justified. 418 1 Parents' debts were being paid, pawn tickets, hospital bills. 2 Q. For the parents? 3 A. For the parents, yes. Purchase of furniture and appliances, 4 $10,000 from a nine-year-old was used for the down payment on a 5 van. 6 THE COURT: Mr. Smith, is this particular example an 7 example of a disbursement problem that falls under the 8 restitution category or is this more of a management problem 9 that might fall under damages? 10 MR. SMITH: Your Honor, I think this would fall under 11 restitution. 12 THE COURT: The money was paid. Right? 13 MR. SMITH: We don't know if it was paid or not. It 14 went out but we don't really know where it went, whether it went 15 for the benefit of the supervisor or someone else. 16 THE COURT: Well, purchase furniture and appliances, 17 parents have a down payment for a van. All right. Go on, go 18 on. I'm not sure what portion of this this bears to the whole, 19 but it strikes me as a slightly off-kilter example of what 20 you're talking about. 21 MR. SMITH: I understand, Your Honor. 22 BY MR. SMITH: 23 Q. Let's go on and talk about dormant accounts. What is the 24 concern with dormant accounts? 25 A. A dormant account, by definition, has very little activity, 419 1 so there is a question about whether anybody is monitoring the 2 account. If the account is dormant, and there is no beneficiary 3 who is aware that the money is owed, if I were going to 4 misappropriate funds, that would be a place I would do it 5 because the odds on somebody finding it are not really that 6 good. 7 Q. And how many instances did you see of problems with dormant 8 accounts? 9 A. There were several instances where there were criticisms of 10 the review and accounting for dormant accounts. 11 Q. And if we could look at 1982, number 222. And if you could 12 link on the first page and tell us what this is? 13 A. This is a report to Congress by the Comptroller General 14 describing improvements needed in the BIA accounting system. 15 Q. And go back to the link page, and third full paragraph, if 16 you could focus on that. 17 A. And in this case, what they're saying is, as I mentioned, 18 dormant accounts need to be reviewed to see if there's any 19 unusual activity, and the Comptroller General report says that 20 they're not being periodically reviewed, making fraudulent use 21 of the funds easier. And they point to at least one example 22 where a Tribal employee was convicted of embezzling more than 23 $26,000 from a dormant account that belonged to an aged, 24 incompetent adult. 25 Q. The next item was actually negative balances. What are we 420 1 talking about when we talk about negative balances? 2 A. Well, negative balances, they have paid out more than the 3 account holder had in their account. That's obviously an issue, 4 because presumably this person now owes the Trust some money. 5 Whether it was ever paid is a question. As an auditor, you have 6 to satisfy yourself that that debt was ultimately collectible, 7 and I'm not sure that the auditors ever did that. 8 But if money is being paid inappropriately to somebody 9 that is included in the disbursements, clearly that disbursement 10 was not a valid one. 11 Q. How often did you see problems with negative balances? 12 A. There were several references to negative balances going 13 back to the 1950s. 14 Q. And are we talking about small amounts of money or somewhat 15 larger? 16 A. It varied. There were very small amounts and very large 17 amounts. 18 Q. In millions? 19 A. Yes. 20 Q. And again, how does that affect your concerns about 21 disbursements from the Trust? 22 A. Well, it tells you that the fact that a disbursement has 23 been made doesn't mean it went to a valid recipient. 24 Q. How would negative balances affect those concerns where 25 you're dealing with an account that might be commingled? 421 1 A. Well, to the extent that your total was correct, a 2 negative -- if you've overpaid one person, you will by necessity 3 have to have underpaid another person. 4 Q. Next item on your list was lack of addresses. And just 5 describe generally for the Court what the concern was. 6 A. Well, the concern of the auditors was for large portions of 7 some of the populations, the Trust did not have current 8 addresses for the beneficiaries. So if a check was mailed to 9 the beneficiary, the question arises, where did you mail it if 10 you don't have a current address? If you sent a statement, 11 where did you send the statement if you don't have a current 12 address? 13 Q. And how common was this concern reflected by the auditors? 14 A. There were several reports that discussed this issue. 15 Q. And are we talking about just a handful of addresses or 16 something more significant? 17 A. In some cases it was very significant. 18 Q. If we could look at 1956, number 105. And can you describe 19 what this document is? 20 A. It's a 1956 audit report in the Aberdeen area, done by a 21 government auditor, but I'm not sure which department it is from 22 looking at this. 23 Q. And if you could link on to the -- under analysis, if you 24 could focus in on that paragraph under there in the middle of 25 the page. 422 1 A. Uh-huh. 2 Q. What was the problem with addresses there? 3 A. It said that of 581 accounts, 87 percent did not show the 4 addresses of the account holders. Also had problems with dates 5 of birth. 6 Q. Again, problems that were not isolated but were fairly 7 routine? 8 A. Common, anyway. 9 Q. Next item was failure to safeguard checks. And Mr. Ziler 10 testified a little bit about this, but could you describe what 11 your concerns were? 12 A. Well, there are several reports that discuss the fact that 13 the checks were out in the open, they weren't accounted for, the 14 check writing machines were available to people who might not be 15 authorized to use them, check signing plates were available. So 16 it would be not difficult for an unauthorized person to write 17 what appears to be a valid check. 18 Q. Okay. In your review, did you find instances of actual 19 erroneous distributions or actual theft of IIM funds? 20 A. Yes, there were several reports that referred to identified 21 theft and some erroneous distributions. 22 Q. And the Court has already seen the 1914 report that talked 23 about that. Do you recall that one? 24 A. Yes. 25 MR. SMITH: If we could just look at some more recent 423 1 examples. 1974, item 210. 2 BY MR. SMITH: 3 Q. What is this document? 4 A. This is an audit done by the Bureau of Indian Affairs on the 5 Crow Indian Agency in Montana in 1974. 6 Q. And if you could turn to the link page. And could you 7 describe for the Court what this is? 8 A. What this is showing is a number of unauthorized checks 9 written on that account totaling $4,500. 10 Q. And if you go to the next page, they actually have some 11 details on those particular checks. Is that correct? 12 A. Right. 13 MR. SMITH: And if we could go, I believe it's five 14 pages after that, page nine of the document. 15 BY MR. SMITH: 16 Q. And can you describe for the Court what this is? 17 A. This is a summary of the forged disbursements, so first 18 line, for example, on August 12th, there are 42 forged checks; 19 on the 21st there were three batches of forged checks. 20 Q. If you could look at the comment on the bottom of the page, 21 what does that indicate? 22 A. It says the administrative officer stated that the 23 signature, apparently his signature on the check wasn't actually 24 his. 25 Q. If we could look at another recent example, 1982, item 424 1 number 216. And if we could link on the first page. 2 And is this another GAO report? 3 A. Yes, it is. 4 Q. It's a document you identified? 5 A. It's a document I reviewed. 6 Q. A document you reviewed. I'm sorry. 7 MR. SMITH: If we could go back to the link page and 8 focus in on the first paragraph. 9 BY MR. SMITH: 10 Q. Is there an indication there that money in fact was going to 11 people who had no authority to receive it? 12 A. It shows that names of 173 individuals who received trust 13 fund checks were not shown on the list of authorized trust fund 14 recipients. 15 Q. Okay. Another example, 1990, number 293. And is this a 16 1990 report from Arthur Andersen? 17 A. Yes, it is. 18 Q. And again, one of the documents you reviewed? 19 A. Yes. 20 Q. Does it indicate as well that there's evidence of money 21 being misappropriated? 22 A. Yes. 23 MR. SMITH: If we could go to the link page and focus 24 in on, I believe, the third paragraph. 25 BY MR. SMITH: 425 1 Q. And what does that reflect? 2 A. It says there have been instances of misappropriated funds 3 due to inadequate safeguards over Treasury checks, and poor 4 internal control over disbursement in general. 5 Q. And again, are these a handful of the items that you saw 6 that reflected money going to the wrong people or being 7 embezzled? 8 A. Correct. 9 Q. We've talked about your concerns about the disbursements. 10 Let me change the focus a little bit. And in your review of 11 these audits, did you identify instances where money was not 12 disbursed? 13 A. Yes. 14 Q. For whatever reason? 15 A. Yes. 16 Q. And let's talk about some of the earlier years. Let's say 17 pre-1930, what kinds of things did you identify? 18 A. Well, apparently there was a policy described in these 19 reports in which the Trust simply did not pay money out to 20 beneficiaries, or if they did, they paid very little, regardless 21 of what the balance was in the account. 22 Q. And if you could, as an example, look at 1909, item number 23 2. 24 MR. SMITH: 1909, I'm sorry. 25 BY MR. SMITH: 426 1 Q. And can you describe for the Court what this document is? 2 A. This is a report of the Department of Interior dated 3 June 30th -- or for the fiscal year ended June 30, 1909. 4 MR. SMITH: And if you could go back to the linked page 5 and focus in on the second paragraph. 6 BY MR. SMITH: 7 Q. And generally what does this describe? 8 A. What this describes is a procedure in which they were only 9 paying $10 monthly allowances to certain Indians, and the 10 writer's belief that -- and the instructions were issued to 11 discontinue even the $10 payments. 12 Q. Except in certain circumstances? 13 A. Right. 14 Q. And was this typical of some of the reports you saw in 15 earlier years? 16 A. Yes, there were several reports that talk about this sort of 17 thing in the earlier years. 18 MR. SMITH: If we could look at 1915, item number 16. 19 Go a little further. 20 BY MR. SMITH: 21 Q. Let's go ahead. Maybe we can figure out that one. 22 In some of the later years, did you find instances 23 where money was supposed to be disbursed but it just for 24 whatever reason was not? 25 A. Yeah, there were examples where balances had accumulated, 427 1 that there were problems distributing funds that had 2 accumulated, there were problems with minors who had aged out 3 and were unaware that funds were available to them. 4 Q. Let me give you an example. 1935, number 23. And what is 5 this document? I believe it's dated November 28, 1935. 6 A. Yeah, it's a report on IIM funds at -- 7 Q. Does it appear to be the Colville agency? 