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‘A little bit of blood’: Mississippi tech company settles welfare scandal suit


‘A little bit of blood’: Mississippi tech company settles welfare scandal suit

Apr 23, 2024 | 12:44 pm ET
By Anna Wolfe
Lobaki Director of Production Zack Davenport (left) with company President Kevin Loud at the VR company, Thursday, April 18, 2024 in Jackson. Credit: Vickie D. King/Mississippi Today

Lobaki Director of Production Zack Davenport (left) with company President Kevin Loud at the VR company, Thursday, April 18, 2024 in Jackson. Credit: Vickie D. King/Mississippi Today

Ricky Junco was working a low-wage, e-commerce job at Goodwill and volunteering to teach Microsoft Word to kids at a youth detention center in 2018 when he met Vince Jordan, founder of a local tech startup.

Junco had been looking for ways to strengthen his skills to secure better employment. And Jordan had the solution: a virtual reality programming academy offered by his company, Lobaki. Junco said he was reluctant at first, doubting he’d be able to afford the courses. That’s when Jordan explained he could attend free of charge.

Lobaki’s foundation had recently — and suddenly — received a large grant from the state’s welfare department, Mississippi Department of Human Services, to offer the classes. 

The money didn’t come directly from the state agency, but through a contract with a private entity called Families First for Mississippi, which auditors and prosecutors say facilitated a multimillion dollar fraud scheme between 2016 to 2019.

Junco started training at the academy in the evenings. First, he learned how to design a graphic triangle, then make it 3D, then give it texture, then make it look like concrete, and so on.

Junco and his classmates, some of whom he said were transitioning out of prison, were learning how to design and build “experiences” — the term that describes the immersive worlds that appear inside virtual reality headsets. Junco’s goal was to create a simulation of a welding gun, then the experience of welding at a tall height.

“A big challenge in the oil rig right now is that they’ll spend time training somebody to be a welder, and then they ask her to go on top of the rig, and they find out that she’s hesitant about heights,” Junco said. “So therein lies one of the examples of the value of immersive technology is that you can replicate these things and identify fears and defeat fears as well.”

These programming skills could translate to the entertainment industry, such as animation in video games or movies, or to virtual education and vocational training, such as programs to teach someone how to drive a forklift.

Before its demise, Families First touted its VR capabilities in preparing people for the workforce, though it’s unclear how much of that kind of training actually took place.

Faster than it began, the welfare-meets-silicon valley experiment was over. 

In June of 2019, Lobaki President Kevin Loud said three women whose names and titles he couldn’t remember visited the tech company’s office and pulled Lobaki’s chief operating officer aside.

“She came out with this amazed look on her face, and she says, ‘We gotta be out of here by the end of the week,’” Loud said.

The state auditor had begun investigating widespread misspending and theft within the state’s welfare program after receiving a tip from inside the agency. MDHS seized all of the VR equipment Lobaki purchased under the grant, including two expensive harness stations, devices similar to treadmills used for immersive gaming — a seemingly bizarre purchase for a state welfare office.

Lobaki would soon find itself at the center of one of the biggest scandals in state history. The tech startup was lumped with dozens of other alleged fraudsters and accused of robbing the poorest citizens of the poorest state in the country.

“We felt it was completely unjust and we tried to position ourselves as best as possible, but it was like a wave that just kept coming in on you, you know?” Loud said.

The former state welfare agency director and directors of both nonprofits in charge of Families First pleaded guilty to federal criminal charges — some of which relate to the Lobaki contract — in 2022 and 2023 and are awaiting sentencing.

‘A little bit of blood’: Mississippi tech company settles welfare scandal suit
Lobaki President Kevin Loud at the VR company, Thursday, April 18, 2024 in Jackson. Credit: Vickie D. King/Mississippi Today

But to Junco, Lobaki’s function with the welfare agency was the embodiment of the popular “hand up, not a hand out” philosophy. Though Junco and his classmates did not have to be low-income to participate, Junco said that he and plenty of others were, in fact, just the kind of people MDHS purports to serve.

“As a result of that exposure, it did lead to a better lifestyle for me later on,” Junco said. “Because I learned something and it segued to a job opportunity as well. Which is, in my opinion, the classic example of what programs like this should look like.”

