Office of Inspector General

Semiannual Report to Congress

October 1, 2003 through March 31, 2004

U.S. Department of Housing and Urban Development
PROFILE OF PERFORMANCE

FOR THE PERIOD

October 1, 2003 through March 31, 2004 

Audit and Investigation Results Audit Investigation Combined 

Recommendations That Funds Be Put to Better Use $1,865,688,100 $1,865,688,100 

Management Decisions on Audits with Recommendations That Funds Be 

Put to Better Use $766,584,070 $766,584,070 

Questioned Costs $67,111,824 $67,111,824 

Management Decisions on Audits with Questioned Costs $39,796,808 $39,796,808 

Collections from Audits $13,206,6771 $13,206,6771

Investigative Receivables/Recoveries $300,080,255 $300,080,255 

Funds Put to Better Use $266,005,577 $266,005,577 

Indictments/Informations 690 690 

Convictions/Pleas/Pre-Trial Diversions 353 353 

Administrative Actions 6 467 473 

Civil Actions 29 29 

Months in Prison 5,512 5,512 

Months of Probation 11,837 11,837 

Hours of Community Service 3,446 3,446 

Personnel Actions 1 38 39 

Arrests 1,137 1,137 

Subpoenas Issued 24 335 359 

Search Warrants 39 39 

Weapons Seized 3 3 

Value of Drugs Seized $7,457 $7,457 

1 Collections reduced by $209,470 which represents collections on report number 2003-NY-1801 which was claimed by the Office of Investigation.
INSPECTOR GENERAL’S MESSAGE

It is with pride that I present the U.S. Department of Housing and Urban

Development Office of Inspector General Semiannual Report on our activities for

the half year beginning October 1, 2003.

Before highlighting all the OIG’s recent activities, I want to acknowledge the

excellence and competence of the auditors, investigators, and support personnel

who form the core of the HUD OIG. During the last half year, scores of our employees have been selected for awards and commendations by the President, the

President’s Council on Integrity and Efficiency, U.S. Attorneys’ Offices, the

Department of Justice, elected officials, and editorial boards for the superior work

they have performed.

The HUD OIG is serving the American taxpayer by our oversight of HUD program administration through our

audits of the Department’s financial statements and through internal control reviews. Further, the American taxpayer is served through our investigations of white collar crime and program abuse. Departmental employee misconduct is checked through our vigorous efforts in investigating and resolving reported abuses. We continue to

assess information security efforts, report on Departmental compliance and accountability, and identify management and performance challenges.

During the past half year, we have seen the HUD OIG’s “return on investment” increase fourfold to 51 to 1. This

performance measure, which is more fully explained in the next section of this report, means that OIG is producing

audits and investigations that have a potential monetary impact of 51 times more than we are spending.

The following highlights some of the areas detailed in this report.

A centerpiece to many of HUD OIG’s investigations and audits is the effectiveness of our OIG Hotline. As an

intake point for allegations of waste, fraud, abuse, or mismanagement in HUD or in HUD funded programs, the OIG

Hotline has garnered a reputation for excellence that is acknowledged and copied throughout many other federal

OIGs. Since October 1, 2003, the OIG Hotline has logged more than 9,000 phone calls and letters.

The Federal Housing Administration’s Single Family Program continues to be a major management challenge

for the Department, and the HUD OIG has been active on two fronts to preserve and improve this program. Our

investigative efforts have targeted predatory lending activities and single family housing property flipping. These

efforts have met with great success. In addition, our auditors have assessed the indemnification of claims on HUD

single family insured loans, the HUD Philadelphia Homeownership Center’s system of quality controls over its FHA

single family mortgage insurance process, the Home Equity Conversion Mortgage Program, and the Officer/

Teacher Next Door Programs, to name a few.

In addition, we reviewed HUD management of public housing agency (PHA) development activities, the portability features of the Section 8 Housing Choice Voucher Program, the Moving to Work Program, and other activities

at various PHAs. Moreover, we are reporting on our audit work that resulted in a qui tam lawsuit involving overbilling by a security company. We also audited Community Development Block Grant Disaster Assistance Funds in

the State of New York, the Section 108 Loan, the Community Development Block Grant, the HOME, and the Home

Investment Partnership Programs, effecting over $60 million in funds put to better use.
In our discussion of the audit resolution process, we are pleased to report that, for the sixth consecutive semiannual reporting period, we have no items to report on significant audits where a management decision had not been

reached for audits that were more than six months old. We attribute this accomplishment to the ongoing support

provided by the Department and their priority to resolve OIG audit report recommendations as expeditiously as

possible.

It is clearly evident that the HUD OIG has had a positive impact on the Department’s performance, thanks to the

dedicated and talented men and women who truly believe in the mission of the Department: that of safe, decent, and

sanitary housing for people and of the economic vitality of our communities. We will continue our work with Secretary Jackson to achieve a Department that administers the country’s housing programs effectively and efficiently,

free from waste, fraud, and abuse.

Kenneth M. Donohue

Inspector General
Information About the HUD Office of Inspector General

HUD’s Office of Inspector General is one of the original 12 designated by the Inspector General Act of 1978. The OIG oversees HUD’s programs

and operations with its audit and investigative personnel. While organizationally located within the Department, the OIG has separate budgetary

authority. The IG’s mission is to provide independent and objective reporting to the Secretary and the Congress. OIG activities seek to:

3⁄4 Promote efficiency and effectiveness in programs and operations;

3⁄4 Detect and deter fraud and abuse;

3⁄4 Investigate allegations of misconduct by HUD employees; and

3⁄4 Review and make recommendations regarding existing and proposed legislation and regulations affecting HUD.

The Executive Office and the Offices of Audit, Investigation, Counsel, and Management and Policy are located in Headquarters. Also, the Offices

of Audit and Investigation have field staff located in ten regions and many field offices. The following charts provide information on the OIG’s return on

investment for the six-month reporting period, along with audit and investigation reports/cases, recoveries, and funds put to better use by program area.

Return on Investment

OIG developed a Return-On-Investment (ROI) computation as one method to measure its contribution to the Department’s mission. This measure takes

the total dollars of Recommended Funds To Be Put To Better Use 1 and Questioned Costs2 together with Investigative Receivables and Recoveries3 and

divides that total by OIG’s operating costs, including salaries, for the period. The resulting ratio represents the potential amounts that could be realized per

dollar of OIG expenditures either during current or future periods. Many factors affect when and how much is actually returned, so OIG uses Recommended

amounts in our ROI calculation, rather than Management Decision amounts, to better relate results to the work that was actually done during the period.

Much of this period’s ROI results from the annual financial audit finding regarding the need to deobligate more than $1 billion in HUD funds. The majority of

remaining contributing factors to the ROI are the results from reviews of external parties who administer or benefit from HUD funded programs. HUD refers

many matters such as these to OIG for audit or investigation, as appropriate.
Footnotes

1 Funds To Be Put To Better Use is an item required by Congress and is defined in the IG Act as “a recommendation by the Office that funds could be used more efficiently if management

of an establishment took actions to implement and complete the recommendation, including: (1) reductions in outlays; (2) deobligations of funds from programs or operations; (3) withdrawal of interest subsidy costs on loans or loan guarantees, insurance, or bonds; (4) costs not incurred by implementing recommended improvements related to the operations of the

establishment, a contractor, or grantee; (5) avoidance of unnecessary expenditures noted in pre-award reviews of contractor grant agreements; or (6) any other savings which are specifically

identified.”

2 Questioned Costs are “a cost that is questioned by the Office because of: (1) an alleged violation or provision of law, regulation, contract, grant, or cooperative agreement, or other

agreement or document governing the expenditure of funds; (2) a finding that at the time of the audit, such cost is not supported by adequate documentation; or (3) a finding that the

expenditure of funds for the intended purpose is unnecessary or unreasonable.”

3

 Investigative Receivables and Recoveries are based on the total dollar value of: (1) Criminal cases—the amount of restitution, criminal fines, and/or special assessments based on a criminal

judgment or established through a pretrial diversion agreement; (2) Civil cases—the amount of damages, penalties, and/or forfeitures resulting from judgments issued by any court (Federal,

state, local, military, or foreign government) in favor of the U.S. government; or the amount of funds to be repaid to the U.S. government based on any negotiated settlements by a prosecuting authority; or the amount of any assessments and/or penalties imposed, based on actions brought under the PCFRA, civil money penalties, or other agency-specific civil litigation

authority, or settlement agreements negotiated by the agency while proceeding under any of these authorities; (3) Voluntary repayments—the amount of funds repaid on a voluntary basis or

funds repaid based on an agency’s administrative processes, by a subject of an OIG investigation, or the value of official property recovered by an OIG during an investigation, before

prosecutive action is taken, any of which result from a case in which an OIG has an active investigative role.

$4,528,532

Administration & 

Operations

$35,172,329

Personnel Services

$9,378,558

Centrally Managed/Funded Services

OIG Cost of Operations 10/1/03 to 3/31/04

$49 Million

$67,111,824

Questioned Costs

$1,865,688,100

Funds Put to Better Use

(Audit)

$300,080,255

Investigative Recoveries/Receivables

OIG Results 10/1/03 to 3/31/04

$2.5 Billion

$266,005,577

Funds Put to Better Use

(Investigation)

OIG Return on Investment: $2.5 billion/$49 million = 51 to 1 return
14%

41%

11%

21%

13%

Single Family

Multifamily

PIH

CPD

Other

Audit Reports Issued by Program

6

7 8

12

23

Monetary Benefits Identified by Program in 

Millions – Office of Audit

$1,459.6

$62.6 $98.0

$10.5 $73.5

0

200

400

600

800

1000

1200

1400

1600

Single

Family

Multifamily PIH CPD Financial

Audit and

Other
Investigation Cases Opened

by Program

0

100

200

300

400

500

600 Single Family

Public Housing

Multifamily

Community Planning

& Development

Other/GNMA

Single Fam ily

89%

Multifamily

2%

Other/GNMA

8%

Public Housing

1%

Investigative Recoveries

Investigation Funds Put to Better Use

by Program

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000 Single Family

Public Housing

Multifamily

Community Planning

Development

Other/GNMA
Reporting Requirements

The specific reporting requirements as prescribed by the Inspector General Act of 1978, as amended by the 

Inspector General Act Amendments of 1988, are listed below:

Section 4(a)(2)-review of existing and proposed legislation and regulations.

Section 5(a)(1)-description of significant problems, abuses, and deficiencies relating to the 

administration of programs and operations of the Department.

Section 5(a)(2)-description of recommendations for corrective action with respect to significant 

problems, abuses, and deficiences.

Section 5(a)(3)-identification of each significant recommendation described in previous Semiannual Reports on which corrective action has not been completed.

Section 5(a)(4)-summary of matters referred to prosecutive authorities and the prosecutions 

and convictions that have resulted.

Section 5(a)(5)-summary of reports made on instances where information or assistance was 

unreasonably refused or not provided, as required by Section 6(b)(2) of the Act.

Section 5(a)(6)-listing of each audit report completed during the reporting period, and for each 

report, where applicable, the total dollar value of questioned and unsupported costs and the 

dollar value of recommendations that funds be put to better use.

Section 5(a)(7)-summary of each particularly significant report.

Section 5(a)(8)-statistical tables showing the total number of audit reports and the total dollar 

value of questioned and unsupported costs.

Section 5(a)(9)-statistical tables showing the total number of audit reports and the dollar value 

of recommendations that funds be put to better use by management.

Section 5(a)(10)-summary of each audit report issued before the commencement of the reporting period for which no management decision had been made by the end of the period.

Section 5(a)(11)-a description and explanation of the reasons for any significant revised management decisions made during the reporting period.

Section 5(a)(12)-information concerning any significant management decision with which the 

Inspector General is in disagreement.

Section 5(a)(13)-the information described under section 05(b) of the Federal Financial Management Improvement Act of 1996.

Source/Requirement Pages

99-100

1-89, 101-104

7-89

Appendix 2, 

Table B

7-89

No instances

Appendix 1

7-89

Appendix 2, 

Table C

Appendix 2, 

Table D

Appendix 2, 

Table A

102-103

No instances

104
Table of Contents

Chapter 1 - HUD’s Management and Performance Challenges .............................................................................. 1

Chapter 2 - HUD’s Single Family Housing Programs

 Audits............................................................................................................................................................7

 Investigations..............................................................................................................................................11

 

Chapter 3 - HUD’s Public and Indian Housing Programs

 Audits.........................................................................................................................................................33

 Investigations.............................................................................................................................................41

 Fugitive Felon Initiative ............................................................................................................................54

 

Chapter 4 -HUD’s Multifamily Housing Programs

 Audits..........................................................................................................................................................57

 Investigations..............................................................................................................................................62

 

Chapter 5 -HUD’s Community Planning and Development Programs

 Audits..........................................................................................................................................................71

 Investigations..............................................................................................................................................77

 

Chapter 6 - Other Significant Audits and Investigations/OIG Hotline

 Audits..........................................................................................................................................................83

 Investigations..............................................................................................................................................87

 OIG Hotline................................................................................................................................................88

 

Chapter 7 - Outreach Efforts...................................................................................................................................91

Chapter 8 - Review of Policy Directives

 Notices of Funding Availability (nofas).....................................................................................................99

 Computer Match Agreement ......................................................................................................................99

 Notices......................................................................................................................................................100

 Congressional Report ...............................................................................................................................100

 

Chapter 9 - Audit Resolution

 Delayed Actions .......................................................................................................................................101

 Significant Revised Management Decisions............................................................................................102

 Federal Financial Management Improvement Act of 1996 (FFMIA)......................................................104

Appendix 1 — Audit Reports Issued

Appendix 2 — Table A - Audit Reports Issued Prior to Start of Period with No Management Decision at

 03/31/04

Table B - Significant Audit Reports Described in Previous Semiannual Reports Where Final Action Had Not Been Completed as of 03/31/04

Table C - Inspector General Issued Reports with Questioned and Unsupported Costs at

 03/31/04

 Table D - Inspector General Issued Reports with Recommendations that Funds Be Put To Better 

Use at 03/31/04
Chapter 1 - HUD’s Management and Performance Challenges 1

Chapter 1 — HUD’s Management and Performance Challenges

The HUD Office of Inspector

General

The HUD Inspector General is one of the original

12 Inspectors General authorized under the Inspector

General Act of 1978. Over the years, our audit and

investigative staff have forged a strong alliance with

HUD personnel in recommending ways to improve

Departmental operations or in prosecuting program

abuse. We strongly believe that we have made a

difference in HUD’s performance and accountability.

We are committed to our statutory mission of detecting and preventing waste, fraud, and abuse, and

promoting the effectiveness and efficiency of government operations. While organizationally we are

located within the Department, we operate independently with separate budgetary authority. This independence allows for clear and objective reporting to

the Secretary and the Congress. Our activities seek

to:

3⁄4Promote efficiency and effectiveness in programs and operations.

3⁄4Detect and deter fraud and abuse.

3⁄4Investigate allegations of misconduct by HUD

employees.

3⁄4Review and make recommendations regarding

existing and proposed legislation and regulations

affecting HUD.

The Executive Office and the Offices of Audit,

Investigation, Counsel, and Management and Policy

are located in Headquarters. Also, the Offices of

Audit and Investigation have staff located in ten

regions and numerous field offices.

Major Issues Facing HUD

The Department’s primary mission is to expand

housing opportunities for American families seeking

to better their quality of life. HUD seeks to accomplish this through a wide variety of housing and

community development grant, subsidy, and loan

programs. HUD’s budget approximates $31 billion

annually. Additionally, HUD assists families in obtaining housing by providing Federal Housing Administration (FHA) mortgage insurance for single family and

multifamily properties. FHA’s outstanding mortgage

insurance portfolio exceeds one half trillion dollars.

Ginnie Mae, through its Mortgage-Backed Securities

Program, gives issuers access to capital markets

through the pooling of federally insured loans.

While HUD may appear to be a small agency, with

about 9,200 staff nationwide, numerous partners are

relied upon for the performance and integrity of a

large number of diverse programs. Among these

partners are hundreds of cities that manage HUD’s

Community Development Block Grant funds, hundreds of public housing agencies and thousands of

nonprofit and for-profit housing sponsors that manage

assisted housing funds, thousands of HUD approved

lenders that originate and service FHA insured loans,

and hundreds of Ginnie Mae mortgaged-backed

securities issuers that provide mortgage capital.

Achieving HUD’s mission continues to be an

ambitious challenge for its limited staff, given the

agency’s many distinct programs. HUD’s management

problems have for years kept HUD on GAO’s list of

agencies with high-risk programs. HUD’s management team, the GAO, and the OIG share the view that

improvements in human capital, acquisitions, and

information systems are essential in removing HUD

from its high-risk designation. More specifically,

HUD must focus these improvements on Rental

Housing Assistance Programs and Single Family

Housing Mortgage Insurance Programs, two areas

where financial and programmatic exposure is the

greatest. That HUD’s reported management challenges are included as part of the President’s Management Agenda is indicative of HUD’s important role

in the federal sector. HUD’s current Administration

places a high priority on correcting those weaknesses

that put HUD on GAO’s high-risk list.

Each year, in accordance with the Reports

Consolidation Act of 2000, the HUD OIG is required to

submit a statement to the Secretary with a summary

assessment of the most serious challenges facing the
Chapter 1 - HUD’s Management and Performance Challenges 2

Department. We submitted our last assessment on

November 12, 2003. These reported challenges are

the continued focus of our audit and investigative

effort. HUD is working to address these challenges,

and in some instances has made progress in correcting them. HUD’s Executive Management Meeting

focuses on the actions taken by each Assistant Secretary in meeting the President’s Management Agenda

(PMA). The PMA includes government-wide as well as

HUD specific initiatives. The HUD specific initiatives

are intended to formulate viable strategies and plans

to address the major problems facing the Department.

The Department’s management challenges and

current efforts to address these challenges are as

follows:

Department-wide Organizational Changes

For more than a decade, the Department has

struggled with organizational and management

changes in an effort to streamline its operations.

These changes were necessary as HUD tried to

manage more programs and larger budgets with

fewer staff. The former HUD Administration tried to

realign the Department along functional lines, separating outreach from program administration. Also,

they attempted to place greater reliance on automated

tools, processing centers, and contracted services. As

HUD implemented these realignments, many employees were assigned new duties and responsibilities and

many new employees were hired. HUD also experienced a serious “brain drain” as many senior staff

took buy-outs and left the Department. While these

organizational changes were well intended, the

disruptions caused by these sweeping changes further

compounded problems in effectively managing HUD

operations. Among the problems were unclear lines

of authority, many staff in the wrong location, staff

not trained in new duties, and difficulty in providing

supervision to remote staff.

Our past Semiannual Reports noted that many

organizational changes were slow to be put in place,

and some of those in place were ineffective. For

example, they lacked delegations of authority, written

policies and procedures, and training support. HUD’s

current management team likewise found problems

with the organizational and operational changes made

by the previous Administration. The current Administration made changes to include:

3⁄4Placing the Departmental Enforcement Center

(DEC) under the direction of the General Counsel to

consolidate legal resources in support of a strong

program enforcement effort. HUD’s program

enforcement efforts were previously under the

Office of General Counsel before the creation of a

separate DEC.

3⁄4Placing the Real Estate Assessment Center (REAC)

under the direction of the Assistant Secretary for

Public and Indian Housing (PIH), in order to improve REAC’s working relationships with program

staff and program partners and strengthen accountability for resource use and results.

3⁄4Placing the Office of the Chief Procurement

Officer (OCPO) and the Office of the Chief Information Officer (OCIO) under the direction of the

Assistant Secretary for Administration/Chief

Information Officer, to streamline HUD’s organizational structure and improve service delivery to

HUD’s program and administrative components.

3⁄4Establishing the Office of Field Policy and Management as an independent office reporting to the

Deputy Secretary, with responsibility for oversight

of HUD’s field management and assistance to

program Assistant Secretaries in meeting program

goals at the field office level.

3⁄4Redeploying staff in the outreach function to understaffed program delivery and oversight functions,

where there was a critical need.

3⁄4Creating new regional management positions to

give HUD’s field operations greater operational

control over the administrative budget resources

they need to pursue their operating and program

goals, and to strengthen the local focus on workload

management to meet national performance goals.

These operational changes delegate additional

authority to the field, and represent positive steps that

bring HUD’s operational activities and authority closer

to the customers it serves. However, we continue to

see the changes as a management challenge until

Departmental realignments become fully functional.

Our audits will evaluate the effectiveness of many of

these changes. For example, we have recently com-
Chapter 1 - HUD’s Management and Performance Challenges 3

pleted a review of the operations of the Enforcement

Center and will issue a report in the next few weeks.

Financial Management Systems

The lack of a HUD integrated financial management system that complies with federal financial

system requirements has been reported in our financial audit as a material weakness since Fiscal Year

(FY) 1991. To correct financial managaement deficiencies in a Department-wide manner, HUD initiated

a project to design and implement an integrated

financial management system consisting of both

financial and mixed systems. Over the years, these

plans have experienced significant changes and delays.

Because of the large volume of financial transactions, HUD relies heavily on automated information

systems. For several years, our financial audits

reported on security weaknesses in both HUD’s

general processing and specific applications such that

HUD could not be reasonably assured that assets were

adequately safeguarded against waste, loss, and

unauthorized use or misappropriation. Progress in

improving these controls has been slow. The weaknesses noted in our FY 2003 Consolidated Financial

Audit relate to the need to improve:

3⁄4Controls over the computing environment; and

3⁄4Administration of personnel security operations.

We also noted the need for HUD to improve the

process for reviewing outstanding obligations to

ensure that unneeded amounts are timely deobligated.

A lack of integration between accounting systems and

the need for accurate databases has hampered HUD’s

ability to evaluate unexpended obligations.

One of the most significant financial management

deficiencies exists in FHA, where FHA’s ADP system

environment needs enhancement to effectively

support business and budget processes. A recent key

improvement was the implementation of the FHA

Subsidiary Ledger financial system, which automated

several manual processes. Nevertheless, FHA continues its day-to-day business processes using many

legacy-based systems.

Adequate and Sufficiently Trained Staff

For many years, the Department has lacked a

system for measuring work and reporting time,

thereby making it a difficult task to determine staff

resource needs. HUD worked with the National

Academy of Public Administration (NAPA) to develop

a methodology or approach for resource management

that would allow the Department to identify and

justify its resource requirements for effective and

efficient program administration and management.

HUD’s current Administration has embraced

standards of management accountability. However,

HUD needs to more effectively manage its limited

staff resources. Many of the weaknesses facing HUD,

particularly those concerning HUD’s oversight of

program recipients, are exacerbated by HUD’s

resource management shortcomings. Accordingly, we

consider it critical for the Department to address

these shortcomings through the successful completion

of ongoing plans. To operate properly and hold

individuals responsible for performance, HUD needs

to know that it has the right number of staff with the

proper skills.

To address staffing imbalances and other human

capital challenges, the Department has implemented

the Resource Estimation and Allocation Process

(REAP). The last phase of REAP (a baseline for

staffing requirements) was completed in January

2002. Also completed in 2002 was the development of

the Department’s resource management strategy in

the implementation of the Total Estimation and

Allocation Mechanism (TEAM). TEAM is the validation component of REAP and collects actual workload

accomplishments and staff usage data for comparison

against the REAP baseline. The REAP/TEAM process

and data are being used to support the HUD budget

justification, and discussions with OMB and Congress.

Last year, the Department began implementing

its Strategic Human Capital Management Plan. The

plan requires a comprehensive workforce analysis of

core business program offices. These analyses will

identify mission critical positions and assess present

and future workload. They will be conducted in HUD’s

four core business areas: Housing; Public and Indian

Housing; Fair Housing and Equal Opportunity; and

Community Planning and Development. The plan, to

be implemented over the next three to five years,
Chapter 1 - HUD’s Management and Performance Challenges 4

requires a serious focus on human capital management.

In recent years, HUD’s programmatic responsibilities have increased, given the reduction in HUD

staffing and the growth in programs. Exacerbating

this problem is the more than 50 percent of HUD’s

employees with vast amounts of historical knowledge

that are retirement eligible. Most of these retirement

eligible employees are in Grades 13 to 15, and have

spent the majority of their federal career acquiring

complex program and technical knowledge. Managing

human capital effectively will require new ways of

capturing knowledge, transferring the knowledge and

experience from those who will retire, and attracting

and developing a new cadre of employees. This will

ensure that HUD continues to maintain a professional,

customer focused, high quality, and diverse

workforce.

FHA Single Family Insurance Program

Procedures and practices in HUD’s Single Family

Mortgage Insurance Program have undergone considerable change, particularly in the last five years. The

changes have been both programmatic and organizational. Among recent program changes, HUD introduced an automated underwriting scorecard that

lenders can use to evaluate the overall credit worthiness of FHA mortgage loan applicants. HUD also

issued new rules to reduce fraud committed through a

predatory practice known a “property flipping.”

Organizationally, HUD continues to rely on contractors under the oversight of HUD’s Homeownership

Centers to perform monitoring of virtually all aspects

of single family mortgage insurance production. As a

consequence, staff responsibilities have changed,

requiring greater emphasis on contract administration

and oversight.

The Single Family Mortgage Insurance Program

remains a high-risk area, as identified by GAO.

However, HUD has committed to addressing the

higher risks through the President’s Management

Agenda. More staff have been dedicated to lender

monitoring. New technologies now allow for the quick

identification of poor lenders and the withdrawal of

their authority to originate FHA loans. This includes

the “Credit Watch” and “Appraiser Watch” processes that play an important role in risk reduction.

Moreover, stronger sanctions, including civil money

penalties, have become the norm in recent Mortgagee

Review Board actions. Additionally, HUD has tackled

and continues to strengthen important buyer protection concerns, especially property valuation (appraisal) and disclosure of loan closing costs.

The FHA financial audit reported a need to place

more emphasis on monitoring lender underwriting

and continuing to improve early warning and loss

prevention for single family. In response, HUD is

developing proposed rule changes that will require

lenders to report 30- and 60-day delinquencies to the

Default Monitoring System. Timely identifying

lenders with unacceptable early default rates is a key

element of FHA’s efforts to target monitoring and

enforcement resources toward lenders that represent

the greatest financial risk to FHA. Potentially problem

lenders must be identified before FHA can institute

loss mitigation techniques and lender enforcement

measures that can reduce eventual claims.

During this semiannual reporting period, we

issued three internal audit reports on HUD’s Single

Family Programs. An audit of the insurance claims

process disclosed that HUD was neither timely billing

nor adequately collecting over $44 million in FHA

claims losses that lenders had agreed to reimburse.

Another audit of FHA’s quality controls over insurance

endorsement processing and underwriting found

deficiencies in HUD’s oversight of its mortgage

insurance contractors at the Philadelphia

Homeownership Center. A regional review of HUD’s

Reverse Mortgage Program in New England found

only minor technical deficiencies in the administration of this program for seniors. We recommended

ways for HUD to ensure timely collection of obligations from lenders and also perform more effective

monitoring of the endorsement and quality assurance

contractors. We are currently expanding our review of

HUD/FHA claims processing and expect to issue a

report of our findings during the next semiannual

reporting period. More details on the completed

internal reviews can be found in Chapter 2 of this

Report.

We currently have 27 lender audits in various

stages of completion based on a targeting strategy that

identified lenders with poor performing FHA portfolios. Results from two completed audits found significant lender loan origination irregularities, including

document falsifications and misrepresentations, and
Chapter 1 - HUD’s Management and Performance Challenges 5

prohibited contract loan originations by mortgage loan

officers that were not FHA approved. We should

complete the majority of these reviews during the next

reporting period.

Public and Assisted Housing Program

Administration

HUD spent about $24 billion in FY 2003 to provide

rent and operating subsidies that benefited over 4.8

million households. HUD provides housing assistance

funds through competitive awards, formulas, and fair

share allocations to public housing agencies (PHAs)

and multifamily project owners (both nonprofits and

for-profits). These intermediaries, in turn, provide

housing assistance to benefit primarily low-income

households. PHAs use the funding and subsidies to

provide decent and affordable housing to qualified

low-income tenants.

Multifamily project owners provide housing

through a variety of Assisted Housing Programs,

including parts of the Section 8 Program and the

Section 202/811 Programs. This funding is called

“project-based” because the subsidy is tied to a

particular property. Therefore, tenants who move

from “project-based” properties may lose their rental

assistance.

Material weaknesses in the monitoring of PHAs

and assisted multifamily projects were first reported

in our financial audit in 1991 and continue to challenge HUD. Material monitoring weaknesses seriously impact HUD’s ability to ensure that its intermediaries are correctly calculating housing subsidies. A

2000 HUD study found that 60 percent of all rent and

subsidy calculations performed by administrative

intermediaries contained some type of error. The

Secretary has rightly made the reduction of subsidy

overpayments a top priority of his Administration. In

2002, HUD set a goal for a 50 percent reduction in the

frequency of calculation processing errors and the

amount of subsidy overpayments by 2005. As of 2003,

HUD had attained a 32 percent reduction in the

original $2.3 billion estimate of erroneous payments.

To achieve this goal over the next two years, HUD

initiated the Rental Housing Integrity Improvement

Project. The project is designed to reduce errors and

improper payments by: (1) simplifying the payment

process; (2) enhancing administrative capacity; and

(3) establishing better controls, incentives, and

sanctions. Paralleling this effort, our investigative and

audit focus is concentrating on fraudulent practices in

the Section 8 Program. Public and Indian Housing

staffs are conducting on-site reviews to ascertain the

validity of family assertions about the sources and

amount of income.

HUD continues to implement its performanceoriented, risk-based strategy for carrying out its PHA

oversight responsibilities. However, as noted in

previous financial audits, further improvements need

to be made in the field office monitoring of PHAs in

other key areas. The Public Housing Assessment

System provides a condition status of the housing

stock. It has been successful in identifying troubled

PHAs and helping PIH management ensure corrective

action. Likewise, a companion system, the Section 8

Management Assessment Program, has been able to

identify problem providers of Section 8 assistance.

In prior years, we have also reported on longstanding weaknesses with the processing of subsidy

payment requests under the project-based programs

administered by the Office of Housing. Historically,

this process has been hampered by the need for

improved information systems to eliminate manually

intensive review procedures that HUD has been unable

to adequately perform.

Office of Housing staff or their Contract Administrators (CAs) are to perform management reviews to

monitor tenant eligibility and ensure that accurate

rents are charged at multifamily projects. The

primary tool is to conduct on-site reviews that assess

the owner’s compliance with HUD’s occupancy

requirements. HUD’s continued implementation of the

CA initiative resulted in a substantial increase in the

total number of management reviews. However, a

comprehensive plan needs to be developed that would

result in an increase in on-site reviews that would

assess and ensure that all owners of assisted multifamily projects comply with HUD’s occupancy requirements.

HUD’s plans include a variety of continuing

efforts. Principle among these are: continued implementation of the CA initiative; increased enforcement

efforts; implementation of more targeted property

inspections; increased frequency of management/

occupancy reviews for assisted projects; and develop-
Chapter 1 - HUD’s Management and Performance Challenges 6

ment of an integrated risk reporting system. We

support these efforts.
Chapter 2 - HUD’s Single Family Housing Programs 7

Chapter 2 — HUD’s Single Family Housing Programs

Single Family Housing Programs are meant to

provide mortgage insurance that enables individuals

to finance the purchase, rehabilitation, and/or construction of a home.

Audits

During this reporting period, the OIG issued eight

reports: three internal audits, one internal memorandum, and four external audits in the Single Family

Housing Program area. These reports disclosed over

$1.6 million in questioned costs and about $71.9

million in recommendations that funds be put to better

use. We reviewed the indemnification of claims on

HUD single family insured loans, the Philadelphia

Homeownership Center’s system of quality controls

over its FHA single family mortgage insurance

process, the Home Equity Conversion Mortgage

Program, the Congress of National Black Churches,

Inc., the Officer/Teacher Next Door Programs, and

three non-supervised loan correspondents.

Indemnification of Claims on Single

Family Insured Loans

The OIG audited the indemnification process for

claims on single family insured mortgage loans. Our

primary objective was to determine the adequacy of

HUD’s internal controls over billing and collections of

insurance losses from FHA mortgage lenders that had

agreed to indemnify the Department. Loan indemnification information entered into HUD’s automated

systems was generally complete and reliable for

billing and collection purposes. However, HUD did not

bill lenders for $44.4 million in insurance losses owed

the Department through indemnification agreements

on 1,231 loans. When lenders were billed, HUD was

also often late. HUD took an average of six months to

send the first bill for 590 loans. Additionally, HUD’s

collection process did not aggressively support the

reduction of FHA indemnified loan debt, as required

by the U.S. Treasury. Accrual of interest and penalties on delinquent debt was improperly suspended;

debts delinquent more than 90 days were not properly

reported; and debts totaling $15.8 million that were

delinquent 180 days or more were not transferred to

the U.S. Treasury for collection.

Single Family Housing 

Reports Issued

3

1 4

Internal Audits

Internal Memoranda

External Reports

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

Internal Audits External Audits

Questioned Costs Funds Put to Better Use

Single Family Housing Dollars
Chapter 2 - HUD’s Single Family Housing Programs 8

The Department took steps during our review to

improve the tracking of indemnified loans, updated the

language of the indemnification agreements, and

disclosed indemnification information to the single

family housing industry. However, more work is

needed to correct the processes for billing and debt

collection. Additional controls over data entry into

HUD systems may further improve the integrity of

indemnification agreement information.

We recommended that HUD: (1) initiate the billing

process to collect $44.4 million from the 1,231

indemnification cases not billed; (2) enhance systems

to automate the billing process and accurately calculate the current profit and loss on sale amount; (3)

implement policies to ensure that the Department is

in compliance with debt collection requirements,

including transferring debt delinquent 180 days or

more to the Treasury; (4) actively pursue collection of

delinquent debts; and (5) implement policies related

to the processing of indemnification agreements used

by the Homeownership and Enforcement Centers to

ensure and maximize the quality, utility, objectivity,

and integrity of indemnification information. (Report

No. 2004-DE-0001)

Philadelphia Homeownership Center

We audited the Philadelphia, PA Homeownership

Center’s (HOC) system of quality controls over its FHA

single family loan insurance endorsement process.

We identified two significant weaknesses in the HOC’s

monitoring of the endorsement and post-endorsement

processes. Specifically, we found the HOC was not

aware that its contractors performed fewer quality

control reviews than required by their contracts.

Further, the HOC staff did not accurately evaluate the

post-endorsement contractor’s performance in

determining the level of payments for services that the

contractor was entitled to receive. As a result of these

monitoring deficiencies, the HOC overpaid the endorsement contractor by more than $75,000; overpaid

the post-endorsement contractor nearly $327,000; and

increased the risk that HUD will insure unacceptable

loans. Management action to correct these deficiencies will put nearly $145,000 to better use over a 12-

month period.

We recommended that the HOC improve controls

related to monitoring reviews of the endorsement and

post-endorsement contractors. We also recommended

the recovery of over $400,000 for reviews not performed or not performed at the acceptable performance level. (Report No. 2004-PH-0002)

Home Equity Conversion Mortgage

Program

We audited the Home Equity Conversion Mortgage (HECM) Program, which enables elderly

homeowner families to stay in their home while using

some of its accumulated equity. Our audit was limited

to loans endorsed for insurance in Connecticut,

Maine, Massachusetts, New Hampshire, Rhode

Island, and Vermont. The maximum dollar amount

that HUD will pay on a claim for insurance benefits is

based on a property’s value. The New England Region

is considered a higher priced housing market area

than most of the rest of the country, which represents

a potentially higher risk for HUD. Although our scope

was limited to the New England Region, we generally

found the HECM to be a sound and beneficial program

for elderly homeowners and their families. We did,

however, make four minor observations that, if

properly addressed, should further strengthen the

program.

3⁄4The calculation of the mortgage principal limit was

not accurate in three of the 74 sample case files we

reviewed. These three loans were overstated by

nearly $10,000. Based on our estimate of the actual

error rate and our universe of 1,680 loans, we

projected that four percent of the HECM loans were

overstated by an average of $3,300 per loan, or a

total of over $221,500 for all of the loans.

3⁄4Lenders did not complete the appropriate form to

document that repairs were finished in accordance

with appropriate agreements. In addition, lenders

did not ensure that borrowers completed repairs in

a timely manner, or follow proper procedures for

granting extensions for completing repairs.

3⁄4Reverse mortgage housing counseling was provided

by an agency that also held and serviced the mortgage on the client’s property, an apparent conflict of

interest.

3⁄4The data shared between various HUD information

systems were not always compatible among the

separate systems, and did not always coincide with

data shared in HECM files.
Chapter 2 - HUD’s Single Family Housing Programs 9

We recommended that the Philadelphia

Homeownership Center establish a quality control

plan for the review of HECM loans that will avoid any

overstatements; strengthen procedures to ensure that

lenders adhere to the provisions of the repair agreements; determine if a conflict of interest exists with

the mortgagee that provided HECM counseling services; and determine if lenders followed program

requirements, and take appropriate action if required.

(Report No. 2004-BO-0001)

The Congress of National Black

Churches, Inc.

In response to a Hotline complaint, we audited

the Housing Counseling Program administered by the

Congress of National Black Churches (CNBC) in

Washington, DC. The complaint alleged that CNBC

drew down funds from the housing counseling grant

and then failed to reimburse its affiliates for services

rendered. The complaint also noted that CNBC

affiliates were performing services without sub-grant

agreements, which is a violation of the grant agreement between HUD and CNBC.