8 MR. SIEMIETKOWSKI: Objection, Your Honor, leading. 9 THE COURT: Well, I think that's foundational. He's 10 trying to get him to read a fuzzy word at the top of the page. 11 I think it says Colville. 12 BY MR. SMITH: 13 Q. Does it appear to be Colville? 14 A. It looks like Colville. 15 Q. If you could move to the actual linked page and focus in on 16 the third full paragraph. 17 A. It's referring to an effort to exercise restraint in paying 18 out funds to individual beneficiaries. 19 MR. SMITH: Let's look at item number 57, 1955. 20 THE COURT: After this one we're going to take a short 21 break. 22 BY MR. SMITH: 23 Q. Could you describe what this document is? 24 A. This is a GAO report on audits at Anadarko, Oklahoma for the 25 year ended June 30, 1955. 428 1 Q. Is this one of the documents you reviewed as well? 2 A. Yes. 3 Q. And under the first paragraph, what is indicated there? 4 A. They're looking at some of the accounts and they've found 5 that 14 separate accounts totaling about $5,000 were as much as 6 eight years old. 7 Q. Okay. 8 MR. SMITH: Does Your Honor want to take a break? 9 THE COURT: Yeah, just a couple of observations on 10 particularly the recent stuff you've been showing him, 11 Mr. Smith. Reluctance in 1909 to pay $10 to Indians because it 12 might make them lazy, which I think is what that whole thing is 13 all about. 14 MR. SMITH: That's the implication. 15 THE COURT: Or restraining themselves from making 16 payments in later years doesn't mean -- doesn't affect the 17 disbursement schedules. It may affect the policy by which the 18 schedules are made, but I don't see how it impacts the 19 legitimacy of the disbursement numbers. 20 And as to the many examples you've shown me of fraud, 21 waste, and abuse, and all of the subcategories of it, that's 22 kind of a double-edged sword, isn't it? I mean, if the money 23 was paid out, how was it held for the benefit of the government? 24 Think about that and let's talk about it later. We'll be in 25 recess for 10 minutes. 429 1 (Recess taken at 3:17 p.m.) 2 THE COURT: Okay, Mr. Smith, proceed. 3 MR. SMITH: Your Honor, do you want me to respond to 4 your questions or proceed with the examination? 5 THE COURT: No, let's proceed with the witness. We can 6 talk about the question later. I just wanted to sort of throw a 7 marker down and we'll talk about it later. 8 MR. SMITH: Okay. That's great. 9 BY MR. SMITH: 10 Q. Mr. Pallais, we've looked at a lot of examples, and is it 11 fair to say you could point to other examples where money was 12 not disbursed from the IIM Trust? 13 A. Yes. 14 Q. And that goes throughout the decades? 15 A. Yes. 16 Q. As an accountant, what kinds of issues does this raise with 17 you? 18 A. Well, it raises questions about whether the money is going 19 out, to who it's supposed to be going to. And if it's not going 20 out, what's happening to it. 21 Q. In light of the pervasive problems that you saw over the 22 hundreds of years of the Trust, what conclusions did you reach 23 regarding the ability to rely on Interior's own distribution 24 data? 25 A. I think you can't really rely on their distribution numbers 430 1 to represent valid payments to valid individual Indian 2 beneficiaries. 3 Q. And were the problems that you noted, were they better 4 pre-1972 or post-1972, or were they the same? 5 A. There were problems throughout. They were sometimes 6 different problems, but there were problems throughout. 7 MR. SMITH: Your Honor, I have no further questions. 8 THE COURT: Cross-examine, Mr. Siemietkowski? 9 MR. SIEMIETKOWSKI: Good afternoon, Your Honor. 10 THE COURT: Good afternoon. 11 CROSS-EXAMINATION 12 BY MR. SIEMIETKOWSKI: 13 Q. Good afternoon, Mr. Pallais. 14 A. Good afternoon. 15 Q. You're an expert in accounting and accounting procedure and 16 methods, are you not? 17 A. Yeah, I suppose. Yeah. 18 Q. You're not an expert in government records, are you? 19 A. No. 20 Q. You're not an expert in federal Indian relations, are you? 21 A. No, sir. 22 Q. You're not an expert in federal Indian records, are you? 23 A. No. 24 Q. You have not reviewed any of the actual government records 25 underlying the IIM accounts, have you? 431 1 A. No. 2 Q. You just reviewed reports about those records, as you've 3 discussed in your direct examination. Correct? 4 A. That's correct. 5 Q. So, for instance, you have not reviewed Treasury settlement 6 packages? 7 A. That's correct. 8 Q. You have not reviewed GAO settlement packages? 9 A. Correct. 10 Q. You have not reviewed any statements of differences. 11 Correct? 12 A. That's correct. 13 Q. Do you know what a statement of difference is? 14 A. I'm not sure I do. I'm going to say I don't, although I'm 15 thinking there might have been an example in the October -- in 16 some of the materials I looked at in October. But I'm not 17 sufficiently confident to describe it. 18 Q. You have not reviewed any statements of accountability, have 19 you? 20 A. Statements of accountability? You mean individual 21 statements to Indians, or the IIM's accountability, the 22 financial statements? 23 Q. Statements of accountability as prepared by BIA in the 24 context of the IIM system. Have you seen any of those? 25 A. I don't believe I've seen what you're probably referring to. 432 1 I mean, the financial statements of the IIM would be a statement 2 of accountability, but I don't think that's what you're talking 3 about. 4 Q. You haven't reviewed any statements of funded checking 5 accounts, have you? 6 A. No, sir. 7 Q. Do you know what those are? 8 A. Statements of funded checking accounts? I could surmise, 9 but I haven't actually looked at one. 10 Q. You have not reviewed any Osage documents, have you, 11 Mr. Pallais? 12 A. No, I have not. 13 Q. You have not reviewed any judgment and per capita documents, 14 have you? 15 A. No. 16 Q. You have not reviewed any electronic fund transfers records, 17 have you? 18 A. No. 19 Q. Beyond the reports which you testified about on direct 20 examination, you have not actually looked at any receipts data, 21 have you? 22 A. Not any original data. I clearly have seen AR-171, for 23 example, and other things that have been introduced at trial, 24 but I haven't seen any original detail data. 25 Q. Likewise, Mr. Pallais, you have not actually looked at any 433 1 original disbursement data, have you? 2 A. Not a lot. There have been copies of things in reports, but 3 I have not seen any outside of reports. 4 Q. Now, regarding the reports, Mr. Pallais, which reports that 5 you have reviewed provide evidence of what percentage of monies 6 collected by the IIM system have been disbursed to 7 beneficiaries? 8 A. I don't believe any of the reports describe that particular 9 statistic. 10 Q. Similarly, which reports that you have reviewed provide 11 evidence of what percentage of monies collected by the IIM 12 system ought to have been disbursed to beneficiaries? 13 A. Again, I don't believe any of the reports say that. What 14 the reports talk about is the lack of reliability of the 15 recorded amounts, but they don't provide the statistic you are 16 requesting. 17 Q. And can you point to any particular reports, Mr. Pallais, 18 that you have reviewed that provide evidence of a benefit to the 19 government conferred by the IIM? 20 A. No. 21 Q. Now looking at what I believe was PPX-61, your list of 10 22 major disbursement problems, do you recall that No. 7 was "Lack 23 of address of account holders"? 24 A. Yes. 25 Q. Are you familiar with Interior's efforts to find WAU? 434 1 A. No. 2 Q. Do you know what WAU refers to? 3 A. I could guess, but I don't -- 4 Q. Do you know what it stands for? 5 A. I could guess what it stands for, but I don't know for sure 6 that's what it stands for. 7 Q. I have another question, please -- 8 MR. SIEMIETKOWSKI: Thank you, Antonio. 9 BY MR. SIEMIETKOWSKI: 10 Q. I have another question, please, about your direct 11 examination. You talked about all the reports in this 12 historical compilation being in the NORC database. And how do 13 you know that those reports are in the NORC database? 14 A. I don't know. I have not spoken to NORC. I was given disks 15 and informed of their provenance, but I have not actually spoken 16 to NORC and I have not audited the database. 17 Q. And just to be clear, you did not actually prepare the 18 73-page historical compilation from which you testified. 19 Correct? 20 A. That's correct. 21 Q. Do you know who selected those particular reports, as 22 opposed to selecting other reports? 23 A. No, I don't. 24 MR. SIEMIETKOWSKI: If I could please see page five of 25 the historical compilation. 435 1 THE COURT: Who is showing page five? Catina? Okay, 2 it's up. 3 MR. SIEMIETKOWSKI: Thank you for your indulgence, Your 4 Honor. 5 BY MR. SIEMIETKOWSKI: 6 Q. Mr. Pallais, that refers to, you see those two bullets in 7 the center of that page, 1928? 8 A. I see two bullets, yes. Do you want me to read them? 9 Q. No, no. You've read those two extracted quotations from the 10 1928 letter from the comptroller general, have you not? 11 A. I believe so. 12 Q. Have you read the entire letter from the comptroller 13 general? 14 A. I don't know if I read this entire letter or not. I read a 15 number of entire reports, many, but I'm not sure. 16 Q. Well, let me then show you DX-467, and specifically page 104 17 of the same comptroller general letter. 18 MR. SIEMIETKOWSKI: If we could please enlarge the 19 highlighted portion for Mr. Pallais to read. 20 BY MR. SIEMIETKOWSKI: 21 Q. Could you please read the highlighted portion, Mr. Pallais? 22 A. To myself, or -- 23 Q. Out loud, please. 24 A. "The check register was however carefully scrutinized, and 25 all large payments and payments listed for the purposes that 436 1 were of an unusual nature were inquired into. The impression 2 prevailed that, with few exceptions, the disbursements were on 3 the whole reasonable, and as a rule made for the purposes 4 beneficial to the Indian concerned." 5 Q. Thank you. Now, were you aware this quote existed in the 6 same 1928 letter from which those two extractions in the 7 historic compilation were found? 8 A. I might have been. I don't know. I just don't recall 9 whether I read this entire report or not. 10 THE COURT: Let me see the quoted portions again. 11 MR. SIEMIETKOWSKI: From our DX, Your Honor? 12 THE COURT: From the compendium. No, I mean from 13 the -- your point is that they were taken out of context. I 14 want to see what the context is. 1928. Okay. 15 MR. SIEMIETKOWSKI: Now if the Court will indulge me, I 16 would like to switch back to a plaintiffs' exhibit briefly one 17 more time before switching back to defense exhibits. If it 18 would possible to show, I believe it's number 23 in the 19 Historical Compilation, the 1935 report which Mr. Pallais 20 testified to. The 1935 report, number 23 in plaintiffs' Historic 21 Compilation. And if it's possible to cursor down to the bottom 22 of page three, I believe it is. Is it possible to cursor down a 23 bit further, please? Is it possible to look at the next page, 24 please? And a bit further, please, if possible. 