The Senate, minutes before a final vote on a $3 billion K-12 education budget Friday, realized it included paying $300,000 to a company the state has filed charges against and is suing to recoup $795,000 in the long-running Mississippi welfare scandal.

The budget proposal would have ordered the state education department to pay $300,000 to Lobaki Inc. for a pilot virtual reality program for schools. Senate leaders said House negotiators put the measure in. A House leader said that’s not true, but he’s unsure who put it in the proposed budget.

The Mississippi Department of Human Services in December added the Jackson-based company to its lawsuit aiming to claw back $77 million in misspent or stolen federal welfare dollars sent to Mississippi. The civil lawsuit is ancillary to state and federal criminal prosecution and continuing investigations into misuse of money meant to help the poor.

The state welfare agency accuses Lobaki of accepting $795,000 in federal Temporary Assistance for Needy Families funds from two private nonprofits to deploy and operate a virtual reality academy in Jackson.

Senate leaders on Friday said the line item was put in by House budget negotiators — they wouldn’t say whom — and they didn’t know anything about it. House leaders did not immediately respond to questions about the line item, other than a spokeswoman for Speaker Philip Gunn said she did not think it was in the budget proposal.

Later, House Education Chairman Richard Bennett, R-Long Beach, said he doesn’t believe the House put it in the budget, but he’s unsure where it came from. He said he believes none of the negotiators knew about the state suing Lobaki over the welfare spending.

“I’m glad (the Senate) brought it to our attention,” Bennett said. “I don’t know anything about them, other than they are a virtual reality company … I do think virtual reality is the thing of the future in education … But I’m glad it got taken out. I don’t think anyone was trying to sneak anything in anywhere.”

Sen. Barbara Blackmon, D-Canton, first noticed the Lobaki line item in the budget, which rank and file lawmakers have been waiting for days to see as a handful of legislative leaders haggled it out.

“Mr. Chairman, this Lobaki, isn’t that the group in the TANF scandal with all the illegal money?” Blackmon asked on the floor. Sen. Derrick Simmons, D-Greenville, then followed up, pointing out that Lobaki was subject of the civil complaint and asking, “Is this something we might want to change?”

After brief consultation, the Senate recommitted the bill for more haggling to remove the payment. The issue temporarily put a halt to Legislature’s budget work as lawmakers worked into Friday night trying to end the 2023 legislative session. Disagreements between the House and Senate over education spending have held up other budget work in the Legislature in the last couple of weeks of the session.

READ MORE: Mississippi lawmakers resolve impasse over K-12 spending

Lobaki is a politically connected tech outfit launched in Mississippi by Vince Jordan in 2017. Former Gov. Phil Bryant, who oversaw the welfare agency during the scandal, previously promoted the company.

“This week I tested the latest virtual reality technology with Lobaki Labs in Jackson, MS, who has partnerships throughout the state with various industries to show all the uses it has in today’s industries. It is amazing,” Bryant wrote in a Facebook post in early 2019, shortly after Lobaki secured its welfare grants.

Another defendant in MDHS’s civil suit, Austin Smith, has subpoenaed Bryant for any of his communication related to Lobaki.

READ MORE: Former Gov. Phil Bryant subpoenaed again

Just after the initial 2020 arrests in the welfare scandal, Lobaki added Glenn McCullough, former director of the Mississippi Development Authority under Bryant, to its board of directors.

Lobaki has filed a motion to dismiss the charges against the organization, arguing that it fulfilled the terms of its contract with the nonprofits.

Lobaki accused MDHS of “stretch(ing) and contort(ing) various legal theories in attempts to hold third parties liable for the wrongdoing of its own employees.”

MDHS does not claim that Lobaki didn’t complete the work. But it argues that the company’s agreement with the nonprofits required it to follow MDHS grant policies and applicable state and federal law — which is why Lobaki is allegedly on the hook for those misspent funds.

The complaint also says that Lobaki asked the nonprofits about the source of the funds, but despite never receiving a response, accepted the funding anyway.

One of the key defendants in the welfare scandal, nonprofit founder Nancy New, pleaded guilty last April of state charges of fraud against the government related to a $365,000 payment to Lobaki for a virtual reality program. She admitted to making the payment “despite knowing that the expenditure was an ineligible use of grant funds.”

Her son, Zack New, also pleaded guilty to wire fraud related to the transfer of $500,000 in welfare funds for the construction of a virtual reality center at City Centre, the downtown Jackson building that houses MDHS offices. Similar to the volleyball stadium scheme involving former NFL quarterback Brett Favre, Zach New admitted that he disguised the payment as a lease agreement in order to circumvent the federal prohibition on using welfare funds for brick-and-mortar construction.

READ MORE: State files lawsuit to recoup welfare funds from Brett Favre, WWE wrestlers and 34 other people or companies

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