We found CNBC did not administer its Housing

Counseling Program according to the grant agreements with HUD and applicable HUD rules and

regulations. Specifically, CNBC used over $521,000 in

grant funds to pay for ineligible payroll expenses,

operating costs, and payments to several affiliates,

and could not support another $424,000 of grant funds

it received from HUD. In addition, CNBC could not

demonstrate that it provided the required leverage

funding it agreed to under its grant agreement with

HUD.

We attributed these deficiencies to CNBC’s board

of directors not providing adequate oversight of the

executive director and other key management officials’ administration of the program, or ensuring that

adequate management controls were in place to

enable them to detect and prevent these problems.

Due to the severity of the deficiencies and abuses,

CNBC’s affiliates were forced to curtail or suspend

their housing counseling services. Further, CNBC

itself was forced to suspend all program operations.

The audit recommended that HUD’s Assistant

Secretary for Housing take appropriate administrative

action against CNBC as a designated National Housing

Counseling Intermediary, and take debarment action

against the former executive director and chief

financial officer. In addition, we recommended that

CNBC reimburse its affiliates and HUD for ineligible

expenditures and provide adequate support for the

unsupported expenditures. (Report No. 2004-PH-1003)

Officer/Teacher Next Door Programs

In following up on abuses identified in a June 2001

nationwide audit of the Officer Next Door and

Teacher Next Door Programs (OND/TND), we

identified a management control weakness that

warranted corrective action. Recent OIG work with

the U.S. Attorney’s Office, in preparation for possible

civil or criminal cases involving violations of OND/

TND Program requirements, disclosed that certification statements required of homebuyers were not

adequate to support Assistant U.S. Attorneys’ efforts

to prosecute civil and criminal cases. The language

within the certifications was prospective of future

actions and did not adequately address completed

portions of the three-year occupancy term. Consequently, legal actions were unnecessarily difficult and

prosecutors were reluctant to proceed with civil and

criminal actions when occupancy violations occurred.

During the course of our work, we advised HUD’s

National Servicing Center about the Assistant U.S.

Attorneys’ suggestions to improve the language of

certifications and require a final certification as a

condition of releasing a second mortgage. The

National Servicing Center made improvements in the

standard recertification statements at that time, and

forwarded the second suggestion to the Director of

HUD’s Asset Management and Property Disposition

Description Ineligible Unsupported 

Unauthorized 

Payroll Costs 

$394,933 

2000 Operating 

Costs 

$72,629 

Contracts with 

Affiliates 

$53,500 $417,547 

No Support 

Documentation 

$6,037 

TOTAL $521,062 $423,584 
Chapter 2 - HUD’s Single Family Housing Programs 10

Division for appropriate action. (Report No. 2004-AT0801)

Non-Supervised Loan Correspondents

Based on its high default and claim rates, we

audited Treehouse Mortgage, LLC, a HUD approved

non-supervised loan correspondent in Denver, CO.

The review found that contrary to FHA requirements,

Treehouse used contract loan officers that were not

approved by HUD to originate FHA insured loans.

Treehouse contracted with several independent loan

officers, and paid these officers a commission on

each FHA loan. Because these loan officers worked as

independent contractors, Treehouse management was

not able to oversee their performance with the same

level of control as its own employees. HUD considers

proper oversight and control of the loan origination

process as key to reducing FHA mortgage insurance

risks.

Treehouse did not have a formal written quality

control plan and was deficient in its overall quality

control activities. In addition, Treehouse did not

perform the required quality control reviews on all

defaulted loans or meet FHA’s minimum sampling

requirements. In addition, Treehouse failed to submit

written reports to senior management that identified

deficiencies noted in the files reviewed. Treehouse’s

non-compliance with HUD requirements prevented

management from taking corrective actions on

deficiencies noted or ensuring the completeness,

accuracy, and validity of loan origination files.

While our audit was in process, we recommended

that Treehouse Mortgage convert its contract loan

officers to full time employees. Treehouse implemented this change and two of the remaining loan

officers are now full time employees while the third is

no longer allowed to originate FHA insured loans. We

also recommended that Treehouse fully implement its

quality control program and complete monthly or

quarterly quality control reviews. Treehouse has

already written a comprehensive quality control plan

that, if followed as written, should provide adequate

assurance to management that its operations comply

with HUD directives. (Report No. 2004-DE-1002)

Because of their high default and claim rates, we

audited Scheller Hess-Yoder and Associates (SHYA),

a non-supervised loan correspondent in Portland,

OR, and found that SHYA disregarded HUD/FHA

requirements and entered into agreements with

outside contractors to originate FHA insured loans.

The contractors acted as independent branches or

leased employees. Further, SHYA did not adequately

supervise the contractors’ employees as required.

Loan applications completed by the non-SHYA employees contained misleading certifications that full time

SHYA employees processed the applications. HUD/

FHA considers the practice of mortgagees using

unauthorized branches and non-employees for the

origination of insured loans a significant risk to the

FHA insurance fund. We also found that SHYA disregarded its own approved Quality Control Plan and

HUD’s quality control requirements, and allowed the

person responsible for conducting SHYA’s quality

control reviews to also process and originate FHA

insured loans.

We recommended that SHYA reimburse HUD/FHA

over $266,000 for claims paid on three inappropriately originated loans and nearly $7 million for any

future losses on 52 other loans. Also, HUD/FHA

should consider seeking civil monetary penalties

against SHYA, its unapproved branch offices, and its

“leased employees” for submitting false certifications

to HUD/FHA. We further recommended that HUD/FHA

determine whether SHYA’s deficiencies in its loan

origination activities warrant its removal from

participation in HUD’s Single Family Mortgage

Insurance Programs. (Report No. 2004-SE-1002)

Based on identified risk factors and indications

that it originated loans at an office that had its origination approval terminated under HUD’s Credit Watch

authority, we audited Keystone Mortgage and Investment Company, a non-supervised loan correspondent

mortgagee in Phoenix, AZ. Forty-eight of the 65

loans we reviewed (74 percent) contained false or

altered borrower credit and/or employment documents, including fabricated or altered W-2 forms, pay

stubs, and verification of employment forms, fabricated or altered credit reference letters showing

invalid accounts or inaccurate credit history information, and false credit reports listing invalid borrower

credit history information. We identified a pattern of

apparent mortgagee complicity in the loan origination

process that allowed false documents to be used, and

a serious lack of due professional care by mortgagee

personnel. Based on information obtained during the
Chapter 2 - HUD’s Single Family Housing Programs 11

audit, it appears that one Keystone employee was

primarily responsible for the false and fabricated

documents.

Keystone’s failure to implement a quality control

plan allowed the pervasive use of falsified loan

origination documents to continue over a period of at

least three years. As a result, loans were approved

based on false information, causing FHA to assume

over $5 million in unnecessary insurance risk.

Keystone improperly originated FHA loans at its

home office in Phoenix after HUD terminated that

office’s origination approval under the Credit Watch

Program. We attribute this to Keystone’s intentional

disregard for the requirements of HUD’s termination.

As a result, FHA was exposed to unnecessary risk on

loans originated by a terminated mortgagee office.

The audit recommended that HUD take appropriate action against Keystone for not adhering to HUD’s

program requirements, and require Keystone to

indemnify HUD/FHA for $4.3 million against past and

future losses on the 48 loans containing false documents. (Report No. 2004-LA-1001)

Investigations

During this reporting period, the OIG opened 335

investigation cases and closed 159 cases in the Single

Family Housing Program area. Judicial action taken

on these cases during the period included

$256,422,064 in investigative recoveries,

$133,023,451 in funds put to better use, 244 indictments/informations, 106 convictions/pleas/pre-trial

diversions, 154 administrative actions, 16 civil

actions, and 228 arrests.

Some of the investigations discussed in this Report

were conducted by the OIG, while others were

conducted jointly with federal, state, and local law

enforcement agencies. The results of our more

significant investigations are described below.

Unfair Mortgage Servicing Practices

The Federal Trade Commission and HUD announced a joint civil settlement with Fairbanks

Capital and Thomas D. Basmajian, the former

founder and CEO. The settlement was based on

Fairbanks’ willingness to settle alleged charges that it

engaged in illegal practices while servicing subprime loans. The settlement calls for Fairbanks,

located in Salt Lake City, UT, and Basmajian to pay

$40 million and $400,000, respectively, to compensate

individual borrowers who paid improper amounts and

suffered from improper servicing practices. Approximately 500,000 consumers are eligible to participate

in the settlement. The average payout per consumer

will be about $88. The U.S. District Court for the

District of Massachusetts must approve the proposed

settlement.

This civil settlement also enjoins the defendants

from future law violations and imposes new restrictions on their business practices. The settlement will

require the defendants to accept partial payments

from most consumers and to apply most consumers’

mortgage payments first to interest and principal;

prohibit the defendants from force placing insurance

when they know the consumer has insurance or fail to

take reasonable actions to determine whether the

consumer has insurance; enjoin the defendants from

charging unauthorized fees, and place limits on

specific fees; require the defendants to acknowledge,

investigate, and resolve consumer disputes in a timely

manner; require the defendants to provide timely

billing information, including an itemization of fees

charged; prohibit the defendants from taking any

action toward foreclosure unless they have reviewed

consumer’s loan records to verify that the consumers

failed to make three full monthly payments, confirmed that the consumers have not been the subject

of any illegal practices, and investigated and resolved

any consumer disputes; prohibit the defendants from

piling on late fees in certain situations; prohibit the

defendants from enforcing certain waiver provisions

in forbearance agreements that consumers had to sign

to prevent foreclosure; and prohibit the defendants

from violating the Fair Debt Collection Practices

Act, the Fair Credit Reporting Act, and the Real

Estate Settlement Procedures Act. To provide further

remedial relief to consumers harmed by its practices,

Fairbanks will correct certain open accounts that may

have been classified wrongly as delinquent, reclassify

these accounts as current, and report to any consumer reporting agency previously provided with

information about the consumer’s account that the

account is current and that the prior record of delin-
Chapter 2 - HUD’s Single Family Housing Programs 12

quency should be removed from the consumer’s

report.

Mortgagee Review Board Settlement

HUD’s Mortgagee Review Board reached a

settlement with Alliance Mortgage Banking Association (AMBA), Rochester, NY, whereby AMBA agreed to

an administrative payment in the amount of $500,000.

The investigation disclosed that AMBA did not prudently

underwrite loans and failed to sufficiently document

the source of down payment funds and the adequacy of

funds, accepted overestimated appraisals on properties, and did not properly check or verify the rehabilitation work done on the properties. AMBA underwrote

approximately 80 FHA insured mortgages for defendant Helen Zapesochny. Zapesochny obtained Section

203(k) rehabilitation loans from AMBA to purchase and

finance the rehabilitation of the properties.

Zapesochny and others conspired to steal the rehabilitation funds by either not completing the specified

work on the houses or doing the work with inexpensive materials in an unacceptable and unprofessional

manner. Zapesochny was previously convicted and

sentenced to six months home confinement and five

years probation, and was ordered to pay $871,000 in

restitution.

Qui Tam Lawsuit

In Chicago, IL, in Federal Court for the Northern District of Illinois, the law firm of Fisher &

Fisher and the U.S. Attorney’s Office, Civil Division,

reached a settlement regarding a qui tam lawsuit that

was filed in 2000. As part of the settlement, Fisher &

Fisher has paid $676,852, to be divided among the

original relator, the Department of Veteran Affairs

(DVA), and HUD. The lion’s share of this amount will

go to HUD based on the volume of FHA insured loans

involved. Specifically, the lawsuit alleged that Fisher

& Fisher submitted fraudulent bills to various mortgage companies for publication of service on behalf of

FHA insured and DVA guaranteed properties during

the foreclosure process. In fact, no publications were

completed. However, these costs were passed on to

HUD and DVA by the lenders as normal costs in the

completion of the foreclosure process. HUD and DVA

regularly pay these costs upon payment of claim and

conveyance of the property. Fisher & Fisher is one of

the three largest law firms in the Chicago metropolitan area handling HUD and DVA foreclosures.

Property Flipping/Loan Origination

In Los Angeles, CA, in Federal Court for the

Central District of California, defendants Shirley

DeSilva, an associate of Allstate Mortgage Company,

and Alberto Jose Rivas and Louis Alberto Vallardes,

loan officers at Allstate, were sentenced on mail

fraud charges. DeSilva was sentenced to 24 months

incarceration and was ordered to pay $3,658,866 in

restitution. Rivas was sentenced to 18 months incarceration and was ordered to pay $37,742,023 in

restitution. Vallardes was sentenced to 37 months

incarceration and was ordered to pay $37,742,023 in

restitution. Defendant Douglas Alfonso Estrada,

owner of Allstate Mortgage Company, was also

sentenced to 51 months incarceration and was ordered to pay $37,742,023 in restitution. Estrada

previously pled guilty to five counts of mail fraud, ten

counts of money laundering, and one count of tax

evasion.

The defendants engaged in a single family loan

origination fraud scheme by recruiting buyers to

purchase over-valued properties. The sales were

inflated by approximately $150,000 per property.

DeSilva, Estrada, Noval, and others then prepared

fraudulent loan applications in the names of fictitious

purchasers and submitted the documents to HUD. The

mortgage insurance applications in the names of the

fictitious purchasers contained false employment

documents, verifications that the down payments were

made from either the buyers’ personal funds or were

gifts when in fact Noval and associates made the

down payments, and inflated real estate appraisals.

Their actions caused approximately $100,000,000 in

fraudulent loans to be funded. Of this amount,

approximately $35,000,000 were funded with FHA

insured mortgages.

In Baltimore, MD, in Federal Court for the

District of Maryland, defendant Pamela Cummings, a

former employee at Schmidbauer Realty, was sentenced to six months incarceration and ordered to pay

$2.4 million in restitution to HUD for her role in a

property flipping scam. From 1994 through 2003,

Cummings was employed as a secretary and assistant

to William Otto Schmidbauer. At Schmidbauer’s
Chapter 2 - HUD’s Single Family Housing Programs 13

request, she prepared and submitted false and fraudulent documents to various lenders in connection with

applications for FHA insured loans. Among these

documents were verifications of employment and

rent, drivers’ licenses, Social Security cards, pay

stubs, W-2 forms, and letters evidencing credit

accounts of the purchasers with various companies.

Based on these fraudulent documents, numerous loans

were insured by FHA that subsequently went into

default and foreclosure. FHA suffered a loss of

approximately $3.9 million.

In the same case, defendants Edward and Andrea

Rybczynski, owners of Liberty Title Company who

pled guilty to defrauding HUD out of nearly $600,000

in a property flipping scheme, were sentenced in

Baltimore, MD, in U.S. District Court for the

District of Maryland. Edward Rybczynski was

sentenced to ten months incarceration and three years

probation, and was ordered to pay $594,433 in

restitution to HUD. Andrea Rybczynski was sentenced

to six months incarceration and three years probation,

and was ordered to help pay the restitution. The

Rybczynskis were among 18 defendants charged with

fraudulent property transactions linked to William

Otto Schmidbauer, who pled guilty earlier this year

and is currently incarcerated.

Defendant Dale Schulz, a real estate appraiser,

was sentenced in Baltimore, MD, in U.S. District

Court for the District of Maryland, to three years

probation, which includes eight months of home

detention with an electronic monitor, for his role in a

property flipping scheme involving FHA insured

mortgages. Schulz was also ordered to pay $500,000

in restitution to HUD, which represents the losses to

the FHA fund from mortgages involving false appraisals. Beginning in early 1996, real estate speculator

William Otto Schmidbauer, who was previously

convicted and sentenced, engaged the services of

Schulz, a certified appraiser, to prepare and file

appraisals for properties that Schmidbauer purchased

at very low cost and intended to resell at inflated

prices. Schulz falsely represented that he personally

conducted the inspections and the appraisals when in

fact, on many occasions, the appraisals were prepared by another person and only signed by Schulz. In

addition, numerous appraisals were false and greatly

inflated the value of the properties. The appraisals

were then used to obtain inflated mortgages on

Schmidbauer property flips. To date, 18 defendants

have pled guilty and been sentenced in this case.

In East St. Louis, IL, in U.S. District Court for

the Southern District of Illinois, Marvis “Swamp

Dog” Bownes was ordered to pay $2.4 million in

restitution to victims of his property flipping scheme.

Bownes previously pled guilty to one count of mail

fraud and one count of money laundering and was

sentenced to 17-1/2 years in prison and five years

supervised release, and was fined $200,000. Bownes

was sentenced to the higher end of the sentencing

guidelines in part due to his predatory real estate

practices on poor and vulnerable individuals in an

economically depressed area of East St. Louis.

Between 1997 and 2002, Bownes, owner of The

Property Management Company, Inc., purchased

dilapidated homes and sold them to unqualified buyers

after obtaining falsely inflated appraisals. Bownes

admitted to defrauding numerous mortgage companies by providing false gift letters, appraisals, W-2s,

verifications of employment and rent, and backdated

bonds for deeds. The government was able to show

relevant fraudulent conduct in 85 properties sold by

Bownes, which generated approximately $4.2 million

in revenue for him and caused approximately $2.3

million in losses. Bownes has been ordered to forfeit

to the government $939,000 in cashiers’ checks

previously seized, 21 investment properties, and his

property management office building. During the

restitution hearing, the judge ordered restitution to the

victims/homebuyers as well as the mortgage companies. Bownes was a former East St. Louis precinct

committeeman and a former East St. Louis police

and fire commissioner.

In Los Angeles, CA, in Federal Court for the

Central District of California, defendant Alejandro

Morales was sentenced to 21 months in prison and

two years supervised release, and was ordered to pay

$436,802 in restitution for his participation in an FHA

loan fraud scheme. As part of the scheme, Morales

and others located residential properties and purchased them with FHA insured mortgages for the

purpose of reselling them. Potential buyers were

recruited who often failed to qualify for FHA insured

loans due to inadequate income or insufficient assets

for a down payment. Recruiters received a commission for every purchaser they located. The buyers
Chapter 2 - HUD’s Single Family Housing Programs 14

were then assisted in finding co-signers for the loans.

As a result, fraudulent mortgage applications were

completed and submitted in the names of the buyers

and co-signers. These applications contained false

employment documents, down payment verifications,

explanation letters, and notarizations of the signatures

of the buyers and co-signers. Morales assisted the

buyers in completing fraudulent loan applications.

Also in this case, defendant David Garcia Ramos

was sentenced to five months in prison and five

months home detention, was ordered to pay $686,975

in restitution, and was fined $200. Ramos was indicted in March 2002 on charges of conspiracy, mail

fraud, and aiding and abetting.

Defendant Marilyn Trujillo, a real estate investor, was sentenced in Los Angeles, CA, in Federal

Court for the Central District of California, to 36

months probation and ordered to pay $10,000 in fines

and assessments for conspiracy, false statements, and

aiding and abetting. Trujillo purchased foreclosed

homes from HUD and later sold them to unqualified

individuals whom she and her co-conspirators,

defendants Morteza Eghbal, Arturo Aranda and

Carla Piza, owner of Quality Home Investments,

recruited. Eghbal was sentenced to five months

incarceration, five months home detention, and 36

months supervised release, and was ordered to pay

special fines and assessments totaling $7,600 and

restitution of $1,346,220, which he paid at sentencing.

Aranda was also sentenced in State Court to 27

months incarceration and 36 months supervised

release, and was ordered to pay $419,946 in restitution. Piza pled guilty to three counts of wire fraud and

one count of false statements.

The defendants purchased several cashiers’

checks that were used to provide funds for the individuals’ down payments and falsely certified that they

did not pay or reimburse any part of the down payments. In total, the defendants paid, or caused to be

paid, the down payments for approximately 62 loans,

causing $5,542,000 of FHA insured loans to be funded

and an approximate loss of $2,056,482 to HUD.

Also in this case, defendants Joe Zamorano, a

real estate agent, and his son Mario, a real estate

investor, pled guilty to one count of wire fraud and

conspiracy. The Zamoranos were part of a scheme in

which they used strawbuyers and recruited nonqualifying buyers to purchase residential properties

using FHA insured mortgages. In furtherance of the

scheme, they purchased cashiers’ checks used for the

buyers’ down payments and obtained fraudulent

documents, including W-2 forms, pay stubs, and credit

letters, that were submitted as part of the loan applications. In total, the loan origination scheme caused

$7,666,405 in fraudulent loans to be funded and

caused a loss of $3,352,400 to HUD.

In the same case, defendant Art Tapia, a loan

officer, was sentenced to 33 months incarceration and

36 months supervised release for false statements,

wire fraud, and aiding and abetting. Tapia was

ordered to pay $725,526 in restitution. Tapia recruited

non-qualified buyers to purchase FHA insured properties. To facilitate the scheme, he purchased, or

caused to be purchased, cashiers’ checks that were

used to provide the funds for the buyers’ down payments. Tapia also caused mortgage loan applications

containing false documents to be submitted to HUD for

insurance. These false submissions resulted in an

approximate loss of $1,700,000 to HUD.

Defendant William Dunn was sentenced in

Baltimore, MD, in U.S. District Court for the

District of Maryland, to four months incarceration

and three years probation, and was ordered to pay

$211,899 in restitution to HUD for his role in a property flipping scam. Dunn previously pled guilty to

conspiracy to make false statements, admitting that he

used fraudulent documents to obtain government

backed mortgages for buyers of houses sold by his

company. On at least seven occasions, Dunn and codefendant Michael Dronet bought houses, refurbished

them, and sold them at inflated prices to individuals

who were not qualified for FHA mortgages. Dunn also

assisted in the creation of fraudulent gift letters, tax

returns, and W-2’s to qualify individuals to purchase

his properties.

In Chicago, IL, in Federal Court for the Northern District of Illinois, defendants Victor Agama and

Andy Quiroz, real estate agents, Rachel Ladesma, a

loan officer, and Alex Carrera, an insurance broker,

were sentenced following their December 2003 guilty

pleas. Agama was sentenced to five months prison,

five months home confinement, and three years

probation. Quiroz and Ladesma were each sentenced

to six months home confinement and three years
Chapter 2 - HUD’s Single Family Housing Programs 15

probation. The defendants were also ordered to pay

$118,275 in restitution, joint but severally, to HUD.

Carrera was sentenced to two years probation and 100

hours of community service, and was fined $2,000.

The four defendants were charged in October 2003

with participating in a conspiracy to falsify FHA

insured loan applications for mortgagors who would

otherwise not have qualified. In particular, they

falsified W-2’s, tax documents, verifications of

employment, pay stubs, verifications of landlord, and

credit letters from an insurance company which

indicated that the mortgagors had been paying on

policies which in reality did not exist. The total

amount of the loans was over $800,000.

Defendant Tanya Stephenson-First was sentenced

in St. Louis, MO, in Federal Court for the Eastern

District of Missouri, to three years probation and was

ordered to pay $53,517 in restitution for conspiracy to

commit bank fraud. Stephenson-First, a former

mortgage broker for Prism Mortgage, Paradigm

Mortgage, and Accent Mortgage, admitted to engaging

in an illegal property flipping scheme between

October 1999 and January 2002. She used false

documentation and Social Security numbers to qualify

herself and other individuals for conventional and FHA

insured loans. She also filed bankruptcy under her

real Social Security number and three days later,

purchased real estate under a different Social Security number. Stephenson-First was involved in over

$415,000 in fraudulent loans, causing over $53,000 in

losses.

In Baltimore, MD, in Federal Court for the

District of Maryland, defendant Waldo Andia, a

property speculator, was sentenced to 18 months

incarceration and five years probation, and was

ordered to pay $77,489 in restitution to HUD for his

role in submitting false statements on loan applications in a property flipping scheme. Andia flipped

approximately 40 single family homes. He typically

sold the homes to first time homebuyers, who purchased the properties with both FHA insured and

conventional mortgage loans. Andia created false

employment documents for the homebuyers, including

W-2’s, pay stubs, and verifications of employment, to

help them qualify for the mortgage loans.

In Norfolk, VA, in U.S. District Court for the

Eastern District of Virginia, an Administrative Law

Judge levied a default judgment against defendant

Matthew Davis, a real estate developer, in the amount

of $82,500. This action was the result of a Program

Fraud Civil Remedies Act referral made to HUD’s

Office of General Counsel. In September 2001, Davis

pled guilty to loan origination fraud involving the sale

of 15 FHA insured properties. Davis purchased

numerous HUD owned properties, made minor

repairs, and then resold them at inflated prices. He

admitted providing prospective buyers, who otherwise

would not have qualified for the mortgages, with funds

for the down payments. Davis also paid off prospective buyers’ personal debts, which he secured with

second mortgages that were never disclosed. One

property had gone into foreclosure at the time of

sentencing, for which Davis paid $61,033 in restitution to HUD. As a condition of his probation, Davis

was ordered to indemnify the government for any

future losses that may incur relative to the 14 other

FHA insured properties. Davis was debarred by HUD’s

Enforcement Center in March 2002.

Defendants Beth Lanza, Gary Stephens, Michael

Cartron, and Zina Sagona, all loan officers, pled

guilty in Las Vegas, NV, in Federal Court for the

District of Nevada. Lanza and Cartron pled guilty to a

second superseding indictment charging them with

wire fraud in furtherance of loan fraud. Stephens pled

guilty to making false statements to HUD. Sagona pled

guilty to conspiracy to commit loan fraud and making

false statements to HUD. The three defendants

originated fraudulent FHA insured loans while employed at Mortgage Capital Resources (MCR) and

originated fraudulent conventional loans at National

City Mortgage (NCM) after leaving MCR. They falsified

income and employment information for borrowers,

including tax returns, pay stubs, W-2’s, gift letters,

and credit documents. Thirty-two fraudulent FHA

insured loans originated by the defendants were

identified. Eighteen of those loans, valued at $1.9

million, have defaulted with a loss to HUD of

$533,294. While employed at NCM, the defendants

originated another 18 fraudulent conventional loans

using strawbuyers. These loans were valued at $3.1

million with a loss to NCM of $185,126.

In the same case, defendant Horace Smith, a

former MCR loan officer, was sentenced in Federal

Court for the District of Nevada to 37 months incarceration and three years supervised release, and was
Chapter 2 - HUD’s Single Family Housing Programs 16

ordered to pay $349,103 in restitution. Smith was

sentenced on counts one and six of an indictment that

charged him with conspiracy to commit mortgage

fraud, making false statements to HUD, and aiding

and abetting in the fraud. Smith helped provide false

income and employment information to borrowers to

obtain FHA insured loans to purchase single family

properties.

In Washington, DC, in U.S. District Court for

the District of Columbia, defendants Vernando and

Shauna Everett were sentenced to 72 months probation and two months home detention and ordered to

pay $392,781 in restitution. The Everetts previously

pled guilty to a two-count criminal information

charging them with conspiracy to defraud HUD and

equity skimming for their participation in an illegal

property flipping scheme with co-defendant Modou

Camara. Camara, owner of SAFF Unlimited Services,

was previously found guilty of nine felony counts,

including conspiracy (one count), interstate transportation of money and securities obtained by fraud (one

count), wire fraud (five counts), and money laundering (two counts). Acting as a real estate speculator,

Camara recruited the Everetts to purchase FHA

insured properties and arranged for them to submit

fraudulent loan applications to lenders. To ensure that

they qualified for the loans, Camara instructed the

Everetts how to complete false gift letters, secretly

provided them with cash down payments, and created

false separation agreements to mislead the lending

institutions. He also provided Vernando Everett with

false W-2’s and pay stubs, and instructed the Everetts

to falsify their intent to live declarations on their loan

applications. In an effort to keep the mortgages from

going into default, Camara made initial mortgage

payments for the Everetts and encouraged them to

rent their properties as part of the District of Columbia Housing Authority’s Section 8 Program. The

Everetts rented all of their properties to Section 8

tenants, collected the rental assistance payments, and

failed to make the mortgage payments. In total, the

Everetts contracted to purchase six properties from

Camara, five of which eventually went into foreclosure. HUD sustained $329,781 in losses.

In a related case, defendant Baboucarr Lowe was

sentenced to 36 months probation and one month of

home detention and was ordered to pay $90,224 in

restitution. Lowe previously pled guilty to a one-count

indictment charging him with conspiracy to defraud

HUD for his participation in an illegal property

flipping scheme with co-defendant Modou Camara.

Camara recruited Lowe, his cousin, to purchase an

FHA insured property and instructed Lowe how to

complete a false gift letter. He also provided Lowe

with the cash down payment. Camara also informed

Lowe that his credit was poor and needed to be

repaired, and offered to “clean up” Lowe’s credit

report by paying his debts. He provided Lowe with

several thousand dollars in order to pay these debts.

HUD sustained $90,224 in losses in this case.

Defendants Nicholas Pistolas, a settlement

attorney, and Norman “Reggie” Anderson, Jr., a

property speculator, pled guilty in Baltimore, MD, in

U.S. District Court for the District of Maryland, to

mail fraud for their role in a scheme to defraud the

FHA and conventional lenders. An investigation

disclosed that, from January 1997 through December

2000, Pistolas, along with co-defendants Anderson

and Steven Jernigan, purchased and then flipped

numerous homes at inflated prices to individuals

whom they qualified by using false verifications of

income and assets and in some cases false Social

Security numbers. In many cases, defendant Jernigan

purchased and then resold properties on the same day,

using mortgage proceeds from the second transaction

to fund the first transaction, aided and abetted by

Pistolas and his company, All City Title. In at least

one instance, Pistolas used loan funds from a financial institution to conduct illegal and fraudulent real

estate settlements.

Anderson admitted that, from 1999 through early

2001, he purchased 13 homes from defendant Steven

Jernigan with the intention that they would become

income producing by being rented out. Anderson

received approximately $5,000 to $7,000 per transaction from the seller as an inducement to buy the

homes.

In the same case, defendant Barbara Ann

Prichard, a settlement agent, pled guilty to mail fraud

for her role in the scheme. Prichard assisted Pistolas

in the fraudulent preparation of title insurance commitments and HUD settlement statements. She also

conducted fraudulent real estate settlements for

numerous flipped properties. Anticipated losses to the

lending institutions and FHA may exceed $1 million.
Chapter 2 - HUD’s Single Family Housing Programs 17

Defendant Jocelyne Martinez, a former investigator for the State Attorney General’s Office, pled

guilty in Central Islip, NY, in Federal Court for the

Eastern District of New York, to loan origination

fraud and obstruction of justice. Martinez defrauded

the HUD Single Family Insurance Program by illegally obtaining $1.7 million in federally insured

mortgages in 2002 to purchase four multifamily

buildings in the Bronx, and then coached a witness to

lie to investigators about the transactions.

In Spokane, WA, in U.S. District Court for the

Eastern District of Washington, defendant Ronald

Burger pled guilty to conspiracy to commit wire

fraud. Burger was charged in August 2003, along with

fellow mortgage broker and speculator Sage Gibbons,

doing business as Century Mortgage; real estate

appraiser John Hansen, doing business as J. Hansen

Appraisals, Inc.; real estate agent Sally Gibson; and

escrow officer Cathy Patrick, for their roles in a

scheme to defraud lenders and flip numerous homes,

including HUD real estate owned homes, at inflated

prices. Hansen, who has already pled guilty in this

case, provided inflated and fraudulent appraisals on

numerous homes. The homes were subsequently sold

at inflated prices to individuals whom other defendants in the scheme made appear qualified by using a

variety of falsified documents. The fraudulent loans

were then sold on the secondary market. Buyers of

the loans included Ginnie Mae and Freddie Mac.

Since the homes were sold at inflated prices, and the

loans were at high interest rates, many buyers were

forced into foreclosure because they were unable to

make the payments, refinance the loans, or sell the

properties.

Defendant Allen J. Meyer pled guilty in Seagirt,

NJ, in Federal Court for the District of New Jersey,

to one count of conspiracy to commit offense or to

defraud the United States. Meyer participated in a

scheme to falsify mortgage loan applications and

related documents in order to obtain FHA insured

loans for unqualified borrowers. The false documents

included uniform settlement statements, which falsely

represented required down payments from the

borrowers. The fraud was committed by Meyer as a

closing attorney for Mortgage Acceptance Corporation. Losses to HUD total $1.1 million.

In Baltimore, MD, in Federal Court for the

District of Maryland, defendant Deborah Kolodner, a

property speculator, pled guilty to three counts of

mail fraud in connection to her role in a fraudulent

loan origination scheme. Kolodner was indicted in

April 2003 in a nine-count superseding indictment for

mail fraud, money laundering, aiding and abetting,

and obstruction of justice in connection with her

involvement in a loan origination fraud scheme. The

superseding indictment charged Kolodner with using

straw purchasers in an effort to conceal the real

estate transactions, using an investment scheme to

obtain monies from unsuspecting parties, laundering

money from real estate and investment transactions to

purchase personal items, and attempting to threaten a

federal grand jury witness.

Defendant Angel L. Serrano, Jr., a former selfemployed real estate broker, was found guilty in

Springfield, MA, in Federal Court for the District of

Massachusetts, of one count of conspiracy to commit

wire fraud, one count of wire fraud, and one count of

false statements. As part of his fraudulent scheme,

Serrano obtained contracts to purchase properties and

then persuaded unsophisticated first-time homebuyers

to pay inflated prices for the properties. Many of the

homeowners paid double the original price. In order

to get the homebuyers qualified, Serrano falsified the

mortgage applications. All of the charges related to

Serrano’s property flipping scheme in Westfield,

MA. As a result of Serrano’s scheme, FHA suffered

losses in excess of $200,000.

In Chicago, IL, in Federal Court for the Northern District of Illinois, eight individuals were charged

in a 30-property loan fraud/property flipping scheme.

Defendants James Rucker, an FHA mortgagor/loan

officer, Virgil Griffin, Gregory Jacobs, Stephen

Lawhorn, Patricia Mays, and Carmen Perry, all loan

officers, Tina Hoard, a mortgagor/seller, and William Scott, an investor/seller, were charged in an 11-

count indictment with mail and wire fraud. The

defendants allegedly participated in a scheme to buy

and sell real estate using false documents, including

Social Security numbers, employment, credit, and

banking history, and land contracts. In some cases,

the loan officers originated loans for their own

mortgages by using aliases, which disguised the fact

that they were interested parties in the transactions.
Chapter 2 - HUD’s Single Family Housing Programs 18

In other cases, after the original purchases, the

properties were resold at higher than normal values

to unwitting buyers, whose loan packages the defendants falsified. This investigation was originated by

the U.S. Trustee’s Office for the Northern District of

Illinois as a referral on FHA insured mortgages with

serial bankruptcy filings. Although the total amount of

losses is undetermined, the estimated value of the

loans in question is $4.7 million.

In Salt Lake City, UT, in the 3rd District Court,

defendants Jose Alejandro Pedraza Martinez,

Claudia Cardenas Cruz, Claudia Abud, Joel Resendiz

Ruiz, and Gabino Resendiz Ruiz were indicted for

recording false or forged instruments, forgery, and/or

identity fraud. The defendants allegedly used the

Social Security number of another individual to obtain

a single family home with an FHA insured mortgage.

The property was part of a flipping scheme involving

a limited liability company (LLC) that enticed undocumented/unqualified buyers into purchasing homes at

inflated values. The owners of the LLC often conducted simultaneous closings on the same day, netting

large profits. In many cases, the buyers stopped

making mortgage payments and subsequently defaulted on the loans. The defaults were reflected on

the credit reports of the actual owners of the Social

Security numbers, which made future financial

transactions very difficult. The total loss to the FHA

insurance fund is expected to exceed $1.7 million for

all investigations associated with the investigations of

the LLC.

In the same case, defendants Maria Rodriguez

Herrera, Anasatcia Preciado Rolon, Gabino

Resendiz Ruiz, Jose Alejandro Pedraza Martinez,

and Claudia Cardenas Cruz were arrested as a result

of their indictment for allegedly recording false or

forged instruments and/or identity fraud.

Defendant Nancy Jacobs was arrested based on a

post indictment warrant for submitting false statements. Jacobs was indicted in San Bernardino, CA,

in Federal Court for the Central District of California, in November 2003 following an investigation

which disclosed that between 1996 and 1998, she

allegedly flipped $4.4 million in FHA insured properties. She carried out her scheme by using six fictitious

identities, purchasing 46 properties (19 of which are

in claims), and arranging the escrows by which the

properties were bought and sold on the same day.

In Chicago, IL, in Federal Court for the Northern District of Illinois, defendants Gordon Nelson,

owner of a construction company, Jae Rank and Lynn

Martz, employees of Nelson’s, and Alfredo Busano, a

loan officer, were charged in a 14-count indictment

for their role in an FHA single family loan fraud

scheme. The charges included making false statements to HUD and mail fraud. In total, 28 FHA

insured loans totaling $3.2 million were involved in

the case. While HUD’s losses exceeded $650,000,

Nelson’s profits were $680,000.

According to the indictment, Nelson and his

employees allegedly found unqualified buyers with

poor credit, low income, and little or no savings and

directed them to properties in the Candlewick Lakes

subdivision, Poplar Grove, IL, by pretending that

Nelson or one of his companies owned the properties.

In reality, the houses were either owned by HUD or a

private investor. Unknown to the buyers, Nelson

planned to purchase the properties either shortly

before or on the same day as his sale to the unqualified buyers with an increase in price of $15,000 to

$40,000. Nelson and his employees then referred the

buyers to Busano at Anchor Mortgage in order to

receive financing. At this point, Nelson, his employees, and Busano purportedly conspired to create

fictitious gift donors and gift letters by making it

appear that relatives provided funds, when in fact the

monies were provided by Nelson.

In the same case, defendant Marco Reyes, a real

estate agent, was charged with one count of making

false statements to HUD. Reyes allegedly used Anna

Corporation, his realty company, to mirror Nelson’s

activities by supplying gift money to one buyer in

Candlewick Lakes who could not otherwise qualify

for financing. This buyer had his mother pass the

money through her bank account and return the

money to the buyer for closing to make it appear she

was providing him with a legitimate gift for the

purchase of the property.