25 My apologies to the Court, Your Honor. I cannot find 437 1 the quote I was looking for. And we will be using defense 2 exhibits from now on. 3 BY MR. SIEMIETKOWSKI: 4 Q. Now, Mr. Pallais, you testified regarding several reports 5 listed on pages 19 to 33 of your historical compilation. And 6 those discuss BIA -- or those are quotes from BIA auditor 7 reports between 1956 and 1966. Do you recall testifying about 8 some of those BIA auditor reports during that time frame? 9 A. Yes. 10 Q. Now, you have not reviewed all of those auditor reports, 11 have you? 12 A. If it was in the compilation, I have looked at every one of 13 them. If they were in the database provided for the October 14 trial, I read all of them. 15 So I think that answers your question. 16 Q. It does, thank you. 17 But you're not familiar, are you, with the BIA standard 18 procedures associated with those audits? 19 A. No. 20 Q. Did you know that BIA's audit division visited these area 21 offices annually? 22 A. No. 23 Q. Did you know, for instance, that auditors usually spent one 24 to three weeks at an agency, reviewing IIM records? 25 A. No. 438 1 Q. Did you know that the auditors conducted an exit interview 2 with the area officer at the conclusion of the visit? 3 A. I didn't know that. I would have assumed it. 4 Q. Are you aware that the auditors submitted their reports to 5 the Commissioner of Indian Affairs? 6 A. I would not have -- I would not know who the reports were 7 actually sent to. 8 Q. Did you know that the commissioner's office submitted the 9 auditor's findings back to the area office? 10 A. No, but that makes sense. 11 Q. And were you aware that those submissions typically 12 contained instructions to correct the deficiencies noted? 13 A. No, I did not know that. 14 Q. Now, on pages 34 and 35 of the compilation -- 15 MR. SIEMIETKOWSKI: And if it's possible to show those, 16 I would like to as well. Thank you. 17 BY MR. SIEMIETKOWSKI: 18 Q. On pages 34 and 35, Mr. Pallais, do you see reports 19 referenced in 1969 and 1972? 20 A. I see something for 1969 and for 1972. 21 Q. Okay. And those are OSR reports, are they not? 22 A. The ones for 1972 are. 23 Q. Are you aware that the 1972 report was a follow-up to the 24 1969 report? 25 A. If I knew that, I don't recall it. 439 1 Q. You do know, though, that OSR stands for Office of Survey 2 and Review? 3 A. That's what it says, yes. 4 Q. Did you know that that was a precursor to the Office of the 5 Inspector General? 6 A. No, I did not. 7 Q. I would like to show you DX-76, if I could, please. And 8 specifically, page seven of DX-76. This is the 1972 OSR report. 9 MR. SIEMIETKOWSKI: If we could enlarge that so the 10 Court and the witness could see that, please. 11 BY MR. SIEMIETKOWSKI: 12 Q. Would you please read that to yourself, Mr. Pallais, and 13 tell me when you're finished reading it. 14 A. (Witness complies.) I have read them. You just want the 15 three highlighted? 16 Q. Excuse me? 17 A. You just want the three highlighted? 18 Q. Yes, please. 19 A. Yes, I've read those. 20 Q. Now, at the time you reviewed those extracted quotes in the 21 compilation, were you aware that this language also existed in 22 the 1972 OSR report? 23 A. I don't recall being aware of that. 24 Q. I would like to take you from page seven of this same 25 exhibit to page two of this same exhibit, please. 440 1 MR. SIEMIETKOWSKI: If we could please expand that so 2 the Court and the witness could see it. 3 BY MR. SIEMIETKOWSKI: 4 Q. Could you please read the yellow highlighted section to 5 yourself and tell me when you're finished, Mr. Pallais? 6 A. (Witness complies.) I've read that. 7 Q. Were you aware that language existed at the time you 8 reviewed the compilation of quotes from that same report? 9 A. I don't recall seeing this one before. 10 Q. Now, on page 35 of your compilation, Mr. Pallais, you cite, 11 and earlier I believe you discussed a 1974 accountant's report 12 for the Crow Agency. Do you see that on the screen, 13 Mr. Pallais? 14 A. I see that. You keep referring to "my report" and "that I 15 referred to." But it's not my report and I didn't make this 16 reference. But I do see it. 17 Q. Right, this is not your compilation, as you testified. But 18 you do see the 1974 bullet there? 19 A. Yes. 20 MR. SIEMIETKOWSKI: If I could please show the witness 21 DX-469, and specifically page two. 22 BY MR. SIEMIETKOWSKI: 23 Q. You recall testifying about these forgeries. Right? 24 A. Yes. 25 Q. On direct examination? 441 1 A. Right. 2 Q. Once it comes up large enough on the screen, Mr. Pallais, 3 would you please read out loud the yellow highlighted portion? 4 A. "The irregularities reported on herein are currently under 5 investigation by representatives of the Federal Bureau of 6 Investigation and the Secret Service." 7 Q. Were you aware of this particular portion of the report when 8 you earlier discussed the other portions in your direct 9 examination? 10 A. I don't know if I was or not. I'm not certain this would 11 have affected my perception at all. So if I had read it, it 12 would not have mattered to me. 13 Q. Now, page 35 of the compilation also cites a 1981 OIG 14 report, and the gist of that was that IRMS was a mistake. Do 15 you see that on your screen? 16 A. Yes, I do. 17 Q. Were you aware that in that very same report that the 18 statement is made that IIM was excluded from review? 19 A. No. 20 Q. Would that change any weight you gave to that particular 21 bullet on the screen now? 22 A. No, not at all. I didn't refer to this in my testimony. 23 Whether IIM was included or not, would not have been affected by 24 that piece of information. 25 Q. Let me move if I could to page 47 of the historic 442 1 compilation. This is the last example I'll discuss with you, 2 Mr. Pallais, of one of the reports cited in the 73-page 3 compilation. 4 Now, at page 47 do you see the reference, and if it 5 could be enlarged a bit, do you see the reference to the 1989 6 Arthur Andersen audit? 7 A. I'm sorry, which bullet should I be looking at now? 8 Q. I believe you testified to it earlier. The bullet regarding 9 the 100 percent with the negative confirmation. Yes, that one 10 right there. Do you recall testifying about that in your direct 11 examination? 12 A. Yes, sir. 13 Q. Now, you testified about this on direct but I want to 14 clarify a few things. This particular bullet states that 15 negative confirmation messages were typed on the December 1988 16 statements that went to account holders. That's what it says. 17 Right? 18 A. Right. 19 Q. And the bullet further states that 100 percent of the 20 account holders had complaints about the statements they 21 received, or generally about mismanagement. Right? 22 A. 100 percent of the responses they got back, yes. 23 Q. Correct, exactly. 100 percent of the responses received. 24 Correct? 25 Now, I just want to make sure I understood your direct. 443 1 A negative confirmation is one of three types of confirmation 2 requests that an auditor might send a recipient or customer. 3 Correct? 4 A. One of three kinds? 5 Q. Yeah. The other two being positive and blank? 6 A. Okay. Yeah, I would consider blank to be a kind of 7 positive. But yeah, if you want to divide it up that way, yes. 8 Q. And just to be clear, in a negative confirmation, 9 Mr. Pallais, the recipient or customer replies only if the 10 recipient disagrees with the balance provided or with the 11 information provided. Correct? 12 A. Correct. 13 Q. Thank you. 14 MR. SIEMIETKOWSKI: Thank you, Matthew. 15 BY MR. SIEMIETKOWSKI: 16 Q. Now, regarding the reports more generally cited in the 17 73-page compilation, none of those reports discuss loss from the 18 IIM system of, say, a billion dollars, do they? 19 A. I don't recall any of them referring to a loss of a billion 20 dollars, that's correct. 21 Q. None discussed loss of a million dollars, do they? 22 A. There is a substantial number that discuss amounts that have 23 been diverted. Whether it's a loss to any individual entity, I 24 guess I would have to look at each of the comments in context to 25 determine whether any of them are phrased that way. 444 1 Q. But you don't recall seeing any kind of numbers on that 2 magnitude, do you? 3 A. Of loss? Certainly not a billion dollars, no. 4 Q. Now, I want to turn again to some of your testimony 5 regarding your major disbursement problems. Number one on that 6 list is "Lack of authorization for disbursements to 7 beneficiaries and third parties." Do you remember testifying 8 about that? 9 A. Yes. 10 Q. And in fact, also in your expert report of last August, you 11 also discussed that on page 26. Do you remember that? 12 A. No. 13 MR. SIEMIETKOWSKI: Would you please show page 26 of 14 Mr. Pallais' August 2007 report? 15 BY MR. SIEMIETKOWSKI: 16 Q. All right. Would you please read for the record, 17 Mr. Pallais, the second and third highlighted portions of that? 18 A. I'm sorry, to myself or into the record? 19 Q. Out loud, please. 20 A. "Tests of disbursements are subject to the following 21 potential weaknesses. The tests do not include obtaining any 22 evidence of authorization by the account holder except in the 23 case of payments to third parties." 24 Q. Now, that's consistent with your testimony today, is it not? 25 A. I'm not sure I'm getting your point. This has to do with 445 1 the tests the auditors were going to do, and my testimony today 2 had to do with IIM procedures. 3 Q. Right. But similarly to what you say in your report, today 4 you identified as a major disbursement problem lack of 5 authorization for disbursements. 6 A. Yes, I did. 7 Q. And that was identified as number one on your list. 8 Correct? 9 A. That was the first one on the list. 10 Q. I understand. I understand. Now, are you aware, 11 Mr. Pallais, that funds in IIM accounts are automatically 12 disbursed to the beneficiary upon reaching $15? 13 A. No, I was not. 14 Q. Are you aware that for oil and gas payments, such automatic 15 disbursements go to the beneficiary upon reaching $5? 16 A. No. I didn't audit these amounts. All I can tell you is 17 what the auditors observed as weaknesses in the system. So I 18 presume, if the auditor was criticizing lack of authorization, 19 they were aware of whatever these rules were. 20 Q. So you wouldn't be aware, for example, that's been the 21 practice at least since the 1960s? 22 A. No, I wouldn't. I don't know whether those were the 23 disbursements being criticized by the auditors over the years or 24 not. 25 Q. And in fact, you have not actually spoken to any Indian 446 1 beneficiaries about disbursements, have you? 2 A. No, I have not. 3 Q. Likewise, you have not spoken to any individual 4 beneficiaries about receipts, have you? 5 A. That's correct. 6 Q. The only documents that you reviewed were those provided to 7 you by plaintiffs' counsel. Correct? 8 A. Yes, that's correct. 9 Q. You did not research and find any documents on your own, did 10 you? 11 A. No, I did not. 12 Q. You have not met any OHTA accountants? 13 A. No. 14 Q. You have not met any OHTA contractor accountants? 