What it means

Pass-through money: This is money earmarked for a specific purpose, usually by legislators, and administered by a state agency or sub-state planning district.

Sub-state district: These 11 entities each represent a different area of Oklahoma. Using state and federal money, their goal is economic development.

Two legislators combined to earmark more than $1.2 million in "special project" money for a southeastern Oklahoma foundation that now is under FBI investigation, records show. 'Special projects' fund districts

The two Democratic House members, Mike Mass and Randall Erwin, apparently specified at least $824,474 of that money for a dog food plant in McAlester, outside the legislators' districts.

The amount of money and its intended recipient -- a for-profit business -- "stands out," said Don Hackler, a state Commerce Department attorney. Hackler administers millions of dollars annually in special project money that passes through his agency.

Mandatory term limits will force Mass out of office in December. Erwin left the House in late 2004 to become head of the Little Dixie Community Action Agency in Hugo.

Commerce and agriculture are the two main state agencies through which legislators dole out money for pet projects, commonly called "pork."

Receiving the money from 2002 to 2005 was an Antlers-based entity called Rural Development Foundation. It was formed as a not-for-profit in September 2002 but changed its status to charitable organization eight months later, records show. That change was necessary for the foundation to receive state money directly.

The foundation's address is the same as an abstract company co-owned by Steve Phipps, who has identified himself as the foundation's consultant. Erwin said his dealings were with Phipps.

Phipps also is majority owner of National Pet Products, a dog food plant in McAlester that received the $824,474 earmarked by Mass and Erwin.

The plant in 2002 also received $250,000 in "start-up" money from the city of McAlester and $100,000 from the McAlester Foundation, a collection of local businessmen.

"Public money is supposed to be used for a public purpose. It's hard to see how that was done here," Hackler said of the pet food plant.

The state money went through the Kiamichi Economic Development District of Oklahoma, one of 11 sub-state planning districts through which legislators fund pet projects.

The Oklahoman found the earmarked money through an open records request to the district.

Of the state money, $849,560 was earmarked by Mass, D-Hartshorne, all during fiscal year 2005. Erwin, D-Nashoba, allocated another $384,914, all during fiscal year 2004.

Legislators appropriated an extra $700,000 for the Rural Development Foundation in 2002 for a revolving loan program. A former House fiscal analyst said, and Erwin confirmed, that Mass and Erwin also were responsible for obtaining that money.

"I'm not ashamed of anything I've done," Erwin said Friday.

He said even though the foundation was run out of Phipps' office in Antlers, Phipps presented himself only as its spokesman. Its board appeared to be interested only in economic development for southeastern Oklahoma.

Erwin said that when he earmarked the money for the foundation, he didn't know Phipps was majority owner of the dog food plant.

"Once it (the money) was appropriated, I don't know what happened to it. I assumed everything was on the up and up.

"There was nothing sinister on my part in trying to get some dollars down here," he said. Mass didn't respond to e-mails or phone messages left on his Capitol office phone. His home phone recently was disconnected.

* Money diverted?

Hackler, the Commerce Department attorney, said the FBI interviewed him twice last winter about state money sent to the Rural Development Foundation.

Among other things, he said, agents asked whether Hackler knew of any money for the Rural Development Foundation that went to other businesses owned by Phipps.

Hackler said they specifically mentioned Indian Nation Entertainment, a gambling machine company Phipps owns a mile from the pet food plant.

The dog food plant housed some of that company's machines in 2004, his partner in Indian Nation Entertainment told The Oklahoman last year.

Dan Webber, Phipps' attorney, said he couldn't comment on whether any of the state money went to his client's businesses other than the pet food plant. He said Phipps has cooperated with the FBI's records requests.

Erwin said the FBI hasn't contacted him.

FBI spokesman Gary Johnson said he could neither confirm nor deny that an investigation is under way.

Hackler said from his conversations with the FBI, he expects indictments to be issued.

He said agents told him they were examining the Rural Development Foundation's tax statements, in part to determine whether false statements were used to obtain tax-exempt status.

It would be improper, for example, for a person who controls a nonprofit foundation to send foundation money to his own company.

"It would surprise me if he spent the dog food money on his other ventures," Erwin said.

Erwin said Indian Nation Entertainment paid him about $3,000 to act as an intermediary with three casino-owning tribes in 2004. He said he received no other payments from Phipps.

The pet food plant was built on property previously owned by former state Sen. Gene Stipe.

Stipe sold the property to the McAlester Foundation for $190,000, a mix of public and private funds. A year earlier, the Pittsburg County assessor had set its fair-market value at $75,665.

Phipps and Stipe co-own several abstract and title com-panies, including the Antlers office where Rural Develop- ment Foundation is based. The men are embroiled in a lawsuit to dissolve their partnership.

* Invoices stop

In early 2004, the Kiamichi Economic Development District stopped requiring invoices showing how the Rural Development Foundation was spending state money.

Most the invoices submitted before then are detailed. Some are for equipment delivered to National Pet Products.

One, however, simply says "Electrical work." The bill is for $164,390. The district reimbursed the Rural Development Foundation for the entire amount.

The bill is from Roger Hatridge of Kiowa, doing business as R&R Electric. He is an uncle of Roy Hatridge, Phipps' minority partner in the dog food plant.

Hackler laughed when shown the invoice last week.

"Our auditor would have problems if we had gotten that" invoice and paid it, he said. Webber, Phipps' attorney, said the electrical work was submitted for bids.

The Kiamichi Economic Development District is required to submit annual audits to the Commerce Department. Its private auditing firm didn't mention the district's reimbursements to the Rural Development Foundation despite flimsy or no documentation, Hackler said.

Why the district stopped requiring invoices is a matter of debate.

Chester Dennis, the district's executive director, said he realized that it wasn't required to keep documentation on "pass-through" money. That realization came after a conversation with some legislators whose names he couldn't recall and with State Auditor and Inspector Jeff McMahan's office.

McMahan said Dennis called June 6 -- several hours after The Oklahoman inquired about the missing invoices -- to remind him of the earlier conversation.

That conversation never took place, McMahan said.

"It makes no sense that we would tell them they didn't have to keep documentation," McMahan said. "That's stupid."

McMahan's office regulates abstract companies, including the nine Phipps owns.

Records show McMahan's 2002 campaign received thousands of dollars from Phipps, his abstract company employees and people associated with the pet food plant and Rural Development Foundation.

"If they thought they were getting anything but good government, they were mistaken," McMahan said.

"I wish now I'd never heard of Steve Phipps," he said.

Contributing: Chris Casteel in the Washington Bureau and Database Editor Ryan McNeill