Defendant Julie Kumarsingh, an outside contractor working with American International Mortgage

Bankers Corporation (AIMB) in Lake Success, NY,

was sentenced to 12 months confinement and 36
Chapter 2 - HUD’s Single Family Housing Programs 19

months probation, and was ordered to pay $995,153 in

restitution and $30,000 in fines. Kumarsingh has

already been imprisoned for over 12 months, which

will represent time served. She previously pled guilty

to conspiracy to commit offense against or defraud

the United States and mail fraud for her role in a

fraud scheme. As part of the scheme, co-conspirators

assisted in creating false documentation for FHA

insured loans for questionable homebuyers located in

the New York metropolitan area, including Nassau

and Suffolk Counties. Over 90 percent of the loans

originated by AIMB contained one or more altered

documents, including false pay stubs, bank statements,

W-2’s, rent verifications, verifications of employment

and deposit, credit worthiness letters, gift letters, and

credit reports. The Section 203(b) loans were subsequently endorsed.

Also in this case, defendants Donna Martin, a

senior underwriter, and Emerick Martin and Valerie

Vineyard, loan processors, all formerly from AIMB,

pled guilty to charges including false statements,

conspiracy to commit offense or defraud the United

States, and mail fraud. The defendants assisted in

obtaining FHA insured loans for questionable

homebuyers.

Defendant Arlene Lacey, a closing attorney

working with AIMB, was charged with conspiracy and

false statements. Lacey allegedly helped AIMB in

ensuring that questionable homebuyers would qualify

for FHA insured loans. Defendant Nicholas Graham,

another outside contractor working with AIMB, was

arrested for the second time for continuing to perform

the same fraudulent activities for which he was

initially indicted in November 2002. Graham allegedly assisted in obtaining FHA insured loans for

questionable homebuyers.

Defendants Paul Calcasola and Elisabel Rivas

were charged in Springfield, MA, in Federal Court

for the District of Massachusetts, with conspiracy,

bank fraud, false statements, and obstruction of

justice. The indictment also contained a forfeiture

count for a property valued at $97,000. An investigation of the City of Springfield Economic and Community Development (ECD) Program examined HOME

funds in conjunction with the Business Improvement

Program. The indictment alleges that Calcasola,

Rivas, and an unnamed business owner conspired to

falsify employment records and income in order for

Rivas to qualify for a mortgage through Springfield

Neighborhood Housing Services, a nonprofit organization that assists first time low- to moderate-income

homebuyers. Rivas then used the same false documentation to obtain the down payment furnished by the

HOME Program through the City of Springfield ECD.

Calcasola prepared false rental documents claiming

that Rivas was his renter at a property that was

determined to belong to Calcasola’s parents. Rivas

and Calcasola have resided together since 1996.

Calcasola was previously convicted as part of the

investigation involving illegal gambling activities and

organized crime.

Conspiracy/False Statements/Fraud

In Detroit, MI, in Federal Court for the Eastern

District of Michigan, defendant Patrick D. Quinlan

entered guilty pleas to conspiracy and making false

and fraudulent statements in corporate financial

reports to the Securities and Exchange Commission

(SEC). Quinlan had been the chairman and chief

executive officer of MCA Financial Corporation of

Southfield, MI. MCA had been Michigan’s largest

FHA approved direct endorsement lender. For a

number of years, Quinlan and the financial management committee of MCA created false financial

statements that did not reflect the financial condition

of the company. MCA did not list millions of dollars of

debt within the company’s mortgage/land contract

investment pools, or millions of dollars of intercompany receivable mortgages on the annual statements. On the contrary, MCA altered its financial

statements to give the appearance of a positive cash

flow. These misrepresentations allowed the company

to gain access to a line of credit, sell its mortgage and

investment products, and operate as a direct endorsement lender. The false financial statements were

mailed to HUD and the SEC.

MCA further defrauded investors in its land

contract/mortgage investment pools by operating a

scheme similar to a “ponzi.” MCA depleted the real

assets of the pool and substituted basically worthless

inter-company mortgages or other non-performing

paper. Investors were sent annual interest payments

by MCA based on fraudulent accounting statements,

which resulted in interest disbursements that were

unrelated to the pools’ actual performance.
Chapter 2 - HUD’s Single Family Housing Programs 20

Defendant Kevin Lasky previously pled guilty in

this case and was sentenced to 24 months incarceration and 36 months supervised release. The restitution

amount of $256 million was ordered previously in this

case and is to be paid jointly with the other members

involved in the scheme.

Defendant Brian Eden, former president of

United Pathway Foundation, Inc., pled guilty and was

sentenced in Miami, FL, in Federal Court for the

Southern District of Florida, to 37 months incarceration and three years probation, and was ordered to

pay $7,835,002 in restitution, $1,279,653 of which

was payable to HUD/FHA. Eden was previously

charged with conspiracy related to over 100 Section

203(k) loans. Eden submitted false documents to HUD

representing that required property improvements

were completed as specified on numerous Section

203(k) work orders. The monies not utilized for the

required improvements were diverted to Eden and his

co-conspirators. United Pathway eventually defaulted

on over 100 loans. After resale, these failed loans

caused losses to HUD of more than $1.2 million.

In San Diego, CA, in Federal Court for the

Southern District of California, defendant Kim A.

Larsen, an officer of Copyfax, Inc., pled guilty to

making false statements to a federal agent. Larsen

participated in a conspiracy to provide funds to

PinnFund, a HUD approved direct endorsement

lender, through fraudulent equipment leases. He

obtained information about a potential equipment

leasing transaction involving PinnFund from his

father, Tommy Larsen. Kim Larsen used this information to generate a Copyfax invoice showing a

purported sale of the equipment to PinnFund. The

Copyfax invoice fraudulently inflated the value of

equipment and failed to reveal that the proposed

transaction was not an arms-length sale of equipment

from Copyfax to PinnFund. On the basis of the

Copyfax invoice and other information, a creditor

financed the equipment lease by paying Copyfax its

invoice amount. Larsen forwarded a portion of this

money to Michael Fanghella, the chief executive

officer of PinnFund. Creditors who performed checks

of the equipment purportedly serving as collateral for

a lease were given false representations and shown

other equipment. Kim Larsen was interviewed by

federal agents regarding these matters and made

false statements about the equipment leasing transactions.

In December 2003, Tommy Larsen, former

president of PinnLease, Inc., a PinnFund subsidiary,

pled guilty to his involvement in a scheme to obtain

funds for PinnFund through fraudulent equipment

leases and laundering kickbacks of those funds to

PinnFund and himself through sham transactions and

false invoices. In April 2002, Michael Fanghella pled

guilty to conspiracy to commit wire fraud, conspiracy

to commit money laundering, tax evasion, and filing a

false entry with HUD. Fanghella has already been

sentenced to 10 years in prison and ordered to pay

$234,251,066 restitution.

Defendant Sharon Surles Johnson, a loan officer

for Creative Mortgage Lending, pled guilty in Dallas,

TX, in U.S. District Court for the Northern District

of Texas, to one count of misuse of a Social Security

number (SSN). Johnson, who was previously indicted

on one count of wire fraud and two counts of misuse

of an SSN, used an SSN that did not belong to her in

order to obtain an FHA insured loan and a conventional loan. These loans were used to purchase two

separate properties. Johnson’s loan files contained

fraudulent W-2’s, pay stubs, and other documentation

containing the false SSN. In addition to the two residential properties, Johnson used the same SSN to

purchase a vehicle. Finally, as a loan officer, Johnson

was involved in additional loans that contained false

information. The loss to the government is approximately $281,000.

In Phoenix, AZ, in Federal Court for the District

of Arizona, defendant Eva Martinez pled guilty to one

count of submitting false statements to HUD.

Martinez, a former loan officer at American Financial Resources, Inc. (AFR), was previously indicted on

charges of conspiracy to defraud HUD and submitting

of false statements. An investigation disclosed that

Martinez prepared three FHA insured home loan

packages that contained falsified wage documents for

the borrowers. She either prepared these falsified

wage documents or obtained the documents from

other individuals. The total insured mortgage amount

of the three loans is $252,564.

In Anchorage, AK, in U.S. District Court for the

District of Alaska, defendant Samuel H. Schurig, a
Chapter 2 - HUD’s Single Family Housing Programs 21

doctor in Eagle River Alaska, pled guilty to one count

of HUD fraud. Schurig was convicted for his part in

originating a fraudulent $119,000 FHA insured mortgage. He convinced a patient to participate in the

fraudulent sale of her home to him and to provide him

with a portion of the net proceeds from the sale,

approximately $52,000. He then provided HUD with

falsified paperwork for the sale, informing HUD that

he was going to use the Eagle River home as his

primary residence. He never did reside in the house;

the patient continued to reside there. The loan subsequently went into default.

In St. Louis, MO, in U.S. District Court for the

Eastern District of Missouri, defendants Judy Hallock

and Todd Coffman pled guilty to false use of a Social

Security number. Hallock was previously charged

with making false statements to HUD on a loan

application for an FHA insured loan. In addition to

using a false Social Security number, Hallock overstated her income and failed to report her liabilities

on the loan application. The mortgage went into

foreclosure, resulting in a $40,000 loss to FHA. In

Coffman’s case, which is independent of Hallock’s, he

used a false Social Security number and false employment and rental verification information on his loan

application for an FHA insured mortgage. The property, which was one of the properties flipped by New

Alliance Enterprises and purchased through fraudulent means, went into default and subsequent foreclosure, resulting in a $40,000 loss to the FHA insurance

fund.

In Lancaster, PA, in U.S. District Court for the

Eastern District of Pennsylvania, defendants Philip

Garland, a prominent land developer and builder in

the Lancaster and York areas, Rich Myford, Judy

Gemmill, and James Ballantyne, loan officers, and

David Gregory Herb, a real estate agent, were

indicted on 34 counts of conspiracy and false statements. Allegedly, the defendants sold newly built

Garland Construction Company (GCC) homes from

1996 to 2001 and made it appear by their false certifications of HUD documents that prospective GCC

buyers qualified for FHA insured mortgage loans. This

fraud scheme caused about 100 GCC homebuyers to

lose their homes and/or default on their mortgages.

Garland and his co-defendants also had many unwitting GCC homebuyers execute illegal promissory

notes, which bound families to economically burdensome debts that were never disclosed on HUD loan

origination documents. According to the indictment,

the defendants targeted unsophisticated customers,

particularly first time homebuyers with low incomes

and poor credit histories. One hundred transactions

were identified in which undisclosed advances were

made to appear to be from family members, friends,

and employers. To date, this widespread and complex

FHA single family fraud scheme has resulted in HUD’s

paying up to $10 million in FHA claims and the foreclosure of approximately 50 homes.

Defendant Harold V. Fields, a real estate agent at

Valley Home Experts, Glendale, AZ, was indicted in

Phoenix, AZ, in Arizona State Court, for a second

time on separate charges. This indictment included

one count of fraudulent schemes, one count of unlicensed real estate activity, and five counts of theft.

Fields was arrested following the indictment. Fields’

real estate license was previously suspended by the

Arizona Department of Real Estate and in November

2003, he was indicted on two counts of fraudulent

schemes and 22 counts of theft.

Valley Home Experts had been the number one

seller of HUD real estate owned (REO) properties in

Arizona for several years. An investigation disclosed

that Fields allegedly recruited investors through

advertisements in the newspaper and requested that

each investor give him $25,000 to $100,000 to buy

HUD REO properties. Fields told the investors that the

funds would be held in an escrow account to be used

for down payments and closing costs for up to 12

investment properties. Often, because of financing

issues, many of the loans did not close and the properties were recycled back into the HUD inventory. Many

of the investors began to demand that Fields return

their money after he failed to provide closing costs for

several homes. The first indictment included interviews with 22 investors who lost $1,436,416. This

second indictment includes four new victims with a

loss of $65,750. These funds were taken by Fields

after his license had been suspended and after the

first indictment.

In Atlanta, GA, in Federal Court for the Northern District of Georgia, defendant Omar Turral was

charged with conspiracy, identity theft, wire fraud,

and bank fraud. While he was a pharmacy student at
Chapter 2 - HUD’s Single Family Housing Programs 22

Florida A&M University, Turral allegedly obtained

other students’ names and Social Security numbers

and sold that information to co-conspirators Renee

Meeks and Lupita McCarty, both previously convicted. The false identities were used to obtain 16

mortgage loans from eight different lenders totaling

$4 million. A majority of the mortgages have gone

into default and foreclosure with an expected loss of

$2 million.

In Denver, CO, in Federal Court for the District

of Colorado, a 48-count indictment was returned

against 28 defendants. This matter was brought to the

OIG’s attention by HUD program staff, who were

conducting routine reviews of mortgage companies

when they discovered a number of borrowers who

appeared to be using false Social Security numbers

(SSN) and false income information. Three employers,

Neighborstat, W & W Enterprise, and Comp System,

appeared in all of the loan packages. Verifications of

employment were sent to all three of the companies at

two different addresses. An investigation disclosed

that the addresses were actually post office boxes

rented by defendant Roderick Wesson. Telephone

numbers listed on the loan applications and verifications of employment for the three companies were

also listed in Wesson’s name.

Wesson claimed to be the owner of a credit repair

company and guaranteed that he could obtain an FHA

insured mortgage for anyone. He worked closely with

loan officers Nina Cameron and Warren Williams, as

well as real estate agents Linda Edwards, Lewey

Thomas, and Toni Myles, also known as Toni

Hendricks, who was also a loan processor working

for Nina Cameron. Each of these individuals allegedly assisted homebuyers in obtaining mortgages for

which they would otherwise have been unqualified.

All of the homebuyers obtained false SSNs, W-2’s, and

pay stubs from Wesson for a fee ranging between

$400 and $1,000. The documents they received falsely

indicated that they were working for companies and

earning substantially more money than they actually

did. Cameron, Williams, Edwards, Thomas, and

Myles were all aware that false information was

being used in order to qualify the homebuyers for FHA

insured loans. After the loans closed, Edwards and

Thomas kicked back approximately 20 percent of

their commissions to Wesson, who split the fees with

Cameron and Williams. On top of receiving a loan

origination fee, Cameron and Williams also obtained

large yield spread premiums when the loans closed.

Defendant Roderick Wesson was charged with

one count of conspiracy, 23 counts of false statements,

and 20 counts of misuse of an SSN. Cameron was

charged with one count of conspiracy, 16 counts of

false statements, and 14 counts of misuse of an SSN.

Edwards was charged with one count of conspiracy,

eight counts of false statements, and seven counts of

misuse of an SSN. Myles was charged with one count

of conspiracy, six counts of making false statements,

and five counts of misuse of an SSN. Thomas was

charged with one count of conspiracy, one count of

false statements, and one count of misuse of an SSN.

Williams was charged with one count of conspiracy,

two counts of false statements, and two counts of

misuse of an SSN. These defendants were suspended

from participation in procurement and non-procurement transactions as participants or principals with

HUD and throughout the Executive Branch of the

Federal Government.

As a result of the indictment, the following

defendants were arrested. Nina Cameron was

arrested on one count of conspiracy, 16 counts of false

statements, and 14 counts of misuse of an SSN and

aiding and abetting. Linda Carnagie, Keith Griffin,

Janice Fisher, Janice Marshall, Lasonji Linnear,

Lorene Livingston, Suzanne Nangah, Sallena

Nichols, Deneen Stone, Paulmiko Parker, Tracey

Joyner, Ekan Udom, and Lynn Jones were arrested on

one count of false statements and one count of misuse

of an SSN and aiding and abetting. Floyd Benjamin and

Toni Fisher were arrested on one count of false

statements and aiding and abetting. Other defendants

included Curtis Lee, Marshon Williams, Michelle

Palmer, Mariea Powell, Anthony Rice, and Vaughn

Thomas.

Following a 36-count indictment handed down by

the Grand Jury for the City and County of Denver,

CO, 11 individuals were arrested. The arrestees are

Golda Harvey, Natalie Soria, Frank Elliott, Albert

Lujan, Bridget Kelly, Mary Torres, Reyna Gutierrez,

Donnie Pierce, Melanie Seely, Robert Sanchez, and

Sylvia Meraz. The indictment included the following

charges: violation of the Colorado Organized Crime

Control Act; conspiracy; securities fraud; theft;

forgery; criminal impersonation; theft from an at-risk
Chapter 2 - HUD’s Single Family Housing Programs 23

adult; criminal attempt theft; and first degree aggravated motor vehicle theft. The arrestees were part of

a criminal enterprise that defrauded individuals out of

the equity in their homes. They also coaxed individuals into becoming “investors,” when in fact the

individuals acted as strawbuyers, allowing the enterprise to obtain title to several high-end properties and

several FHA insured properties. Also, as a continuation of the criminal enterprise, the defendants fraudulently acquired vehicles with false documentation that

they used as props to portray to potential investors the

successes of the real estate investment.

As a result of this indictment, defendants Natalie

Soria, Albert Lujan, Bridget Kelly, and Reyna

Gutierrez were subsequently suspended by HUD from

participation in procurement and non-procurement

transactions, as a participant or principal, with HUD

and throughout the Executive Branch of the Federal

Government. Defendant Golda Harvey and three

entities affiliated with her, ASAP Financing, LLC,

Colorado Real Estate Funding, LLC, and Harvey and

Associates, LP, as well as Donnie Pierce and Melanie

Seeley, two individuals associated with Harvey, and

Infinity Real Estate Investments, Inc., were also

suspended.

Following the filing of a criminal complaint in

Detroit, MI, in Federal Court for the Eastern

District of Michigan, defendant Voneesa Crystal

Thomas was arrested. The complaint alleges that

Thomas, along with at least nine accomplices,

assisted in devising and executing a scheme to defraud

homeowners whose mortgages were in foreclosure.

For the purpose of executing the scheme, Thomas

allegedly filed or caused to have filed numerous

fraudulent bankruptcy petitions in the U.S. Bankruptcy Court for the Eastern District of Michigan. As

of January 2004, HUD had paid over $1.8 million in

FHA insurance claims. HUD has resold many of the

foreclosed properties and has an actual loss of

$717,000.

In Birmingham, AL, in Federal Court for the

Northern District of Alabama, defendants Jason

LeSeur, Darren Leonard, Robert McIssac, and

Kenneth Taylor were charged with three counts of

fraud against HUD and one count of conspiracy. The

defendants allegedly sold homes on behalf of Southern

Construction, which paid the purchasers’ down

payments and provided false gift letters to HUD. The

defendants also provided false credit reference letters

to HUD. False documents were submitted to HUD on

more than 55 loans totaling $3 million. HUD suffered

a loss of approximately $1.5 million due to the

scheme.

Four defendants who worked at Saxon Mortgage

Bank were indicted in Central Islip, NY, in Federal

Court for the Eastern District of New York. Frances

Purcell, a real estate agent and accountant, allegedly

facilitated the production of, and prepared, fake W2’s, tax returns, verifications of employment, and pay

statements for mortgage applicants. Eli Louis-Pierre,

a former loan officer at Saxon, was also charged with

arranging for fake documents and false employment

information for applicants. Carol Horton-Branch, a

real estate agent, was charged with facilitating false

documents, including the arrangement of fraudulent

gift and down payment information. These three

defendants were each indicted on eight counts of

making false statements and one count of theft.

Defendant Stephen Cox, a business owner, was

charged with conspiracy for allowing his hair salon to

be used as a fraudulent place of employment for

mortgage applicants. He was indicted on one count of

theft.

Defendant Lilia Ramirez Pereyra was arrested at

her place of employment, Express Home Loans,

pursuant to a federal arrest warrant. The previous

day, Pereyra was indicted in Phoenix, AZ, in Federal

Court for the District of Arizona, on one count of

conspiracy, four counts of submitting false statements

to HUD, and two counts of misusing a Social Security

number (SSN). An investigation disclosed that, while

she was employed as a loan officer at American

Financial Resources, Inc. (AFR), Pereyra allegedly

used falsified wage documents to qualify four of her

clients for FHA insured home loans; the mortgages

totaled $373,178. In addition, the SSN which Pereyra

reported on her employment applications at AFR and

at another employer, First National Mortgage Bank,

was not her SSN. In addition, Pereyra was using a

falsified resident alien card and had no legal status in

the United States. Based on this information, the

Bureau of Immigration and Customs Enforcement

issued a detention order for Pereyra.
Chapter 2 - HUD’s Single Family Housing Programs 24

In State Court in Salt Lake City, UT, defendant

Ricky Lee Hale was served with an arrest warrant

for committing single family loan fraud while in

custody for a recent arrest related to charges of rape

of a child. Specifically, he was charged with theft by

deception, forgery, and tampering with records. Hale

allegedly used a fictitious Social Security number to

obtain an FHA insured mortgage that later went into

foreclosure, resulting in a $40,202 loss to HUD. He

also used the fictitious Social Security number to

obtain employment, conceal income, avoid paying

child support, and open a business.

Defendant Joseph Nardone, Sr., was indicted in

Jersey City, NJ, in Federal Court for the District of

New Jersey, on charges of conspiracy to embezzle

from a welfare benefit fund. Nardone was the former

president of the Novelty Production Workers Union.

He and his son, Joseph Nardone, Jr., along with

defendants Stanley Rothman and Pete Hasho, were

part of a six-count indictment handed down in May

2003. Rothman allegedly used strawbuyers to purchase HUD properties in Florida, which he later

resold for a profit. Some of the strawbuyers were

members of Rothman’s family and others worked for

or were associated with the Novelty Production

Workers Union 148 Welfare Fund.

Mail, Wire & Bank Fraud

In Los Angeles, CA, in Federal Court for the

Central District of California, defendant Maggie

Cuevas was sentenced for mail and bank fraud and

aiding and abetting to 51 months incarceration and

five years probation, and was ordered to pay $10.2

million in restitution. Cuevas owned a business that

created false documents for more than 200 individuals

in the real estate industry. Customers contacted

Cuevas and her staff for fictitious employment

documents and W-2 forms needed to qualify buyers

for FHA insured mortgages. False credit letters,

rental documents, and references were also provided.

Cuevas’ operation was organized to the degree that

she maintained a bank of telephones and operators

corresponding to fictitious businesses established to

verify borrowers’ employment. A forensic auditor

team analyzed seized documents and identified

borrowers in approximately 3,500 FHA insured loan

transactions totaling over $450 million, and then

matched the seized documents to employment documents in FHA case binders for 450 loans on which

claims had been filed, with losses to HUD exceeding

$20 million. Cuevas was on federal probation at the

time this investigation began after pleading guilty in

1999 to mail fraud involving FHA loan originations.

Defendant Dora Medrano also pled guilty in this

case to conspiracy and wire fraud. Medrano purchased false documents, including pay stubs and W-2

forms, from Cuevas. The documents later appeared in

FHA loan applications, resulting in a loss to the

government of $1,032,886.

In Chicago, IL, in Federal Court for the Northern District of Illinois, defendant Anthony Culpepper,

a loan officer, was sentenced to 12 months incarceration, three years probation, and 100 hours of community service, and was ordered to pay $1,105,636 in

restitution. Culpepper previously pled guilty to one

count of mail fraud for his participation in multiple

schemes to defraud HUD and conventional lenders.

Specifically, Culpepper originated more than 30 loans

through the use of strawbuyers, false down payments,

fabricated employment information, fraudulent Social

Security numbers, fictitious landlords and rental

payments, and bogus tax documents in order to

qualify otherwise unqualified mortgagors. HUD

suffered losses of approximately $460,000, while

conventional banks and lenders lost approximately

$640,000. Defendants Dawn McCain and Richard

Thomas, co-conspirators in this investigation, have

already been sentenced. This case was originally

referred to OIG from the Atlanta Homeownership

Center and the Chicago Quality Assurance Division.

In Chicago, IL, in Federal Court for the Northern District of Illinois, defendant Mark Schmitt, an

appraiser at First Tennessee National Bank, was

sentenced to 22 months incarceration and 60 months

probation. Schmitt pled guilty in August 2003 to both

mail fraud and income tax fraud for his role in a real

estate scheme involving HUD’s Section 203(k) Rehabilitation Home Mortgage Insurance Program. As

part of the scheme, Schmitt falsified 72 HUD insured

203(k) mortgage inspections by indicating that work

had been completed by contractors, thus authorizing

escrow draws, when in fact either no work was done,

the work was done improperly, or in some cases, the

homes had been demolished. Other co-defendants in
Chapter 2 - HUD’s Single Family Housing Programs 25

this case include David Guel and John Wojcik, who

have already been convicted and sentenced. Restitution totaling $4,218,496 was previously ordered in this

investigation, and is to be paid jointly and severally by

all of the defendants in the case. This case was

originally referred to OIG by the HUD Quality Assurance Division in Chicago.

Defendant Angela Daidone, president and owner

of Morningstar Bank, was sentenced in New York,

NY, in Federal Court for the Eastern District of New

York, to 13 months in prison and 36 months supervised release, and was ordered to pay $1,757,714 in

restitution to warehouse banks. Daidone pled guilty to

one count of wire fraud following an investigation into

double dipping on Morningstar’s warehouse lines of

credit and the use of FHA mortgage insurance premiums to pay business expenses of the bank.

The investigation of Morningstar and Diadone

began in February 2000. At that time, Morningstar

occupied the business premises previously occupied

by Executive Mortgage Company. In December 1999,

a search warrant executed on the business premises

of Executive Mortgage netted evidence that Executive

was, among other things, committing wire fraud by

double dipping on its warehouse lines of credit.

Executive ceased business operations in January 2000

and sold its pipeline inventory, business equipment,

and other assets to Morningstar. Morningstar also

hired some former Executive employees and assumed

Executive’s lease. After the FBI raided the same

business location, the U.S. Attorney’s Office, Eastern

District of New York, requested the assistance of the

HUD OIG. The investigation disclosed that defendant

Daidone was committing wire fraud by double dipping

on the bank’s warehouse line of credit, and was

delaying payments of FHA mortgage insurance

premiums in order to use the float of the premium

money.

In Chicago, IL, in Federal Court for the Northern District of Illinois, defendant Brian Wilkozek, a

loan officer, was sentenced to one year and one day in

prison and two years supervised release, and was

ordered to pay $713,400 in restitution for mail fraud.

Wilkozek participated in a fraud scheme involving 100

properties with $5.7 million in loans. The scheme

involved Theresa Holt, a current fugitive and former

employee of North East Austin, a HUD approved

nonprofit, who started her own business known as

Share Development Corporation. Share Development

acquired numerous properties, some of which were

obtained through HUD’s Direct Sales Program and

North East Austin, and resold them. Many of the

applications for the mortgage loans contained inflated

employment information, including information that

some buyers worked for Share Development and

Northeast Austin. In addition, buyers, as well as loan

officers, were paid $3,000 to $4,000 outside of closing

for purchasing the properties.

In a related case, defendant Ellen Berry, a

mortgagor and former employee of North East Austin,

was sentenced to five years probation and ordered to

pay $246,009 in restitution, while defendant Thomas

Hozier, a mortgagor, was sentenced to five years

probation, four months home detention, and 150 hours

of community service, and was ordered to pay

$359,974 in restitution. Defendant Jacqueline Watson,

a borrower, was sentenced to five years probation,

four months home confinement, and 150 hours of

community service, and was ordered to pay $402,750

in restitution. All three defendants previously pled

guilty to their participation in a fraud scheme with

defendant Theresa Holt.

Defendant Hector Rosales Contreras was sentenced in Los Angeles, CA, in Federal Court for the

Central District of California, for wire fraud. He was

sentenced to 15 months in jail and three years probation, and was ordered to pay $790,905 in restitution

and a $200 fine. Contreras worked as a property

investor and caused false documentation to be submitted to HUD concerning FHA insured loans. He caused

not less than $2,763,294 in fraudulent FHA insured

loans to be submitted to HUD, resulting in a loss of

$1,360,676.

In the same case, defendant Hector Piza was

indicted on one count of conspiracy, four counts of

false statements, and one count of causing an act to be

done. Piza allegedly caused false documentation to be

submitted to HUD concerning FHA insured loans. The

loans, valued at $829,824, were based on this false

documentation.

This sentencing and indictment were part of a

larger investigation which revealed that the owners of
Chapter 2 - HUD’s Single Family Housing Programs 26

April 8 Realty in La Puente, CA, fabricated and sold

thousands of false loan support documents to numerous real estate agents. To date, the investigation has

resulted in guilty pleas by 24 individuals and

sentencings totaling 100 months incarceration, 39

years probation, $1,683,742 in restitution, and

$22,800 in fines.

In Cleveland, OH, in Federal Court for the

Northern District of Ohio, defendant Albert Thrower

was sentenced to 90 months incarceration and three

years supervised release, and was ordered to pay

$188,328 in restitution. The sentence was based on a

32-count federal indictment and conviction, including

charges of concealment of assets, bankruptcy fraud,

conspiracy, fraud in connection with identification

documents, mail fraud, and destruction, falsification,

or alteration of records in a federal investigation.

Thrower, who had been in custody since his initial

arrest and indictment, was found guilty of targeting

distressed homebuyers, some of whom had FHA

insured loans through his company, American Services. Specifically, he started a bankruptcy petition

and statement of financial affairs, but had no intention

of following through with the plan or the schedules of

assets and debts. In addition, American Services

failed to report on the petition or the statement of

financial affairs that they prepared the documents or

received payment for their services, in violation of

bankruptcy law. As a result, HUD, banks, and private

lenders were precluded from foreclosing and minimizing their losses through reacquisition of the

properties. One of the counts charged, known as

Sarbanes-Oxley, was the first bankruptcy case to be

charged under Section 1519 of the recently passed

U.S. Patriot Act.

In Los Angeles, CA, in Federal Court for the

Central District of California, defendant Benjamin

Harrison Tyler was sentenced to five years probation

and eight months home detention, was ordered to pay

$43,516 in restitution to Equicredit, and was fined

$10,000. Tyler pled guilty to mail fraud in July 2002.

Tyler, along with co-defendants Tony Hicks and Greg

Philips, used their companies, Malitop, Inc., Malitop

Realty, Inc., Western Security Group, and Nesbitt’s

Distributing, Ltd., in a fraud directed at commercial

lending institutions and HUD’s Title I Program. The

defendants used the personal information of others,

including Social Security numbers and dates of birth,

to fraudulently obtain conventional mortgage loans

and FHA insured Title I loans. They recruited

strawbuyers or directed other co-conspirators to do

so, created or obtained false W-2 forms and pay stubs

in the names of the strawbuyers, and then notarized

documents certifying that the strawbuyers signed

deeds and other necessary documentation. The loan

applications and false documents were submitted to

lending institutions to support inflated income levels

necessary for the loans to fund, and the lending

institutions in turn relied on the false information to

extend loans to the strawbuyers. The defendants

caused at least $1.5 million in loans to go into default.

Defendant Martha Amaya, an associate of a real

estate investor, pled guilty in Los Angeles, CA, in

Federal Court for the Central District of California,

to two counts of wire fraud. Amaya recruited unqualified buyers to act as purchasers of residential properties from her employer. She then purchased fraudulent documents and caused the buyers to obtain FHA

insured mortgages to purchase the properties. As a

result of the fraud, Amaya caused $4,879,563 in

fraudulent FHA insured loans to be submitted to

various lending institutions and HUD.

In Seattle, WA, in U.S. District Court for the

Western District of Washington, defendants Scott

Anderson and Stephanie Anderson were indicted on

five additional counts of mail fraud by way of a

superseding indictment. The defendants were originally indicted on eight counts of conspiracy, wire

fraud, money laundering, interstate transmission of

stolen funds, and possession of cocaine. The defendants were the owners and operators of an escrow

company named Washington One Stop. During their

operation of the company, they allegedly embezzled

funds from the escrow trust account. These funds

were due the various parties in real estate financial

transactions, such as borrowers, title companies, and

mortgage brokers. These embezzlements created a

surplus of funds in the escrow account. During a

three-month period, the defendants withdrew

$134,863 from the escrow trust account through five

withdrawals and then abandoned the company. After

withdrawing the funds, they made $60,000 in subsequent wire transfers to a casino in Las Vegas.
Chapter 2 - HUD’s Single Family Housing Programs 27

The additional five counts of mail fraud stem

from the defendants’ submission of false employment

and wage earnings to the Washington State Employment Security Department in order to obtain payments to which they were not entitled. Employment

Security transmits unemployment insurance checks

via the United States mail.

In Cleveland, OH, in Federal Court for the

Northern District of Ohio, defendant Otis Bevel, an

investor/mortgage broker, was charged in a 12-count

indictment with mail fraud, bank fraud, money

laundering, and Social Security number fraud related

to his involvement in a mortgage loan fraud scheme.

The indictment alleged that in March and April 2003,

Bevel executed a scheme to defraud Second National

Bank and other mortgage lenders through his two

residential real estate companies, Capital Realty

Group and Midwest Venture Realty, Inc. Bevel allegedly provided various false and fraudulent financial

documents to lenders in support of loan applications

for both conventional and FHA insured loans. Several

of the loan applications contained fictitious names and

Social Security numbers. Bevel also used nominee or

nonexistent employers to falsely verify employment

and income for the loan applicants, as well as fictitious pay stubs and tax forms.

Bevel allegedly caused one loan to close in which

the mortgagor used the alias of a minor child, concealing from the lender the true identity of the

borrower. HUD insured this particular loan in the

amount of $111,599. To date, Bevel has enriched

himself by more than $500,000 in proceeds from his

illegal activities. He is currently serving a prison

sentence for a previous mortgage fraud activity after

pleading guilty in March 2003. The earliest offense in

this current indictment allegedly began on the same

day of his original guilty plea. Bevel continued his

illegal activities right up until the time he reported to

prison in August 2003.

In St. Louis, MO, in Federal Court for the

Eastern District of Missouri, defendant Sean Holland

pled guilty to a one-count information charging him

with conspiracy to commit wire fraud. Holland was

an accountant for The Loan Store, Inc. He admitted

creating false tax returns and other income documents for the owner and officers of The Loan Store. A

federal search warrant was executed at Holland’s

home/office in November 2001, and computer files

containing the false income documents were seized.

Also in this case, defendant Tandy Hairston,

former president of The Loan Store, Inc., pled guilty

to five counts of wire fraud and one count of conspiracy. Hairston, who operated as a mortgage

broker and banker, admitted to committing mail fraud

and wire fraud by submitting false documents to

obtain funding from warehouse lines of credit and

then using false documents to sell the loans to mortgage investors. Hairston also operated as Midtown

Mortgage and Nations Investments, and admitted to

using his businesses to flip properties to unqualified

buyers and strawbuyers. Hairston and associated real

estate investors purchased dilapidated properties

under the name Nations Investments in and around St.

Louis, and obtained false income documents from

Sean Holland to qualify purchasers for loans through

The Loan Store/Midtown Mortgage, an FHA approved

lender. In a signed plea agreement, Hairston admitted to $5 million in intended losses, and $2.5 million

of actual losses.

In the same case, defendant Kelan Pyant pled

guilty to one count of conspiracy to commit wire

fraud. Pyant, who worked for Nations Investments,

admitted using a strawbuyer to purchase a property

from HUD, transferring the property to his own name,

and then obtaining an inflated appraisal and flipping

the property at a substantial profit to an unqualified

purchaser. Pyant also admitted conspiring with

Hairston to obtain financing with false documents.

Pyant’s fraudulent activities caused a loss of approximately $50,000.

Defendant Billy Miller, a real estate investor,

pled guilty in this case to one count of wire fraud.

Miller admitted being paid for locating a strawbuyer

to purchase property and obtain over $350,000 in

mortgage loans, and for assisting investors in avoiding

the loss of their properties to the foreclosure process.

Miller caused $345,000 to be wired under false

pretenses.

Finally in this case, defendants Iris Whitener,

DeMona Payne, Anthony Orr, Kelan Pyant, Arnold

Mitchell, and Mark Williams, six of Hairston’s

employees and associates, were indicted for conspiracy to commit wire fraud, mail fraud, and money

laundering.
Chapter 2 - HUD’s Single Family Housing Programs 28

Defendant Leslie Bhagwandin, a real estate and

mortgage broker, was arrested and charged in

Central Islip, NY, in Federal Court for the Eastern

District of New York, with conspiracy to commit mail

fraud in connection with FHA loan files that were

eventually endorsed by HUD. Bhagwandin, who is the

president and chief executive officer of Nardin Realty

and Nardin Group of Companies, planned, coordinated, and caused to be submitted numerous fraudulent loans that have either gone into default or foreclosure. Bhagwandin allegedly solicited business from

first time homebuyers with promises of low or no

down payments or closing costs. In order to further

the scheme, bogus gift affidavits, tenant letters, W-2

forms, pay stubs, and verifications of employment

were created. Bhagwandin orchestrated the fraud by

handling all HUD required documents and steering

potential homeowners to a lending institution that was

involved in the fraud and to attorneys who claimed to

have received escrow monies on behalf of the

homebuyers. The amount of the fraudulent loans totals

more than $2.4 million.

In the same case, defendant David Becker, a

licensed attorney in the state of New York, was

arrested and charged in Central Islip, NY, in Federal Court for the Eastern District of New York, with

conspiracy to commit mail fraud. Becker allegedly

submitted numerous fraudulent loan documents in

support of FHA insured loans that have gone into either

default or foreclosure. On at least two separate

occasions, Becker acted as the homebuyers’ attorney,

claiming to hold down payments and closing fees in

his attorney escrow account. The scheme was carried

out by means of bogus gift donors who used checks

that were either never endorsed or were re-deposited

in their accounts.