15 A. I don't believe so. 16 Q. You have never been to Lenexa? 17 A. You asked me that in October. I have not been there since 18 October. 19 Q. Right, thank you. You have not analyzed the LSA report, 20 have you? 21 A. No. 22 Q. So of course you're not aware of the LSA error rate, are 23 you? 24 A. No. 25 Q. You have not been to any Interior facilities in Albuquerque, 447 1 have you? 2 A. No. 3 Q. You have not been to any Federal Records Centers, have you? 4 A. No. 5 Q. Nor to any National Archives facilities? 6 A. No. 7 Q. In the documents you've reviewed, Mr. Pallais, you haven't 8 seen any direct evidence of unaccounted-for accumulation of 9 funds, have you? 10 A. I'm going to say no, the way you phrased that. 11 Q. In a similar vein, in the documents you've reviewed, you 12 have not seen any direct evidence of the government benefitting 13 from any accumulation of IIM funds, have you? 14 A. I have no idea what the government might have benefitted 15 from or not. The audit reports don't talk about that. 16 Q. In fact, none of the reports in this 73 pages talk about 17 that, do they? 18 A. I'm not sure that's true. 19 Q. Can you point to any that do? 20 A. No, I can't offhand. But I cannot say that the statement 21 you made is true. It may be, but I don't know. I did not 22 review the reports with that in mind. And I can envision 23 situations where that would not be the case, but I just can't 24 testify that it is. 25 Q. Now, you're aware, are you not, Mr. Pallais, that plaintiffs 448 1 in many instances rely upon the same historic documents in 2 calculating both their collections and disbursement figures? 3 A. They might. I have not made much of a study of how 4 plaintiffs calculate receipts or disbursement figures. 5 Q. So you're not aware of which documents they pulled their 6 figures from? 7 A. I might have read it, but it's not something that I paid a 8 lot of attention to. 9 Q. Well, let me ask you this, Mr. Pallais: Are you aware at 10 all that the plaintiffs used government records in calculating 11 the $58 billion which they seek? 12 A. I believe that -- 13 MR. SMITH: Objection. This is outside the scope of 14 direct, and irrelevant to his testimony. 15 THE COURT: I'm sorry, repeat the question. 16 BY MR. SIEMIETKOWSKI: 17 Q. Are you aware, Mr. Pallais, at all, that the plaintiffs have 18 used government records in calculating the $58 billion which 19 they request? 20 THE COURT: I'll sustain the objection. 21 MR. SIEMIETKOWSKI: No further questions, Your Honor. 22 THE COURT: Okay. Mr. Smith? 23 MR. SMITH: Just a few questions, Your Honor. 24 REDIRECT EXAMINATION 25 BY MR. SMITH: 449 1 Q. You were asked about whether you knew if the documents were 2 provided to you from the NORC database. Do you recall that? 3 A. Yes. 4 MR. SMITH: And if you could just pull up, for example, 5 Document 18, 1928. 6 A. Yes. 7 BY MR. SMITH: 8 Q. And is there a Bates stamped number NORCMA? 9 A. Yes. 10 Q. And was that on a number of these documents that you 11 reviewed, either NORCMA or NORCMAP? 12 A. Yes, I recall seeing those. 13 Q. Next question: You were asked about the selection of the 14 documents in this report. Of all the audits that you reviewed, 15 and you said you've reviewed 300-some back in October, and you 16 reviewed even more now, how many of those audits would you 17 describe as positive audits? 18 A. I would say of the 300 I reviewed in October, there weren't 19 more than a handful, five perhaps, that did not have criticisms 20 of internal control at the IIM facilities. 21 Q. Okay. There's a document that you were shown regarding the 22 1928 report. 23 MR. SMITH: Could we pull that up? It's a defendant's 24 exhibit, the highlighted language. 1928 report, 467. I'm 25 sorry, 469. I'm sorry, that's not the one. We were looking at 450 1 1928. 2 Your Honor, I'll move ahead. 3 BY MR. SMITH: 4 Q. Do you recall, you were asked about the 1928 document, and 5 there's a reference to check registers for major disbursements? 6 A. I remember answering a question about that, but I would have 7 to look at the document. It's not something I saw before today. 8 And frankly, I never really got the chance to look at 9 the additional document I was shown today to see how if at all 10 it related to the comments in the compilation. But I didn't get 11 a chance to do that. I was only asked whether I was aware of 12 it. 13 Q. You were asked by Mr. Siemietkowski whether you were aware 14 that after an audit there would be instructions to the agency to 15 correct the problems. Do you recall that? 16 A. Yes. 17 Q. In your review of the audits, as a routine matter, were the 18 problems corrected or did they recur? 19 A. Most of the problems continued to recur past -- certainly 20 past the 1970s, when this policy apparently was in place. 21 Q. Okay. And you were asked about a 1972 audit where it was 22 suggested there were matters that significantly improved. Do 23 you recall that? 24 A. Yes. 25 Q. What happened by 1982, when Arthur Andersen stepped in? I'm 451 1 sorry, the GAO looked at it, or the comptroller? 2 A. Well, there continued to be problems. There were -- 3 regardless of what improvements there might have been, the story 4 across 30 years after that was that there continued to be 5 problems over controls on disbursements. 6 Q. Okay. And finally, you were asked about accumulation of IIM 7 funds, and you expressed some hesitancy the way the question was 8 worded. What was your hesitancy? 9 A. I don't recall specifically that the -- there were comments 10 in the reports about amounts not being paid out, and there was 11 some question in my mind whether his question encompassed those 12 or not. And ultimately I concluded that I didn't think his 13 question technically encompassed that, so I agreed with 14 Mr. Siemietkowski's proposition. But it requires a certain 15 level of sentence parsing to get there. 16 Q. Okay. But is it fair to say that you did identify instances 17 within the audits where money was supposed to be paid out that 18 was not? 19 A. That's correct. 20 MR. SMITH: No further questions, Your Honor. 21 THE COURT: All right. Mr. Pallais, I think that 22 completes your testimony. Thank you. You may step down. 23 Mr. Dorris? 24 MR. DORRIS: Your Honor, we have some administrative 25 matters in terms of moving in some exhibits. I don't know if 452 1 you want it before we rest, if you want to take that up now, or 2 you prefer to move on with a witness and us take that up at some 3 other point. 4 THE COURT: You're through with witnesses? 5 Does the government have a witness? 6 MR. KIRSCHMAN: Yes, Your Honor. 7 THE COURT: Let's call -- let's deal with the 8 administrative matters later. Thank you. But are you telling 9 me that except for those administrative matters, the plaintiffs 10 rest? 11 MR. DORRIS: That is correct, Your Honor. 12 MR. KIRSCHMAN: Your Honor, and with that, I want to 13 inform the Court that defendants plan to file a Rule 52(c) 14 motion later today, and would like -- 15 THE COURT: It will be deemed filed now. 16 MR. KIRSCHMAN: And we would like an opportunity to 17 argue that briefly tomorrow. 18 THE COURT: All right. 19 MR. DORRIS: Your Honor, may I approach the witness 20 stand to get an exhibit? 21 THE COURT: Don't hurt anybody up there. 22 MR. DORRIS: Is that a yes? 23 THE COURT: That's a yes. 24 MR. DORRIS: Thank you, Your Honor. 25 MR. KIRSCHMAN: Your Honor, to let you know, our first 453 1 witness will be Michelle Herman. And following her will be 2 Dr. Ed Angel, both of whom you have heard from in October. 3 THE COURT: All right. 4 MR. QUINN: Good afternoon, Your Honor. Michael Quinn 5 for the defendants. 6 THE COURT: Mr. Quinn. 7 MR. QUINN: We would like to call Ms. Michelle Herman 8 to the stand. 9 THE COURT: Very well. 10 (Oath administered by Courtroom Deputy.) 11 (MICHELLE HERMAN, DEFENDANT witness, having been duly sworn, 12 testified as follows:) 13 DIRECT EXAMINATION 14 BY MR. QUINN: 15 Q. Good afternoon. Would you please state your name for the 16 record? 17 A. Michelle Herman. 18 Q. Welcome back. You testified and spent some time with us and 19 the judge in the hearing last October. Is that right? 20 A. Yes, I did. 21 Q. If you could just refresh our memory here, collective 22 memory, and give us just a brief recap of the topics you 23 testified about last October. 24 A. Yes. I testified about our data completeness validation 25 reports, the accounting reconciliation tool, the litigation 454 1 support accounting effort, and the land-to-dollar testing, as 2 well as our work on throughput. 3 Q. I'm sorry, what was the last part? 4 A. Our work on the throughput estimate. 5 Q. Are you referring to a document that was numbered as AR-171? 6 A. Yes, I am. 7 Q. Are you still employed with FTI Consulting? 8 A. Yes, I am. 9 Q. And your title currently today? 10 A. Managing director. 11 Q. Is that the position you held last October when you 12 testified? 13 A. Yes, it is. 14 Q. And if you could just briefly remind us of the area of the 15 company in which you work. 16 A. I work within the technology practice in a group referred to 17 as financial and enterprise data analytics. 18 Q. And how long have you been with FTI? 19 A. Since November 2003. 20 Q. And I believe you testified last fall you had been involved, 21 employed by other consulting firms. Is that right? 22 A. Yes. Prior to FTI, I was employed by KPMG. And prior to 23 KPMG, by Arthur Andersen. 24 Q. And while employed with those firms and now with FTI, have 25 you had occasion to work on matters pertaining to the Individual 455 1 Indian Money accounts? 2 A. Yes, I have. 3 Q. Did your work involve the study of IIM account data, 4 bookkeeping records, as well as Interior's bookkeeping practices 5 for IIM historically? 6 A. Yes, I have. 7 Q. Would you say that most of your professional career has been 8 devoted to the examination and study of the Indian Trust records 9 and Interior's bookkeeping practices historically? 10 A. Yes, it has. 11 Q. In fact, how long have you been working with respect to 12 individual Indian accounting and data? 13 A. Since January 1997. 14 Q. And does that include work involving detailed financial 15 examination of the IIM system? 16 A. Yes, it has. 17 Q. Your college education, your business degree came from what 18 school? 19 A. The University of California at Berkeley. 20 Q. And your degree is in what field? 21 A. In business administration. 22 Q. I know this is a very broad question, but could you just 23 list the major projects that you've participated in since 1997 24 that relate to the IIM system in some way or another? 25 A. Our initial work with the information was gathering data 456 1 from the IRMS system that was located on backup tapes, and 2 restoring that data and creating a database with all of the 3 information from February of '85 forward. 4 Our next -- 5 Q. What system was that where the data was coming from? 6 A. The IIM subsystem within the IRMS system. 