After the investigation began, Junco returned to class one night to find the doors locked. He walked down the stairs to another level of the building and peered through the windows of a vacant room where the VR equipment was stashed haphazardly. MDHS owned the gadgets, but the agency didn’t have a use for them, so they would continue collecting dust for years. MDHS eventually disposed of the equipment by sending it to the Mississippi Office of Surplus Property, which sells the public’s unused or confiscated items. MDHS did not answer Mississippi Today’s questions about when this occurred, how much money it may have recouped from any sales, or if those proceeds will be transferred back to the welfare program.

Though Junco said he never received a certificate from Lobaki’s VR academy due to the fallout, the company later hired him to teach programming classes at the Jackson Medical Mall. He now serves as Lobaki’s director of business development. A handful of other employees at the roughly 15-person firm also came from the academy.

Lobaki told auditors that it graduated a total of 60 students at a cost of $13,250 per student. The academy was not an accredited program, but Loud said students took with them design portfolios they could use to entice employers. Student outcomes weren’t well documented. Besides the participants Lobaki hired, one of which eventually left to work for Meta, formerly known as Facebook, Lobaki is aware of two other students who secured jobs in the field, plus one who went back to college and another who entered the military for computer science.

‘A little bit of blood’: Mississippi tech company settles welfare scandal suit
Lobaki founder Vince Jordan (center) talks with students in Clarksdale, Mississippi in this 2017 file photo. Credit: Lobaki, Inc.

This lack of data collection isn’t unusual: the welfare grant Lobaki operated the academy under is notorious for involving no metrics for tracking program performance.

The public funds Lobaki received came from the federal safety net program called Temporary Assistance for Needy Families, or “TANF,” which is known for providing monthly cash assistance, or “welfare checks,” to very poor families. But Mississippi only uses 5% of the funds this way. States may also use the block grant to “end the dependence of needy parents on government benefits” through workforce development.

Lawyers working to recoup misspent TANF funds for the state argued that Lobaki received the grant through fraudulent transfers, that its program did not align with a lawful TANF purpose, especially since its participants were not necessarily needy, and that it must return $795,000 to the state. 

After waging a legal battle for nearly two years, MDHS and Lobaki recently reached a settlement. Lobaki paid MDHS $10,000 on April 15 and the next day, the judge dismissed charges against the company. Lobaki agreed to pay back a total of $300,000 by 2028, which could be reduced to $240,000 if it pays earlier. In the agreement, Lobaki maintained its denial of the allegations in the suit, saying it only settles “to buy their peace and avoid further cost of defense.”

In Lobaki’s failed 2023 motion to dismiss the complaint against it, the company argued, among other things, that it never made any false statements or misrepresentations to procure the funds. Hinds County Circuit Court Judge Faye Peterson denied the motion and the Mississippi Supreme Court declined to take the case on appeal. 

“We didn’t know the difference between TANF and a frickin’ turnip patch, you know?” Loud said.

But Lobaki’s stated mission of providing unique training that underemployed Mississippians could use to take advantage of better, newly emerging job opportunities sounds like exactly the kind of thing that Mississippi’s conservative welfare agency would support.

“We thought we were doing something good for society,” Loud said. “We thought we were doing it completely along the lines of state regulation.”

In fact, shortly after they launched the academy in downtown Jackson, Loud said he remembered receiving a visit from then-Gov. Phil Bryant, who appointed the now disgraced former director John Davis and oversaw the agency during the years of the scandal.

“He (Bryant) puts on the headsets, and he says, ‘This is exactly what we should be doing,’ you know?” Loud said. “And when you see the governor of the state saying something like that, and then he says to John Davis, he says, ‘How much money are we giving these guys?’ He says, ‘We’ve given them $635,000.’ He (Bryant) goes, ‘Give them some more.’ He (Davis) writes us a check for $160,000 that day.”

“So, I mean, how are you not going to think that you’re not doing something in complete compliance with the state?” Loud added.

MDHS has not named Bryant as a defendant in the civil suit and he is not facing any criminal charges. Bryant’s attorney declined to comment on the former governor’s dealings with Lobaki. MDHS would not comment on the Lobaki settlement, telling Mississippi Today, “Due to the suppression order in the Civil Case, MDHS is unable to comment on the filing.”

Loud said Lobaki first got linked up with the welfare agency in 2018 after Davis read an Fox News article about its efforts to train students in Clarksdale, Mississippi, in video game development. “Virtual reality developers aim to spark tech boom in the Deep South,” the headline reads.