In Los Angeles, CA, in Federal Court for the

Central District of California, defendants Jade

Serrano, Enrique Martinez, and Douglas Segura

were charged with wire fraud. Serrano, a loan

officer for North American Mortgage Company, and

Martinez and Segura, real estate agents with California Brokers, allegedly caused mortgage applications

that contained false employment, income, and credit

related documents to be submitted to HUD. As part of

the scheme, Serrano claimed that she had conducted

face-to-face interviews with borrowers when in fact

she had not. In one instance, the interview was not

conducted because the borrower did not exist. In

furtherance of the scheme, Serrano and others caused

wire transfers to be sent from commercial lenders in

California to HUD’s account at Mellon Bank in

Pennsylvania. This investigation was initiated following a referral from the HUD Quality Assurance

Division at the Santa Ana Homeownership Center.

Defendants Pete Karsos and Kimberly Kovacs,

brokers at Nation Mortgage Company, and Anthony

Dichiara, an appraiser at LTD Appraisals, were

indicted in Baltimore, MD, in U.S. District Court for

the District of Maryland, on mail fraud charges. An

investigation disclosed that, from at least April 1998

through December 1999, Karsos and Kovacs allegedly were involved in buying and selling homes to

investors. Each brokered the mortgage loans and

knowingly provided false information to mortgage

lenders by using fictitious Social Security numbers,

inflating borrowers’ income, and fraudulently stating

that the borrowers intended to occupy the homes as

their primary residence. Dichiara provided false

appraisals to support the inflated property values. In

some instances, Karsos or Kovacs provided money to

potential homebuyers to handle closing costs and

ensure a steady stream of business. In furtherance of

the scheme, defendants Nicholas Pistolas and Barbara Prichard, settlement agents who have already

been charged in this case, prepared fraudulent

settlement sheets and were involved in property

flipping transactions.

Equity Skimming

In Los Angeles, CA, in Federal Court for the

Central District of California, defendant Ray

Tomlinson was sentenced to 30 months imprisonment

and three years probation, was ordered to pay

$932,626 in restitution to HUD and $433,654 in

restitution to the Department of Veterans Affairs

(DVA), and was fined $50,000. Defendant Penny

Lubanko was sentenced to 21 months imprisonment

and three years probation and was fined $40,000.

Lubanko is jointly libel for the same restitution as

Tomlinson. This investigation began after OIG received allegations that the defendants were associated

with a bankruptcy fraud and equity skimming scheme

that involved 150 properties with HUD insured and
Chapter 2 - HUD’s Single Family Housing Programs 29

DVA guaranteed mortgages. Federal informations

were filed against Tomlinson and Lubanko, alleging

that they had purchased properties with HUD insured

and DVA guaranteed loans that were in default, and

failed to make the mortgage payments while they

continued collecting rent. The defendants pled guilty

to bankruptcy fraud, equity skimming, conspiracy,

false representation of Social Security numbers, and

submitting false statements in bankruptcy proceedings.

Defendant Renee Wilmot was sentenced in

Newark, NJ, in Federal Court for the District of New

Jersey, to three years and five months home detention

for her part in an equity skimming and mail fraud

scheme. Wilmot previously pled guilty to failure to

file income tax returns. Wilmot and her two codefendants, Timothy Burke and Paul Ligas, operated a

real estate company called Lincoln Management.

Lincoln Management fraudulently claimed to be able

to help homeowners who were in default on their

mortgages, and then converted homeowner payments

to their own use, forcing many to lose their homes.

Defendant Edwin “Andy” Kane was indicted in

Rochester, NY, in Federal Court for the Western

District of New York, on one count of single family

equity skimming and four counts of mail fraud. Kane

allegedly devised a scheme in which he purchased,

through simple assumption, numerous FHA insured

properties throughout the City of Rochester. At the

time of purchase, all of the properties were rented to

tenants. Kane continued to collect rents on the properties but failed to make any mortgage payments,

causing the properties to go into foreclosure. In

addition, shortly after assuming the properties, Kane

sold them, again through simple assumption, to a

fictitious third party. He then mailed the fraudulent

assumption paperwork to the financial institution

servicing the FHA insured mortgage.

Money Laundering

In Cook County Court, Chicago, IL, defendant

David Johnson pled guilty to theft of over $100,000 and

received 30 months probation. The next day, defendant Eric Pollards, an appraiser, pled guilty to money

laundering and theft of over $100,000 and received 36

months probation. Johnson and Pollards were indicted

in June 2003 along with 15 other co-defendants for

their role in an elaborate single family fraud scheme

wherein HUD Direct Sales properties and privately

owned homes were sold with mortgages which were

obtained with fraudulent appraisals, false employment

information, fictitious down payment information, and

bogus identities. Johnson was not a licensed appraiser. Instead, he stole the name and appraisal

identification number of his deceased brother in order

to inflate property values and verify rehabilitation

work on properties. Overall, Johnson accepted

responsibility for fraudulent loans valued at $300,000.

Pollards, a licensed appraiser, accepted responsibility

for fraudulent appraisals and for his role in diverting

mortgage proceeds through fraudulent pay-off letters.

Pollards would file fraudulent documentation with the

recorder’s office and assist in the laundering of

diverted closing funds. The monies should have

ultimately gone to a legitimate lender holding the first

lien on the properties. Pollards accepted responsibility for over $1 million in fraudulent loans.

Forgery/Theft/Embezzlement

Defendant Dina M. Leone was charged in

Westminster, MD, in District Court of Maryland for

Carroll County, with nine counts of theft over $500, 12

counts of theft under $500, and one count of carrying

out a theft scheme over $500 in connection with her

role in defrauding local homeowners into making

their monthly mortgage payments to Leone in order to

avoid foreclosure. In May 2001, the victims in this

case were in financial danger of losing their FHA

insured properties. In an effort to avoid foreclosure,

the homeowners hired an attorney at the local law

office of Bauhof & Dorsey. The attorney worked on

the case for approximately one month but was unable

to develop a plan to prevent the foreclosures. At the

time, Leone was employed at Bauhof & Dorsey as a

paralegal.

In June 2001, Leone contacted the homeowners

and told them that she was leaving Bauhof & Dorsey

to start her own practice, giving the homeowners the

impression that she was an attorney. To help the

homeowners avoid foreclosure, Leone proposed that

payments be made to her in cash and that she would

in turn pay the bank until their financial obligations

were current. In September 2001, desperate to keep
Chapter 2 - HUD’s Single Family Housing Programs 30

their homes, the homeowners agreed to Leone’s offer

and began making monthly mortgage payments

directly to Leone. Leone usually requested amounts

that were higher than the monthly mortgage payments, explaining that extra money was needed to

bring the mortgage payments current. The

homeowners struggled to make the monthly mortgage

payments to Leone through January 2003, in one

instance withdrawing money from an Individual

Retirement Account with the understanding the money

would be applied to the mortgage. In February 2003,

the lender from this particular property foreclosed on

the loan, resulting in a loss of over $15,000 to the

Department after the subsequent resale. Subpoenaed

financial records from the lender revealed that no

payments were made on the mortgage during the

period in which the homeowner was giving money to

Leone.

Conversion of Government Property

In Grand Rapids, MI, in Federal Court for the

Western District of Michigan, defendants Chad and

Dawn Elve, children of Terrance Hansen, the former

chief of property disposition, and Judy Hansen,

former HUD multifamily specialist, were sentenced

for their earlier guilty pleas to conversion of government property. Chad Elve was sentenced to 18 months

incarceration, 300 hours of community service, and

three years probation, and was ordered to pay $91,968

in restitution. Dawn Elve was sentenced to six months

home confinement and three years probation, and was

ordered to pay $66,328 in restitution. Through their

stepfather, Terry Hansen, Chad and Dawn Elve

obtained HUD properties for $600 each when in fact

they were valued at $96,000 and $80,000, respectively. In addition to their $600 purchases, they both

obtained equity out of the properties totaling $70,000

and $40,000, respectively.

Their mother, Judy Hansen, was previously

sentenced to four months home confinement, three

years supervised release, and 300 hours of community service, was fined $2,000, and ordered to pay

$53,400 in restitution to HUD. Terry Hansen has

already pled guilty to two of four different indictments

with which he was charged. Specifically, Hansen pled

guilty to three counts of wire fraud and one count of

false statements for lying to federal agents during an

interview. In his capacity as chief property officer,

Hansen was responsible for selling property acquired

through FHA foreclosures. He was required to sell the

properties for their maximum value, in compliance

with outstanding regulations and guidelines, in order

to replenish the mortgage insurance fund. As part of

his plea, Hansen accepted responsibility for selling

HUD foreclosed properties to his wife, Judy Hansen.

In an attempt to confuse or misrepresent the details of

the sales to his family members, Hansen created

false entries in the Single Family Asset Management

System (SAMS). He was also responsible for creating

a bogus vendor number in SAMS for his stepdaughter,

and directed HUD funds to be paid to his stepdaughter

via SAMS. Finally, Hansen created a bogus deed of

sale reflecting a false sales price for the home

purchased by his stepson. Using the false deed, the

stepson immediately obtained an equity loan from

Bank One to “cash out” for the true value of the

home.

In the second indictment to which Hansen has

pled, he pled guilty to 10 counts of wire fraud and 10

counts of conversion. Hansen admitted selling HUD

property disposition properties to Emalee and Jack

Birne at prices well below their appraised values. At

the time of the fraudulent sales, Emalee Birne was

acting as the HUD closing agent and was responsible

for repossessed property closings on behalf of HUD.

Prior to this contract, Emalee Birne also served as

the real estate asset manager for the HUD Grand

Rapids Office.

Officer Next Door (OND) Program

In Chicago, IL, the U.S. District Court for the

Northern District of Illinois entered a default judgment in favor of the Federal Government in the

amount of $184,500 against defendant Robert

Mohedano, a participant in HUD’s OND Program.

This amount was three times the discount price of

$61,500 for Mohedano’s initial purchase of the OND

property. Specifically, Mohedano allegedly rented out

his OND property to a market rate tenant while he

lived elsewhere. Two months after the purchase of the

property, Mohedano refinanced the house using a

fictitious lease agreement between him and his

girlfriend and received cash proceeds of approximately $75,000. While still bound by the OND threeyear commitment to live in the property, Mohedano

refinanced his other two properties and purchased an
Chapter 2 - HUD’s Single Family Housing Programs 31

additional two residences, one of which was an FHA

insured property in Puerto Rico. On all of these

subsequent purchases, Mohedano indicated that he

would occupy the properties as his primary residence.

In Chicago, IL, in Federal Court for the Northern District of Illinois, defendant Dionisio Flores, a

police officer with the Chicago Police Department,

agreed to pay $138,000 through a civil settlement with

the U.S. Attorney’s Office, Civil Division. This

amount is double damages for the $69,000 discount he

received on his original purchase of an OND property.

Flores rented out the property to family members

while he lived at his girlfriend’s house instead of

occupying the property as required by HUD regulations.

In Milwaukee, WI, in Federal Court for the

Eastern District of Wisconsin, the U.S. Attorney’s

Office entered into a settlement agreement with

defendant Jeffrey S. Stevens, a Milwaukee County

Sheriff’s Office deputy, on behalf of HUD with respect

to Stevens’ failure to complete his required three

years of residency at the property he purchased

through HUD’s OND Program. Pursuant to the agreement, Stevens paid $12,500 to the United States. In

August 1998, Stevens purchased the OND property,

which had been appraised at $38,000, for the discounted price of $19,000. He initially resided at the

property, but in December 2000, moved to live with

his fiance in a house that was purchased in her name

in November 2000. Stevens then rented out his OND

property for $500 per month and subsequently sold the

property in August 2002 for $78,000.

Defendants Torris Cooper, a police officer for the

South Miami Police Department, and Gwendolyn

Okotogbo, a corrections officer for the Metro-Dade

Department of Corrections, were sentenced in

Miami, FL, in Federal Court for the Southern

District of Florida. Cooper was sentenced to 15

months incarceration, 24 months probation, and 200

hours of community service. The judge delayed her

finding on restitution until a later date. Okotogbo was

sentenced to four months home confinement and 12

months probation, and was ordered to pay $43,200 in

restitution to HUD. The defendants were two of three

law enforcement officers who purchased homes

through HUD’s OND Program and were indicted in

July 2003 on charges of making false statements to

HUD and to federal law enforcement officers. Cooper

and Okotogbo, along with defendant Charles D.

Brunson, a police officer for the City of Opa Locka

Police Department, were charged with falsely

claiming that they used/intended to use their OND

homes as their sole residences during the three-year

occupancy requirement. Brunson was also sentenced

to one year probation.

Defendant Stacey Orr, a former Kenosha, WI

police officer, pled guilty in Milwaukee, WI, in U.S.

District Court for the Eastern District of Wisconsin,

to one count of false statements in connection with

two Uniform Residential Loan Applications used to

obtain guarantees on two mortgages on two separate

properties. The original indictment charged Orr with

failing to disclose the existence of loans on which he

was making payments to the Kenosha Police and Fire

Credit Union. On the dates of the false statements,

the unpaid balances were identified as $35,688 and

$29,183, respectively. The second count of the

indictment charged Orr with submitting a false

statement related to the refinancing of a property

obtained through HUD’s OND Program. The indictment further stated that both mortgages subsequently

went into foreclosure. As a result of these foreclosures, Orr failed to complete his three-year occupancy requirement under the OND Program, and the

Department of Veterans Affairs (DVA) paid out

$27,181 for the guaranty. Orr had purchased the OND

property, then appraised at $71,100, for the discounted

price of $35,550, obtaining a 50 percent discount

from HUD based on his agreement to reside in the

property for at least three years.

In Chicago, IL, in Federal Court for the Northern District of Illinois, a civil complaint was filed by

the U.S. Attorney’s Office, Civil Division, against

defendant Ronald Johnson, a police officer, who

allegedly rented out his OND Program property

instead of occupying it as his residence. Johnson

purportedly resided with his girlfriend in lieu of

occupying the property. The U.S. Attorney’s Office is

seeking $98,000, which is half of the $196,000 FHA

insured Section 203(k) loan.

In Chicago, IL, in Federal Court for the Northern District of Illinois, a civil complaint was filed by
Chapter 2 - HUD’s Single Family Housing Programs 32

the U.S. Attorney’s Office, Civil Division, against

John Luckett, a corrections officer, who allegedly

rented out his OND Program property instead of

occupying it as his residence. In addition, Luckett

allegedly obtained a loan for another single family

property during the required three-year occupancy

timeframe, claiming he would be the owner/occupant. The U.S. Attorney’s Office is seeking $57,000,

which is half of Luckett’s $114,000 conventional loan.

Grand Larceny

Defendant Jean Guilbaud, a real estate broker

who is presently a fugitive, was indicted in State

Court, Nassau County, NY, on four counts of grand

larceny, one count of scheme to defraud, and one

count of bail jumping in connection with a $40,000

HUD real estate owned fraud scheme. Guilbaud was

authorized to submit bids on HUD owned properties on

behalf of the general public. She was charged with

receiving bid deposits from complainants, ranging

from $1,000 to $13,000, and failing to return the

deposits when the bids were not awarded. Guilbaud

also failed to pass bid deposits on to HUD that were

due from winning bidders who failed to close on the

properties. HUD has since terminated Guilbaud’s

approval to bid on HUD owned properties.

Harboring Unauthorized Aliens

In Norfolk, VA, in U.S. District Court for the

Eastern District of Virginia, defendant Ubaldo

Gomez-Mercado was sentenced to 33 months incarceration for harboring unauthorized aliens, 33 months

incarceration for mail fraud, and 33 months incarceration for making false statements on a loan

application, all to be served concurrently. GomezMercado was also sentenced to three years supervised release and was ordered to pay $23,185 in

restitution. Upon his release from prison, GomezMercado is required to surrender himself to the

Bureau of Immigration and Customs Enforcement to

undergo a deportation hearing.

Gomez-Mercado used strawbuyers to purchase

FHA insured properties in a scheme to hide his own

assets and to establish secure locations to house

illegal immigrants. Both the strawbuyers and a large

number of illegal immigrants worked for businesses

owned by Gomez-Mercado. The defendant falsely

certified in a gift letter that he was giving $12,000 to

Juan Carlos Ayala toward the purchase of an FHA

insured property. Ayala was previously sentenced to

six months incarceration and one year supervised

release for making false certifications on his loan

application. Gomez-Mercado also pled guilty to mail

fraud in connection with his underreporting of income

from a business that he owns and his subsequent

failure to pay related sales taxes.

Gomez-Mercado was charged as a result of a

Joint Terrorist Task Force looking into the transportation of illegal aliens and the creation of counterfeit

identification documents in the Tidewater area. HUD

OIG was tasked with investigating FHA insurance

fraud and the manufacture of fraudulent identification

documents.
Chapter 3 - HUD’s Public and Indian Housing Programs 33

Chapter 3 — HUD’s Public and Indian Housing Programs

HUD provides grants and subsidies to approximately 4,200 public housing agencies (PHAs) nationwide. About 3,200 PHAs manage public housing units

and another 1,000 PHAs, with no public housing,

manage units under Section 8 Programs. Many PHAs

administer both Public Housing and Section 8 Programs. HUD also provides assistance directly to

PHAs’ resident organizations to encourage increased

resident management of public housing developments

and to promote the formation and development of

resident management entities and resident skills.

Programs administered by PHAs are designed to

enable low-income families, the elderly, and persons

with disabilities to obtain and reside in housing that is

safe, decent, sanitary, and in good repair.

Audits

During this reporting period, the OIG issued 23

reports: three internal audits, 13 external audits, and

seven external memoranda in the Public and Indian

Housing Program area. These reports disclosed

about $43.5 million in questioned costs, and over

$54.5 million in recommendations that funds be put to

better use. During this reporting period, we reviewed

HUD management of PHA development activities, the

portability features of the Section 8 Housing Choice

Voucher Program, the Moving to Work Program, and

activities at various PHAs. In addition, we are reporting on our audit work that related to a qui tam lawsuit

involving overbilling by a security company.

HUD Management of PHA

Development Activities

We conducted an audit to determine whether HUD

had adequate management controls to assess PHA

development activities. We found that HUD often was

unaware of the extent to which activities with related

nonprofit organizations impacted PHA operations and

of the numerous Annual Contributions Contract (ACC)

violations associated with them. HUD had neither the

mechanisms to readily identify or monitor such

activities, nor staff adequately trained to detect

improper transactions. Further, even when field

offices did become aware of improper activities, they

did not aggressively pursue corrective actions to stop

the activities or recover funds.

PHAs did not fully disclose activities with related

nonprofit organizations in their financial statements

and Independent Public Accountants did not include

findings when those activities violated ACCs or other

requirements. PHAs also claimed to misunderstand

HUD’s rules. The impact of known and potential

violations is high. Our analysis of key account balances from PHAs’ audited financial statements

identified 777 PHAs with indicators of possible

unauthorized development activities. Eleven PHAs

recently audited by OIG and four PHAs reviewed for

this audit, all of which had unauthorized development

PIH Reports Issued

3

7

13

Internal Audits

External Reports

External Memoranda

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

Internal Audits External Audits External

Memoranda

Questioned Costs Funds Put to Better Use

PIH Dollars
Chapter 3 - HUD’s Public and Indian Housing Programs 34

activities, were included in the 777 PHAs. The OIG

audits questioned over $16 million. For the 777 PHAs,

the potential risk to the Low-Income Public Housing

Program alone could be $600 million or more. The

potential negative impact of the inequitable agreements is unknown, but also could be substantial.

We recommended that HUD take immediate steps

to identify PHAs involved in nonprofit development

activities, halt deals that violate the ACCs, and begin

training its own staff and the public housing community on the legal avenues for developing low-income

housing through nonprofit affiliates. (Report No.

2004-AT-0001)

To further assess the impact of the inadequate

controls over these activities, we are auditing development activities at PHAs selected from the list of 777

referred to above. This effort is ongoing. During this

semiannual reporting period, we completed audits at

four PHAs where findings included improper development activities. Presented below under “Public

Housing Agency Activities” are the results of our

audits of the Corpus Christi, TX, Petersburg, VA,

Cuthbert, GA, and Ft. Lauderdale, FL PHAs.

Portability Features of the Section 8

Housing Choice Voucher Program

Our audit of the portability features of the Section

8 Housing Choice Voucher Program (HCVP) determined that the PHAs’ administration of the portability

features was not always effective when the receiving

PHA terminated program participants. In 33 percent

of the 335 terminations reviewed, the payments from

the initial PHA to the receiving PHA continued after

the program participant terminated. Overpayment

periods ranged from one month to 22 months and

totaled over $158,000; we attributed the overpayments

to poor communication between PHAs. In addition,

initial PHAs have limited access to data for program

participants terminated by the receiving PHA. Consequently, Housing Choice Vouchers were not available

to serve other needy clients.

We analyzed the current databases for the six

New England States from the Multifamily Tenant

Characteristics System module of the Public and

Indian Housing Information Center (PIC) and found

that seven percent of the data fields reviewed contained fatal errors that circumvented system edit

checks. HUD’s risk of program fraud increases and

the reliability of PIC information decreases because of

these deficiencies.

We recommended that HUD require PHAs to

communicate sufficiently with each other and to

refund any outstanding overpayments to initial PHAs;

provide guidance to PHAs on how refunded amounts

should be recorded on the financial statements; and

impose administrative sanctions against PHAs that do

not comply with HUD regulations related to the

portability features of the HCVP. (Report No. 2004-

BO-0006)

Moving to Work Program

Our audit of HUD’s oversight of the Philadelphia,

PA Housing Authority’s (PHA) Moving to Work

Program, a new flexible housing demonstration

program, found that HUD accepted the PHA into the

program without restriction before carefully evaluating the reasons for the PHA’s past poor performance

in utilizing its Section 8 funding and the merits of its

Moving to Work application. Although HUD was

within its authority to accept the PHA into the demonstration program, by doing so it incurred a high risk.

HUD should have established more stringent controls

under its agreement with the PHA to ensure its

interests were adequately protected and HUD funds

were used in the most effective manner to serve the

residents of the community.

After it accepted the PHA into the Moving to

Work Program, HUD did not provide adequate oversight of the development and implementation of the

PHA’s Moving to Work plans. Specifically, HUD did

not adequately evaluate the appropriateness of the

PHA’s proposed alternative uses of Section 8 funds to

determine if they would better serve the residents of

Philadelphia, nor did HUD develop an effective

monitoring plan to track the PHA’s progress and

performance in implementing its new program.

HUD personnel stated that the Department was

reluctant to interfere with the PHA’s Moving to Work

plans because it viewed this action as contrary to the

philosophy of the demonstration program. They also

said a lack of resources hindered HUD’s ability to

adequately monitor the PHA’s performance under the

program. As a result, HUD has no assurance that the
Chapter 3 - HUD’s Public and Indian Housing Programs 35

PHA’s plans to spend as much as $134 million of

Section 8 funds in alternative ways, over the sevenyear term of its Moving to Work Agreement, will

provide more efficient and effective housing assistance to needy families in the City.

In a September 2003 audit, the OIG determined

that the PHA was not able to fully utilize its Section 8

Program due to limitations in the way it administered

the program. HUD’s local field office had similar

concerns; the PHA’s Section 8 Management Assessment Program scores reflected its performance

problems. In effect, HUD rewarded the PHA for its

past poor performance by allowing it to participate in

the new program in which it has the flexibility to use

substantial Section 8 funds in non-traditional ways.

Accordingly, we believe the PHA could put to better

use an estimated $50.2 million of the Section 8

funding it will receive over the remaining four years

of its Agreement by leasing-up the remaining rental

housing vouchers in its inventory. (Report No. 2004-

PH-0003)

Public Housing Agency Activities

Our audit of the Springfield, MA Housing

Authority found that the Authority: (1) failed to ensure

that its Section 8 housing met housing quality standards; (2) violated federal conflict of interest provisions; (3) inappropriately charged over $550,000 to

the Capital Fund Program (CFP), and if it does not

change its practices, stands to charge an additional

$411,000; (4) lacked adequate management controls to

protect the integrity of its federal programs; (5)

ignored implementing an equitable method of allocating costs between its federal and state housing

programs; (6) inadequately determined the rent

reasonableness for units entering the Section 8

Program and subsequent rent increases; (7) submitted inaccurate performance and financial data to

HUD; and (8) improperly procured goods and services

and lacked adequate documentation to ensure its grant

program complied with federal regulations.

Eighty-six percent of the Authority’s $11 million in

housing assistance payments for FY 2002 were

questionable because HUD cannot be assured that the

payments were for decent, safe, and sanitary housing.

Examples of cases in which the Authority failed to

ensure that its Section 8 housing met housing quality

standards are shown as follows:

Broken window with jagged edged glass at Section 8 unit

administered by the Springfield Housing Authority.

Hole in bathroom floor at Section 8 unit administered by the

Springfield Housing Authority.

In addition, the Authority may have inappropriately received $1.6 million in Section 8 administrative

fees in FY 2003. Also, although the Authority expended $19 million in federal awards in FY 2002, the

Authority did not follow its own policies or federal

regulations when procuring goods and services.

Furthermore, the Authority cannot assure HUD that it

properly monitors its modernization grants by maintaining sufficient records to ensure that its $10 million

modernization program complies with federal

regulations and that related performance goals are

being realized.

We recommended, among other things, that: (1)

the Authority provide assurances that $9.8 million in

housing assistance payments for FY 2002 were used

for decent, safe, and sanitary housing; (2) HUD

determine if the Authority has any funds available
Chapter 3 - HUD’s Public and Indian Housing Programs 36

from its low-income operating budgets for FYs 1998

through 2001 and whether it may reassign over

$550,000 in ineligible and $411,000 in questioned CFP

costs; (3) the Authority submit corrected operating

budgets and audited financial statements for the last

four fiscal years in support of $21.6 million in salaries

charged to federal programs; and (4) the Authority

repay unearned administrative fees of over $1.6

million for FY 2003. In addition, HUD should take

appropriate administrative sanctions, where warranted. (Report No. 2004-BO-1005)

Our audit of the Danbury, CT Housing

Authority’s Capital Fund Program (CFP) disclosed

that the Authority’s: (1) $11 million variable rate

general obligation bonds were declared to be in

default by the bank, making them immediately due

and payable; (2) financial viability is threatened and it

lacks the ability to pay debt and fees associated with

the bonds; and (3) operations are not being managed

effectively and efficiently. The Authority lacked

adequate policies, procedures, and internal controls

governing the use of vehicles, cellular phones, and

maintenance costs. We identified potential annual cost

savings (funds put to better use) of over $390,000.

The audit also found that the Authority incurred

nearly $93,000 of ineligible and unsupported costs.

We identified $73,000 of ineligible salary bonus

payments made to the executive director (ED) and his

staff, $9,800 of personal expenses (ceramic tiles and

a cellular phone) that the ED charged to the Authority,

and $10,000 in unsupported costs paid to the ED. In

addition, the Authority’s procurement practices did

not comply with HUD regulations and its own procurement policy.

We recommended that the Authority: (1) take

steps to recover approximately $1.9 million of the

$2.3 million in improper bond related transactions

related to an improper contractor advance, ineligible

loans, and unsupported costs; (2) work with the bank

and the contractor’s surety company to negotiate a

restructuring agreement for the bonds; (3) develop a

long-term cash flow analysis and a plan to show how

its financial obligations and public housing modernization needs will be addressed; (4) establish adequate policies, procedures, and internal controls

governing the use of vehicles, cellular phones, and

maintenance costs; (5) implement OIG suggestions for

achieving potential annual cost savings of over

$390,000; (6) recover all ineligible and unsupported

costs; and (7) implement adequate procedures over

the procurement process. We also recommended that

HUD sanction the former ED, as appropriate. (Report

No. 2004-BO-1004)

At the request of the Director of Public Housing,

we audited the Housing Authority of Corpus Christi,

TX, to determine whether the Authority used funds in

accordance with HUD requirements under the LowRent, Section 8, Drug Elimination, and Resident

Opportunity and Self-Sufficiency Programs. We found

that the Authority violated HUD program requirements by spending over $4 million in HUD funds for

ineligible and questionable purposes. The Authority

management used over $1 million in HUD program

funds for unauthorized purposes and cannot support

over $3 million in arbitrary payroll allocations and

other program costs. The unauthorized and unsupported costs charged to HUD programs included costs

to develop a housing project of an affiliated nonprofit

entity and arbitrary allocations of administrative

costs.

Examples of the Authority’s misuse of program

funds include the following. The Authority: (1) used

over $2.9 million in Low-Rent funds to pay development and salary costs of an affiliated nonprofit’s

housing project, Section 8 Program salary and benefit

costs, and administrative costs; (2) used nearly

$534,000 in Section 8 Voucher Program funds to pay

the development and salary costs of an affiliated

nonprofit’s housing project and arbitrary salary and

benefit cost allocations; (3) used over $228,000 in

Drug Elimination Grant funds to pay the development

and salary costs of an affiliated nonprofit’s housing

project and questionable program costs; and (4) used

over $194,000 in Capital Funds to pay arbitrary salary

and benefit cost allocations.

Authority managers told the OIG they were not

familiar with the provisions of Low-Rent and Section

8 contracts, federal cost principles, and other HUD

program requirements for cost eligibility. They also

told us they thought that all HUD program funds could

be used for the purpose of providing any affordable

housing for people throughout Corpus Christi. During

the audit, Authority officials indicated they took action

to address our concerns by implementing cost alloca-
Chapter 3 - HUD’s Public and Indian Housing Programs 37

tion plans and timekeeping procedures to properly

allocate salaries and benefits. In addition, the Authority paid back to HUD programs or recorded inter-fund

payables for nearly $489,000 of the unallowable costs

we identified for nonprofit activities and common cost

allocations.

We recommended that the Authority implement

effective procedures to ensure costs are eligible and

adequately documented. The Authority also needs to

repay all ineligible costs incurred during and subsequent to the audit period. In addition, HUD should

obtain sufficient support for the arbitrary salary and

benefit allocations, common cost allocations, and

other questionable costs, and recover any remaining

unsupported costs. (Report No. 2004-FW-1004)

In response to an anonymous complaint, the OIG

reviewed the Public Housing Drug Elimination

Program grant funds awarded to the Allegheny

County Housing Authority, Pittsburgh, PA, for FYs

1996 through 2000. The complainant alleged that the

Authority was misspending grant funds on various

ineligible expenditures, such as payments to consultants, a $20,000 wood chipper, and entertainment. We

found that the Authority did not administer its Drug

Elimination Program according to its grant agreements with HUD and applicable HUD rules and

regulations. Specifically, the Authority did not always

ensure program expenditures were eligible and

properly supported, and did not properly follow

federal procurement requirements when it awarded a

number of service contracts. Therefore, the

complainant’s allegations that the Authority misspent

grant funds had merit. The deficiencies can be

attributed to the Authority’s lack of proper controls.

As a result of these deficiencies, the Authority spent

over $615,000 on ineligible expenditures and drew

down over $761,000 of grant funds for expenditures

that were not properly supported.

In addition to making recommendations to

improve the Authority’s management of its grant

funds, we requested that HUD ensure that the Authority reimburses HUD for the ineligible and questioned

costs it cannot properly support, and develop and

implement appropriate management controls to

correct the weaknesses cited in this report. (Report

No. 2004-PH-1002)

As part of an ongoing comprehensive audit of the

Kankakee, IL County Housing Authority, the OIG

audited the Authority’s Section 8 Housing Program.

A citizen’s complaint to the OIG alleged that the

Authority’s former executive director, who left the

Authority in 2001, was not qualified for his position.

We found that the Authority’s management

controls over its Section 8 Housing Program were

very weak. The Authority lacked adequate procedures

and controls over housing quality standards (HQS) and

administrative processes, resulting in Section 8 units

that contained health and safety violations. A total of

873 HQS violations were found in 47 of the 50 units

inspected.

Electrical wall outlet cover plate missing at Kankakee

Housing Authority unit.

Doorframe heavily damaged, loose hinges, at Kankakee

Housing Authority unit.

.
Chapter 3 - HUD’s Public and Indian Housing Programs 38

In addition, the Authority failed to properly

enforce the City of Kankakee’s ordinance governing

the licensing of housing units occupied by persons

other than the owners. The Authority: (1) made over

$36,000 in housing assistance payments (HAPs) for 11

units without executing HAP contracts with the landlords; (2) lacked HAP contracts, lease agreements,

and/or tenancy addendums to show that over $324,000

in HAPs for 40 units were appropriate; (3) incorrectly

calculated HAPs for 19 units; (4) failed to conduct five

reexaminations for four tenants; (5) did not complete

seven reexaminations prior to the anniversary date for

nine tenants; (6) lacked other required supporting

documentation for 56 reexaminations for 29 units; (7)

failed to review and/or did not have documentation to

support its utility allowances and Section 8 Housing

Choice Program payment standards; (8) did not

properly establish or manage its Family Self-Sufficiency Program according to the minimum required

program size; (9) failed to open a federally insured

interest bearing investment account and deposit

escrow balances totaling over $37,000 into the account; and (10) did not properly complete rent reasonableness certifications for Section 8 housing units

placed under contract.

The Authority’s board of commissioners did not

adequately exercise its responsibility to effectively

manage the Authority, and the Authority’s former

executive directors did not implement adequate

controls to ensure that Section 8 units were free of

health and safety violations. Further, the Authority’s

board and former executive directors did not follow

federal requirements, the City of Kankakee’s ordinance, or the Authority’s own policies.

We recommended that HUD assure that the

Authority implements procedures and controls to

correct the weaknesses cited in this report. In addition, HUD should: (1) take administrative action

against the Authority’s former executive directors and

board of commissioners for failing to administer the

Authority according to federal, City of Kankakee, and

its own requirements; (2) provide training and technical assistance to the Authority’s staff and its board of

commissioners regarding their duties and responsibilities; and (3) issue a notice of default to the Authority as permitted by the Consolidated Annual Contributions Contract. HUD’s default notice should help

ensure that the Authority’s $2.2 million in Section 8

Program funds are used appropriately. (Report No.

2004-CH-1001)

Our audit found that the Petersburg, VA Redevelopment and Housing Authority improperly used

federal funds on a regular basis to support its nonfederal entities and placed its Annual Contributions

Contract assets at risk by improperly guaranteeing

the debt of two of its three affiliated non-federal

entities. This occurred because the Authority did not

properly account for the work its employees performed, and failed to establish appropriate management controls to prevent it from encumbering or

pledging its federal assets without HUD approval. The

Authority’s high management turnover, inadequate

financial system, and practice of allowing key Authority personnel to serve in similar roles for its nonfederal entities contributed to these problems.

As a result, the Authority improperly pledged

assets to guarantee debt incurred by its non-federal

entities estimated at over $950,000. Additionally, the

Authority paid salaries estimated at more than

$620,000 from federal funds for work its employees

performed in support of its affiliated non-federal

entities on a part-time basis from January 2001 until

December 2003. Further, we estimated the Authority

could more effectively use another $370,000 annually

by ensuring it properly accounts for and receives

reimbursement for work its employees perform for its

affiliated non-federal housing projects, and by preventing apparent conflict of interest situations in the

future. Under the Consolidated Annual Contributions

Contract, these activities may be considered events of

substantial default.

We recommended that HUD require the Authority

to recover or repay from non-federal funds over

$620,000 in salaries, implement controls to prevent it

from pledging future HUD assets, and withdraw its

pledge of Consolidated Annual Contributions Contract

assets. In addition, HUD should take appropriate

administrative action against the chairmen of the

Authority’s board of commissioners responsible for

pledging HUD assets. Lastly, the Authority should

develop a reasonable method for allocating and

collecting future costs from its affiliated non-federal

entities. (Report No. 2004-PH-1005)
Chapter 3 - HUD’s Public and Indian Housing Programs 39

The Housing Authority of the City of Cuthbert,

GA, violated its Annual Contributions Contract (ACC)

with HUD by inappropriately advancing funds and

pledging assets for non-federal development activities.

As of April 2002, management had advanced nearly

$800,000 of low-income housing (LIH) funds to the

Southwest Georgia Housing Development Corporation

(SGHDC) to pay its development expenses. As of June

2003, SGHDC had reimbursed the Authority all but

about $300,000. The advances reduced LIH funds

available for Authority operating expenses. Management also inappropriately pledged assets when it

guaranteed repayment of two SGHDC loans totaling

nearly $700,000. Further, the Authority’s executive

director, who was also the secretary/treasurer of

SGHDC, violated conflict of interest restrictions. We

attributed these deficiencies to the fact that the board

of commissioners did not establish sufficient controls

to monitor the nonprofit and ensure transactions

adhered to federal regulations. In addition, the

executive director did not have a full understanding of

the provisions of the Quality Housing and Work

Responsibility Act of 1998.

We recommended that the Authority be required

to collect the approximately $300,000 due from

SGHDC and discontinue advancing funds, and ensure

that its assets are not encumbered or pledged without

HUD approval. In addition, HUD should ensure that the

board of commissioners takes appropriate measures

to prevent conflict of interest situations, and require

the Authority to develop a reasonable method for

allocating costs. (Report No. 2004-AT-1001)

As part of an audit of HUD’s oversight of public

housing agency activities with related nonprofit

entities, the OIG reviewed the administration of

development activities by the Housing Authority of the

City of Fort Lauderdale, FL. The audit disclosed that

the Authority violated its Annual Contributions

Contract (ACC) with HUD by inappropriately pledging

assets and advancing funds for some of its activities.