7 Q. Okay. 8 A. Our next major project was a document search and collection 9 effort that was referred to as Paragraph 19. Subsequent to the 10 Paragraph 19 collection effort, we worked with OHTA on designing 11 and executing their historical accounting plan. 12 Q. Okay. And the Paragraph 19, when you described that, what 13 was the -- what did the project entail that you were doing? 14 A. We worked both with the Interior Department and the Treasury 15 Department to locate documents related to the five named 16 plaintiffs and their agreed-upon predecessors. 17 Q. Do you remember how many agreed-upon predecessors were 18 involved in that examination? 19 A. Approximately 31. 20 Q. Were you looking just for accounting information relating to 21 these individuals? 22 A. No. Any information that we could locate relative to those 23 individuals. 24 Q. And then you mentioned you worked in connection with the 25 Office of Historical Trust Accounting? 457 1 A. That's correct. 2 Q. What did you -- what were you engaged to do for them? 3 A. We've worked with OHTA on numerous projects, ranging from 4 assisting with writing the plans that they've submitted to data 5 completeness validation and accounting projects. 6 Q. Could you describe the accounting projects that you've been 7 involved in? 8 A. The Litigation Support Accounting, which was the 9 reconciliation of sampled and high-dollar transactions. 10 Q. And what types of work did you do specifically with respect 11 to that? 12 A. We assisted in designing the tool that was utilized to 13 actually perform the accounting work, as well as reconciling 14 transactions that had been selected. 15 Q. Are you referring to the ART program? 16 A. That's correct. 17 Q. Is that the computer program you demonstrated for the Court 18 last fall? 19 A. Yes, it is. 20 Q. And what is that? Again, briefly, what is that used for? 21 A. The ART program itself contains the financial transactions, 22 as well as the supporting documentation and the resulting 23 product of the accounting firm's analysis. 24 Q. For what class of information? 25 A. For the sampled -- well, all of the transactional data is 458 1 contained within the ART, documents that have been gathered over 2 time, both in connection with the LSA project and other projects 3 that OHTA has performed, in addition to the results from the 4 accounting firm, specifically from the LSA project. 5 Q. What specifically were you doing in connection with the 6 account reconciliation? 7 A. I assisted in designing the tool itself, and actually 8 reconciled transactions. 9 Q. As part of the LSA? 10 A. Yes. 11 Q. As part of that project, about how many reconciliation -- I 12 don't know how you count them, but how many reconciliations of 13 accounts did you -- were you involved in? 14 A. We reconciled approximately 6,500 transactions. 15 Q. And then I think you mentioned data completeness validation. 16 Could you describe what that task involved? 17 A. Yes. We were measuring the completeness of the electronic 18 data as it exists today relative to the data when it was process 19 the historically. 20 Q. And where was that data -- what data were you testing? 21 A. Initially, we were testing the IRMS data, and later we added 22 the TFAS data to that database. 23 Q. Did you produce -- provide some reports that were entered as 24 exhibits at your testimony last fall? 25 A. Yes, I did. We produced six regional reports and one 459 1 overall report last year. 2 Q. As part, up to that report date last October, are the report 3 dates September? 4 A. September 2007. 5 Q. As of that date, the report date, about how many 6 transactions had you and your team studied? 7 A. Approximately 114 million. 8 Q. 114 million? 9 A. That's correct. 10 Q. Through last October. Is that project continuing? 11 A. Yes, it has. 12 Q. Are you anticipating FTI will provide additional reports? 13 A. Yes. We're going to provide eight regional reports this 14 September, and a new overall report. 15 Q. So does that mean that there are two new regional reports in 16 this next round of reporting? 17 A. Yes. There are two new regional reports, plus the 18 additional work that we've performed on the initial six regions. 19 Q. I take that to mean then that you have continued to work on 20 the DCV testing since you testified last fall. Is that correct? 21 A. That's correct. 22 Q. About approximately how many transactions have you examined 23 as of today? 24 A. As of today, it's just over 119 million. 25 Q. You're up to 119 million? 460 1 A. That's correct. 2 Q. Did you have any involvement in land-to-dollar pilot 3 testing? 4 A. Yes, I did. 5 Q. Can you describe what that testing involved? 6 A. We were involved in the pilot test at the Horton Agency, and 7 the purpose of that test was to evaluate whether or not funds 8 had been collected that were not in fact posted to the IRMS or 9 TFAS systems. 10 Q. And have you more recently been requested to undertake 11 analysis of collections, further analysis of collections into 12 the IIM system? 13 A. Yes, I have. 14 Q. And what was the purpose of that project? 15 A. To update AR-171 to provide a better estimate of collections 16 and disbursements. 17 Q. And have you prepared an update to AR-171, that table? 18 A. Yes, I have. 19 MR. QUINN: Could we put up AR-171? 20 BY MR. QUINN: 21 Q. With respect to the preparation of the original AR-171 that 22 you testified about last fall, do you recognize that document? 23 A. Yes, I do. 24 Q. What work did you do leading up to the preparation of the 25 document that got filed with the Court? 461 1 A. AR-171? 2 Q. Yes. 3 A. Our firm had gathered information from both NORC and Morgan 4 Angel and Clifton Gunderson for some of the earlier years, and 5 we had performed work from '86 forward using the IRMS and TFAS 6 data. 7 Q. Just so the record is clear, you've identified three 8 organizations. Could you specify what their role was? 9 A. Yes. The information from 1909 through 1971 was an estimate 10 initially provided by NORC of total collections. And from 1972 11 through 1985 was information gathered by Clifton Gunderson. 12 Q. And who are they? 13 A. They are another accounting firm employed by OHTA. And some 14 of the balance data at that point had been gathered by Dr. Angel 15 and Morgan Angel & Associates. 16 Q. And what kind of work did they do? 17 A. They gathered historical records that they provided to me. 18 Q. Are they accountants? 19 A. Clifton Gunderson is, but the other two firms are not. 20 Q. What do you understand Morgan Angel, their firm to be? 21 A. Morgan Angel & Associates is a historian firm. 22 Q. With your appearance today, how many times have you 23 testified in this case? 24 A. This is the third time. 25 Q. And besides last October, when else did you testify? 462 1 A. In what's referred to as Trial 1.5. 2 Q. Do you remember approximately when that was? 3 A. No, I'm sorry, I do not. 4 Q. In each case before, have you testified as a fact witness? 5 A. Yes, I have. 6 Q. And are you here today to testify based on your own personal 7 knowledge and experience in working with the Department of 8 Interior over the last 11 years? 9 A. Yes, I am. 10 Q. Let's see if we can give the Court of a preview of your 11 testimony at this hearing. 12 What matters have you and FTI been working on since you 13 testified last year, besides the data completeness validation 14 work you've described? 15 A. We continued work on the paper era accounting, and we've 16 continued work to update AR-171. 17 Q. Okay. What work has FTI done with respect to updating 18 AR-171? 19 A. We've worked with Morgan Angel & Associates to gather 20 additional historical documents with NORC to assist in preparing 21 the early year estimates, and to refine our double-counting 22 analysis during the later years. 23 Q. And have you in fact prepared an updated table? 24 A. Yes, I have. 25 Q. And are you prepared to talk about that in the course of 463 1 this hearing? 2 A. Yes, I am. 3 Q. Have you also been asked by Department of Interior to study 4 consolidated records relating to the IIM system? 5 A. Yes, I have. 6 Q. And when did you undertake that research? 7 A. That began several months ago. 8 Q. Could you briefly describe the kinds of research that you've 9 conducted since you began the project? 10 A. We've worked with Morgan Angel & Associates in an attempt to 11 identify historical reports that would report IIM collections 12 and disbursements at an aggregate level. 13 Q. Are you prepared to testify today about your personal 14 knowledge from your experience in working with the IIM data, and 15 from your research into the historical records about IIM 16 accounting, concerning the historical flow of funds in the IIM 17 system? 18 A. Yes, I am. 19 Q. Did you happen to prepare a diagram relating to your study 20 of the flow of funds? 21 A. Yes, I have. 22 Q. There's a poster over here to your right. Is that a diagram 23 that you prepared? 24 A. Yes, it is. 25 MR. QUINN: Your Honor, for purposes of identification 464 1 in the record, we have marked a paper copy of the same diagram 2 as Defendant's Exhibit 370. It's the exact same, just a 3 paper-sized version of the chart. I would like to offer it to 4 the Court. It might be easier to read. 5 THE COURT: All right. 6 BY MR. QUINN: 7 Q. Are you prepared today to describe what you've observed in 8 the historical flow funds through the IIM system as represented 9 in your diagram? 10 A. Yes, I am. 11 Q. Let's talk about your chart. We'll come back to some of the 12 other topics you may address later. 13 What did you study in the IIM system that led you to 14 the diagram that's up here on the poster and in Exhibit DX-370? 15 A. The primary information that we studied was the IRMS and 16 TFAS data from 1985 through 2000, supplemented by the historical 17 reports gathered by Morgan Angel & Associates. 18 Q. And what were you looking for? 19 A. To identify the ways that monies were collected into, moved 20 within the system, and were disbursed from the system. 21 Q. How is that historical flow of funds relevant to the issue 22 of collections and disbursements, the throughput issue? 23 A. It helps explain how monies come into the system, how they 24 may be double counted within the system, and how to classify the 25 monies within the system into different revenue categories. 465 1 Q. And when you talk about the system, the IIM system, how 2 would you describe your understanding of that term? What do you 3 mean when you say IIM system? 4 A. All the monies that come into IRMS or TFAS, regardless of 5 the source of those monies. 6 Q. And what's your understanding of those fund flows based on? 7 A. Based on the 11 years of work that I've performed for the 8 Interior Department. 9 Q. And you mentioned the additional work you've been 10 conducting. Is it also based on the work you've done that you 11 mentioned since March? 12 A. Yes, it is. 13 Q. By your personal work on the IIM records and data over the 14 last 11 years, and the additional work you said you've done 15 recently, have you gained an understanding of how the IIM system 16 is operated historically? 17 A. Yes, I have. 18 Q. And that's reflected in what's been marked for 19 identification as DX-370? 