Unlike other defendants in the scandal, Loud noted that MDHS approached Lobaki, not the other way around.

“John Davis sees it, calls up Vince, comes up, tours it. He (Davis) says, ‘I love this, but I want you to do it in Jackson,’” Loud said. “‘You come to Jackson, we’ll set up an academy. I got 58 career development centers across the state. We’ll set these up in all 58 of them.’”

By this point, MDHS had begun pushing tens of millions of TANF funds to the two nonprofits running Families First for Mississippi. Technically, states may define “needy” however they want. For the types of services Families First provided, Mississippi had set the income threshold at 300% of the poverty line, so in 2018, a family of three could have earned $60,000 and still qualified for the program. But no one was checking. The state had written in official plans submitted to the federal government that the Families First centers “have strategically braided all available resources therefore eligibility requirements are waived for families and services are free of charge.” 

This may have been moot anyway because according to emails and notes from a meeting between MDHS and another grantee, MDHS lawyers and Families First had adopted the theory that once the money hit the private nonprofits, the grantee was no longer bound by federal spending regulations. 

Davis instructed the nonprofits running Families First to ink a one-year $635,000 contract with Lobaki to begin Sept. 1, 2018. This itself was a violation of federal regulations, according to the state auditor, because it flouted the competitive bid process. Also, according to contracting rules, once the government issues a contract to a private entity, it cannot then tell that entity with whom to enter subcontracts.

Davis had recently leased expensive offices for MDHS executive staff at a high rise in the middle of downtown Jackson called City Centre, where Lobaki was given space to set up shop. The academy, where students like Junco took classes, was located at the old state-owned building on State Street that previously housed MDHS and where Families First would soon be headquartered.

‘A little bit of blood’: Mississippi tech company settles welfare scandal suit
Dylan White, VR programmer at Lobaki, works on a project at the company, Thursday, April 19, 2024 in Jackson. Credit: Vickie D. King/Mississippi Today

Family Resource Center of North Mississippi, the nonprofit running Families First in the northern part of the state, paid Lobaki the $635,000 in one lump sum payment at the start of the contract. In January of 2019, Gov. Bryant toured Lobaki, and Mississippi Community Education Center, the other Families First nonprofit, entered an additional contract with Lobaki for $160,000.

Loud said the first red flag surrounding Lobaki’s relationship with MDHS came in early 2019 when Lobaki was seeking support from another state agency, the Mississippi Development Authority. MDA asked Lobaki for a copy of its office lease. It didn’t have one. By June of 2019, the state was kicking Davis out of office and stripping Lobaki of its academy.

Bryant left office in January of 2020 and auditors office agents arrested Davis and Mississippi Community Education Center founder Nancy New in February of 2020. Loud said Davis’ fall and the revelations around the funding devastated Jordan, Lobaki’s founder, who eventually left the company to join a VR education consultancy in Florida.

Before that, though, Lobaki brought on Glenn McCullough, who had just left his post as director of MDA under Bryant, as a board member in March of 2020.

A couple months later, State Auditor Shad White released his single audit, which first questioned the payments to Lobaki “due to the known conflict of interest, and inability to determine if these contracts were reasonably priced due to lack of procurement and the lack of arms-length bargaining,” the audit reads.

Despite the audit finding, Gov. Tate Reeves distributed $800,000 in Governor’s Emergency Education Relief (GEER) funds to Loabki for online learning in early 2021.

Later that year in October of 2021, independent forensic auditors commissioned by MDHS confirmed that the welfare payments to Lobaki were unallowable under federal regulations. The audit said the VR academy failed to align with federal TANF rules because it did not impose eligibility requirements on participants. But while the program violated federal rules, it did appear to adhere to the state’s own rules since the state plan had suspended income requirements for Families First clients.

“The work performed by Lobaki Foundation appeared to align with its contractual obligations,” forensic auditors wrote.

‘A little bit of blood’: Mississippi tech company settles welfare scandal suit
Lobaki Vice President of Development Vinny Jordan and Senior Programmer Michael Peacock, discuss a project at the company, Thursday, April 18, 2024 in Jackson. Credit: Vickie D. King/Mississippi Today

After the forensic audit, White sent demands for repayment to more than two dozen people or companies, which he referred to the AG’s office. Lobaki was not one of the entities White recommended for prosecution.