The Authority’s management inappropriately pledged

assets of $452,000 in low-income housing (LIH) funds

to assure the rehabilitation and purchase of two nonfederal development activities. Management also

inappropriately advanced over $151,000 in LIH funds

to support various programs. Specifically, the Authority used nearly $128,000 to purchase inventory

materials or insurance for seven programs/activities,

and nearly $24,000 to support the activities of an

affiliated nonprofit. On December 5, 2003, the

Authority reimbursed all but $82,000.

The Authority did not have a proper cost allocation plan to support the allocation of over $11,000 to

the Section 8 Program and more than $86,000 of

indirect costs to LIH and Section 8 funds. We believe

these deficiencies occurred because the Authority has

not established adequate controls to monitor and

ensure that its transactions adhere to HUD requirements.

We recommended that HUD require the Authority

to establish procedures to ensure that its assets are

not encumbered or pledged without HUD approval;

establish adequate controls to monitor and ensure that

transactions comply with the ACC and other HUD

requirements; reallocate costs of $11,000 from the

Section 8 Program to the Affordable Housing Program; develop a reasonable method of allocating

shared and indirect costs in accordance with appropriate regulations; and reallocate costs of $86,000 to

other programs using a reasonable method. (Report

No. 2004-AT-1003)

Our audit of the City of Little Rock, AR Housing

Authority disclosed that the Authority lacked sufficient controls and management over its procurement

process and assets. The Authority sole-sourced two

contracts that were not approved by HUD, resulting in

over $228,000 in unsupported payments. The Authority also needs to improve maintenance and security at

some sites. Needed maintenance included demolition

of units not viable to rehabilitate; securing of vacant

buildings; routine repairs to and repainting of units

per tenant requests; treatment for insects; replacement of smoke detector batteries and air conditioning

filters; cleaning of common areas; and improvements

to security.

The audit also found that the Authority did not

develop and implement written policies and procedures for disbursements to ensure its funds were

properly expended or assets were properly utilized.

Further, the Authority’s independent audits were not

completed timely for FYs 2000 and 2001 and they did

not disclose identity-of-interest issues with related

nonprofit development entities. These entities paid

$20,000 to the Authority’s executive director and

deputy director during the audit period.
Chapter 3 - HUD’s Public and Indian Housing Programs 40

We recommended that the Authority adhere to its

procurement policy; support or repay any amounts

that it paid in excess of reasonable costs; and reprocure the contracted services. Further, the Authority should promptly identify and correct maintenance

and security deficiencies and implement the necessary policies to prevent the deficiencies from recurring. Finally, HUD should review the relationship

between the Authority and the nonprofit entities and

take necessary action regarding the money given to

the two directors. (Report No. 2004-FW-1001)

In response to a complaint regarding the Seattle,

WA Housing Authority’s procurement and award of

Section 8 project-based vouchers, and personnel

conduct issues regarding conflict of interest and

lobbying, we audited the Authority. The audit results

indicated that the complaint was not valid. However,

during the review we found that the Authority improperly waived part of its published contracting requirements when it awarded Section 8 project-based

vouchers to the YWCA. Because the Authority did not

provide other potential applicants with the opportunity

to submit proposals based on the waived requirements, the procurement process was neither open nor

fair to all possible proposers. This occurred because

the Authority did not have clear and specific controls

to ensure that the requirements of the Request for

Proposals were followed when determining eligibility

of proposals.

We recommended that HUD determine if the

Authority has implemented policies and procedures to

ensure that procurements are performed fairly and

openly. The Authority should also be required to

implement necessary controls. (Report No. 2004-SE1001)

We previously completed a review of the procurement activities of the Housing Authority of the City of

Los Angeles, CA (HACLA), including ongoing monitoring and management of resultant contracts as they

relate to HACLA’s Resident Management Corporations/Resident Advisory Councils (RMCs). The review

was initiated in response to several citizen complaints

alleging irregularities with HACLA’s RMCs and related

contracting activities. Legal complications have

precluded the issuance of a final audit report describing the results of this review. However, as part of the

review, we also identified problems related to

HACLA’s management of its legal affairs, including

failure to advise HUD of significant legal matters.

Specifically, HACLA incurred outside legal service

fees and entered into a $1.8 million litigation settlement agreement to resolve an employee lawsuit

without required prior HUD notification and approval.

HACLA also incurred unnecessary and ineligible

attorney fees of over $119,000 on behalf of a consultant and over $47,000 in unnecessary attorney fees to

monitor information requests and activities of the OIG

during our review.

We recommended that HUD ensure HACLA uses

non-federal funds to reimburse its Low-Rent Housing

Program for the ineligible legal fees and require

HACLA to establish appropriate policies and procedures to ensure that in the future, legal activities are

carried out in accordance with HUD requirements.

(Report No. 2004-LA-1002)

Qui Tam Civil Lawsuit

For over three years, OIG has provided extensive

audit assistance to an Assistant U.S. Attorney (AUSA)

on a qui tam civil lawsuit against Patrol Services, Inc.

Patrol Services routinely overbilled for its services as

if every guard shift were fully staffed, and submitted

false time records listing nonexistent persons and

persons who did not work the hours claimed. OIG

estimated that Patrol Services over-claimed $536,000

from February 1997 through September 1998. The

AUSA settled the case out of court. Under the settlement, the government will receive $100,000 from the

Atlanta, GA Housing Authority and $300,000 from

Dominium Management Georgia Company, a management contractor for the Authority, and its parent,

Dominium Management Services, Inc. Dominium

hired Patrol Services to provide security guard

services at three Housing Authority properties and

was responsible for overseeing its performance and

billings. The husband and wife owners of the now

bankrupt Patrol Services, Andrew and Michelle

Bryan, separately consented to judgments in favor of

the U.S. totaling $380,000. The qui tam relator will

receive 25 to 30 percent of settlement amounts

collected by the U.S.
Chapter 3 - HUD’s Public and Indian Housing Programs 41

Investigations

During this reporting period, the OIG opened 519

investigation cases and closed 335 cases in the Public

and Indian Housing Program area. Judicial action

taken on these cases during the period included

$4,438,487 in investigative recoveries, $12,659,934 in

funds put to better use, 341 indictments/informations,

212 convictions/pleas/pre-trial diversions, 230 administrative actions, eight civil actions, and 691 arrests.

The results of our more significant investigations are

described below.

Racketeering

In Federal Court for the District of Columbia,

the following verdicts were handed down against

defendants Tayo John Bode, Sunday Yemi Adefehinti,

Stephen Benson Akinkuowo, Olushola Akinleye, and

Protech Builders, Inc. Bode was found guilty of one

count of racketeering, six counts of bank fraud, two

counts of money laundering, and four counts of

interstate transportation of stolen property. Adefehinti

was found guilty of one count of racketeering, five

counts of bank fraud, one count of money laundering,

and one count of interstate transportation of stolen

property. Akinkuowo was found guilty of one count of

racketeering, two counts of bank fraud, three counts

of money laundering, 14 counts of mail fraud, and

three counts of interstate transportation of stolen

property. Akinleye was found guilty of one count of

racketeering and three counts of bank fraud. Protech

Builders, Inc., was found guilty of one count of

racketeering and three counts of bank fraud.

The defendants were involved in a scheme in

which they flipped properties, transferred ownership

into the names of strawbuyers, fraudulently obtained

conventional mortgages, and then entered the properties into the Section 8 Program. The defendants

allowed the properties to go into default and subsequent foreclosure while continuing to receive Section

8 rental subsidies. A Section 8 subsidized apartment

was used by the defendants to make the false identities of the strawbuyers appear to be legitimate.

Annual certifications made to HUD regarding this

Section 8 apartment were false.

In October 2003, a hearing was held before the

jury to determine whether there was a nexus between

the items to be forfeited and the Racketeering Influenced Corrupt Organizations (RICO) enterprise, as

required for forfeiture under the RICO statute. The

jury returned a verdict for the forfeiture of $1,253,338

from defendants Bode, Adefehinti, Akinkuowo, and

Akinleye. Of this amount, $98,588 involved Section 8

benefits which were fraudulently obtained. The

remainder was the amount of loan proceeds obtained

from commercial lending institutions.

PHA Management and Program

Officials/Employees

In Marquette, MI, in Federal Court for the

Western District of Michigan, defendant Brenda Lou

Welsh, the former executive director of the Keweenaw

Bay Ojibwa Housing Authority (KBOHA), was sentenced for embezzling funds from the Authority. She

was sentenced to 36 months incarceration and 36

months supervised release, and was ordered to pay

$420,780 in restitution to HUD. Welsh was the executive director of the KBOHA from March 1972 until

June 2001 and used her position to embezzle funds.

She used a variety of payees, including cash to herself, credit cards, and car payments. The stolen funds

consisted primarily of funds appropriated to the

Authority by HUD.

In Tampa, FL, in Federal Court for the Middle

District of Florida, defendant Audley Evans, the

former executive director of the Tampa Housing

Authority, was sentenced to 33 months in prison and

24 months probation, and was ordered to pay $20,000

in restitution and $400 in court fees. Evans was

convicted on three counts of making false statements

to HUD, two counts of bribery, and one count of

conspiracy.

Defendant Debra Smith, the former Section 8

housing assistance manager for the Housing Authority

of Bogalusa, was sentenced in New Orleans, LA, in

Federal Court for the Eastern District of Louisiana, to

five years probation and was ordered to pay $6,990 in

restitution for her role in defrauding the Section 8

Housing Assistance Payment (HAP) Program. Smith

previously pled guilty to making false statements to

HUD. From January 1997 to March 1999, Smith used

her position to create and approve fraudulent Section
Chapter 3 - HUD’s Public and Indian Housing Programs 42

8 HAP contracts in the names of family and friends.

As a result of the scheme, about $25,000 in Section 8

payments were made to landlords who are Smith’s

relatives.

Defendant Derrick Moreau, former executive

director of the Simmesport Housing Authority, pled

guilty in Simmesport, LA, in Avoyelles Parish State

Court, to seven counts of felony theft, one count of

malfeasance in office, and one count of misdemeanor

theft. Moreau was sentenced to eight years on each of

the felony theft counts, five years on the malfeasance

in office charge, and six months on the misdemeanor

theft charge, all to run concurrently. While working

as executive director, Moreau was reimbursed for

items that had previously been purchased by the

Housing Authority, paid for personal expenses, such

as child support payments, and purchased a new air

conditioner for his home using Authority funds.

Defendant Eddy Lee Summers, former deputy

executive director of the Wheeling, WV Housing

Authority (WHA), was debarred by the HUD Enforcement Center from future participation in HUD funded

programs. Summers was also ordered to pay $12,240

in restitution. Summers, who pled guilty in June 2003

to embezzling $3,496 from the WHA petty cash

account by submitting falsified invoices for equipment

and services, will also be prohibited from obtaining

employment with organizations receiving funding

from HUD. Summers created a scheme to defraud

WHA by identifying these expenditures as emergencies

and bypassing the financial control system at WHA.

This investigation was initiated after finance representatives from WHA began to notice inconsistencies

as well as an inordinate amount of “emergency”

expenditures by Summers.

In Kansas City, MO, in Platte County District

Court, defendant Paul Howard pled guilty to stealing

and was sentenced to four years supervised release

and ordered to pay $12,179 in restitution. From July

through October 2003, Howard charged $12,179 on a

gas credit card that he stole from the Housing Authority of Kansas City while he was an employee.

In Clinton, MO, in Henry County District Court,

defendants Bonnie Houk, former executive director of

the Clinton Housing Authority (CHA), and Donna

Tyler, former administrative assistant at the CHA,

each pled guilty to issuing a false instrument. The

defendants altered criminal background checks in

order to allow prospective tenants into HUD subsidized housing. Both Houk and Tyler received a

suspended imposition of sentence and two years

probation, and were ordered to perform 60 hours of

community service.

Defendant Susan Adams, former executive

director of the Auburn Housing Authority, was

sentenced in Omaha, NE, in U.S. District Court for

the District of Nebraska, for embezzling $15,881

from the Housing Authority. She was sentenced to

three years probation and 120 hours of community

service, and was ordered to pay $15,881 in restitution

and a $100 assessment fee.

The Departmental Enforcement Center suspended and proposed debarment against former

Lycoming County Housing Authority employee

Theresa Coughlin. Coughlin was convicted and

sentenced in Williamsport, PA, in U.S. District

Court, Middle District of Pennsylvania, to five years

supervised probation and 100 hours of community

service, and was ordered to pay $28,000 in restitution

to the Housing Authority. Coughlin was charged with

208 counts of theft for failure to make required

disposition of funds, tampering with public records,

and receiving stolen property. She was employed as

the housing coordinator at the Pennvale public housing

development when the thefts occurred. Coughlin stole

the cash rent payments that she received from

tenants, and lowered the rents for other tenants

without justification or authorization.

Defendant Joyce Gates, former executive director

of the Logansport Housing Authority (LHA), pled

guilty in Logansport, LA, in Federal Court for the

Western District of Louisiana, to one count of theft of

government funds. Gates admitted stealing over

$117,000 from the LHA by skimming rent, giving

herself raises that were not authorized by the board,

purchasing a personal vehicle, paying for car insurance for her personal vehicle, having furniture

delivered to her home, and installing a fence at her

residence. Gates also wrote numerous checks to

fictitious companies for work that was never com-
Chapter 3 - HUD’s Public and Indian Housing Programs 43

pleted and subsequently deposited the money in her

personal account.

In Albuquerque, NM, in U.S. District Court for

the District of New Mexico, defendant Joe R.

Calabaza pled guilty to one count of theft of federal

program funds. Defendant Lorenzo Coriz pled guilty

to embezzlement and theft from an Indian Tribal

Organization. As part of the plea, both defendants

have agreed to make restitution to the Santo Domingo

Tribal Housing Authority (SDTHA) of the funds they

embezzled. The exact amount of restitution will not

be determined until the pre-sentence report is completed, but it is anticipated to be approximately

$157,000 for Calabaza and $37,700 for Coriz.

Calabaza, who is the former SDTHA executive director, and Coriz, a former SDTHA board member, were

charged in September 2003, along with former SDTHA

board members Jerry Nieto and Howard Tenorio,

with embezzling over $200,000 from SDTHA. Nieto

and Tenorio have already pled guilty in this case.

Defendant Jimmie L. Woodard, a former accountant at the Diboll Housing Authority, pled guilty in

Diboll, TX, in Federal Court for the Eastern District

of Texas, to theft from a government program. An

investigation revealed that over a period of five years,

Woodard embezzled over $78,000 by failing to deduct

monies from her payroll checks to cover federal

withholding taxes and personal loan payments to a

credit union.

In Oklahoma City, OK, in Federal Court for the

Western District of Oklahoma, defendant Gwendolyn

Terrapin pled guilty to one count of a three-count

indictment. This investigation was initiated after OIG

received allegations that the defendant was embezzling HUD funds from the Otoe-Missouria Indian

Housing Authority while she was executive director.

Terrapin admitted in a change of plea hearing that she

used the Authority’s credit card to make personal

purchases and pay personal bills. She later authorized

the Authority to pay the credit card bill. HUD’s loss

amounted to $23,683. Terrapin resigned after being

investigated by the Tribe and moved from the area,

leaving an outstanding rent and utility balance for a

20-month time period. The Authority paid this balance.

Defendant Sonja Hamilton, former executive

director of the Homer Housing Authority (HHA), pled

guilty in Homer, LA, in Federal Court for the

Western District of Louisiana, to one count of theft of

government funds. Between 2002 and March 2003,

Hamilton telephonically transferred over $12,000

from the HHA’s account to her personal account. She

also paid personal credit card bills on line with

Housing Authority funds. Hamilton concealed these

transactions from the HHA’s fee accountant by

altering the Authority’s bank statements each month.

In addition, Hamilton lived in the Housing Authority

rent-free and gave herself raises that were not

approved by the board. This scheme resulted in a

$30,178 loss to the HHA. Hamilton has also been

suspended from participation in procurement and

non-procurement transactions with the Executive

Branch of the Federal Government.

Defendant Terry Latimore, a former employee of

the Dallas Housing Authority (DHA), pled guilty in

Dallas, TX, in Dallas County State Court, to one

count of theft by a public servant and was sentenced to

five years probation, fined $750, and ordered to pay

$2,910 in restitution to the DHA and $360 to the Dallas

District Attorney’s Office. While working for the DHA

as a public housing manager, Latimore embezzled

rent payments from tenants. He stole blank money

orders from elderly and disabled tenants and wrote

his name in the payee line. In addition, Latimore took

cash for rent from tenants and never applied it to their

accounts. Latimore gave each tenant a receipt for

these transactions.

Defendant Charles T. Bell, former executive

director of the Ferriday Housing Authority, was

debarred from participating in any HUD programs for

a five-year period. Bell previously pled guilty in

Ferriday, LA, in Federal Court for the Western

District of Louisiana, to one count of theft of government funds. He created and used a nonprofit organization, Community Housing Development Organization of Concordia, to divert Housing Authority funds

into the nonprofit’s account and subsequently pay for

his personal expenses.

Defendant Tonya House, a former payroll accountant at the Memphis Housing Authority, was indicted

in Memphis, TN, in Federal Court for the Western
Chapter 3 - HUD’s Public and Indian Housing Programs 44

District of Tennessee, for embezzling Authority funds.

Between December 2002 and January 2003, House

allegedly stole 26 payroll checks totaling over $42,000

from the Authority. She was subsequently terminated

from the Authority.

Defendant Charles Brown was indicted in New

York, NY, in Federal Court for the Southern District

of New York, on one count of conspiracy to commit

theft concerning programs receiving federal funds

and one count of theft concerning programs receiving

federal funds. Brown, a former New York City

Housing Authority (NYCHA) property manager, is

charged with using his position with NYCHA in order

to rent or offer to rent NYCHA managed commercial

space without NYCHA’s authorization. He allegedly

caused commercial space to be rented by way of

bogus leases, and collected commissions and down

payments in addition to rent for this space. Brown

used the monies collected from the scheme for his

personal benefit.

Raymond Williams, a real estate agent, was also

charged in this case for allegedly acting as the

middleman in the scheme to solicit prospective

storeowners who then signed fictitious leases obtained

from Brown via his position with NYCHA. Brown and

Williams collected application and commission fees

in addition to approximately $65,000 in rental payments from the shopkeepers.

Defendant Augustus R. Bond, Sr., was indicted in

Baltimore, MD, in Federal Court for the District of

Maryland, on 15 counts of theft of government

property and aiding and abetting for his part in a

scheme to defraud the Housing Authority of Baltimore City (HABC). Bond allegedly received and

negotiated 77 HABC checks representing payment of

Section 8 rent subsidies for two tenants who were no

longer residing at his rental property, resulting in

$65,664 in losses to the HABC and HUD. The scheme

involved the submission and falsification of annual

tenant recertifications and new tenant documentation

for former Section 8 tenants. The first tenant vacated

Bond’s rental unit in April 1993 but was reinitiated as

a new tenant on Bond’s landlord account in May 1995.

Another tenant sublet her Section 8 unit, with Bond’s

knowledge, to a friend in January 1999 for $200 per

month. Bond continued to receive the Section 8

subsidy payments for both of these units through

February 2003, at which time subsequent payments

were suspended pending the outcome of the investigation. This indictment stems from an investigation into

employee theft and misconduct at the HABC, which to

date has resulted in the indictment and conviction of

defendant Cardoza Jacks, another Section 8 landlord,

as well as an administrative action against defendant

Mark Kendel, an HABC employee. Jacks was sentenced to three years probation and ordered to pay

$44,706 in restitution to HUD for his role in the

fraudulent receipt of housing assistance payments

from the HABC.

Defendants Valarie Campbell, Debbie Nelson,

Frances Robinson, and Genevie Smith, former

Pompano Beach Housing Authority (PBHA) employees, Arjunen Apana, a current PBHA employee, and

Denise Laxey, Erius Thomas, and Leroyd Cleofoster

Joyce were indicted in Pompano Beach, FL, in

Federal Court for the Southern District of Florida, on

22 counts of conspiracy, theft concerning programs

receiving federal funds, and theft of public funds. The

indictment also alleged that the PBHA constituted a

criminal enterprise involved in racketeering, as

defined under the Racketeering Influenced and

Corrupt Organizations statute. Those charged under

this indictment allegedly solicited bribes to award

Section 8 rental subsidies to ineligible individuals.

Campbell allegedly misused her position with the

PBHA to fraudulently issue Section 8 landlord payments to Joyce and Thomas. Nelson allegedly misused her position with the PBHA to fraudulently issue

payments to Laxey. These defendants were among 14

individuals charged with conspiring to defraud HUD’s

Section 8 Program. From June 1997 through March

2002, the co-conspirators profited from the illegal

award of over 300 Section 8 vouchers to individuals

who neither qualified for rental subsidies nor appeared on the PBHA’s waiting list. This waiting list

was closed in June 1997 due to an overwhelming

number of qualified applicants. The co-conspirators

also issued or received fraudulent Section 8 landlord

payments.

Also in this case, defendants Chiquita Blue,

Deborah Youn Brown, Nirmala Chandradat, Connie

Devoe, Denise Haygood, and Belinda Moore were

charged as co-conspirators with defrauding HUD’s

Section 8 Rental Subsidy Program.
Chapter 3 - HUD’s Public and Indian Housing Programs 45

Defendant Michael Lyons, an employee of the

Buffalo, NY Municipal Housing Authority (BMHA),

was suspended without pay for 30 days and placed on

probation for one year. As a result of Lyons’ suspension, the BMHA will not pay him $4,529 of his yearly

salary. Lyons was involved in a bid rigging scheme in

which defendant Dominic DiSalvo, a contractor,

submitted fraudulent bids to the BMHA in order win a

contract award. DiSalvo has already pled guilty to

making a false statement and was sentenced to one

year probation and ordered to pay $1,000 in restitution.

Defendant Denise Guite was arrested pursuant to

a Connecticut State arrest warrant on one count of

larceny in the first degree by defrauding a public

community. Guite is the former executive director of

the Berlin, CT Housing Authority. While employed in

that capacity between November 2000 and November

2002, Guite allegedly embezzled approximately

$17,205 from the Authority. This dollar amount

includes funds to pay health insurance and dental

insurance benefits to which she was not entitled.

Defendants Vernell King and her sister Elise

Johnson, both employees of the City of New York,

were arrested on complaints issued by the U.S.

Attorney’s Office, Eastern District of New York, for

defrauding the HUD Section 236 Program. King, a

secretary for the Law Department of the New York

City Housing Authority, the same agency that administered the program she allegedly defrauded, was

charged with theft of government funds and false

statements. Johnson, a community service aide with

the New York City Health and Hospital Corporation,

was arrested on the same charges. Allegedly, King

fraudulently obtained two separate subsidized apartments, one for herself and one for her sister. Both

would have been ineligible for subsidies had they

reported their true income.

Defendant Nestor Zamot, Sr., a former York

Housing Authority employee who was fired after his

fraud scheme was uncovered, was convicted in

Harrisburg, PA, in Federal Court for the Middle

District of Pennsylvania, for living rent-free in a

public housing unit. Zamot, who was employed as a

groundskeeper, pled guilty to the illegal conversion of

government property. He had been living rent-free in

a public housing unit with his wife, whom he had

reportedly divorced. A search warrant executed at the

residence yielded evidence that Zamot had been

living with his wife in the unit for the past three years.

The Housing Authority suffered a loss of $17,000.

Defendant Millie Holliday was arrested pursuant

to a state warrant issued by the Spaulding County

Superior Court. Holliday, the former executive

director of the Griffin, GA Housing Authority, who

was terminated from her position, was charged with

misusing the Housing Authority’s credit card and

illegally eavesdropping on employees. Holliday

allegedly charged $4,177 in personal items on the

credit card. She also had surveillance equipment

installed on the computer of the Authority’s accountant, and when the accountant cooperated with the

OIG, Holliday fired the employee.

Investigations Involving Public

Officials

In Little Rock, AR, in Federal Court for the

Eastern District of Arkansas, defendant Jack E.

Foster, a member of the Pine Bluff City Council, and

a tenant of the Pine Bluff Housing Authority, was

indicted for allegedly extorting $32,500 in community

development funds from a contactor in return for his

vote in favor of a motion before the City Council. The

investigation also disclosed that Foster failed to report

his income from his City Council position while he

was receiving housing assistance.

In Hammond, IN, in Federal Court for the

Northern District of Indiana, defendants Geraldine

Tousant, deputy mayor of the City of Gary, IN,

Vanessa Dabney, executive director of the City of

Gary Department of Redevelopment and Demolition,

and Kimberly E. Lyles, superintendent of parks for

the City of Gary Parks Department, were each

indicted for making false statements to investigators

of a federal task force investigating public corruption

in the City of Gary. Tousant, Dabney, and Lyles were

each indicted for lying to federal agents during their

interviews regarding their dealings with a specific

Gary, IN businessperson.
Chapter 3 - HUD’s Public and Indian Housing Programs 46

In the same case, defendant Otho Lyles, commissioner of the Gary sanitary district and contractor

with the City of Gary, was indicted in Federal Court

for the Northern District of Indiana for making a false

statement to federal task force agents investigating

public corruption. Lyles was indicted for lying about

his knowledge of the involvement of a city official in

the awarding of contracts by the City of Gary. Lyles is

also the owner of Northlake Excavating and Demolition (NED). Lyles and NED allegedly received payments from the Gary Housing Authority.

Conspiracy

In Los Angeles, CA, in Federal Court for the

Central District of California, defendant Michael

Clarence Jones was sentenced for conspiracy and

mail fraud to one year plus one day incarceration.

Jones was paid a salary by American Development

Company (ADC), a company that managed Section 8

properties, when in reality he was a ghost employee

who rarely did any work for ADC. Jones also used ADC

salaried employees to perform construction work at a

private residence for a construction company he

controlled. Jones’ fraud resulted in $206,000 in losses

to HUD.

Defendants Ernest Stevenson, a Section 8 landlord, and Paula Petruk, a Section 8 tenant, were

indicted in Duluth, MN, in Federal Court for the

District of Minnesota, on one count of conspiracy and

three counts of false statements. The defendants

allegedly conspired to fraudulently obtain $45,000 in

Section 8 rental assistance during a scheme in which

Stevenson resided in the Section 8 unit with Petruk

from 1987 through 2001.

Defendant Juan Carlos Don Juan-Gayton, also

known as Juan Carlos Don Juan and Juan Cisneros,

pled guilty in Houston, TX, in Federal Court for the

Southern District of Texas. Juan-Gayton was previously indicted, along with 13 other individuals,

including Claudia Carrizales de Villa, as part of a 58-

count indictment that outlined his involvement in a

conspiracy to harbor/conceal illegal aliens in Section

8 apartment units. The actions of Juan-Gayton and his

co-conspirators resulted in the death and injury of a

number of illegal aliens. The investigation also

revealed that Carrizales de Villa falsified information

on her application for housing assistance and fraudulently obtained housing for illegal aliens.

In Syracuse, NY, in Federal Court for the

Northern District of New York, defendant Griffin

International, Inc., of Plattsburgh, NY, pled guilty to

conspiracy to violate the Clean Air Act and mail

fraud. Griffin International provides project design,

project monitoring, and air monitoring to firms

performing asbestos abatement. The charges arose

from an illegal agreement between Griffin International and Parker Environmental Management Group.

Griffin International took fraudulent air monitoring

samples and permitted Parker Environmental to

perform illegal asbestos work practices during an

abatement project at the Plattsburgh Housing Authority. Parker Environmental and its owner, Andre

Parker, were previously found guilty of illegal removal and disposal of asbestos containing materials

from several buildings at the Plattsburgh Housing

Authority.

Grand Larceny/Theft

Defendant Shau Ling Yam, a Section 236 Program participant, pled guilty in State of New York

Supreme Court, New York, NY, to grand larceny in

the third degree and scheming to defraud in the first

degree. Yam, a resident of Two Bridges Houses,

posed as a HUD managing agent in her housing

community. She approached unwitting immigrants in

Chinatown and made false promises to assist them in

obtaining public housing units. She charged individuals

between $1,000 and $17,500 as initial fees to obtain

these units. In order to make her scheme appear

legitimate, Yam used altered HUD recertification

forms from her own request for recertification. When

the victims finally realized what had happened and

requested their money back, Yam threatened them

with gang violence. There were over 33 victims who

came forward in this case claiming to have been

defrauded by Yam. In total, Yam stole over $171,000

from her victims.

Defendants Micah Brown, Leonard Walters,

Berquilia Paulino, also known as Belkis Paulino,

Theresa Ahmed, Joy Felder, and Tracey Hannon

were arrested and charged in State Court in New

York, NY, with grand larceny, false filings, offering a
Chapter 3 - HUD’s Public and Indian Housing Programs 47

false instrument, and criminal possession of a forged

instrument. Defendants Brown and Walters allegedly

underreported their income and received more than

$3,000 each in Section 8 subsidies to which they were

not entitled. Defendants Paulino and Ahmed allegedly

submitted false documents in which they misrepresented their total household income over a period of

several years. During that time, they received $22,171

and $21,518, respectively, in Section 8 assistance to

which they were not entitled. Defendants Felder and

Hannon allegedly underreported their income and

received more than $3,000 each in excess Section 8

subsidies.

Numerous investigations have disclosed various

theft schemes by individuals attempting to defraud the

Yonkers Municipal Housing Authority (YMHA). In

White Plains, NY, in U.S. District Court for the

Southern District of New York, defendant Celeste

Peixoto was sentenced to 13 months in prison and was

ordered to pay $85,449 in restitution and a $5,000

fine. Peixoto was previously charged with theft

concerning programs receiving federal funds, false

statements, and conspiracy to defraud HUD. By

creating and using false documents such as sham

leases and fake real estate deeds, Peixoto fraudulently

obtained monies from the Section 8 Program administered by the YMHA.

Defendant Janette Torres was sentenced to six

months home confinement and was ordered to pay

$45,472 in restitution. Torres previously pled guilty to

theft of government funds. She defrauded the Section

8 Program by concealing her employment and income

from the YMHA.

Defendant Shelli Phoenix was sentenced to three

years probation and was ordered to pay $53,322 in

restitution. Defendant Shirley Jones was sentenced to

three years probation and was ordered to pay $23,700

in restitution. Phoenix held two HUD subsidized

apartments and failed to disclose her true income to

the YMHA. Jones, who lived in one of the apartments,

benefited from the fraud.

Defendants Amanda Soto and Bilal Mehdawi pled

guilty to theft of government money. Soto failed to

inform the YMHA that her husband, Bilal Mehdawi,

had been living with her since 1998. Mehdawi

allegedly owns a business, which would have made

Soto ineligible to receive Section 8 subsidies. The

estimated overpayment is $49,787.

Defendants Rosario and Victor Mendoza, husband and wife, were sentenced in Los Angeles, CA,

in State Court, to four years in state prison for grand

theft and welfare fraud. They were also ordered to

pay $55,003 each in restitution to the City of Norwalk

Housing Authority. In April 2003, a felony complaint

was filed by the County of Los Angeles District

Attorney’s Office against the defendants alleging that

they made false statements to unlawfully obtain

Section 8 benefits. The Section 8 loss amount was

calculated at $55,003.

In Eden, NC, in Federal Court for the Middle

District of North Carolina, defendant April Deese, a

former Section 8 manager, was sentenced for theft of

government funds. Deese received six months home

detention and five years probation, and was ordered to

pay $53,350 in restitution. Deese was the on-site

manager for five housing developments, two of which

were Section 8 complexes. From 1999 to 2001, Deese

deposited tenant rents in her personal bank account

and then used the funds for her own benefit.

Defendant Grace M. DeLarge, who fraudulently

cashed $23,414 worth of Section 8 housing assistance

payments checks intended for her deceased mother,

Hazel Thompson, was sentenced in Los Angeles,

CA, in Federal Court for the Central District of

California, to five years probation and was ordered to

pay $78,726 in restitution.

In Seattle, WA, in U.S. District Court for the

Western District of Washington, defendant Vernice

Allen, a Section 8 housing voucher recipient, was

sentenced to five years probation and ordered to pay

$25,632 in restitution. Allen pled guilty in October

2003 to one count of theft of a thing of value from a

government department. During three annual recertifications, Allen underreported her income and

received $25,632 in assistance to which she was not

entitled.

Defendant Nhat Huynh, a former Section 8

tenant, pled guilty in the State of California Superior

Court, San Jose, CA, to five counts of grand theft,

welfare fraud, submitting a false application for
Chapter 3 - HUD’s Public and Indian Housing Programs 48

housing, and perjury in connection with her failure to

provide complete and accurate information about her

household composition, income, and employment to

various Santa Clara County social services agencies,

including the Santa Clara County Housing Authority.

From 1996 to 1999, Huynh told local authorities that

she was a single mother and that she did not know the

father of her three children, when in fact the father

was living with her in her Section 8 unit. Huynh also

withheld information about her spouse’s ownership of

a tailoring business and two rental properties. As a

result of this false information, Huynh received more

than $117,000 in housing, medical, and welfare

benefits to which she was not entitled.

Defendant Denise Gardner pled guilty in Philadelphia, PA, in the Commonwealth of Pennsylvania

Court of Common Pleas, to felony theft by deception,

unsworn falsifications, and false swearing. An

investigation uncovered Gardner’s scheme to submit

false information to the Philadelphia Housing Authority (PHA). Gardner, a Pennsylvania State employee,

allegedly misrepresented her yearly income to the

PHA in order to qualify for over $34,000 in Section 8

assistance. Her fraud scheme began in 1995 and

ended approximately one year ago. The investigation

further determined that Gardner conspired to submit

false unemployment information to the PHA on behalf

of her sister, Patricia Wright, who was also a Section

8 tenant.

In Harrisburg, PA, in Federal Court for the

Middle District of Pennsylvania, defendant Heather

Roberts pled guilty to conversion of government

property for her own personal use in connection with

her participation in HUD’s Housing Choice Voucher

Program (HCVP). Roberts participated in the HCVP

from March 1997 through September 2003, during

which time she lived at the Waterford at Summit

View development in Hummelstown, PA. An investigation disclosed that Roberts failed to report her

marriage to the Dauphin County Housing Authority

and the fact that her husband was living with her.

Roberts’ husband had several felony drug convictions

that would have made her ineligible to continue

participating in the HCVP. The Housing Authority paid

$24,000 in housing assistance payments on Roberts’

behalf.

Defendants Jonetta Reeves, a former Section 8

tenant, and Preston Handcox, a former Section 8

landlord, were indicted in the Circuit Court of Cook

County, Chicago, IL, on four felony counts of theft.

According to the indictment, Reeves was responsible

for planning a scheme wherein she and her husband,

Graylin Waters, would occupy their newly purchased

home as co-occupants, while at the same time

instructing her father-in-law, Handcox, to act as the

owner and landlord for Section 8 purposes on behalf

of that same property. Handcox is alleged to have

collected the monthly housing assistance payment

checks from the Cook County Housing Authority and,

after cashing them, kicking back the money to

Reeves, the Section 8 tenant. The total loss to the

Housing Authority was $17,000.

In a separate indictment, defendant Allison

Waters, the brother of Graylin Waters, and Patricia

Flowers, Waters’ wife and a former Section 8 tenant,

were charged with three felony counts of theft.

Waters and Flowers allegedly planned a similar

scheme by occupying a newly purchased home as cooccupants. In this case, Waters was the Section 8

landlord for the property he occupied with his wife,

Flowers. The role of Handcox in this case was the use

of his address as a Section 8 drop box. Handcox would

accept checks from the Housing Authority made out

to Waters, and would in turn provide them directly to

Waters. The total loss to the Housing Authority was

$48,000.

The Alameda County District Attorney’s Office

issued a complaint and arrest warrant for defendant

Caprell Moss, a public housing tenant at the Oakland, CA Housing Authority, charging Moss with

multiple counts of grand theft and perjury relating to

welfare and housing fraud. From July 1997 through

August 2002, Moss repeatedly told the Alameda

County Department of Social Services and the

Oakland Housing Authority that she did not know the

whereabouts of her children’s father. However, an

investigation disclosed that the children’s father was

gainfully employed and was living with Moss and

their children at her public housing unit. As the result

of the fraud, Moss received $40,812 in housing

assistance to which she was not entitled.
Chapter 3 - HUD’s Public and Indian Housing Programs 49

In Norristown, PA, in the Commonwealth of

Pennsylvania District Court for Montgomery County,

a criminal complaint was filed charging defendants

Anndria Smith Watkins and Christopher Watkins with

one count each of conspiracy, eight counts each of

theft by unlawful taking or disposition, and eight

counts each of theft by deception for receiving more

than $39,000 in public housing assistance to which

they were not entitled. Anndria Smith Watkins

allegedly failed to report to Montgomery County

Housing Authority (MCHA) officials that her husband,

Christopher Watkins, was residing with her at her

subsidized unit. Christopher Watkins was employed

during this time. In addition, Anndria Smith Watkins

underreported her own income to the MCHA. While

they were receiving rental assistance, the defendants

purchased a home in Norristown and sublet the

subsidized unit to a relative; they also failed to report

this information to the MCHA.

The Watkinses were also charged with an additional nine counts each of theft by unlawful taking or

disposition and nine counts each of theft by deception

for the unlawful taking of school services valued at

more than $102,000. After the family relocated to the

home they purchased, which was in another school

district, their children continued to attend school in

the district in which the subsidized unit was located.

The theft of services related to the defendants’

falsifying documents and maintaining the false

information for their personal gain.