20 A. Yes, it is. 21 Q. And that's the same as what's on our poster over here? 22 A. Yes, it is. 23 Q. What does the diagram represent generally? 24 A. The collection of money into, the movement within, and the 25 disbursement from the IIM system. 466 1 Q. And the information and experience you've had with the data, 2 you're relying on -- what are you drawing on in terms of 3 identifying those fund flows? What experiences? 4 A. Not only the data completeness validation work, but the 5 accounting work that we've performed through the LSA project, 6 some of the work that we performed with the Special Deposit 7 Accounts, as well as historical records that we've analyzed 8 through the Paragraph 19 effort and our work with Dr. Angel 9 recently. 10 Q. I don't think we talked -- you mentioned the SDA work, 11 Special Deposit Account work you just mentioned now. Could you 12 describe what you were doing? 13 A. OHTA was tasked with distributing monies from Special 14 Deposit Accounts that had a balance as of 2002, and we worked 15 with them to identify monies in some of the higher-value 16 accounts and the appropriate owners of those monies. 17 Q. And what information did you have to research? What records 18 did you have to research in order to make -- provide that 19 research assistance? 20 A. We had to create a complete account history for each Special 21 Deposit Account that we were analyzing. To the extent that that 22 wasn't contained within the electronic era, we had to go back 23 and locate the paper ledgers, and then we had to identify the 24 funds that had been distributed already from those accounts and 25 the monies that were remaining in those accounts. 467 1 Q. Have you looked at other paper records more generally as -- 2 going back into the paper era, as part of your task of trying to 3 understand the flow of funds historically? 4 A. I've looked at several audits that Dr. Angel located from 5 the 1940s, some Commissioner of Indian Affairs reports from the 6 early 1900s, some documents that we had located from the 1970s, 7 in addition to the documents that have been collected to date 8 for the paper ledger accounting. 9 Q. I would like to show you one of the exhibits. 10 MR. QUINN: Excuse me, Your Honor. We have a set of 11 copies of exhibits we'll be using for plaintiffs. 12 Could you zoom in on the top part of that, just so the 13 witness can see it better? 14 BY MR. QUINN: 15 Q. All right. This has been marked for identification as 16 Defendant's Exhibit 485. Can you identify, describe what 17 that -- have you seen this document before? 18 A. Yes, I have. 19 Q. Is this the sort of document that you just referring to, 20 things that you looked at? 21 A. Yes, it is. 22 Q. Could you just describe generally what this is? 23 A. This is a review performed by a BIA clerk of the Winnebago 24 Agency, an audit of IIM accounts at that agency for the time 25 frame of June 1st, 1938 through December 31st, 1939. 468 1 Q. And you looked back -- when you say you looked back into the 2 paper era in terms of understanding fund flows, were you looking 3 at documents similar to this? 4 A. Yes, I was. 5 Q. And in fact, do you have some examples to share with the 6 Court later today about the fund flows indicated in this 7 exhibit? 8 A. Yes, I do. 9 Q. We'll come back to those records in a moment. 10 MR. QUINN: If you could put up DX-33. It's in 11 evidence. Zoom in on just the cover so we can see the cover 12 better. 13 I believe this has been mentioned already in court, 14 Your Honor, Defendant's Exhibit 33 in evidence, titled 15 "Commissioner of Indian Affairs" -- "Report of the Commissioner 16 of Indian Affairs," and the date for the fiscal year ended 17 June 30, 1910. 18 BY MR. QUINN: 19 Q. Ms. Herman, have you seen this document before? 20 A. Yes, I have. 21 Q. Is this another sort of the paper era record you would have 22 looked at as part of getting an understanding of the fund flows, 23 looking at those in comparison to what you've seen in the 24 electronic era? 25 A. Yes, I did. 469 1 Q. We'll come back to that in a moment. 2 Let's get an overview of what your diagram is 3 displaying. I see it's divided into roughly three general 4 parts. And let's just talk for a second about what the left 5 side, the green section, is intended to show by your diagram. 6 A. The left section of the diagram is meant to reflect 7 collections into the system. 8 Q. Okay. And the middle part, the middle section which is 9 mostly blue, what is that intended to depict? 10 A. Transfers of monies within the system. 11 Q. And then the right third of your diagram, the gray boxes on 12 the right, what is that intended to depict? 13 A. Disbursements from the system, and the people or parties to 14 whom those funds are disbursed. 15 Q. Did you prepare some slides that can help step us through 16 your diagram? 17 A. Yes, I did. 18 Q. Ms. Herman, we've put up on the screen here slide one. Is 19 this the first slide in your slide show? 20 A. Yes, it is. 21 Q. Did you prepare this slide? Not the graphics, but the 22 information that went into the slide presentation? 23 THE COURT: I think all of those formalities, you can 24 sort of skip through those. This is her deal, she put it 25 together. I understand that. 470 1 MR. QUINN: Fine, Your Honor. Let's go. Get the show 2 on the road. 3 BY MR. QUINN: 4 Q. Could you tell us about the very first box that's here, and 5 what that represents? 6 A. The first box lists the type of income collected into the 7 system; other receipts including timber, oil and gas, typical 8 land-based income; Tribal IIM; judgment and per capita monies; 9 Osage annuity payments; and interest monies. 10 Q. And there's a notation on the slide here at the bottom. 11 Could you describe what that is intended to show? 12 A. The total collections into the system, which is reflected in 13 the update to AR-171, from the period 1887 through 2007, were 14 14.3 billion. 15 Q. And you have a subsection there, 1985 to 2000, of 16 4.6 billion. What does that indicate? 17 A. That's the amount of money collected during that time frame, 18 which was the starting point for the analysis of these -- of 19 this chart. 20 Q. Is that the era that you most closely studied? 21 A. Yes, it is. 22 Q. Why didn't you study the entire 120-year history? 23 A. There would be a significant number of documents that you 24 would have to gather to do that, and there simply wasn't enough 25 time. 471 1 Q. In any case, you used the period through 2000. Why didn't 2 you look into the more recent era as part of your investigation? 3 A. Beginning in August of 1998 there was a conversion to the 4 TFAS system, and beginning in March of 1999, the Tribal Trust 5 and the individual trusts were held within the same system. And 6 so it's a much more time-consuming effort to appropriately 7 categorize those monies as tribal or individual. 8 Q. But if you had the time, you could take that and include 9 that as part of your analysis? 10 A. Yes, I could. 11 Q. Based on your 11 years' experience studying the IIM system 12 records, does your diagram also reflect historical flow of funds 13 in the paper era, as well? 14 A. For the documents that I've analyzed to date, yes. 15 Q. Is your understanding -- that's based on the historical 16 records you've looked at? 17 A. Yes, it is. 18 Q. Let's talk about exactly what's in the box, the green box in 19 the left third, that green section. 20 The labels in there look familiar to me. What do those 21 represent? 22 A. Those are the labels from AR-171, as well as our update, 23 DX-371. 24 Q. Are you saying these categories here refer back to these 25 columns in the collections? (Indicating.) 472 1 A. Yes, they do. 2 MR. QUINN: And if we can zoom in to the top part, the 3 left edge of the document, please. That's great. 4 BY MR. QUINN: 5 Q. The first in the "Collections" category, Column B, is 6 labeled "Interest." Could you describe what that covers? 7 A. That would include interest earned on individual and 8 non-individual accounts in the IIM system. 9 Q. Is all interest that's been collected into the IIM system 10 over its history appear in that category on your table? 11 A. No. Only the interest that we were identified, because it 12 was coded as such. 13 Q. What do you mean, coded as such? 14 A. Within the electronic system there's a revenue code that 15 indicates the type of income, and in many instances that labels 16 the income as miscellaneous. 17 So this only includes income that's been labeled as 18 interest or, to the extent that we had an investment report, 19 interest in those reports. 20 Q. If there's some interest that's not in the interest column, 21 does it appear elsewhere in the table? 22 A. It would be included in other receipts. 23 Q. That's Column F of AR-171? 24 A. That's correct. 25 Q. So if you ignore Column B, the interest column, in totaling 473 1 up the collections, does that total still contain interest? 2 A. It would contain some interest. 3 Q. The next column, Column C in AR-171, is labeled "Osage 4 quarterly annuity." What does that cover? 5 A. That covers payments from the Osage tribe to headright 6 owners that enter into the IIM system. 7 Q. Is all Osage headright income represented in that column? 8 A. No, it is not. 9 Q. Could you describe what is not -- what Osage headright 10 income is not in that column? 11 A. There are some payments that are made directly from the 12 Tribal Trust to owners of head rights, and that money would not 13 be included in this column. 14 Q. So there's some money -- when you, on your diagram, look at 15 the green box, look over here, is that the Osage annuity you're 16 referring? 17 A. Monies paid directly from the Tribal Trust system would not 18 be included in that green box. 19 Q. So what does that box represent, the Osage annuity in the 20 box? 21 A. Only funds that were actually collected into the IIM system. 22 Q. If I were to try to draw on this chart the Osage headrights 23 income paid directly out of the Tribal Trust, where would I show 24 it? 25 A. You would need to create another funds flow to represent 474 1 monies moving from the Tribal Trust. 2 Q. The next column in AR-171 is listed as "judgment/per 3 capita." What does that cover? 4 A. That includes judgment funds and per capita payments from 5 tribes that actually enter into the IIM system. 6 Q. And for years prior to, I think it looks like 1986, there 7 isn't an entry in the "judgment/per capita" column. Is that 8 right? 9 A. That's correct. 10 Q. Does that mean there was no judgment or per capita money 11 earned in those years, or received in those years? 12 A. No, it only means that we weren't able to separately 13 identify them. 14 Q. So for an earlier period, if there is a judgment/per capita 15 receipt, where would that be reflected on AR-171? 16 A. In the "other receipts" category. 17 Q. Column E in AR-171 is the Tribal IIM, and I think you 18 testified about this last fall. Could you briefly describe what 19 that includes? 20 A. That includes collections into what I refer to as Tribal IIM 21 accounts. Those accounts typically have a T in the fourth 22 character of the account number. 