By April of 2022, Nancy New and her son Zach New were pleading guilty to charges of fraud against the government and wire fraud for the payments they made to the VR academy. Zach New admitted to paying $500,000 to construct a virtual reality center at the downtown high rise and disguising the payment as a “lease.” There is a strict prohibition on using TANF funds for brick and mortar construction.

Represented by outside counsel Brad Pigott, a former U.S. Attorney, MDHS filed its first civil suit in May of 2022, but the complaint did not name Lobaki. MDHS fired Pigott shortly after he filed the suit and replaced him with law firm Jones Walker, which filed the amended complaint that added Lobaki to the suit in December of 2022. McCullough left Lobaki shortly after that but maintains stock in the company, Loud said.

Loud said he’s caught up with White since Lobaki’s legal troubles began.

“I said, ‘Shad,’ I said, ‘You recommended a lot of people over to the AG to be prosecuted. Why didn’t you recommend Lobaki?’ He said, very simply, he says, ‘Because you guys didn’t do anything.’ I said, ‘Well, thanks. Can you stop this litigation?’” Loud said with a laugh.

As White has stated repeatedly, the state auditor and his investigators are not prosecutors and do not determine who will be charged criminally or civilly.

“We did not serve a demand letter on Lobaki because the evidence we’d seen suggested they performed the services they were hired to perform,” White said in a statement to Mississippi Today. “It’s similar to the newspapers that had been paid in welfare money to run ads, and then they ran those ads. Performing the service would possibly give a vendor a good faith vendor defense under the law, though the ultimate call about whether to sue anyone in this case who did not receive a demand is made by the attorneys representing the state, not us.”

The attorney general’s office has partnered with MDHS’s counsel on the civil suit, but Gov. Reeves has indicated that as the authority over MDHS, his office is leading the litigation and ultimately selected who to hold culpable.

Loud estimates Lobaki has spent $100,000 or $150,000 in legal fees. That’s a lot for a young company like Lobaki, Loud said, whereas the state of Mississippi has seemingly unlimited resources, especially since it’s dipping into its large TANF pot to pay for the lawsuit.

Since the state has tightened up spending in light of the scandal, it has amassed an unspent balance of $146 million in TANF as of 2022 — money that the state could direct towards fighting poverty. When Lobaki received the welfare grant in 2018, the state was serving roughly 4,500 families through the traditional cash assistance program and reported a TANF application approval rate of about 20%. Today, as the welfare civil suit enters its third year, MDHS is serving just 1,600 families and approves roughly 9% of monthly applicants, according to 2023 data.

“It’s just kind of ironic that the attorneys opposing us are getting funded from TANF funds. And one of the things that they’re accusing us of is using TANF funds incorrectly,” Loud said. “But the attorneys wrote the law, so the attorneys wrote that it was fine for them to get paid out of it.”

What’s worse for the company, Loud believes Lobaki has lost roughly $8 million in work with entities who were turned off by its association with the TANF scandal. In 2023, Lobaki secured a $300,000 line item appropriation in Mississippi’s K-12 budget proposal for a VR pilot program. Before state lawmakers passed the budget, they found the appropriation to Lobaki tucked away in the bill. No lawmaker would admit to making the addition and they removed it before passage

Lobaki did, however, quietly receive $74,500 from the American Rescue Plan Act, the coronavirus pandemic relief fund, for a program with the Mississippi National Guard Youth ChalleNGe Academy in 2023.

The company also hired powerful lobbying firm Capital Resources in 2023 to lobby for VR funding on the federal level and offer public relations advice, but that contract has since ended. Lobaki’s current lobbyist, according to the Secretary of State’s Office, is Allan Cole.

Loud and the rest of the staff hope the recent settlement means Lobaki can begin repairing its reputation.

On April 15 after delivering the $10,000 check to MDHS, Loud said he ran into the agency’s director Bob Anderson — a former unit director at the Attorney General’s Office appointed by Reeves to run MDHS in 2020 — at Martin’s restaurant, a popular lunch spot in downtown Jackson. They’d never met in person. Loud went up to the former prosecutor, stuck out his hand and introduced himself.

“I said, ‘I didn’t think you could get blood out of a turnip, but you did a pretty damn good job,’” Loud said. “He said, ‘We just wanted a little bit of blood.’”