In Charleston, WV, in U.S. District Court for

the Southern District of West Virginia, defendant

Ramona Taylor-Williams, a local housing activist and

chief executive officer (CEO) of a nonprofit organization, was indicted on 40 counts of theft/embezzlement

and mail fraud. Taylor-Williams, the CEO of Realizing

Economic Development Through Education, Enterprise and Morals, Inc. (REDEEM), an organization

established to promote community enrichment,

received grants through the West Virginia Department

of Health and Human Services to promote AIDS

education and awareness, and West Virginia State

College’s Office of Land Grant Programs. TaylorWilliams also served as a principal for the Risen

Corporation, a construction/maintenance firm in

Charleston. As a principal for Risen, she served as

the management agent of a duplex apartment building

used for housing Section 8 housing voucher holders

through the Charleston Housing Authority. TaylorWilliams had two known associates apply and qualify

for housing at the Charleston Housing Authority and

used the housing for employees of REDEEM. She

purposely recruited highly talented and educated

employees to work for REDEEM with the incentive of

free housing benefits. The Section 8 voucher holders

who actually qualified for the housing never lived in

the units.

Defendant Judith Keally, also known as Judy

Deese, a former public housing tenant, was arrested

and charged in Pittsburgh, PA, in State District

Court, Pennsylvania Court of Common Pleas, with

one count of theft by deception, two counts of unsworn

falsification to authorities, and one count of forgery

for participating in a scheme to defraud HUD and the

Allegheny County Housing Authority (ACHA) between

1990 and 2001. Keally resided in the Groveton Village

housing development in Coraopolis, PA, from 1974 to

2001. She was terminated from the Public Housing

Program when ACHA officials found that her husband,

Frank Keally, was residing in her unit while he was

gainfully employed at a local metal plant. Frank

Keally’s income was never reported to ACHA. During

the time period in question, Judith Keally’s daughter,

Traci, also resided in the unit while working fulltime. Her income information was also withheld from

ACHA. Keally is being charged with defrauding the

government out of $32,000 in subsidies and other

housing related services.

Defendant Patrick E. McHugh, Jr., pled guilty in

Boston, MA, in U.S. District Court for the District

of Massachusetts, to two counts of theft of government

funds. McHugh received housing assistance by failing

to claim all of his income. The investigation disclosed

a loss to HUD of $33,341 and an estimated loss to the

Social Security Administration of $65,575.

False Statements

In Baltimore, MD, in Federal Court for the

District of Maryland, a civil judgment was entered

against defendant Harvey Lee Adler, former president and owner of Adler Services Group, Inc., ordering civil damages totaling $705,000. The civil damages ordered were three times the criminal restitution ordered when Adler was sentenced. Adler was

previously convicted on nine counts of a ten-count
Chapter 3 - HUD’s Public and Indian Housing Programs 50

indictment for making false statements and submitting

false and/or inflated repair and maintenance invoices

to the Housing Authority of Baltimore City (HABC).

Adler defrauded HABC by grossly overbilling HABC

for technician labor hours, as well as for parts which

were never replaced under a purchase order for

maintenance and repair services for gas and oil fired

furnaces in rental units owned by HABC. In addition,

defendant Scott Dower, former vice president of

operations, pled guilty to one count of submitting false

statements for his role in the scheme. Adler and

Dower instructed technicians to bill HABC for nonbillable time, such as travel time, to increase the

technician hours charged, in addition to altering

invoices submitted by technicians to reflect additional

billable hours and parts installed to reach a pre-set

minimum billing amount. In one case, the additions

made by Adler and Dower caused one technician to

charge 26 hours of labor for one calendar day. Adler

continues to serve his 41-month sentence in connection with this case.

Defendant Sheryl Cannamore was sentenced in

St. Louis, MO, in Federal Court for the Eastern

District of Missouri, to six months home confinement

and five years probation, and was ordered to pay

$81,322 in restitution. Cannamore previously pled

guilty to making false statements on her housing

certifications to the St. Louis Housing Authority.

Cannamore reported no earned income when in fact

she was a full time employee at the Federal Reserve

in St. Louis.

Defendants Dazerine Winter, a Section 8 landlord, and Amos Winter, a management agent, agreed

to repay $15,000 in HUD subsidies they received

illegally. Dazerine Winter, while also receiving rental

assistance through the Rural Rental Assistance

Program (RRAP), purchased a house and rented it to a

Section 8 tenant, and created an illegal second

apartment. She financed the purchase with a

$221,000 mortgage, while reporting $18,000 in annual

earnings to RRAP. The East Hampton, NY Housing

Authority terminated the HUD contract with Dazerine

Winter upon discovering the illegal apartment and

learning that she was receiving rental assistance.

Winter had failed to report the property ownership

and rental income to RRAP.

In Lakewood, CO, defendant Jennifer Verzuh, a

former Section 8 tenant, agreed to repay the

Jefferson County Housing Authority $40,950 for

ineligible rental assistance paid on her behalf. Verzuh

received Section 8 assistance for a unit in which she

had an ownership interest. In addition, she is the

primary mortgagor on an FHA insured mortgage.

Verzuh’s ownership interest was never disclosed to

the Housing Authority during the certification process. This case was identified as the result of the data

match of assisted housing benefits and FHA insured

mortgages.

Defendant Robert Freschi pled guilty in St.

Louis, MO, in Federal Court for the Eastern District

of Missouri, to false statements. Freschi received

HUD Section 8 assistance from June 1993 to November 2002. From February 1997 to January 2003, he

maintained a bank account at the Cumberland County

Bank in Crossville, TN. This bank account was used

to provide hidden assets and income to Freschi while

he continued to claim on his Section 8 annual recertification forms that he had no income or assets other

than $6,500 per year in Social Security disability

payments.

In fact, Freschi’s bank account had been supplied

with a monthly deposit of $1,666 and an annual

deposit of $8,000. The bank statements reflected a

steady flow of ATM withdrawals at bank locations in

downtown St. Louis. Freschi had lived in St. Louis at

the Centenary Towers Apartments since June 1993.

During the time Freschi was receiving Section 8

assistance, HUD’s loss amounted to approximately

$50,000.

In Richmond, CA, in Federal Court for the

Northern District of California, defendant Candy

Renee Anderson, a former Section 8 tenant who

previously pled guilty to theft of government funds,

was sentenced to five years probation and 142 hours

of community service, and was ordered to pay

$27,912 in restitution to HUD. Anderson admitted that

she knowingly withheld information from HUD and the

Richmond Housing Authority about her part-time

employment.

In Alexandria, VA, defendant Mary Salihi, a

Section 8 recipient, executed a repayment agreement
Chapter 3 - HUD’s Public and Indian Housing Programs 51

with the Fairfax County Department of Housing and

Community Development (DHCD) to repay $23,209 in

excess rental assistance received on her behalf. She

paid $10,000 upon signing the agreement, with the

remainder to be paid at $500 per month. Salihi was

also required to put up her interest in a home that she

owns as collateral. An investigation found that Salihi

and her family falsely claimed a landlord/tenant

relationship that did not exist, and claimed that she

and her “landlord,” who was a family member, were

co-owners of the property for which rental assistance

was being paid on her behalf.

Defendant Valerie Curry was convicted in

Philadelphia, PA, in Federal Court for the Middle

District of Pennsylvania, in connection with her

participation in HUD’s Public Housing Program.

Curry pled guilty after being charged with falsification of documents used to determine her eligibility to

reside in public housing. Curry, who claimed zero

income, owned and operated the Faze One Realty

Corporation from her assisted unit. She bought,

resold, and rented out homes. She concealed her

business and real estate assets from the Housing

Authority. In reality, Curry owned six homes and two

vacant lots valued at $175,000. Disclosure of her

assets would have made her ineligible to participate in

the Public Housing Program. The local housing

authority suffered a $12,000 loss as a result of her

false statements.

In Jefferson City, MO, in U.S. District Court for

the Western District of Missouri, defendant Donna

Marie Sly, a Section 8 tenant at the Columbia Housing Authority, pled guilty to submitting false statements on her annual Section 8 certifications. Sly

failed to report her actual household income by

omitting the fact that her husband, an employee of the

Columbia public schools, was residing with her in the

Section 8 unit. HUD overpaid $22,761 in subsidies on

Sly’s behalf.

Defendant Latonya Decker, a resident of the New

York City Housing Authority (NYCHA), pled guilty in

Brooklyn, NY, in Federal Court for the Southern

District of New York, to submitting false statements.

Decker allegedly provided false statements to NYCHA

during the recertification process by failing to disclose her true income, causing an overpayment of

Section 8 subsidies of more than $40,000.

Defendant Donna Robertson pled guilty in Cleveland, OH, in Cuyahoga County Common Pleas

Court, to one felony count of obstructing justice.

Robertson admitted that she falsified her identity

while responding to a grand jury subpoena for handwriting, photographs, and fingerprints. In exchange

for her plea, a second and more serious charge of

tampering with records was dismissed. The subject

subpoena was issued in relation to an identity used by

another defendant, Charlotte Peters, in a separate

case. Peters is presently awaiting trial concerning

payments in excess of $90,000 she fraudulently

received from HUD via the Section 8 Program and the

Social Security Administration (SSA) via Social

Security disability payments. This second defendant,

Peters, posed as her own landlord, using the false

Peters identity, while receiving monthly rental

assistance as a tenant in her own house. Again, using

the false identity, Peters received additional rental

assistance payments as a landlord for her daughter,

Falesia Wiley. The daughter, Wiley, is a co-defendant

in this matter. The SSA charges stem from Wiley’s

failing to report her true assets in real property and

income from HUD as well as from a business in

which she is co-owner.

In Topeka, KS, in Federal Court for the District

of Kansas, defendant Melva Fulton, a Section 8 tenant

at the Topeka Housing Authority, pled guilty to one

count of submitting false statements. Fulton was

previously indicted after failing to provide the Housing

Authority with true and accurate information pertaining to household income and family composition. She

received $31,550 in housing assistance to which she

was not entitled.

A two-count felony complaint was filed by the

County of San Diego, CA District Attorney’s Office

against defendant Dolores Smith alleging that she

made false statements and unlawfully obtained

Section 8 subsidies. The amount of the loss was

calculated at $22,135. The complaint stemmed from

an investigation which disclosed that Smith received

Section 8 subsidies from the Department of Housing

and Community Development for the County of San
Chapter 3 - HUD’s Public and Indian Housing Programs 52

Diego by making false statements on her Section 8

application.

In a related case, a one-count felony complaint

was filed by the County of San Diego District

Attorney’s Office against defendant Mitchel Snowden

alleging that he made false statements to obtain

$43,700 in Section 8 subsidies. Snowden allegedly

made false statements on his application in order to

receive Section 8 subsidies from the Department of

Housing and Community Development for the County

of San Diego.

In Omaha, NE, in U.S. District Court for the

District of Nebraska, defendant David Williams, a

former public housing tenant at the Omaha Housing

Authority, was indicted on three counts for defrauding

HUD out of $37,149. Williams allegedly failed to

report his true household income by omitting his

employment during the annual certification for tenant

eligibility.

In Concord, NH, in Federal Court for the

District of New Hampshire, defendant Trudy

Goodwin was charged by information with two counts

of making false statements. Goodwin allegedly failed

to disclose to the Nashua, NH Housing Authority her

accurate income from about January 1999 through

June 2003, resulting in an overpayment of Section 8

benefits totaling $24,556. In addition, Goodwin

collected Social Security disability insurance benefits

to which she was not entitled by failing to notify the

Social Security Administration (SSA) of her employment. SSA sustained a loss of approximately $40,000.

Defendant Laura Freytes, a former Section 8

tenant, was indicted in Boston, MA, in Federal Court

for the District of Massachusetts, on one count each

of false statements, wire fraud, and theft of government funds. A federal arrest warrant was also issued

for Freytes. The indictment alleges that Freytes

caused false statements to be submitted to HUD

relating to her Section 8 housing assistance payments.

Freytes failed to report her income to both HUD and

the Social Security Administration while she was

receiving benefits from both departments. Freytes

caused a loss to HUD of more than $9,000 and a loss

to the Social Security Administration of more than

$30,000.

Defendant Linda Marie Corum was charged in

Upper Marlboro, MD, in the District Court of

Maryland for Prince George’s County, with five

counts of theft and false statements for her role in

receiving Section 8 housing assistance to which she

was not entitled. Corum was charged with failing to

report employment income earned since October

2000 to the Prince George’s County Department of

Housing and Community Development. Based on her

false statements, Corum received $21,668 in rental

assistance to which she was not entitled.

Four former tenants of the Paris Housing Authority were indicted in Paris, TX, in the District Court

of Lamar County. Defendants Crystle Mooneyham,

Hobbie Davis, Ethel Davis, and Teresa Tarkington

were each charged with one count of securing execution of a document by deception. This investigation

revealed that all four defendants allegedly failed to

report their true income to the Paris Housing Authority. As a result, they received a total of $36,663 in

rent subsidies to which they were not entitled.

In Leonardtown, MD, in the Circuit Court for

St. Mary’s County, separate, two-count indictments

were returned against defendants Jo Ann

Sommerfeld, a tenant, and Richard Quade, a landlord, for making false statements and engaging in a

continuing theft scheme involving the Section 8

Housing Choice Voucher Program. This investigation

began following a referral from the St. Mary’s

County Housing Authority. Allegedly, Sommerfeld

and Quade had been in the program since 1992 and

were cohabitating the entire time. Additionally,

Sommerfeld concealed from the Housing Authority

considerable income and assets, including employment in a department store and co-ownership of a

home in Oklahoma. The estimated fraud against the

Section 8 Program was $77,000. Both Sommerfeld

and Quade have been terminated from the program.

Program Fraud Civil Remedies Act remedies are

being considered.

Mail/Bank Fraud

In Chicago, IL, in Federal Court for the Northern District of Illinois, defendants Alicia Riley, a

Section 8 tenant, and Ellis Franklin, a Section 8

landlord and Riley’s brother-in-law, were sentenced
Chapter 3 - HUD’s Public and Indian Housing Programs 53

after their earlier guilty pleas to mail fraud. Riley

and Franklin both falsely certified on Cook County

Housing Authority annual applications that Franklin

was the true owner of a home in order for Riley to

receive Section 8 subsidy as a tenant. Mortgage

documents, U.S. Bankruptcy Court records, an

inspection of the property, and a report from the local

fire department revealed that Riley had in fact been

the legitimate owner of the building since 1994, which

was the same year she began receiving Section 8

benefits. Franklin only acted in the capacity of owner,

but in turn kicked back housing payments to Riley

each month. Riley and Franklin received over $25,000

in Section 8 subsidies to which they were not entitled.

Franklin was sentenced to eight months in prison and

two years supervised release, while Riley was

sentenced to three years probation. Both were ordered to pay $26,281 in restitution, joint but several,

to HUD.

In St. Louis, MO, in U.S. District Court for the

Eastern District of Missouri, defendant Michele

Meekie was sentenced to two months imprisonment,

five years supervised release, and 30 days in a drug

treatment facility, and was ordered to pay $15,546 in

restitution to the St. Louis County Housing Authority.

Meekie previously pled guilty to one count of a fourcount indictment charging her with bank fraud.

Meekie admitted that she engaged in a scheme to

defraud and obtain monies from Union Planters Bank

by transacting counterfeit checks drawn on the St.

Louis County Housing Authority’s Section 8 account.

She deposited approximately $19,000 in counterfeit

Housing Authority checks in her personal bank

account and contributed to approximately $32,000 in

losses to the Authority.

Also in this case, defendant Dennie Washington

was sentenced to six months incarceration and five

years probation, and was ordered to pay $20,433 in

restitution. Washington manufactured counterfeit

checks drawn on the St. Louis City and St. Louis

County Housing Authorities. He previously pled guilty

to two counts of bank fraud. Washington admitted

engaging in a scheme beginning in October 2002 and

continuing until April 2003 to obtain moneys by means

of material false and fraudulent pretenses. During

that time period, over $80,000 in fraudulent Housing

Authority checks were created and transacted in the

St. Louis metropolitan area. Along with losses

incurred by financial institutions, the St. Louis County

Housing Authority lost over $32,000 from its Section

8 account.

Embezzlement through Counterfeiting

Schemes

In Cleveland, OH, in Federal Court for the

Northern District of Ohio, defendant Sharon Smith

was sentenced to six months confinement and 36

months supervised release, and was ordered to pay

$6,103 in restitution. Defendants Gregory Carr and

Tina Cannon pled guilty to their participation in a

scheme to cash counterfeit checks from the Cuyahoga

Metropolitan Housing Authority (CMHA). All three

defendants were previously charged in a 14-person

indictment for their roles in a conspiracy to defraud

local banks, merchants, and businesses, including the

CMHA, as part of a loosely connected ring formed to

counterfeit payroll and business checks. This investigation has shown that defendant Vaden Anderson,

who had recently been released from state prison for

attempting to cash a counterfeit check using a false

identity, sought others, including Smith, Carr, and

Cannon, whom he used as “recruiters” who, in turn,

would seek out individuals who were willing to

provide their identification and in some cases their

own bank accounts to deposit counterfeit checks

which Anderson made on a home computer. Anderson, the recruiters, and the check “passers” would

then split the proceeds; Anderson received the lion’s

share of the proceeds. Counterfeit check amounts

ranged from as little as $300 to in excess of $16,000.

Loss estimates exceed $49,500.

In Canton, OH, in Stark County State Court,

defendant David Barbour pled guilty to one count of

engaging in a pattern of corrupt activity and two

counts of passing bad checks and was sentenced to 24

months incarceration. Barbour was charged in a

January 2004 indictment with counterfeiting checks

for cash and merchandise by using the Stark Metropolitan Housing Authority’s account number through

the use of several aliases and false businesses.

Barbour was arrested in November 2003, and at that

time, consented to a search. The search yielded

evidence relating to his use of the Internet to place

orders for products ranging from clothing to household goods.
Chapter 3 - HUD’s Public and Indian Housing Programs 54

In Indianapolis, IN, in Marion County State

Court, 20 individuals, who comprised a counterfeit

check cashing ring that cashed or attempted to cash at

least $75,000 in counterfeit checks, were charged

with theft and forgery related charges. Approximately

$10,000 of this amount represents counterfeit checks

issued on a bank account of the Indianapolis Housing

Agency. The counterfeit checks were made by

scanning legitimate checks into a computer and using

commercially available software to produce the

fraudulent checks. The check software, check paper

stock, computer, scanner, printer, and some preprinted counterfeit checks were previously seized

during execution of a search warrant at the residence

of the counterfeit check ringleader, Adrian Cole. The

fraudulent checks were cashed predominately at

grocery and liquor stores in the Indianapolis area.

The 20 individuals charged are as follows: Adrian

Cole, Kristina Elliott, Adriene McCurtis, Adrina

Cole, Ariga Grimes, Brandie Walton, Carrie Colquit,

Charles Johnson, Corey Wadlington, Cynthia Scrivener, Erma Johnson, James Dorsey, Jr., James

Johnson, Kenneth Canady, Latoria Bowie, Monica

Garrison, Montez Craig, Quiana White, Rebbi

Smith, and Vanessa Hankins.

Identity Theft

In State Court in Cleveland, OH, defendant

Gregario Pimental was sentenced to three years

incarceration for tampering with records and 11 years

for drug trafficking, to be served concurrently.

Pimental was previously convicted for his role in a

conspiracy with defendant James Smith, a Section 8

landlord, who obtained properties and collected

housing assistance payments under false names and

Social Security numbers. Smith has already pled

guilty to engaging in a pattern of corrupt activity, drug

trafficking, and tampering with records. Like Smith,

Pimental used different names to obtain properties

and vehicles. At the same time, he assisted Smith in

laundering drug proceeds in order to purchase

additional Section 8 residences.

Other individuals convicted in this case include

Linda Bivens, a loan officer, Earl Howard, Lisa

Jones, Dennis McKenzie, Damon Berry, and Richelle

Spears. Bivens has already been sentenced to one

year probation for tampering with records, securing

writings by deception, falsification, an uttering.

Among the other State of Ohio counts charged in this

case were engaging in a pattern of corrupt activity,

conspiracy, taking the identification of another,

identity theft, and money laundering. As part of this

investigation, two computers, over $5,000 in cash, one

vehicle, about $25,000 in jewelry, and approximately

$200,000 in real estate and business assets were

seized.

In Albany, GA, 53 defendants were arrested, 18

of whom were Section 8 recipients, and 27 more

arrests are anticipated for multiple counts of identity

theft. The subjects are charged with forgery in the

first degree in violation of Georgia State Code.

Defendant Kwezeta Butler, who has been a participant in the Section 8 Program since October 2001,

was the mastermind behind the scheme. Butler

scanned the newspapers for obituaries and then paid

an Internet search company to check the backgrounds

of the deceased. She obtained Social Security numbers and credit information on 80 individuals from

five states. Butler then sold the information for $500

to $600 to people with bad credit. Many of the subjects used the stolen identities to purchase vehicles

from a major car dealership in the South Metro

Atlanta area. The dealership has since closed as a

result of the fraud. As part of this investigation, an

effort is being made to have all Section 8 participants

involved in the fraud terminated from the Section 8

Program.

Fugitive Felon Initiative

Section 903 of the Personal Responsibility and

Work Opportunity Reconciliation Act of 1996

(PRWORA), Pub. Law No. 104-193 (Aug. 22, 1996),

amended 42 U.S.C. §§ 1437d(1)(9) and

1437f(d)(1)(B)(v), makes being a fugitive felon a

ground for the termination of participation in federally

funded assisted housing programs. A fugitive felon,

for the purpose of this law, is any federally funded

assisted housing participant (tenant) who is fleeing to

avoid prosecution for a felony, fleeing to avoid confinement for conviction of a felony, or is violating a

condition of probation or parole imposed for the

commission of a felony.
Chapter 3 - HUD’s Public and Indian Housing Programs 55

On September 25, 2002, the General Accounting

Office (GAO) issued GAO Report No. 02-716, 

Welfare

Reform: Implementation of Fugitive Felon Provisions

Should Be Strengthened. The GAO Report evaluated

several agencies’ efforts to implement various

PRWORA provisions that related to fugitives receiving

benefits from federal assistance programs, and

critically noted that HUD had not conducted a data

match to identify fugitives receiving rental assistance. GAO further determined that HUD had effectively

delegated its responsibilities to public housing agencies (PHAs), and that HUD had not monitored or

evaluated the efforts of PHAs in this regard.

To assist HUD in its response to the GAO Report,

the OIG began a Fugitive Felon Initiative. The Fugitive

Felon Initiative was designed to identify fugitive felons

residing in federally funded assisted housing. The OIG

recognized that, unlike some other federal agencies,

neither HUD nor the OIG is the body that terminates

the tenancy of a violator of the PRWORA statute.

Rather, a third party, generally a PHA, manages the

PRWORA violator’s tenancy. In addition, the OIG

recognized that once the arrest of the fugitive felon

has occurred, the PRWORA fugitive provision making

it a ground for tenancy termination has been removed,

as the subject is no longer a fugitive.

The OIG Fugitive Felon Initiative began in FY

2003. Initially, the Fugitive Felon Initiative used only

U.S. Marshals Service wanted person data in an

effort to identify fugitives. The initiative has expanded

to include the use of state and local wanted person

data in select locations and will soon include the use

of National Crime Information Center wanted person

data to identify wanted fugitives. To date, 445 fugitives

have been arrested as a result of this initiative.

 
Chapter 3 - HUD’s Public and Indian Housing Programs 56

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Chapter 4 - HUD’s Multifamily Housing Programs 57

Chapter 4 — HUD’s Multifamily Housing Programs

In addition to multifamily housing developments

with HUD held or HUD insured mortgages, the Department owns multifamily projects acquired through

defaulted mortgages, subsidizes rents for low-income

households, finances the construction or rehabilitation

of rental housing, and provides support services for

the elderly and handicapped.

Audits

During this reporting period, the OIG issued 12

reports in the Multifamily Housing Program area:

one internal audit, three internal memoranda, seven

external audits, and one external memoranda. These

reports disclosed over $5.5 million in questioned costs

and over $5 million in recommendations that funds be

put to better use.

Over the past six months, we audited owner and

management agent operations at multifamily projects.

The results of our more significant audits are described below.

Owner and Management Agent

Operations

Our audit of the Family Living Adult Care

Center, Biddeford and Saco, ME, disclosed that the

Family Living project has suffered serious financial

problems, including a default on the HUD insured

mortgage, and has ceased being a profitable entity.

These problems were caused by questionable cash

distributions from the project bank accounts by the

owner. We consider these distributions, totaling over

$455,000, to be equity skimming. By means of these

distributions, the owner diverted project funds from

June 2000 to February 2002 to other businesses he

owned and for personal expenses.

We recommended that HUD pursue administrative

sanctions and recovery from the owner of the difference between the amount owed to HUD on the mortgage and the proceeds from the foreclosure sale of

the project (nearly $2.7 million). We also recommended that HUD pursue recovery from the owner of

Multifamily Housing Reports Issued

1 3

7

1

Internal Audits

Internal Memoranda

External Audits

External Memoranda

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

Internal Memoranda External Audits External Memorandum

Questioned Costs Funds Put to Better Use

Multifamily Housing Dollars
Chapter 4 - HUD’s Multifamily Housing Programs 58

double the amount of the questionable cash distributions totaling over $390,000, and obtain from the

owner justification for cash distributions to unidentified recipients totaling over $62,000. If the justification is not provided, we recommended recovery from

the owner of double the amount of unsupported costs.

(Report No. 2004-BO-1002)

In response to a request from the Philadelphia

Multifamily Hub Office, we audited the Carbondale

Nursing Home, Carbondale, PA, a Section 232

multifamily insured project owned by CNH, Inc. The

audit found that the owner did not comply with the

Regulatory Agreement and other HUD requirements

in operating the project. In total, the owner made over

$1.2 million of ineligible and unsupported payments

from project funds. Specifically, the owner received

ineligible salary payments of nearly $375,000;

collected over $170,000 in ineligible distributions/

repayment of advances; paid $486,000 in ineligible

expenses for another company; disbursed ineligible

extension fees totaling nearly $133,000; and paid

unsupported loan payments of more than $97,000.

Several staff persons at the project, including the

controller and administrator, stated that the owner

was not aware of the HUD requirements prohibiting

these expenditures. If the owner had complied with

HUD requirements and used project funds only for

necessary operating expenses of the project, the

owner could have used these funds to pay the mortgage costs (principal and interest) for over two years

and possibly avoided bankruptcy and default on the

HUD insured loan.

The audit recommended that HUD require the

owner to repay over $1.1 million in ineligible expenditures and either support or repay the $97,000 of

unsupported expenditures. HUD should also take

appropriate administrative action against the owner.

(Report No. 2004-PH-1004)

At the request of HUD’s Multifamily Program

Center, Hartford Field Office, we audited Nuestra

Casa, also known as La Casa Elderly Housing, in

Hartford, CT. We found that the management agent

improperly managed project funds totaling over

$371,000 by improperly transferring over $244,000 in

project funds to affiliates, spending over $16,000 in

project funds on other ineligible, unsupported and

unnecessary costs, and circumventing HUD’s reserve

for replacement (RFR) requirements, leaving the RFR

underfunded by nearly $111,000. A breakdown of cost

transfers by the management agent is shown below.

The management agent also failed to manage the

project in compliance with HUD regulations. Specifically, the agent did not keep accounting records

current or submit timely annual financial reports;

consistently maintain bank statements, invoices,

contracts, and supporting documentation for purchases/costs and make them readily available for

review; pay utility and other bills timely; put adequate

computer controls into practice; carry the required

fidelity bond coverage; or implement a capital

improvement plan or an effective maintenance

program. As a result, the project had a serious cash

flow problem, incurred penalty costs, and had liens

placed against the property.

The audit recommended that HUD require the

management agent to repay the unauthorized transfers of funds to affiliates and any other ineligible costs

from non-project funds, and reimburse the RFR. The

agent should also bring current all bills exceeding 30

days old and ensure that all liens on the property are

satisfied using non-project funds. In addition, HUD

should require the project owner to terminate the

management agreement because of the agent’s failure

to comply with the provisions of the Regulatory

Agreement and Management Agent Certification.

Finally, the audit recommended that HUD program

officials and the Departmental Enforcement Center

initiate administrative sanctions against the management agent. (Report No. 2004-BO-1006)
Chapter 4 - HUD’s Multifamily Housing Programs 59

Based on a request from HUD’s Cleveland Office

of Multifamily Housing Program Center, we completed a review of the books and records of Carter

Manor Apartments in Cleveland, OH. We found that

J.B. Tipton, Inc., and Carter Manor Apartments

Limited Partnership violated the Regulatory Agreement by improperly disbursing project funds for

ineligible and unsupported costs. The inappropriate

disbursements occurred when the project was in a

non-surplus cash position and/or after the project

defaulted on its HUD insured mortgage. As a result,

fewer funds were available for the project’s normal

operations and debt service, resulting in a claim

made to the FHA insurance fund.

We referred our draft audit findings to the U.S.

Attorney’s Office for the Northern District of Ohio.

HUD and the U.S. Attorney’s Office executed a

settlement agreement with the general partner for

Carter Manor Apartments Limited Partnership and the

president of J.B. Tipton effective November 24, 2003.

Under the terms of the settlement, the general

partner and J.B. Tipton, without any admission of

wrongdoing, paid HUD $275,000 and agreed not to

participate in project activities for a period of five

years beginning on July 1, 2004. The settlement

agreement permitted the general partner to retain a

limited partnership share of no more than one percent

in the project. (Report No. 2004-CH-1801)

An OIG audit of Jester Trails Apartments, a

Section 221(d)(4) owner managed multifamily project

in Houston, TX, disclosed that although the owner

maintained the property in satisfactory condition, it

did not comply with several provisions of the Regulatory Agreement and other HUD regulations. Specifically, the owner failed to maintain the books and

records of the project, and could not show that it

deposited rental receipts intact. In addition, the owner

paid over $55,000 for ineligible and unsupported

personal expenses with project operating funds. The

owner also improperly obtained and used project

funds to pay over $42,000 for a personal promissory

note. Further, the owner received more than $32,000

in excess of the allowed management fee, and misused $24,000 in tenant security deposit funds.

The owner’s payments of ineligible and unsupported expenses depleted the project’s operating

funds. Currently, the project is in default. However,

the lender has indicated it wishes to prepay the

mortgage to avoid a claim.

The audit recommended that HUD allow the

lender to prepay the mortgage, thus freeing the $2.13

million loan balance for better use. Further, HUD

should require the owner to reimburse the project for

the ineligible use of project funds totaling over

$140,000. HUD should also obtain documentation for

all unsupported expenses and recover from the owner

any project costs determined to be unallowable. If the

owner does not repay the project for improper

diversions of funds, HUD should take civil action and

other prescribed remedies. In addition, HUD should

take administrative action against the owner and its

members to prevent them from managing this or

another HUD property. (Report No. 2004-FW-1002)

We audited Last Star Homes, a 50-unit multifamily housing development in Browning, MT, to determine if current conditions involving maintenance,

occupancy functions, and project management differ

from the conditions identified in HUD’s August 2001

Management and Occupancy Review Report. Our

review concluded that the significant problems and

weaknesses identified in the Review Report still exist,

even though the Blackfeet Tribe, owner of the project,

promised corrective action in January 2003. The

current management and owner were not aware of or

familiar with the project’s use agreement, Section 8

housing assistance payments contract, and other

program requirements, and were therefore not

ensuring that these requirements were being met. In

addition, they have not requested a housing assistance

payment since June 2001. Consequently, adequate

funding was not available to fully maintain the property, and the remaining Section 8 housing assistance

payments reserve of $2.8 million was not being used

as intended.

We recommended that the Denver Multifamily

Hub refer the question of whether the use agreement

can be rescinded to HUD’s Office of General Counsel

and cancel the Section 8 housing assistance payments

contract if the use agreement is rescinded. If the use

agreement cannot be rescinded, we recommended

that HUD provide technical assistance to the project

management to bring the project into compliance;

require the Blackfeet Tribe to repay ineligible costs of

over $8,000; and determine the appropriateness of

questioned costs. (Report No. 2004-DE-1001)
Chapter 4 - HUD’s Multifamily Housing Programs 60

In response to a Congressional complaint of

declining and substandard living conditions at

Saraland Manor Apartments in Gulfport, MS, the

OIG conducted an inspection of the complex. Saraland

Manor is a multifamily apartment project that serves

elderly and handicapped residents, 100 percent of

whom are subsidized through the Section 8 Program.

The inspection identified numerous deficiencies in

building exteriors, common areas, and in the interiors

of 32 apartments. Deficiencies in the exteriors and

common areas included exposed and loose electrical

wires on rooftop air conditioner units, burned out light

bulbs in emergency exit signs and stairwells, and

pooling water on the roofs due to non-functioning air

conditioner condensation lines. In the apartment units,

we found severely deteriorated kitchen sink cabinets

and countertops, rotting shelves, rusting stove vent

hoods with exposed wiring and exposed light bulbs

over the cooktops, windows that were too difficult to

open and close, windows with missing or damaged

seals and broken thermoseals, and water damaged

ceilings and walls.

Sink cabinet sides and bottom shelf rotted out at Saraland

Manor Apartments.

Moisture damaged drywall at window frame at Saraland

Manor Apartments.The age and condition of window units

makes them too difficult to operate and subject to moisture

intrusion.

Most of the deficiencies were the result of the

project’s age and inadequate maintenance and repairs. Numerous health (sanitation) and safety

deficiencies found in the apartment units were not

cited in the last inspection by HUD’s Real Estate

Assessment Center (REAC). We concluded that the

REAC inspection did not identify all significant health

and safety deficiencies and that the owner/management agent did not operate an adequate maintenance

program.

The audit recommended that HUD’s Jackson, MS

Multifamily Program Center conduct a management

review of Saraland and assess why management has

not performed routine maintenance and repairs, and

whether management scheduled repairs of deficiencies identified by REAC inspections. The Program

Center should also require the owner/management

agent to implement adequate management controls to

ensure that health and safety hazards and other

routine maintenance needs are timely identified and

promptly corrected. The audit also recommended

that REAC reinspect Saraland Manor to determine

whether a revised physical condition score and

correlating revisions of the repairs required by REAC

are needed, and whether corrective actions to address the contract inspector’s performance are

warranted. (Report No. 2004-AT-1802)
Chapter 4 - HUD’s Multifamily Housing Programs 61

In response to a request from HUD’s Office of

Multifamily Housing, Kansas City Hub, and their

concern about unallowable disbursements from

project funds, the OIG audited Timberlake Care

Center, a nursing home in Kansas City, MO. We

found that Timberlake made payments for other than

reasonable operating expenses and necessary repairs

of the project. Timberlake paid over $76,000 in

unsupported and/or unallowable disbursements from

the operating account during fiscal years 2002 and

2003. The project’s owner did not alter property

operations to ensure that HUD rules and regulations

were followed after Timberlake obtained HUD insured

financing in August 2001. As a result, funds that

should have been used to pay the operating expenses of

the property were used for unsupported and/or

unallowable purposes, contributing to Timberlake’s

negative surplus cash position.

Timberlake Care Center failed to reconcile its

operating account bank statements to the general

ledger each month to ensure the amounts balanced.

Over the two-year audit period, the operating account

general ledger balance was understated by over

$17,000. Timberlake staff were aware that the

operating account bank statements did not reconcile

to the general ledger balance, but did not know how to

correct the problems, and therefore took no action.

The audit recommended that HUD ensure

Timberlake Care Center owners develop and implement policies and procedures to control funds in

accordance with HUD requirements, and require that

Timberlake’s operating account be reimbursed

$76,000 for the unsupported and/or unallowable

disbursements. We also recommended that HUD

ensure Timberlake owners provide adequate support

for the adjusting entry to cash made at the end of

fiscal year 2002, and properly correct the fiscal year

2003 general ledger, or repay Timberlake’s general

operating account the amount that cannot be supported. Finally, we recommended that HUD verify

that Timberlake owners are correctly reconciling the

bank statements to the general ledger each month.

(Report No. 2004-KC-1002)

In a related audit, the OIG reviewed the owner’s

salary at Timberlake Care Center in Kansas City,

MO. This review was conducted based on a request

from HUD’s Kansas City Office of Multifamily

Housing that indicated there were unallowable

disbursements from project funds. Our review

identified an internal deficiency regarding HUD’s

approval of the project owner’s salary. We found that

the owner was receiving a substantial salary from the

property. We did not take exception to this in our audit

report since HUD had previously approved the salary.

However, the salary may not be reasonable and

necessary because the project’s administrator performs many of the normal management functions. We

found no indication that the owner was performing any

significant management functions that were reasonable and necessary to the operations of the project.

Although HUD approved the salary during the loan

origination process, paying the salary out of operating

funds has further contributed to the project’s negative

surplus cash position.

The audit recommended that HUD identify the

management duties performed by the project owner

and determine the appropriate amount of salary the

owner should receive from operating funds for

performing those duties, and restrict the amount paid

for the salary to the determined amount. (Report No.

2004-KC-0803)

At the request of the Seattle HUD Multifamily

Hub Office, we audited Uptown Towers Apartments

in Portland, OR, to determine if the project owner

received repayment of ineligible construction loans

and capital contributions from project funds; commercial space income has been treated as project

income or the owner’s contribution; commercial

income has been paid out to the project owner; the

management agent has been receiving excessive

management fees; and certain project expenses were

eligible and benefited the project.