23 Q. You're talking about the letter "T," that's what they go by? 24 A. Yes. 25 Q. Is all tribal money that's in the IIM system in a T-labeled 475 1 account? 2 A. No, it is not. 3 Q. So does the Column E, Tribal IIM in AR-171, does that 4 include all tribal money that's flowing through the IIM system? 5 A. No, it does not. 6 Q. Have you found examples of other Indian tribe money that is 7 not Tribal IIM denominated as Tribal IIM? 8 A. Yes, I have. 9 Q. And you have examples that we'll walk through later? 10 A. Yes, I do. 11 Q. Other tribal money that's not here in the Tribal IIM column, 12 where would it show up in your table? 13 A. In other receipts. 14 Q. That brings us to "Other receipts," F, in table AR-171. What 15 collections fall into "Other receipts"? 16 A. As we discussed, to the extent that interest or judgment 17 funds or per capita monies aren't specifically identified, they 18 would be included in other receipts, in addition to what we 19 refer to as land-based revenues. So land sales, oil and gas 20 collections, timber payments, things of that nature. 21 Q. Are there other types of collections you've seen that come 22 in that would fall into the other receipts total? 23 A. Yes. To the extent that bid deposits or bonds or things of 24 that nature came into the system, they would be reflected in 25 other receipts. 476 1 Q. How about money earned from a school play? Have you seen 2 that? 3 A. Yes, I did. 4 Q. Do you have an example of that to share with the Court 5 later? 6 A. Yes, I do. 7 Q. How about money that's being held as part of a cemetery 8 fund? Have you seen that in the IIM system? 9 A. Yes, I have. 10 Q. So in the course of your experience, have you come across 11 such a variety of types of collections over the years? 12 A. Yes, I have. 13 Q. So in going back to 370, if we could put slide one back on 14 the screen, DX-370, and your green box of collections on the 15 right, you've used the same labels in categorizing the types of 16 selections. Is that right? 17 A. Yes, I have. 18 Q. Why are they in reverse order from your table? 19 A. "Other receipts" is the primary category of revenue within 20 the examples, so I've labeled that first. 21 Q. If we could go to slide two and ask you about the next part 22 of your diagram. Going from the green box, you have two arrows, 23 two green arrows. What do they represent? 24 A. In some instances, monies are posted directly to the 25 individual accounts themselves when they're collected. In other 477 1 instances, the monies are posted to what I've referred to as 2 non-individual accounts. 3 Q. That's the box at the top? 4 A. That's correct. 5 Q. In the blue box. The entire blue section, what does that 6 represent? 7 A. The IIM system itself. 8 Q. And let's talk about the different parts that make up that 9 center blue box. Does this represent the internal workings of 10 the IIM system? 11 A. Yes, it does. 12 Q. And you have two boxes, an upper box labeled "Non-Individual 13 accounts" and lower, "Individual accounts." Why did you present 14 it this way? 15 A. As I mentioned, in some instances monies post directly to 16 those individual accounts, and in other cases the monies post to 17 the non-individual accounts, at which point funds may transfer 18 or may be disbursed. 19 Q. And let's look at the top box for a moment, labeled 20 "Non-Individual accounts." You have some labels inside that 21 box. Could you describe what those mean? 22 A. "SDA" stands for Special Deposit Account; "Tribal IIM" 23 refers to the T accounts that we were discussing earlier; and 24 "Other administrative accounts" is a catch-all for the rest of 25 the administrative accounts within the system. 478 1 Q. Could you give an example or two of the other administrative 2 accounts that you've seen? 3 A. For instance, interest accounts within the system or 4 mislabeled accounts within the system. 5 Q. Are there such things as bid deposit accounts? 6 A. Bid deposits could be within the SDA account or an escrow 7 account. 8 Q. Could there be administrative accounts for collection of 9 government fees? 10 A. Yes, that's possible. 11 Q. In your diagram where you say, "Non-Individual," what do you 12 mean by that? 13 A. Monies that may or may not actually transfer to an 14 individual account at the end of the day. 15 Q. So in this part of the process, do you know that they're 16 individual? 17 A. No, not at that point. 18 Q. Do you know for sure that they're going to a trust account? 19 A. No, you do not. 20 Q. You have a circle around the "SDA" and "Tribal IIM" and 21 other administrative -- an arrow in a circle. What does that 22 reflect? 23 A. That there are actually transfers between administrative 24 accounts within the system. 25 Q. You have a label on the arrow, "Admin-to-admin transfers." 479 1 Right? 2 A. That's correct. 3 Q. Could you describe a typical type of 4 administrative-to-administrative transfer that you've seen? 5 A. For instance, when range payments are going to be paid out, 6 in some cases you'll see a debit from all of the various range 7 accounts for that particular agency, and a credit of all of 8 those funds into one singular Special Deposit Account, to 9 facilitate distribution. 10 Q. And did you bring some examples showing these kinds of 11 administrative-to-administrative transfers? 12 A. Yes, I did. 13 Q. And we'll talk about those after we get through your slides 14 here. 15 Let's look at the lower part of the blue box that's 16 labeled "Individual accounts." What funds are represented by 17 that box? 18 A. Monies that are actually credited to individuals within the 19 system. So land-based accounts refers to accounts where the 20 primary source of revenue would be a lease, for instance. 21 Q. Would these be accounts in the name of a particular 22 recipient? 23 A. Yes, they would. 24 Q. And you have in there labeled "Land-Based," "Judgment," and 25 "Per Capita." Could you describe what you're intending to 480 1 depict there? 2 A. Land-based accounts would contain monies primarily from the 3 use of land. So land sales, farm and pasture leases, range 4 income, things of that nature. 5 Judgment accounts would typically be accomplished for a 6 minor or someone deemed to be incompetent to receive judgment 7 monies; similar to that would be per capita accounts. 8 Q. And you have a circle -- or an arrow in a circle going 9 around those identified types of accounts that says, 10 "Individual-to-individual transfers." What are you depicting 11 there? 12 A. In some instances you'll see transfers among individual 13 accounts. A typical example would be either a probate or a land 14 sale. 15 Q. Actually, a movement of money from one individual account to 16 another? 17 A. That's correct. 18 Q. One arrow we haven't discussed is the one in the middle 19 between the two boxes that says, "Transfers." Could you describe 20 what that depicts? 21 A. Yes. To the extent that the monies collected into the 22 non-individual section at the top of the chart are deemed to be 23 individual monies, they're transferred down to the individual 24 accounts. 25 Q. Is it possible that tribal money could move -- be 481 1 transferred that way as well? 2 A. Yes, that is possible. 3 Q. Have you seen that happen? 4 A. Yes, I have. 5 Q. Could you give an example that you've seen of that type of 6 tribal money moving into an individual account? 7 A. The most typical example would be a loan from the tribe to 8 individual. 9 Q. A loan? 10 A. Yes. 11 Q. Why is it important to have an understanding about all the 12 different types of internal transfers that you've described? 13 A. Such that you can reduce potential double-counting in your 14 collection estimate. 15 Q. Last fall when you were talking about your DCV study, I 16 believe you testified about a similar double-counting issue when 17 studying postings. Is that right? 18 A. That's correct. 19 Q. I would like to look back at that one exhibit that we 20 discussed last October. 21 MR. QUINN: If we could go to DX-152A in evidence, at 22 page 15. Can we zoom in on that? 23 BY MR. QUINN: 24 Q. Do you recall your testimony about this example, Ms. Herman? 25 A. Yes, I do. 482 1 Q. Describe what you were talking about here with respect to 2 counting transactions as part of the data completeness analysis? 3 A. This is when we were discussing the manner in which we count 4 throughput for the data completeness validation reports. And we 5 were discussing in essence that we would count each movement of 6 money instead of the unique collection and the unique 7 disbursement. 8 Q. Now, when you're over here talking about the collection and 9 disbursement of funds over the history of the IIM system, do you 10 want to count this way? 11 A. No, you do not. 12 Q. So what needs to be understood then about these internal 13 transfers? 14 A. You need to be able to identify the transfers such that you 15 can eliminate the double-counting. 16 Q. Going back to the upper box -- 17 MR. QUINN: We can put the slide back up on the screen. 18 Thanks. 19 BY MR. QUINN: 20 Q. The upper box labeled "Non-Individual accounts," why is it 21 important, as far as understanding collections into the system 22 and disbursements out, to have an understanding what happens to 23 funds in the upper box on your diagram? 24 A. Some of those monies will eventually be transferred down to 25 individual accounts, but some of those monies will be paid out 483 1 of the non-individual accounts. 2 MR. QUINN: If we could put DX-33 back up on the screen 3 for just a moment. It's in evidence. And go to the right-hand 4 chart at the top. Zoom in at the top, please. 5 BY MR. QUINN: 6 Q. Ms. Herman, you've seen this document before. Right? 7 A. Yes, I have. 8 Q. And could you interpret this document in terms of your 9 diagram, what it's showing in terms of the disbursements and 10 where money is going in terms of your diagram? 11 A. Could you move it down, please, a little bit? Thank you. 12 This diagram is referring to the category of 13 collections for this particular year. And there were total 14 collections of $7.65 million, and of those it gives three 15 categories of disbursements; one, paid directly to Indians by 16 disbursing officers; two, monies returned to unsuccessful 17 bidders; and three, checks drawn by Indians on bank accounts. 18 Q. Out of that example, is there any part of those 19 disbursements that fall into your upper box? 20 A. At minimum, the monies referred to as returned to 21 unsuccessful bidders would be included in that upper box. 22 Q. Do you have a sense of what percentage that makes up of the 23 total disbursements in that year? 24 A. It's roughly 35 percent. 25 Q. Let's go to your third slide and talk about the right third 484 1 of your diagram. Describe what this slide shows. 2 A. This slide illustrates the disbursements from the IIM system 3 and the type of entity that may be receiving those monies. 4 Q. And at the bottom you have a notation about "Total 5 disbursements." Could you explain what your notation means? 