Our audit found no repayments of construction

loans. We determined that repayments of capital

contributions from project surplus cash to the owners

were eligible. We also found that the project’s commercial income was properly treated as owner

contributions or income, and payments to the owner

from the commercial income are allowable. However, the management agent received nearly $15,000

in excessive management fees paid from residential

income for the management of the project’s commercial income. Further, more than $43,000 in ineligible

and unsupported partnership expenses were paid from

project funds.
Chapter 4 - HUD’s Multifamily Housing Programs 62

We recommended that the project owners take

measures to ensure that only proper management

fees and allowable expenses are paid, and repay the

project for ineligible costs. (Report No. 2004-SE1003)

During our September 2003 limited review of

Shawnee Hills, Inc., a not-for-profit company in

Charleston, WV, that managed several HUD assisted

Section 202/811 properties, we found that HUD did not

file Continuation Statements as required under the

Uniform Commercial Code to protect all of HUD’s

financial interests. Under the Uniform Commercial

Code, HUD must file a report periodically (every five

years or as state law requires) to assure that a lien on

chattels remains in effect until the mortgaged property is paid in full or foreclosed. A chattel is any

article of tangible property other than land, and

buildings such as office furnishings, furniture, or

capital equipment.

Our current review found that HUD’s West

Virginia Field Office was not aware of the process for

filing Continuation Statements for Section 202/811

capital advances and direct loans. In part, we attribute this to the fact that the applicable HUD handbooks and related directives are outdated and need to

be revised to provide proper guidance to program

staff. More specifically, under an internal HUD

reorganization in 1998, HUD’s Regional Accounting

Divisions were eliminated, and the function of

maintaining a system to advise the Loan Management

Branch of the date when Continuation Statements

need to be filed was not assumed by or transferred to

another HUD division. As a result, HUD’s financial

interests in chattels are not fully protected; this

problem is not limited to the West Virginia Field

Office.

We recommended that HUD’s Assistant Secretary

for Housing and HUD’s Deputy Chief Financial

Officer coordinate efforts and take appropriate action

to ensure existing policies and procedures for preparing and filing Uniform Commercial Code Continuation Statements are updated and/or consolidated, and

ensure that updated procedures are appropriately

distributed to responsible field office staff for immediate implementation. (Report No. 2004-PH-0001)

Investigations

During this reporting period, the OIG opened 158

investigation cases and closed 80 cases in the Multifamily Housing Program area. Judicial action taken

on these cases during the period included $5,235,373

in investigative recoveries, $3,875,633 in funds put to

better use, 71 indictments/informations, 24 convictions, pleas, and pre-trial diversions, 49 administrative actions, five civil actions, and 182 arrests. The

results of our more significant investigations are

described below.

Equity Skimming

Unidos Management, the former managing agent

of the Jose DeDiego Beekman housing development in

the Bronx, NY, agreed to pay over $690,000 in civil

damages to settle multifamily equity skimming

violations involving the misuse of project funds. An

audit found that the management agent of this 1,200-

unit development violated the Regulatory Agreement

and HUD rules and regulations by making improper

payments of salaries to several on-site supervisory

employees. The salaries were paid from Beekman

project funds when they should have been paid from

the management fees received by the agent to manage

the property. The audit also found that Unidos repaid

loans from Beekman operating accounts while some

of the projects had a negative surplus cash balance,

and used project income to pay an affiliated entity a

fee for investment services. Based on these findings,

civil claims were filed against Unidos.

In Chicago, IL, in Federal Court for the Northern District of Illinois, the U.S. Attorney’s Office,

Civil Division, entered into a settlement agreement

with the owners and management of Aurora Woodlands Apartments, a HUD insured multifamily project

located in Aurora, IL. An investigation disclosed that

the project owners misused property assets by making

an unlawful disbursement to themselves, and presented several false claims to HUD for monthly

subsidy payments in violation of the False Claims Act.

A complaint was not filed because the owners agreed

to settle the case. The terms of the settlement include

the owners making a lump sum payment of $301,720,

and accepting a three-year voluntary exclusion from
Chapter 4 - HUD’s Multifamily Housing Programs 63

Executive Branch Programs. The monetary payment

consists of $263,220, which is double damages for a

March 2000 unlawful distribution to themselves, and

$38,500, which is a $5,500 False Claims Act fine for

each false monthly housing assistance payment

certification submitted between February and August

2000.

Defendant Rodney Myers was indicted in Fort

Smith, AR, in Federal Court for the Western District

of Arkansas, on 22 counts of equity skimming,

bankruptcy fraud, money laundering, making false

statements to HUD, perjury, and subornation of

perjury. Myers is the former owner of Burchwood

Harbour Apartments (BHA), a HUD insured multifamily project in Hot Springs, AR. From December 1998

to April 2000, while the project’s mortgage was in

default and during the period of BHA’s Chapter 11

bankruptcy proceeding, Myers allegedly devised a

scheme to divert over $110,000 in project rents and

other funds, in violation of the Regulatory Agreement

and the bankruptcy court’s cash collateral order.

After the bankruptcy was dismissed in April 2000 and

while the mortgage was in default, Myers diverted

over $40,000 in project rents and other funds. His

scheme involved diverting rent checks to his personal

bank accounts and writing BHA checks to several

contractors, and either receiving cash kickbacks from

contractors or forging contractor endorsements,

purchasing cashiers’ checks, and depositing the

cashiers’ checks in his personal bank accounts.

Myers used inflated and phony invoices and bids for

work not performed to conceal his diversions. He

committed perjury in a Bankruptcy Rule 2004 Examination relating to the diversions, and he and an

attorney, defendant Mike King, also suborned the

perjury of two contractors by convincing them to state

they received the diverted BHA funds for work performed at BHA, when in fact they did not. Myers also

signed and submitted false accounting reports to the

bankruptcy trustee and HUD by stating on the reports

that the diversions were for legitimate work at BHA.

Theft/Embezzlement

Defendant Teresa Sheppard, a former employee

at St. Mary’s Episcopal Retirement Homes, Inc., was

suspended from further participation in procurement

and non-procurement transactions as a participant or

principal with HUD and throughout the Executive

Branch of the Federal Government pending debarment actions. In April 2003, Sheppard pled guilty to

theft in State Court in Big Spring, TX. She admitted

embezzling more than $57,000 in rents from two

Saint Mary’s projects that were insured by HUD.

Sheppard was on probation for a prior embezzlement

charge when she committed this crime. She was

sentenced to seven years imprisonment and ordered to

pay $50,000 in restitution. She was also fined $233 in

court costs.

Defendant James Caccamo, a former resident

property manager at the Butler Family Housing

Apartments (BFHA), was sentenced in Pittsburgh,

PA, in U.S. District Court for the Western District of

Pennsylvania, to six months in prison and 36 months

supervised release, and was ordered to pay $7,569 in

restitution. Caccamo pled guilty in September 2003 to

embezzling funds from the BFHA, an FHA insured,

project-based Section 8 property. Caccamo and his

wife, Linda Caccamo, also a resident property

manager at BFHA, were indicted in June 2003 on

charges of theft from a program receiving federal

funds. The defendants were terminated from their

employment after admitting that they stole nearly

$10,000 in rent proceeds they had collected from

Section 8 tenants residing at the BFHA. Linda

Caccamo has also pled guilty and been admitted to a

court supervised pre-trial diversion program wherein

she will also be required to make restitution for her

role in this crime.

Defendant Roger Younts was sentenced in State

Court in Lexington, NC, to 60-81 months incarceration and was ordered to pay $453,293 in restitution.

Younts was previously charged with and convicted on

11 counts of embezzlement. He was the accountant

for a property management company that managed

HUD insured multifamily complexes. Younts embezzled money from various accounts, including

operating accounts.

Defendant Rita Sharn Hye signed a pretrial

diversion agreement in Little Rock, AR, in U.S.

District Court for the Eastern District of Arkansas,

admitting to theft of program funds. Hye agreed to

perform 180 hours of community service and pay

$7,716 in restitution in return for 18 months of deferred adjudication. From March 2001 to March
Chapter 4 - HUD’s Multifamily Housing Programs 64

2002, Hye failed to report to Asbury Park Apartments

the income she earned working as the manager of a

check cashing business. As a result of failing to

disclose her income, Hye received $7,716 in multifamily project-based Section 8 benefits to which she

was not entitled.

In Charlottesville, VA, in U.S. District Court for

the Western District of Virginia, defendant Nancy

Besemer pled guilty to one count of federal program

fraud in connection with her embezzlement of funds

from Blue Ridge Commons Apartments (BRC).

Besemer, the former property manager of BRC, and

Rodney Crump, the former assistant property manager, embezzled $23,219 in cash payments and blank

money orders from BRC residents. Instead of depositing these funds in a bank account belonging to BRC,

Besemer and Crump kept the money for their own

benefit. Besemer was previously convicted of embezzling from a separate HUD property and was on

probation for that crime at the same time she was

embezzling from BRC. She fled Virginia prior to being

indicted in June 2002 and after a lengthy search, was

apprehended in Savannah, GA, in December 2003.

Crump has already been sentenced to 15 months

incarceration and 36 months supervised release, and

was ordered to pay $23,219 in restitution.

Defendants Wendy and Brian Schweitzer, who

were previously indicted for theft of over $10,000,

pled guilty in State Court in Franklin, TN, to theft

greater than $10,000. Wendy Schweitzer, former

property manager at Harpeth Hills Apartments and

Liberty Oaks Apartments, instructed multifamily

residents to leave the “pay to” line on their money

orders blank when paying their rent. She deposited

the funds in her personal account and concealed the

theft by lapping the accounts receivable. It total, she

embezzled $15,012. Brian Schweitzer, a Nashville

police officer and Wendy Schweitzer’s former

husband, endorsed some of the money orders that

were deposited in a joint bank account.

Defendant Patrick Williams, the controller of

Esplanade Gardens, was arrested on an outstanding

arrest warrant while returning to the United States

from the Dominican Republic. He was charged in

New York, NY, in Federal Court for the Southern

District of New York, with aiding and abetting and

theft from a program receiving federal funds. Williams and other employees of the Esplanade Gardens,

a multifamily development that receives HUD funds,

were allegedly involved in an elaborate scheme to

steal funds from Esplanade Gardens. Defendant

Mark Bynoe, owner of Mark Bynoe, PC, and a sales

person for several different companies, has also been

arrested in this case.

Defendant Janine Coleman, a multifamily specialist at the Overmont Houses development, was

charged in State Court in Philadelphia, PA, with

felony counts of fraud and theft by deception. The

charges stemmed from the investigation of a $40,000

embezzlement scheme carried out at Overmont

Houses, a HUD insured multifamily development. The

investigation disclosed that Sandra Pullett, along with

Coleman, embezzled rent payments from Section 8

tenants at Overmont Houses for about a year and a

half. After receiving the payments, the defendants

split the money between themselves for personal use.

Pullett was previously sentenced in this case.

Conspiracy/Kickbacks/Mail Fraud

Defendants Marvin and Jeffrey Gold were

sentenced in Central Islip, NY, in Federal Court for

the Eastern District of New York. Marvin Gold was

sentenced to 15 months in prison and 36 months

supervised release, and was ordered to pay $965,000

in restitution to the New York City District Attorney’s

Office, while Jeffrey Gold was sentenced to 12

months and one day in prison and 36 months supervised release, and was ordered to pay $100,000 in

restitution. The Golds pled guilty in April 2003 to one

count each of conspiracy to defraud HUD and the IRS.

Marvin Gold was the owner of Marvin Gold Management, a real estate management company in Brooklyn, NY, which managed numerous properties that

received HUD subsidies and loan guarantees. Jeffrey

Gold was vice president of the company. From

January 1992 through April 1999, Marvin Gold

received at least $80,000 in kickbacks from vendors

for work performed at the buildings managed by his

company. He also approved payments of an additional

$210,000 in kickbacks to other individuals. Jeffrey

Gold received at least $17,000 in kickbacks from

vendors during the same time period. The kickbacks

were included in vendor contracts as a cost of services provided.
Chapter 4 - HUD’s Multifamily Housing Programs 65

Defendant Angelo Scudiero, a building manager

for Taino Towers in Manhattan and Dayton Towers in

Far Rockaway, NY, was sentenced in Central Islip,

NY, in Federal Court for the Eastern District of New

York, to 12 months in prison, three years probation,

and restitution of $330,000 for his involvement in a

conspiracy to defraud HUD and the IRS. Scudiero

received over $330,000 in kickbacks from vendors for

work performed at the two buildings that he managed.

In a similar case, defendant Michael Cantor was

sentenced in Central Islip, NY, in Federal Court for

the Eastern District of New York, to 12 months in

prison and three years supervised release on the

same charges. Cantor was the owner and president of

Cantor Real Estate, a management company in

Brooklyn, NY, that managed numerous properties in

New York. Between January 1992 and April 1999,

Cantor received over $13,000 in kickbacks from

vendors for approving work to be done at the numerous buildings that he managed.

In another similar case, defendant Arnold

Zabinsky was sentenced in Central Islip, NY, in

Federal Court for the Eastern District of New York,

to six months home detention and 36 months supervised release, and was ordered to pay $53,000 in

restitution to the State of New York. Zabinsky was the

president of Elm Management Company located in

Elmhurst, NY. Elm provided building managers for

residential buildings throughout the New York area.

From January 1992 through April 1999, Zabinsky

received over $11,000 in kickbacks from vendors for

work performed at the buildings his company managed.

Defendant Eric Dubbs was sentenced in Central

Islip, NY, in Federal Court for the Eastern District of

New York, to two months in prison and three years

supervised release, and was ordered to pay $20,700 in

back taxes to the IRS for his involvement in a conspiracy to defraud both HUD and the IRS. Dubbs was

the building manager for the Amsterdam Building

which receives HUD loan guarantees. From January

1992 through April 1999, Dubbs received over $4,700

in kickbacks from vendors for work performed at the

buildings his company managed. The kickbacks were

disguised in the invoices from the vendors as costs of

services provided.

In all four of these cases, the buildings managed

by the defendants and/or their companies received

HUD subsidies and loan guarantees. The kickbacks

were disguised in the invoices from vendors as costs

of services provided.

Defendant Murray E. Howell, an employee of

Ham Contracting Inc., was debarred from future

participation in procurement and non-procurement

transactions with Executive Branch of the Federal

Government for a three-year period. In December

2002, a bill of information was filed against Howell in

Shreveport, LA, in Federal Court for the Western

District of Louisiana, charging him with one count of

conspiracy to commit mail and wire fraud. Howell

was subsequently sentenced to five months confinement, 36 months supervised release, and $60,000 in

fines.

Defendants Janet Gaibl and Joseph Cassidy were

indicted in Boston, MA, in Federal Court for the

District of Massachusetts, on one count each of

conspiracy. Gaibl was also charged with two counts of

making false statements. The indictment alleges that

between 1988 and continuing until mid-2000, the

defendants, both former employees of First Realty

Management (FRM), caused false statements to be

submitted to HUD relating to a rent subsidy program

at Cummins Towers, a HUD insured multifamily

complex managed by FRM. Gaibl and Cassidy allegedly identified certain federally subsidized units at the

development for their own use, or the use of friends,

and then caused false statements to be made on

related HUD forms and supporting documents to be

fabricated, all for the purpose of obtaining subsidized

units for individuals who would not otherwise qualify.

Gaibl and Cassidy caused a loss to HUD in excess of

$140,000, and deprived qualified families of use of the

units.

Drug and Weapons Violations/Fraud

OIG Agents conducted a sweep of the Englewood

Apartments, a Section 8 project-based development in

Kansas City, MO. Englewood Apartments is a known

high-crime area in the Kansas City metropolitan

region. It is known as a haven for fraud, drugs, and

violence. The apartments are located within one mile

of an elementary and an intermediate school. Follow-
Chapter 4 - HUD’s Multifamily Housing Programs 66

ing this successful sweep, defendants Dolores Mora,

Anita Reece, and Valerie Vallier turned themselves

over to Platte County authorities for pending State

felony charges while defendants Monica Wesley,

Tiffany Gee, and Kim Falley turned themselves over

to the Kansas City Police Department for outstanding

City violations. Defendant Reece was subsequently

sentenced in Platte County District Court for felony

stealing by deceit for obtaining food stamp benefits for

children who were not living in her residence. She

was ordered to pay $9,068 in restitution and placed on

probation for five years. HUD records regarding

Reece’s Section 8 unit provided information proving

that her children were not living with her during the

time she received benefits for them. This is the first

conviction and sentencing stemming from operations

at Englewood Apartments.

As a result of the investigation, to date 34 individuals have been criminally charged and one has

been sentenced for theft by deceit for failure to

accurately report household income and composition

to Englewood’s management. In addition to the

individuals charged with fraud, the investigation has

identified 30 persons with outstanding felony warrants. During the sweep, three weapons and marijuana were seized.

In Omaha, NE, in Federal Court for the District

of Nebraska, defendant Ricky Davis, a convicted

felon and an illegal tenant at Wintergreen Apartments, a Section 8 project-based development, was

indicted on one count of felon in possession of a

firearm. Allegedly, Davis was regularly firing a

weapon at the apartment complex.

A warrant sweep was conducted at Brighton

Place Apartments, a Section 8 project-based complex

in Kansas City, MO. Twelve individuals were arrested on outstanding warrants. Of these 12, defendants Gloria Logan, Carla Hubbard, Vanessa

McCullough, and Carmeia Rivers were charged in

Jackson County District Court, Kansas City, MO,

with theft by deceit for failure to report their income

to Brighton Place management.

False Statements

In Topeka, KS, in Federal Court for the District

of Kansas, defendant Cynthia Edwards, a former

multifamily project manager, was sentenced to three

months electronic home confinement and six months

probation after she pled guilty to a one-count information charging her with making false statements

concerning the eligibility of recipients of HUD rental

assistance. These false statements included certifications that the recipients were eligible for benefits

when they were not. Timberlee owners reimbursed

HUD $90,918 for the losses that transpired from the

scheme. Through an agreement with HUD, Timberlee

ownership also transferred the management of

Timberlee Apartments to a management company to

administer its HUD programs.

Defendant Geraldine Thomas, president of the

Regional Alliance of HUD Tenants (PRAHT), was

sentenced in Philadelphia, PA, in Federal Court for

the Eastern District of Pennsylvania, to 60 months

supervised release and was ordered to pay $24,910 in

restitution to HUD. Thomas pled guilty in November

2003 to one count of making false statements to HUD.

An investigation uncovered misappropriation of HUD

funds following a review of PRAHT’s accounting

practices and management of two HUD multifamily

Intermediate Technical Assistance Grants (ITAGs)

totaling approximately $500,000. The investigation

also disclosed that Thomas submitted false information concerning PRAHT salary expenses to HUD in

order to receive ITAG grant disbursements. In addition, she fraudulently used PRAHT issued ATM cards

and withdrew up to $10,000 from ATM machines

located in Atlantic City, NJ casinos. In attempt to

cover up phony PRAHT salary expenses and fraudulent

use of the ATM cards, Thomas created and submitted

$35,000 in fraudulent invoices to OIG Audit officials

during a routine audit of PRAHT. Thomas was subsequently suspended by HUD’s Enforcement Center.

Defendant Nasser Ahmed Ameri, a citizen of

Yemen, was convicted in Little Rock, AR, in U.S.

District Court for the Eastern District of Arkansas,

on 18 counts of unlawful alien in possession of ammunition, production of fraudulent documents, possession

of fraudulent documents, possession of document

making implements, computer fraud, theft of trade

secrets, identity theft, fraudulent use of a Social

Security number, and making false statements to the

FBI and HUD. Ameri possessed and produced fraudulent Arkansas drivers’ licenses and identification
Chapter 4 - HUD’s Multifamily Housing Programs 67

cards and falsely told Agents he was part of a terrorist plot, thus wasting investigative manpower and

expenses. Ameri also received Section 8 rental

assistance from May 1997 to March 2002. At the

time of his initial application for Section 8 benefits, he

was a non-citizen student and ineligible for Section 8

assistance. In May 1997, Ameri falsely stated on his

declaration of citizenship form that he was a citizen

or national of the United States. As a result of his

fraud and false statements, Ameri received $13,694

in multifamily project-based Section 8 benefits to

which he was not entitled.

In Allen County, OH State Court, defendant

Penny Williams, also known as Penny Schneider, pled

guilty to misdemeanor petty theft and was sentenced

for her role in occupying two HUD subsidized units,

one a public housing unit and the other a privately

owned Section 8 unit. Williams used two different last

names at each of the properties in order to disguise

her residency. She was sentenced to two years

probation and was ordered to pay $1,320 in restitution

to the Allen Metropolitan Housing Authority.

In Detroit, MI, in Federal Court for the Eastern

District of Michigan, defendant Ama Zitaanoff, also

known as Jessie Zitaanoff, a Section 8 tenant, was

sentenced to 10 months in jail and two years supervised release, and was ordered to pay $78,168 in

restitution. Zitaanoff pled guilty in October 2003 to

collecting Social Security supplemental income (SSI)

under two different names. She also admitted receiving HUD subsidized housing at two different apartments. The fraud amount for the SSI benefits is

$23,723, while the money paid out for housing assistance to which she was not entitled totals $54,445.

In Little Rock, AR, in Federal Court for the

Eastern District of Arkansas, defendant Reuben

Bledsoe pled guilty to one count of making false

statements to HUD on a tenant certification form.

Bledsoe filed a false certification form stating that he

was unemployed and had zero income when in fact he

was employed as a full time police officer with the

Pine Bluff Police Department. The total loss to HUD

was $16,500.

The U.S. Attorney’s Office filed an information

in San Francisco, CA, in Federal Court for the

Northern District of California, charging defendant

Albert Boddie, a former Section 8 tenant, with one

count of making false statements to HUD. From 1997

to 2001, Boddie allegedly provided false employment

verifications and income statements to HUD claiming

that he earned between $7,000 and $9,000 per year.

In fact, Boddie earned $46,316 in 1997, $59,154 in

1998, $55,591 in 1999, $68,952 in 2000, and $67,094

in 2001. In 2001, Boddie purchased a home for

$229,000. When he was interviewed, Boddie provided

a sworn statement admitting that he failed to report

his correct income to HUD in order to continue

receiving Section 8 housing benefits. HUD paid

$36,096 in ineligible Section 8 assistance on Boddie’s

behalf.

The U.S. Attorney’s Office filed an information

in San Francisco, CA, in Federal Court for the

Northern District of California, charging defendant

Natasha Adams, a former Section 8 tenant, with one

count of making false statements to HUD. From 1998

to 2001, Adams allegedly provided false verifications

of employment and income to HUD that showed she

had little or no income. In fact, Adams was employed

by the State of California Department of Motor

Vehicles during this period. When she was interviewed, Adams admitted to preparing the false

statements that she made to HUD. As a result of her

failure to properly report her income, HUD paid

$19,152 in overpaid Section 8 housing assistance on

her behalf.

In Bayamon, PR, in State Court for the District

of Bayamon, defendant Maria D. Sanchez-Ortiz, a

former Section 202/Section 8 tenant, was charged

with 11 counts of illegal appropriation. Sanchez

allegedly withheld income information from Egida del

Medico management in order to qualify for rental

assistance in the elderly housing project. As a result

of her false statements, she received $6,204 in

Section 8 housing assistance to which she was not

entitled.

Defendant Mia Shivers, a multifamily Section 8

recipient in the Jersey Park Apartments, was arrested

based on an indictment handed down in State Circuit

Court, Isle of Wight County, VA. The indictment

charged Shivers with 33 fraud related counts, including two counts of making false statements to obtain
Chapter 4 - HUD’s Multifamily Housing Programs 68

housing assistance and 19 counts of grand larceny

from HUD. For over a year and a half, Shivers

allegedly failed to report over $20,000 in income from

her live-in boyfriend, Charles Faltz. Faltz’s unreported income resulted in Shivers receiving $9,400 in

Section 8 benefits to which she was not entitled. This

complaint was referred to the OIG by the Virginia

Department of Social Services (DSS) in Isle of Wight

County. DSS was investigating Shivers for social

services benefit fraud. As a result of local media

coverage of the social services benefit fraud investigations, many subsidy recipients are voluntarily

reporting previously undisclosed employment income.

In Harrisburg, PA, in Federal Court for the

Middle District of Pennsylvania, defendant Clarissa

Taylor was charged with being the principal in the

commission of an offense against the United States

and making false statements in connection with her

participation in HUD’s Multifamily Project-Based

Section 8 Program. Taylor has resided at the Edison

Village development since 1998. Edison Village is

owned and operated by the Wingate Management

Company. Taylor allegedly falsified her annual

recertifications to remain eligible for and continue

living in subsidized housing. She also failed to declare

over $46,000 in Social Security payments she received on behalf of her daughter between 2000 and

2003. During the same period, HUD made $33,000 in

housing assistance payments to the landlord on behalf

of Taylor.

Defendant Robert Freschi was taken into custody

in Knoxville, TN. This investigation was predicated

on an allegation that Freschi received HUD Section 8

assistance from June 1993 to November 2002. From

February 1997 to January 2003, Freschi maintained a

bank account at the Cumberland County Bank in

Crossville, TN. This bank account was used to

provide hidden assets and income to Freschi while he

claimed on his annual Section 8 recertification forms

that he had no income or assets other than monthly

Social Security disability payments. Freschi has been

receiving $6,500 per year in Social Security disability

payments, which he has verified on his recertification

forms as his only source of income. However,

monthly deposits of $1,666 and annual deposits of

$8,000 have been made to his bank account. The bank

statements also reflect a steady flow of ATM withdrawals at bank locations in St. Louis, MO, where

Freschi has lived at the Centenary Towers Apartments since June 1993. HUD’s loss for the time

period Freschi has been in the Section 8 Program is

approximately $47,097.

Davis-Bacon Violations

In Cleveland, OH, in Federal Court for the

Northern District of Ohio, Gatehouse Building

Company, a general contractor for the construction of

FHA insured multifamily developments, reached a

settlement to pay $756,829 to be made available to the

Department of Labor, Wage and Hour Division. The

money will pay wage restitution to numerous laborers

who were paid less than the prevailing wage while

working on developments that were insured by FHA

for over $30 million. This investigation has already

resulted in the conviction defendants Robert Atkins,

Edward Gorges, Robert Gregoric, Avner Leibovitch,

and Andrew Sando. Another four defendants, Dennis

Breiding, Douglas Lund, Joginder Singh, and

Rajinder Singh, are pending trial. The investigation

disclosed that multiple subcontractors were paying

less than what was required by the Department of

Labor and HUD.

Insurance Fraud

In Chicago, IL, in Federal Court for the Northern District of Illinois, defendant Ralph Aulenta,

former president of American Business Insurance of

Illinois, pled guilty to his participation in multiple

schemes to inflate insurance proceeds. Aulenta

accepted responsibility for inflating insurance proceeds totaling $288,000 on behalf of the City of

Rosemont between 1991 and 1996. In addition, over a

nine-year period, Aulenta admitted inflating insurance

premiums totaling $1.7 million for Boulevard Management, a corporation which both owned and managed several FHA insured multifamily developments.

In the case of Boulevard Management, Aulenta

inflated insurance premiums on the HUD insured

projects and disguised kickback payments made back

to Boulevard as rebated premiums.

Warrant Initiative

An arrest/interview operation was conducted at

the Windridge Apartments, an insured multifamily
Chapter 4 - HUD’s Multifamily Housing Programs 69

complex in Wichita, KS. The Wichita West Police

Department previously identified residents with

outstanding warrants, while OIG identified tenants

working or receiving unemployment benefits in 2003

but who were reporting zero income to management.

Seven defendants, representing six households, were

arrested. The defendants were Aisha Jones, Anthony

Henderson, Christina Clinton, George Davis, III,

Brenda Pool, Lakisha M. Ellis, and Jason A. Mims.

During interviews of the arrestees, two households

admitted that their reported income and composition

were not accurate, one admitted that reported household composition was not accurate, and one admitted

that reported income was not accurate. An eviction

notice was also served to Natalie Willis, a tenant and

former Windridge/Insignia manager, for alleged

embezzlement of funds. Seven other tenants were also

interviewed but did not furnish any additional information not previously provided to management. These

arrests are part of the Kansas City Region’s Section 8

Warrant Initiative.

Regulatory Agreement Violations

As a result of an ongoing series of civil litigation

efforts, defendant Morton Sarubin, a multifamily

development owner, agreed to a settlement in Baltimore, MD, in U.S. District Court for the District of

Maryland, by which he will pay $538,768 to the

accounts of two FHA insured Section 8 multifamily

projects to provide for their immediate and long-term

physical repairs. HUD had declared both developments, Old Towne Manor in Cumberland, MD, and

Lansdowne Apartments in Baltimore, in technical

default of their Regulatory Agreements in June 1999

due to long-term uncorrected physical deficiencies.

Interstate Transportation of Stolen

Property

Defendant Barbara Cooper, former Community

Realty Management property manger for the Bentley

Woods apartment complex located in Glassboro, NJ,

pled guilty in Philadelphia, PA, in U.S. District

Court for the Eastern District of Pennsylvania, to one

count of interstate transportation of stolen property.

Cooper’s plea stems from allegations that she stole

$9,143 worth of money orders and checks payable to

Bentley Woods. She then crossed state lines and

deposited the money orders/checks in her personal

bank account in Aston, PA. The stolen money orders,

totaling $8,349, represent the tenants’ portion of their

Section 8 rent payments. The remaining $794 represents two checks sent to Bentley Woods to assist

tenants in temporarily paying their portion of the rent

and two checks from vendors paying reimbursements

to Bentley Woods.
Chapter 4 - HUD’s Multifamily Housing Programs 70

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Chapter 5 - HUD’s Community Planning and Development Programs 71

Chapter 5 — HUD’s Community Planning and

Development Programs

The Office of Community Planning and Development (CPD) seeks to develop viable communities by

promoting integrated approaches that provide decent

housing, a suitable living environment, and expanded

economic opportunities for low- and moderateincome persons. The primary means toward this end

is the development of partnerships among all levels of

government and the private sector.

Audits

During this reporting period, the OIG issued six

external audit reports in the Community Planning and

Development Program area. These reports disclosed

over $10 million in questioned costs and about $52.5

million in recommendations that funds be put to better

use.

We audited Community Development Block Grant

(CDBG) Disaster Assistance Funds in the State of

New York, the Section 108 Loan, CDBG, HOME,

Neighborhood Initiative Grant, and HOME Investment

Partnership Programs.

Disaster Assistance Funds – State of

New York

We are performing ongoing audits of the administration of the CDBG Disaster Assistance Funds

provided to the State of New York as a result of the

terrorist attacks on the World Trade Center in New

York City. These funds are being administered by two

entities, the Empire State Development Corporation

(ESDC) and the Lower Manhattan Development

Corporation (LMDC). We plan to issue an audit report

on each entity every six months and include the

results in the Inspector General’s Semiannual Report

to Congress in order to comply with Congress’

request that the OIG periodically audit and semiannually report on the expenditure of these CDBG Disaster

Assistance Funds. This is the third and final report

that we will issue on the CDBG Disaster Assistance

Funds directly appropriated to ESDC. The prior audit

reports on ESDC were issued on March 25, 2003, and

September 30, 2003. This is the second in a series of

Community Planning and Development 

Reports Issued

6

External Reports

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

External Audits

Questioned Costs Funds Put to Better Use

Community Planning and Development Dollars
Chapter 5 - HUD’s Community Planning and Development Programs 72

reviews that we plan to conduct of LMDC’s administration of CDBG Disaster Assistance Funds. We reported

on the operations of LMDC on September 30, 2003.

The objectives of both the ESDC and LMDC reviews

were to determine whether the entities: (1) disbursed

CDBG funds to eligible applicants in accordance with

the HUD Approved Action Plans; (2) developed and

implemented adequate procedures for monitoring the

programs funded with CDBG Disaster Assistance

Funds; and (3) had financial management systems that

adequately safeguarded the funds. Both reviews

covered the period April 1, 2003, to September 30,

2003.

Our audit found that ESDC generally disbursed

CDBG Disaster Assistance Funds to eligible applicants

in accordance with HUD Approved Action Plans, and

has a financial management system that is capable of

adequately safeguarding the funds. However, we noted

processing deficiencies in its grant programs that

need to be resolved to enhance the efficiency of

ESDC’s administration of the funds. Also, we noted

monitoring controls that need to be strengthened so

HUD can readily make compliance determinations

regarding ESDC’s programs.

ESDC has continued to make substantial progress

in developing and implementing programs that

address the immediate economic needs of numerous

businesses that suffered economic losses and property damages during the September 11, 2001 terrorist

attacks. At September 30, 2003, ESDC had disbursed

over $796 million of the $1.124 billion in CDBG

Disaster Assistance Funds it is administering. ESDC

had disbursed $36 million in Small Firm Attraction

and Retention Grants (SFARGs) to 1,095 businesses

representing over 19,000 employees, $173 million in

Large Firm Job Creation and Retention Grant

Program (JCRP) grants to 44 large businesses, and

$543 million in Business Recovery Grants (BRGs) to

over 14,000 applicants. In addition, ESDC has implemented several other programs to address the

economic needs of the Lower Manhattan area

resulting from the terrorist attacks. ESDC’s grant and

loan programs have contributed significantly to the

revitalization of Lower Manhattan. ESDC budget and

disbursement amounts on September 30, 2003, were

as follows:

Program Budget as of 

9/30/03 

Disbursements 

as of 9/30/03 

Balance as 

of 9/30/03 

Bridge Loan Program $6,760,000 $0 $6,760,000 

Business Recovery Loan Fund $41,140,000 $16,285,298 $24,854,702 

Business Recovery Grant Program $564,360,000 $543,993,383 $20,366,617 

Small Firm Attraction & Retention 

Grants 

$155,000,000 $36,798,430 $118,201,570 

Grants to Technical Assistance Providers $5,000,000 $2,636,584 $2,363,416 

Large Firm Job Creation & Retention $320,000,000 $173,693,270 $146,306,730 

Compensation for Economic Losses to 

Other Businesses $13,240,000 $13,240,000 $0 

Business Information $5,000,000 $3,647,153 $1,352,847 

Administration $14,000,000 $6,215,775 $7,784,225 

TOTALS $1,124,500,000 $796,509,893 $327,990,107 

ESDC’s Action Plans as Approved by HUD
Chapter 5 - HUD’s Community Planning and Development Programs 73

ESDC has also made significant progress in improving its management controls and internal audit procedures

over the disbursement of Disaster Assistance Funds. As a result of actions taken by ESDC, including actions to

resolve recommendations in prior OIG audit reports, ESDC identified and recovered $1.48 million of improper BRG

and SFARG grant disbursements.

ESDC does need to improve procedures for documenting its monitoring reviews of the Business Recovery Loan

Fund (BRLF) Program and the JCRP. Specifically, we found that ESDC is neither adequately documenting its on-site

monitoring of BRLF lenders, nor maintaining written or computerized documentation detailing their monitoring of

JCRP. Without adequate documentation of ESDC’s monitoring of these programs, HUD’s ability to make compliance

determinations regarding these programs as required by the alternative procedures published in the Federal

Register will be limited. We believe these deficiencies occurred because ESDC did not follow procedures that

required formal written documentation of on-site monitoring visits of BRLF lenders, and because its written

monitoring procedures for JCRP do not require that monitoring reviews be fully documented.

Our review of statistically selected samples of SFARG applications disclosed that ESDC disbursed two grants

totaling $49,000 to applicants who were mistakenly determined to be eligible. This occurred because ESDC did not

properly apply certain program guidelines during the processing of the applications. Specifically, we found that

one applicant was ineligible because the program’s lease requirement was not met while the other applicant did

not meet the program’s full time permanent employee requirement.

We recommended that HUD require ESDC to maintain written or computerized documentation detailing on-site

monitoring reviews of BRLF Program lenders to facilitate reviews and audits by HUD, ensure that ESDC reimburses

the SFARG Program $49,000 from non-federal funds to correct improper payments made to ineligible applicants,

and instruct ESDC to improve procedures for verifying the eligibility of SFARG applicants. (Report No. 2004-NY1001)

This second OIG review of LMDC’s operations disclosed that LMDC had drawn down over $377 million of the

$1.6 billion approved by HUD, as shown below:

Funds Drawn Down by LMDC

LMDC’s Action Plans as approved 

by HUD

LMDC Programs 

Budgeted 

Draw Downs 

As of 09/30/03 

Balance 

At 09/30/03 

Residential Grant $280,500,000 $143,857,980 $136,642,020 

Employment Training $500,000 $129,017 $370,983 

Interim Memorial $350,000 $350,000 

Columbus Park Renovation $428,571 $428,571 

Downtown Marketing $4,664,000 $4,664,000 

Short-term Capital Projects $69,405,000 $69,405,000 

Long-Term Planning $13,894,848 $13,894,848 

Business Recovery Disproportionate Loss of Workforce $33,000,000 $33,000,000 

Utility Infrastructure Rebuilding $735,000,000 $735,000,000 

Programs Initiated by ESDC $424,500,000 $216,995,384 $207,504,616 

Planning & Administration $56,802,232 $16,044,976 $40,757,256 
Chapter 5 - HUD’s Community Planning and Development Programs 74

LMDC generally disbursed the CDBG Disaster

Assistance Funds to eligible applicants in accordance

with the HUD Approved Action Plans, implemented

adequate monitoring efforts over the Residential

Grant Program (RGP), has a financial management

system that is capable of adequately safeguarding

funds, and complied with its established recertification polices and procedures while recertifying RGP

participants. However, we noted processing deficiencies in its RGP that still need to be resolved to further

enhance the efficiency of LMDC’s administration of

funds, and to prevent duplicate payments and other

related administrative deficiencies from occurring.

Our audit disclosed that despite correcting

processing deficiencies in its RGP through its recertification process and its alternative supporting documentation requirements, LMDC still has some processing deficiencies that need to be resolved. Specifically, during our testing of a statistically selected

sample of payments to new RGP recipients, we found

that LMDC was unable to provide adequate documentation to fully support the eligibility of some grant

recipients. Furthermore, either the documentation

supporting the applicants’ eligibility was not obtained,

or was obtained but not scanned into the Optical

Image Technology System. As a result, we concluded

that grant payments totaling $86,000 are questionable

since they relate to recipients with questionable

eligibility. These deficiencies are attributed to possible omissions by the grant processors in obtaining

all required documentation from applicants, and/or

possible failures to scan all pertinent documents into

the program administrator’s computerized processing

system.