6 A. From 1887 through 2007, there's approximately $13.7 billion 7 disbursed from the Trust, and from 1985 through 2000, 8 approximately 4.6 billion. 9 Q. And that subset you're referring to, the $4.6 billion in 10 disbursements, what does that refer to? 11 A. Again, that refers to the primary area we focused on from 12 the electronic time frame. 13 Q. This time period, '85 to 2000, is that the same period you 14 focused on in terms of collections? 15 A. Yes, it is. 16 Q. And are the same reasons you stopped it, in terms of the 17 focus of your efforts in 2000 data year, for the same reasons 18 you described in terms of the collections? 19 A. Yes. 20 Q. On the upper right-hand side there are three arrows pointing 21 out from the IIM system. Could you describe what they 22 represent? 23 A. The first is third parties, the second is the Tribal Trust, 24 and the third is stakeholders. 25 Q. But what do the arrows represent going to those boxes? 485 1 A. I'm sorry, the movement of money from the IIM system to 2 those categories of individuals or entities. 3 Q. Are you indicating there that that's movement of money out 4 of non-individual accounts? 5 A. That's correct. 6 Q. This is money going out of the IIM system from 7 non-individual accounts? 8 A. That's correct. 9 Q. So the converse of that is, that's money that not going out 10 of individual Indian accounts in the IIM system? 11 A. Yes. Those funds would not have been transferred down to 12 individual accounts. 13 Q. Let's go over the three boxes and what they represent in 14 terms of the disbursements. The box at the top right is labeled 15 "Third parties." Who are third parties? 16 A. That would represent the return of bid deposits to an 17 unsuccessful bidder; return of bonds, for instance upon 18 completion of a lease; payment of administrative fees to the 19 government for managing the lease. Things of that nature. 20 Q. Any other examples you can think of, sitting here? 21 A. I've seen payments of wages by a tribe to an employee. 22 Q. Have you seen indications of disbursements to Boy Scouts or 23 Girl Scouts? 24 A. Yes, I have. 25 Q. I have a sense of the Tribal Trust, but could you describe 486 1 what that depicts, the next box down? 2 A. There's significant amount of money transferred out to the 3 Tribal Trust from the IIM system. 4 Q. And when you say Tribal Trust, you're talking about that 5 other trust system set up for handling tribal money? 6 A. That's correct. 7 Q. The last box in that top set of three are stakeholders. 8 Describe what this box refers to. 9 A. This includes direct payments. One of the larger categories 10 would be of judgment or per capita monies or direct pay leases 11 that are made from the non-individual section of the system. 12 Q. Are there other types beyond judgment/per capita? 13 A. I've seen leases paid directly from the non-individual 14 accounts. 15 Q. How about, have you seen loan proceeds? 16 A. I'm sorry, I'm not clear on the question. 17 Q. I'm sorry. Have you seen land sale proceeds paid that way? 18 A. Yes, I have. 19 Q. Last fall we heard testimony about direct pay arrangements. 20 When you talk about stakeholder -- payments to stakeholders, are 21 you referring to the direct pay arrangement? 22 A. No, not in this same context. 23 Q. How are they different? How are these different from direct 24 pay arrangements, to your knowledge? 25 A. These are monies that actually entered into the IIM system, 487 1 and are being paid out from the non-individual accounts. 2 Q. But how are they similar to direct pay arrangements? 3 A. The funds are never transferred to an individual money 4 account, a land-based account, for instance. 5 Q. The last box, the lower -- bottom box on your right-hand 6 side says, "IIM beneficiaries." Could you describe what that 7 illustrates? 8 A. These would be payments made from individual accounts to IIM 9 beneficiaries or on their behalf. 10 Q. And what do you mean by "on their behalf"? 11 A. For instance, if an account holder is a minor, you may see a 12 payment for school clothing or medical care. 13 Q. Now, on your slide -- it's not on your poster, but on your 14 slide, the last frame there, you have a large bracket around all 15 three boxes, with the indication of "Total disbursements." Can 16 you describe what that illustrates? 17 A. That illustrates that the total disbursements for all four 18 of those categories is 13.7 billion from 1887 through 2007. 19 Q. So is it correct, then, when you talk about total 20 disbursements, you're talking about total disbursements out of 21 the IIM system? 22 A. That's correct. 23 Q. Let's see if we can just recap on your illustration. With 24 respect to the collections in your green box, does that include 25 money, some money coming into the IIM system that is never 488 1 destined for deposit into an individual IIM account? 2 A. That's correct. 3 Q. Would I be correct to say that based on your own 4 observation, that many credits that are posted to the IIM system 5 involve the upper box, the non-individual accounts? 6 A. That's correct. 7 Q. And when something posts as a credit to the non-individual 8 account box, does that mean it's, in that sense, in that 9 transaction, not a posting to an individual IIM account? 10 A. That's correct. 11 Q. In terms of your description here and your diagram, you have 12 the non-individual accounts. And when you talk about the 13 character of money being non-individual, how is that determined? 14 I mean, how do you classify something as non-individual? 15 A. It's determined based on the type of disbursement. So if 16 the monies flow down to an individual account, it would be 17 considered individual. Or if it's moving out of the system to a 18 third party or the Tribal Trust or a stakeholder, it would be 19 considered non-individual. 20 Q. So that in a sense, then, the non-individual character of 21 the money is determined by its destination? 22 A. That's correct. 23 Q. And that non-individual money includes money going to third 24 parties? 25 A. That's correct. 489 1 Q. And to tribes? 2 A. That's correct. 3 Q. Unsuccessful bidders -- 4 A. That's correct. 5 Q. -- and so forth? Okay. 6 Why is it useful to understand this part of the flow of 7 funds through the IIM system? 8 A. To be able to determine the amount of monies that are 9 actually deposited at the end of the day to individual accounts 10 within the system. 11 MR. QUINN: Could we put up DX-365 for a moment? 12 BY MR. QUINN: 13 Q. I just want to ask you about one document that was discussed 14 at the last trial, DX-365. 15 MR. QUINN: Could we zoom in on the top half of the 16 box, so we get the label? 17 BY MR. QUINN: 18 Q. Can you see that Ms. Herman? 19 A. Yes, I can. 20 Q. Have you seen this document before? 21 A. Yes, I have. 22 Q. Let's talk about it in terms of your document AR-171 and the 23 work you've done, as far as the update to it that we'll be 24 presenting to the Court. 25 Did you use any calculations from DX-365 in revising 490 1 the table, doing the revising of information on AR-171? 2 A. No, I did not. 3 Q. Have you -- looking at the table, on the far upper part of 4 the chart, A, it has a column identified as "Total collections." 5 Do you see that? 6 A. Yes, I do. 7 Q. And at the bottom number it has a number of 13,186,000,000. 8 Right? 9 A. That's correct. 10 Q. What's your understanding of what that number includes? 11 A. That that's the total collection number from AR-171, less 12 Tribal IIM monies. 13 Q. So less Tribal IIM. Does that mean we're talking about that 14 one column that was in AR-171 as -- denominated as Tribal IIM? 15 A. That's correct. 16 Q. So based on your study of the flow of funds through this 17 system, does this total that's indicated here, does that exclude 18 or include the other tribal monies you've seen through this 19 system that are not denominated as IIM? 20 A. This would include those other tribal monies. 21 Q. That would include those other tribal monies. 22 Would it include things such as bid deposits? 23 A. Yes, it would. 24 Q. Would it include undifferentiated interest, interest that 25 you couldn't determine was interest at the time you did the 491 1 calculation? 2 A. All interest is included in this number. 3 Q. So in terms of your -- of this collections figure, it 4 doesn't exclude everything that's in the non-individual accounts 5 that you've identified in terms of fund flows over the history 6 of the IIM system. Is that right? 7 A. That's correct. 8 Q. Can you think of other things that didn't get deducted out 9 of that total collections number, as far as you know? 10 A. For instance, the direct payments for judgment monies that 11 were made that we were referring to, the stakeholder payments, 12 things of that nature would not have been deducted. 13 Q. As a consequence of including these other non-individual 14 monies in the collections figure on this DX-365 figure, what 15 does that do to the total collections number? 16 A. It would overstate collections to individual accounts. 17 Q. So is it fair -- if you go down to the bottom chart, in 18 Part B there's a list, do you see that, of estimated credits to 19 IIM accounts? 20 A. Yes, I do. 21 Q. Of 10 billion. Are those numbers comparable to one another? 22 A. No, they are not. 23 Q. Did you participate in -- did you prepare this DX-365 chart? 24 A. No, I did not. 25 Q. Have you used the computations in here as part of your 492 1 update to AR-171? 2 A. No, I have not. 3 Q. Based on what you know about the calculations you've made in 4 AR-171, does the chart in DX-365 also include 5 individual-to-individual transfers? 6 A. Yes, it does. 7 Q. In your flow of funds chart, DX-375 -- or 370, excuse me, 8 does that diagram indicate how total collections as represented 9 in DX-365 could overstate the amount of individual Indian 10 account money that was in the system? 11 A. Yes, it could. 12 THE COURT: Mr. Quinn, it's 5:00 o'clock and I have 13 another matter that I have to attend to. And besides which, you 14 have about reached my plateau with these numbers. 15 MR. QUINN: I try to make it interesting, Your Honor. 16 THE COURT: Well, it's fascinating. But at 9:30 17 tomorrow morning, we will start again. And I think I'm going to 18 need a little bit of re-grounding in what this exhibit is, the 19 one you've got up on the screen. 20 MR. QUINN: Okay. 21 THE COURT: Because I'm not quite sure I -- frankly, I 22 think I missed where this comes from and how it relates to the 23 other stuff. So let's start with that fresh at 9:30. 24 Thank you, everybody, for your attendance today. We'll 25 be in recess until 9:30 tomorrow morning. 493 1 MR. QUINN: Thank you, Your Honor. 2 THE WITNESS: Thank you, Your Honor. 3 (Proceedings adjourned at 5:06 p.m.) 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 494 1 CERTIFICATE OF OFFICIAL COURT REPORTER 2 3 I, Rebecca Stonestreet, certify that the foregoing is a 4 correct transcript from the record of proceedings in the 5 above-entitled matter. 6 7 8 9 _______________________________ _________ 10 SIGNATURE OF COURT REPORTER DATE 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25