In addition, our audit disclosed that LMDC continued to issue monthly duplicate grant payment checks

either to the same individual or to two individuals

residing in the same housing unit. Specifically,

duplicate grant payment checks, totaling nearly

$6,000, were issued to eight individuals because each

individual was approved to receive a grant check

under two different identification numbers. Furthermore, grant payments in the amount of $11,000 were

issued to an individual who resides in a housing unit

with another individual who received payments for the

same type of grants. Thus, nearly $17,000 of CDBG

Disaster Assistance Funds were improperly used.

The duplication occurred because the processing

controls designed to prevent an individual and/or a

housing unit from being entered into the program’s

computerized grant processing system twice were

flawed. However, LMDC and its program administrator have instituted procedures to prevent the monthly

processing of payment checks, under its two-year

grant program, once a duplicate is identified.

Our audit also disclosed weaknesses in LMDC’s

accounting of funds to be recovered from RGP grant

recipients. Specifically, we noted that LMDC has not

established a receivable account in its general ledger

to record the funds it expects to recover from grant

recipients who failed to comply with RGP requirements, and/or received grant payments to which they

were not entitled. We believe that collectible amounts

should be periodically recorded in LMDC formal

accounting records, and that the absence of such

records is a weakness in LMDC’s accounting controls

that could result in a misuse of RGP recoveries. In

addition, we believe that the establishment of a

receivable account for recoveries will strengthen

LMDC’s accounting procedures and enhance LMDC’s

accountability over CDBG Disaster Assistance Funds.

At January 23, 2004, the master repayment list

reflected over $690,000 of RGP funds to be recovered.

Finally, our audit disclosed two practices that

warrant further examination by HUD management.

These issues involve the use of CDBG Disaster Assistance Funds to pay for: (1) annual leave accrued and

transferred from various New York State departments and institutions; and (2) the salary and fringe

benefits of a part-time employee who does not report

to a department head or supervisor employed within

LMDC’s organizational structure.

We recommended that HUD instruct LMDC and/or

its program administrator to obtain and maintain all

missing documentation that supports the eligibility of

all grant recipients, and continue efforts to pursue

reimbursement from recipients who received overpayments and/or duplicate payments. In addition,

recoveries received should be refunded to the CDBG

Disaster Assistance Fund. Lastly, we recommended

that HUD direct LMDC to establish a receivable

account for all amounts it expects to recover. (Report

No. 2004-NY-1002)
Chapter 5 - HUD’s Community Planning and Development Programs 75

Section 108 Loan Program

An OIG review of the City of New Orleans, LA’s

$25.3 million Section 108 loan to assist in the construction of Jazzland Theme Park found that the City

did not comply with Section 108 requirements regarding applicant eligibility, loan requirements, grant

administration, and performance reviews. We concluded that the City paid over $7.6 million in ineligible

and unsupported expenditures. Nearly $1.3 million in

funds distributed by the City were ineligible because

the funds did not have an underlying loan or grant

agreement. Of the $6.3 million in unsupported costs,

$2.4 million related to a drawdown for which the City

had no documentation to support the release of the

funds. The remaining $3.9 million related to miscalculations of fees, payments to vendors, and possible

duplication of invoices. Further, the City had inadequate controls and management over Jazzland, and

did not manage the development of Jazzland. Because

Jazzland defaulted on the City’s loan, the City will be

required to repay HUD from rents it receives from the

new owners of the amusement park and from its

general fund.

To correct these deficiencies, we recommended

that HUD require the City to repay the $1.3 million in

ineligible expenditures and either support or repay the

$6.3 million in unsupported expenditures. The City

should also seek recovery from vendors who inappropriately gained from the disbursements. The City

needs to implement policies and procedures to ensure

compliance with program requirements. In this

regard, HUD should assist the City in the development

and implementation of the policies and procedures

prior to approving any additional Section 108 loans. By

doing this, the City could potentially use $52 million in

available Section 108 funds more effectively. Additionally, HUD should evaluate if actions by officials,

contractors, and others warrant administrative

sanctions. (Report No. 2004-FW-1003)

CDBG, HOME, Neighborhood

Initiative Grant, and HOME

Investment Partnership Programs

We reviewed 33 loans awarded by the City of

Springfield, MA, that were funded through Community Development Block Grants (CDBG) and HOME

grants, and miscellaneous income generated by

Urban Development Action Grants during the period

January 1, 1996 through March 31, 2001. The 33

loans totaled nearly $692,000. The audit disclosed

problems with the City’s management of community

planning and development funds. The City did not

always comply with its own policies and procedures,

follow HUD program requirements, or maintain

essential documentation. In addition, the City lacked

effective internal controls in some areas. Of the

approximately $692,000 reviewed, we questioned over

$674,000.

The City mismanaged its Business Improvement

Program (BIP). We reviewed 28 BIP projects involving

over $205,000 and found nearly $160,000 expended for

ineligible projects and nearly $28,000 expended

without sufficient documentation. Additionally, the

City had inconsistencies in the processing of loan

applications and requests for payments that had the

appearance of favoritism.

A review of three community development loans

totaling $360,000 disclosed that the City’s files lacked

documentation to determine that all the loans met

program requirements and national objectives. The

loan files did not contain basic documentation such as

applications, award determinations, commitment

letters, and demonstration of the achievement of

national objectives. Because of the nature and extent

of the deficiencies, the $360,000 is ineligible.

Finally, a review of two HOME funded projects

totaling nearly $127,000 disclosed that affordability

requirements were not met, the assistance may have

unduly enriched the project owner, disbursements

were made for ineligible costs and contrary to federal

program policy, and there were several unexplained

deviations from City policies governing disbursements. Neither of these projects was completed in

accordance with the original scope of rehabilitation

work. As a result, we consider the costs ineligible.

We recommended that HUD review the questioned

costs and determine whether the costs are ineligible;

require the City to reimburse HUD from non-federal

sources for any costs deemed ineligible; and require

City officials to implement adequate internal controls

to ensure that City policies and procedures are

followed and that HUD requirements are met. (Report

No. 2004-BO-1003)
Chapter 5 - HUD’s Community Planning and Development Programs 76

At the request of the HUD Kansas City Office of

Community Planning and Development, we audited

the East Meyer Community Association, a Community Development Corporation in Kansas City, MO.

We found that East Meyer mismanaged Neighborhood

Initiative and Community Development Block Grant

funds by improperly using the funds for purposes

other than those specified in the contract and/or grant

agreement. In regard to its $1 million Neighborhood

Initiative Grant, East Meyer improperly spent nearly

$727,000 and incurred over $57,000 of unsupported

expenses. For example, instead of using grant money

for its intended purpose – beautification and repair,

clean-up of dead-end streets, and attraction of new

businesses – East Meyer used over $331,000 of the

Neighborhood Initiative Grant funds to purchase and

rehabilitate an office building for itself. East Meyer

also charged over $65,000 of unsupported expenses to

its Community Development Block Grant.

Building East Meyer purchased for itself with Neighborhood

Initiative Grant funds.

East Meyer did not maintain adequate documentation to support the expenditure of another $123,000 in

grant funds. East Meyer’s records did not adequately

identify the source and application of funds, contain

financial records, or contain supporting documents.

We believe poor record keeping led to East Meyer’s

lack of support for their use of grant funds.

Example of how East Meyer maintained its records.

We recommended that the Director, Economic

Development Initiative, take administrative action

against East Meyer management and the board of

directors that will prevent them from participating in

future HUD funded activities. Additionally, we recommended that the Director take action to recoup the

nearly $727,000 that was inappropriately spent, and

require East Meyer to provide documentation for

unsupported costs charged to the Neighborhood

Initiative Grant. In addition, the Director, Office of

Community Planning and Development, should

require East Meyer to provide documentation for

unsupported costs charged to the Community Development Block Grant or repay the amounts that cannot

be supported. (Report No. 2004-KC-1001)

Based on a citizen complaint, we audited

Waukesha County, WI’s Community Development

Block Grant and HOME Investment Partnership

Programs. The complainant’s specific allegations

were: (1) abuse of HUD’s HOME Investment Partnership Program in the State of Wisconsin; (2) poorly

kept records with the intent of covering up discrepancies in funds given to individuals; and (3) HUD funds

distributed to prominent elected officials or their

spouses to acquire properties.

Although we were not able to substantiate any of

the complainant’s allegations, we found that Waukesha

County did not follow federal requirements regarding

its Block Grant and HOME Programs. Specifically,

the County did not ensure that: (1) federal requirements and its agreements with the Waukesha County
Chapter 5 - HUD’s Community Planning and Development Programs 77

Economic Development Corporation, the County’s

loan administrator, were followed regarding documentation maintenance for 16 economic development

loans; (2) federal requirements and its agreements

with the Corporation were followed for two economic

development loan agreements, since the agreements

either failed to meet HUD’s national objective of

creating job opportunities for low- and moderateincome persons or permitted Block Grant funds to

pay for pre-award costs; and (3) federal requirements

were followed to ensure that assisted houses met local

building codes and/or HUD’s housing quality standards.

The County: (1) lacked adequate documentation

to support that nearly $464,000 in Block Grant loans

were used for eligible expenses; (2) allowed two loan

agreements totaling $306,000 to be executed with

provisions that violated federal requirements and its

agreements with the Corporation; (3) did not include

$650 of housing rehabilitation work in specifications

for four houses to ensure they met local codes and/or

HUD’s standards; and (4) failed to assure that local

building permits were issued and assisted houses

passed local inspections.

We recommended that HUD’s Director of Community Planning and Development, Milwaukee Field

Office, assure that the County reimburses its appropriate program for the inappropriate use of HUD funds

and implements controls to correct the weaknesses

cited in the audit. These improvements should help

ensure that the County’s annual average of nearly

$473,000 in economic development loans meets

federal requirements. (Report No. 2004-CH-1002)

Investigations

During this reporting period, the OIG opened 52

investigation cases and closed 30 cases in the Community Planning and Development Program area.

Judicial action taken on these cases during the period

included $1,409,681 in investigative recoveries,

$11,446,559 in funds put to better use, 30 indictments/

informations, nine convictions, pleas, and pre-trial

diversions, 30 administrative actions, and 32 arrests.

The results of our more significant investigations are

described below.

Disaster Assistance Funds – State of

New York

In our last two Semiannual Reports to Congress,

we reported on both our audit and investigative work

into the misuse of HUD funds provided in the aftermath of the September 11, 2001 terrorist attacks in

New York City. During this reporting period, we

continued to find instances of fraud and abuse involving these funds. Our results are as follows:

In New York, NY, in Federal Court for the

Southern District of New York, defendant Allan Klein

was sentenced to six months in prison and three years

probation, and was fined $1,000. In September 2003,

Klein pled guilty to one count of theft of federal

government money and one count of mail fraud. Klein

was involved in a scheme to defraud HUD and the

Lower Manhattan Development Corporation (LMDC)

of federal grant money made available after the

September 11, 2001 terrorist attacks. LMDC was

created by the State and City of New York to coordinate the rebuilding and revitalization of Lower Manhattan. HUD provided LMDC $2.7 billion in funding for

the grant program.

In New York, NY, in Federal Court for the

Southern District of New York, defendant Azmay

Shahzada was sentenced to two years probation, to be

served in Pakistan, fined $500, and ordered to pay

$250 in restitution. Shahzada is responsible for paying

all fines and restitution prior to her departure to

Pakistan and must not make application to re-enter

the United States during the probation period.

Shahzada was previously found guilty of mail fraud.

She devised a scheme to fraudulently obtain money

from the LMDC.

Defendants Alexander D. Koltovskoy, also known

as Alexander Kolt, and Vincent M. Pizzi, III, were

convicted in New York, NY, in Federal Court for the

Southern District of New York, for defrauding various

private and government agencies of World Trade

Center disaster benefits, including grants and loans.

The following agencies were defrauded out of

$349,723: the Small Business Administration, the

Empire State Development Corporation, which

administers grants received from HUD, the Federal

Emergency Management Agency, the American Red
Chapter 5 - HUD’s Community Planning and Development Programs 78

Cross, the New York City Economic Development

Corporation, Safe Horizon, Inc., and Civic Capital

Corporation.

Defendant Denise O’Connor pled guilty in New

York, NY, in Federal Court for the Southern District

of New York, to one count of theft of government

funds and one count of mail fraud. O’Connor devised

a scheme to fraudulently obtain money from the

LMDC. Defendant Ivy Horn, who claimed to be a

resident of Lower Manhattan, was arrested and

ultimately indicted for theft of government funds and

mail fraud. Horn also fraudulently obtain money from

the LMDC.

In August 2003, LMDC announced an Amnesty

Program that will enable individuals who have

improperly received Residential Grant Program

funds to return them and avoid prosecution. Individuals were required to call the fraud hotline by September 30, 2003, and request amnesty, cooperate fully,

and make full and complete restitution of all funds

improperly received. As of February 2004, LMDC had

received $58,311 in restitution.

Investigations Involving Public

Officials

In Milwaukee, WI, in Federal Court for the

Eastern District of Wisconsin, defendant LaRosa

Roberta Cameron, also known as Roberta Allen,

former executive director of the Williamsburg Heights

Community Block Club Association (WHCBCA) and

the daughter of former City of Milwaukee alderman

Rosa Cameron, was sentenced to five years probation, including 60 days home confinement. Allen

previously pled guilty to participating in a scheme to

conceal a material fact in relation to the award of

HUD Community Development Block Grant funds by

the City of Milwaukee to WHCBCA. Allen’s mother,

Rosa Cameron, previously pled guilty and was

sentenced in connection with this investigation. The

third defendant in this case, LaZanda Moore, another

daughter of the former alderman, was found guilty of

making false statements.

The original charges in this case related to the

operation of the WHCBCA, a nonprofit organization

that received HUD funding. Rosa Cameron and her

daughters participated in a scheme to deliberately

conceal the fact that Cameron’s family members

were receiving compensation from WHCBCA as

salaried employees. Federal regulations prohibited

Rosa Cameron from directing federal grant money to

WHCBCA once she was elected alderwoman. In

Cameron’s case, she was on the City of Milwaukee

subcommittee which authorized federal distributions

to WHCBCA in both 2000 and 2001. In both of these

years, Moore and Allen received compensation from

WHCBCA as employees.

In Tampa, FL, in Federal Court for the Middle

District of Florida, a 60-count indictment was handed

down charging defendants Steven Allen Labrake,

Paulette Lynne McCarter-LaBrake, Dean Ryan,

Chester Maurice Luney, Dean R. Ryan, and Lori A.

Roberts with bribery of public officials, conspiracy to

defraud the United States, wire fraud, scheming to

defraud, theft of federal funds, and embezzlement of

public money. The indictment alleges that City

officials, employees, and others used Community

Development Block Grant, HOME, HOPE 3, and

Housing Opportunities for Persons with AIDS funds

for their personal gain.

Theft/Embezzlement/Forgery

In Ramsey County State Court, St. Paul, MN,

defendant Mary Christine Nelson was ordered to pay

$70,163 in restitution. This was the final phase of her

sentencing, and a follow-up to the initial sentencing

which took place in July 2003. At that time, she was

sentenced to community service, probation, and

confinement. Nelson, the community organizer for

the Capital River Council, pled guilty to one count of

theft by swindle. She wrote over 100 checks to herself

from an account that contained HUD block grant

funds, and deposited them in her personal bank

account.

In Salt Lake City, UT, in Federal Court for the

District of Utah, defendant Christy Marie Martinez

was sentenced to five years probation, including six

months in a community treatment center, and was

ordered to pay $50,185 in restitution for theft of

government funds. Martinez, a former caseworker

for the Salt Lake Community Action Program’s

Housing Opportunities for Persons with HIV/AIDS
Chapter 5 - HUD’s Community Planning and Development Programs 79

(HOPWA) Program, embezzled program funds by

creating false supporting documentation to justify

HOPWA payments to “vendors” on behalf of HOPWA

clients. Martinez also diverted payments prepared for

HOPWA “clients” for her personal benefit, including

money for a vacation condominium rental, a car loan,

and payments to herself. She was ultimately suspended by HUD from participation in procurement and

non-procurement transactions as a participant or

principal with HUD and throughout the Executive

Branch of the Federal Government.

Defendant Sylvester Holmes, former president of

the Black Economic Union, a Community Development Corporation, was sentenced in Kansas City,

MO, in U.S. District Court for the Western District

of Missouri, to five months incarceration and two

years supervised release. He was also ordered to pay

$33,045 in restitution and a $3,200 fine. Holmes

previously pled guilty to two counts of theft concerning programs receiving federal funds.

Defendant Mary Long, former managing director

of Pahrump Family Resource Center (PHRC), a

nonprofit organization that received Housing Opportunities for Persons with AIDS funds from HUD, was

sentenced in Pahrump, NV, in Nevada State District

Court, to 48 months incarceration and was ordered to

pay $102,836 in restitution to PHRC. Long previously

pled guilty to two counts of forgery and embezzlement. Between October 2000 and August 2002, Long

stole a total of $175,000 in cash and checks from

PHRC, which she deposited in her personal account.

In Los Angeles, CA, in Federal Court for the

Central District of California, defendant Tony

Chisum, Jr., president of American Philanthropy

Association (APA), was sentenced to 33 months

incarceration and three years supervised probation,

and was ordered to pay a total of $103,569 in restitution ($43,777 to HUD and $59,792 to the Federal

Emergency Management Agency). He was also

ordered to pay a $1,200 assessment fee. Chisum was

found guilty of one count of conspiracy, five counts of

making false claims to HUD, five counts of theft of

federal government funds, and one count of making

false statements to HUD. In the same case, defendant

Terry Lee Rhodes, an APA employee, pled guilty to one

count of theft of government property.

APA owned and operated three homeless shelters

in Los Angeles. Rhodes and Chisum were responsible

for submitting homeless shelter attendance logs that

included fraudulent and fictitious names in order to

receive federal funds from the Los Angeles Homeless Services Authority’s Winter Shelter Program.

The City and County of Los Angeles funded the

Winter Shelter Program using Emergency Shelter

Program grant funds provided by HUD. APA received

more than $500,000 under the Winter Shelter Program between 1994 and 1998.

Defendants Alexander Zakharov, also known as

“Sasha,” and Syoma Kaplun surrendered and pled

guilty in New York, NY, in Federal Court for the

Southern District of New York, to one count of

conspiracy to commit bribery. Zakharov and Kaplun

made arrangements to pay Rabbi Milton Balkany

monies to have a Bureau of Prisons inmate relocated

to another facility.

Balkany was previously charged with misappropriating $700,000 in federal grant money. Balkany,

president and director of Bais Yaakov, a Jewish day

school in Brooklyn, applied for and later received a

$700,000 Economic Development Initiative grant from

HUD. He represented to HUD that the entire grant

amount would be used to pay off a mortgage on a

building located on the Bais Yaakov property for an

entity called the “Children’s Center of Brooklyn” to

house educational and therapeutic programs for

disabled preschool children. An investigation disclosed that Balkany used some of the grant funds for

himself and diverted other grant funds to individuals

and entities who were not entitled to receive them.

Subsequently, the U.S. Attorneys’ Office issued a

deferred prosecution to Balkany, who agreed to pay

$700,000 in restitution, report to pre-trial services for

six months, and no longer lobby or apply, on his behalf

or on behalf of any others, for government grants

from any agency. Balkany was also in line to receive

Congressionally earmarked funds amounting to $1.5

million. Based on the investigation, however, Balkany

will not be eligible nor will he meet the requirements

for the grant. If Balkany should fail to pay restitution,

a lien will be placed on his property in Brooklyn,

most recently appraised at $8 million.
Chapter 5 - HUD’s Community Planning and Development Programs 80

In State Court in Callahan, FL, defendant

Barbara F. Boone was indicted on 48 counts including

grand theft and theft from the HUD Community

Development Block Grant (CDBG) Program. Boone

obtained and administered the HUD grants for the

Town of Callahan, which received the federal grants

through the Department of Community Affairs, State

of Florida. Boone’s indictment includes additional

counts of grand theft from the Florida Department of

Environmental Protection, theft against the Town of

Callahan, official misconduct, and petit theft. The

Town of Callahan entered into an agreement with the

State of Florida, Department of Community Affairs

(DCA), for the repayment of $206,086 relating to

disbursements on one CDBG grant and $65,000

relating to disbursements on another. The DCA has

responsibility for oversight and accountability for HUD

grant money awarded to the Town of Callahan.

In East Cleveland, OH, in Federal Court for the

Northern District of Ohio, defendants Cecelia

George, the former director of the Department of

Community Development (DCD), her father, Charles

Reed, Sr., her brother, Charles Reed, Jr., and her

son, Willie George, were charged in a ten-count

indictment. Included in the indictment were one count

of conspiracy, three counts of embezzlement, and six

counts of wire fraud. Allegedly, Cecelia George, as

director for the DCD, orchestrated a scheme to funnel

HUD Community Planning and Development funds to

her family. The fraud was accomplished by rigging

bids, illegally awarding contracts to family members

through “sham” or “front” companies, which disguised the family’s interest and/or ownership as the

contractor, providing false information to HUD

regarding the expenditure of funds, forging signatures

on checks in order to profit directly from DCD funds,

and using DCD funds for office entertainment. The

purported fraudulent contracts included the emergency door and lock contract, emergency furnace

contract, emergency roof contract, emergency HVAC

contract, and HOME fund contracts. In total, approximately $69,000 in DCD funds were allegedly misappropriated through one or more of these schemes.

Bribery, Conspiracy, and Mail/Wire

Fraud

Defendants James Asselin and James Krzytofik,

the former director and deputy director, respectively,

of the Hampden County Employment and Training

Consortium (HCETC) and the Greater Springfield

Entrepreneurial Fund (GSEF), pled guilty in Springfield, MA, in Federal Court for the District of

Massachusetts, to conspiracy to defraud, money

laundering, and program fraud. HCETC and GSEF

were established and funded with $700,000 in HUD

funds obtained from the City of Springfield Economic

and Community Development Office. Between 1997

and August 2000, Asselin and Krzytofik embezzled

$432,000 in funds provided by the Small Business

Administration (SBA) and the Department of Commerce through various consulting schemes. The HUD

funds allowed Asselin and Krzytofik to maintain a

float for repayment of loans to SBA and Commerce. In

addition, Asselin and Kristofik made small business

loans to various associates that were never repaid.

Asselin and Krzytofik are scheduled for sentencing on

June 14 and July 6, respectively.

In the same case, defendants Gerald A. Phillips,

executive director of the Massachusetts Career

Development Institute (MCDI), Giuseppe Polimeni,

former director of MCDI, Jamie Dwyer, former MCDI

employee, and Luisa Cardaropoli, alleged MCDI “noshow” employee, were indicted on 19 counts of

defrauding HUD. MCDI, which received funds from a

number of sources, including HUD and the Department of Education, provided educational and job

training programs for income eligible individuals in

the Springfield area. The indictment charged the

defendants with conspiracy to commit program fraud,

aiding and abetting, wire fraud, federal program

fraud, obstruction of justice, making false statements

to a federal agent, and threatening a witness.

Phillips was the commissioner of the Springfield

Police Department until his arrest in March 2003.

Allegedly, Phillips, Polimeni, and Dwyer conspired to

disburse unauthorized MCDI funds to Cardaropoli and

other “no-show” employees of MCDI, including

Polimeni’s son-in-law. In addition, two females were

paid with MCDI funds and received gifts and trips paid

for with MCDI funds for work not performed at MCDI

in exchange for sexual favors to Phillips. One of the
Chapter 5 - HUD’s Community Planning and Development Programs 81

females was 16 years old at the time of the sexual

assault. Phillips arranged for the second female to

receive a Section 8 voucher in return for the sexual

favors provided. The indictment also alleges that there

were numerous fraudulent wire transactions involving

health insurance and employment benefits illegally

awarded to the alleged “no-show” employees. During

the course of the investigation, Phillips threatened,

intimidated, and persuaded a witness in order to

prevent the witness from providing testimony in a

Federal Grand Jury proceeding.

Defendant Pedro Octavio Estevez, also known as

Peter Estevez, pled guilty in San Antonio, TX, in

Federal Court for the Western District of Texas, to

two counts of mail fraud. Estevez obtained a Rental

Rehabilitation Program loan from the City of San

Antonio, which received the money from HUD in the

form of Community Development Block Grant

(CDBG) Program funds. The defendant used the U.S.

Postal Service to provide false statements to the City

of San Antonio by stating that he had the collateral

and remaining proceeds to pay for the CDBG loan to

rehabilitate Elmhurst Apartments when in fact he did

not. He also used the Postal Service in providing false

loan origination documents to fraudulently secure

FHA insured loans for the purchase of residential

property that was in poor condition and was fraudulently overvalued.

Defendant Anthony Auyer was indicted in Chattanooga, TN, in Federal Court for the Eastern District

of Tennessee, on one count of wire fraud. Auyer was

president of Anthony’s Construction Company, Inc.,

which in November 1999, purchased a sawmill in

Warren County, TN. Auyer applied for and received a

$500,000 loan for the purchase of sawmill equipment

through the Tennessee Department of Economic and

Community Development. The loan was made

through HUD’s Community Development Block Grant

Program. When Auyer failed to make the first few

payments on the loan, the State of Tennessee, Office

of the Comptroller, conducted an inventory of the

equipment alleged to have been purchased with the

loan proceeds and noted that some of the equipment

could not be found on the premises. Further review

showed that five equipment purchase invoices in the

amount of $408,000 were fraudulent.

In Milwaukee, WI, in Federal Court for the

Eastern District of Wisconsin, a six-count superseding indictment charged defendants Muhammad AbuShawish, Bassam Abdel Aziz Abu Shawish, and

Wafieh Mohammad Abu Jubran with various charges,

including one count of conspiracy to commit visa

fraud, three counts of visa fraud, and two counts of

federal program fraud.

Muhammad Abu-Shawish, who was the executive

director of Arabian Fest Arab American Festival,

Inc. (Arabian Fest), a nonprofit organization receiving Community Development Block Grant (CDBG)

funds through both the City and the County of Milwaukee, was charged with using official Arabian Fest

stationery to falsely support the issuance of American

visas to foreign nationals by the U.S. Embassy in

Amman, Jordan, and elsewhere in order to circumvent U.S. immigration law, including issuing over 40

false formal letters of invitation. The indictment

charges that the fraudulent documentation used to

obtain these visas included formal letters of invitation

to foreign nationals stating that Arabian Fest would be

paying the costs of the travel, as required by the types

of visas obtained; false statements that Bassam Abdel

Aziz Abu Shawish had never applied for, or had been

refused, an American visa in the past; and formal

letters of invitation which contained other false

information, including fabricated job descriptions,

expertise, and experience. The indictment also alleges

that Muhammad Abu-Shawish and others required

payment for the false letters of invitation and that

threats were made in connection with the foreign

nationals.

The indictment also charges Muhammad AbuShawish with program fraud in connection with both

City and County block grant programs. The City

awarded Arabian Fest $75,000 in CDBG funds to

develop a business plan to recruit new businesses

along Muskego Avenue. The indictment charges that

he submitted a study stating that it was prepared by

Arabian Fest and funded by the City’s Community

Block Grant Administrator when in fact the plan was

not formulated by Arabian Fest, but was an identical

copy of another plan, with minor cosmetic changes,

which had been completed by an individual unrelated

to Arabian Fest and funded by another unrelated

organization at a cost of $25,000. Allegedly, he

fraudulently submitted documentation to the City to
Chapter 5 - HUD’s Community Planning and Development Programs 82

support $30,000 in expenses associated with the study.

The County awarded Arabian Fest $15,000 in CDBG

funds to pay a portion of salary and fringe benefits of

an executive director to operate a business development program to provide technical assistance to a

minimum of three small business owners, “microenterprise owners,” in a specific low- and moderateincome service area. In support of the costs claimed,

Abu-Shawish submitted a document identifying three

storeowners to whom he claimed to have provided

assistance and two with whom he claimed to have

scheduled follow-up meetings. The indictment charges

that he submitted multiple fraudulent claims for

reimbursement to the County until January 2003

although his contact with all three businesses ended in

the summer of 2002 and consisted of less than 50

minutes. The County ultimately spent $15,000 of

CDBG funds for less than 50 minutes of work.

Defendants Joseph Barry and Paul Byrne were

indicted in Newark, NJ, in Federal Court for the

District of New Jersey, on 16 counts of bribery,

conspiracy, and mail and wire fraud. An investigation

found that Barry, a real estate developer, allegedly

bribed a former Hudson County executive to help

secure federal and state grants and loans for some of

Barry’s development projects. Barry managed to

secure HUD grants and loan guarantees under the

Community Development Block Grant Program as

well as Section 108 loan guarantee(s). Byrne allegedly

received checks from Barry and converted some of

the checks to cash in order to make payments to

further the scheme. The indictment detailed $8.8

million in federal and state loan grants that Barry and

his enterprise, the Applies Companies, secured

through bribery.

Misuse of Funds

Defendant Kim Parker was sentenced in Richmond, VA, in U.S. District Court for the Eastern

District of Virginia, to 96 months in prison and three

years supervised release, and was ordered to pay

restitution to agencies and individuals from whom she

obtained funds for an AIDS infected child. Parker

previously pled guilty to misusing HUD and Social

Security Administration (SSA) funds intended for the

child of whom Parker was the legal guardian. Although Parker claimed to have given the child away

three years ago to a couple in another state and to be

unaware of the child’s whereabouts, the couple denied

ever receiving the child. The child, who would

currently be 10 years old, is the subject of a nationwide search. Although the fraud in this case was

estimated at only about $17,000, the Court granted

the government’s request for several enhancements to

the sentencing guidelines because of Parker’s position

as the guardian of a vulnerable victim and her obstruction of the investigation into the child’s whereabouts. The Court also granted the government’s

request for an upward departure from the guidelines

due to the atypical nature of the case. Parker previously received HUD funding for an organization that

she operated called Rainbow Kids, which reportedly

provided counseling and assistance to families of

children with AIDS. However, HUD withdrew funding

from Rainbow Kids in the late 1990’s when Parker

was unable to document how she was spending the

funds.

Tax Fraud

Defendant Johnny Walker, a contractor, was

sentenced in Kansas City, MO, in Federal Court for

the Western District of Missouri, after pleading guilty

to two counts of tax fraud. Walker is a contractor for

the Housing and Economic Development Financial

Corporation (HEDFC), which is commonly referred to

as the lending arm for the City of Kansas City. HEDFC

has been lending millions of dollars in HUD funds for

20 or more years to individuals, community development corporations, and other entities. Allegedly,

HEDFC’s vice president has taken kickbacks from

local businessmen associated with organized crime.

These monies are payments for information allowing

the businessmen to ensure that their bids for contracts

are the lowest. Walker acted as a conduit in the

bribery transactions. He was sentenced to one year

and one day incarceration and 36 months supervised

release. Civil actions are also being pursued against

him.
Chapter 6 - Other Significant Audits and Investigations/OIG Hotline 83

Chapter 6 — Other Significant Audits and Investigations

During this reporting period, the OIG issued seven

reports: six internal audits and one external audit

involving areas of HUD operations that do not fall

under major HUD programs reported in previous

Chapters. These reports disclosed about $1.3 million

in questioned costs and about $1.5 billion in recommendations that funds be put to better use.

OIG Hotline /

Other Reports Issued

6

1

Internal Audits

External Audits

We audited the HUD and FHA Financial Statements, Office of Healthy Homes and Lead Hazard

Control, HUD’s Information Systems Security, and

Historically Black Colleges and Universities Grants

at Jackson, MS State University.

Financial Statement Audits

We issued our audit of HUD’s financial statements

for the FYs ended September 30, 2003 and 2002. In

OIG’s opinion, based on our audit and the reports of

other auditors, the financial statements present fairly,

in all material respects, the financial position of HUD

as of September 30, 2003 and 2002 and its net costs,

changes in net position, budgetary resources, and

reconciliation of net costs to budgetary obligations for

the fiscal years then ended, in conformity with

accounting principles generally accepted in the

United States.

The report identifies two material weaknesses

and seven reportable conditions on internal controls.

The material weaknesses in internal controls in FY

2003 related to the need to: (1) comply with federal

financial management system requirements, including

the need to enhance FHA information technology

systems to more effectively support FHA’s business

and budget processes; and (2) improve oversight and

monitoring of subsidy calculations and intermediaries’ program performance. Reportable conditions in

internal controls in FY 2003 related to the need to: (1)

improve quality control over performance measures

data; (2) improve controls over project-based subsidy

payments; (3) strengthen controls over HUD’s computing environment; (4) improve personnel security

practices for access to the Department’s critical

financial systems; (5) improve processes for reviewing obligation balances; (6) more effectively manage

controls over the FHA systems’ portfolio; and (7) place

more emphasis on monitoring lender underwriting

and improving early warning and loss prevention for

FHA single family insured mortgages. In addition, our

reportable condition on improving the processes for

reviewing obligation balances identified $1.430 billion

in monetary benefits which we reported as “funds put

to better use.”

Audits

$0

$200,000,000

$400,000,000

$600,000,000

$800,000,000

$1,000,000,000

$1,200,000,000

$1,400,000,000

$1,600,000,000

Internal Audits External Audits

Questioned Costs Funds Put to Better Use

Other Dollars
Chapter 6 - Other Significant Audits and Investigations/OIG Hotline 84

Most of these control weaknesses were reported

in prior efforts to audit HUD’s financial statements

and represent long-standing problems. Our findings

also include the following instance of noncompliance

with applicable laws and regulations: HUD did not

substantially comply with the Federal Financial

Management Improvement Act. In this regard, HUD’s

financial management systems did not substantially

comply with federal financial management systems

requirements and applicable accounting standards.

The audit discusses each of these conditions in

detail, provides an assessment of actions taken by

HUD to mitigate them, and makes recommendations

for corrective actions. During the course of the audit,

OIG also identified several matters that were not

material to the financial statements and were separately communicated to HUD management. (Report

No. 2004-FO-0003)

We engaged the independent certified public

accounting firm of KPMG LLP to audit the FY 2003 and

2002 financial statements of the Federal Housing

Administration. In KPMG’s opinion, the financial

statements present fairly, in all material respects,

FHA’s financial position as of September 30, 2003 and

2002, and its net costs, changes in net position,

budgetary resources, and reconciliation of net costs to

budgetary obligations, for the years then ended in

conformity with accounting principles generally

accepted in the United States.

The report identifies one material weakness and

two reportable conditions: (1) HUD/FHA’s automated

data processing (ADP) system environment must be

enhanced to more effectively support FHA’s business

and budget processes; (2) HUD/FHA can more effectively manage controls over the FHA ADP systems

portfolio; and (3) FHA must place more emphasis on

monitoring lender underwriting and continue to

improve early warning and loss prevention for single

family insured mortgages. The first of these three

items is considered to be a material weakness. KPMG

made a series of recommendations for corrective

actions. During the course of the audit, KPMG also

noted other matters that were not material to the

financial statements and were separately communicated to FHA management. (Report No. 2004-FO0001)

Office of Healthy Homes and Lead

Hazard Control

In response to a Hotline complaint, we audited

the grant award and administration process of the

Office of Healthy Homes and Lead Hazard Control

(OHHLHC). We found that OHHLHC awarded grants

without meeting HUD requirements for evaluating

unsolicited proposals and without maintaining a

complete log of unsolicited proposals submitted for

consideration. We attributed these deficiencies to the

fact that OHHLHC did not have adequate management

controls for evaluating proposals and the Director of

OHHLHC had sole responsibility and control over

selecting and awarding grants for unsolicited proposals. As a result, OHHLHC awarded five grants, totaling

nearly $3.8 million, for services based on unsolicited

proposals that were not evaluated.

OHHLHC approved requests for grant amendments for award increases and extensions without

adequately evaluating the grantees’ requests and

documenting the evaluation. Specifically, four grants

were increased to more than three times their

original grant amounts, and their performance

periods were extended significantly. These excessive

award increases and extensions occurred because

OHHLHC did not have adequate controls for modifying

and amending grants. Consequently, OHHLHC had no

assurance that the additional $11.1 million awarded to

these grantees was an efficient use of funds.

Grantee Effective 

Date 

Original 

Grant 

Amount 

The Tides Center 9/1/97 $334,950 

University of Cincinnati 

Medical Center 7/95 300,000 

United Parents Against 

Lead of Michigan (UPAL) 4/1/97 99,650 

UPAL 9/1/02 747,963 

Alliance to End Childhood 

Lead Poisoning 1/1/02 2,300,000 

TOTAL $3,782,563 

Grants Awarded for Unsolicited Proposals Without Evaluations
Chapter 6 - Other Significant Audits and Investigations/OIG Hotline 85

In addition, because of inadequate oversight, OHHLHC did not ensure that grantees expended funds timely. As a

result, grantees had approximately $27 million in unexpended grant funds that OHHLHC could have put to better use.

The audit recommended, among other things, that the Director of OHHLHC ensure: (1) the implementation of

the unsolicited proposal procedures outlined in the Grant Management Desk Guide; (2) that a review panel performs preliminary and comprehensive evaluations of all unsolicited proposals and documents the evaluations in

writing; and (3) that all grantees maintain appropriate financial documentation to support costs charged to grants. In

addition, the director should require Government Technical Representatives (GTRs) to adhere to the Grants Management Desk Guide on grant monitoring, modifications, and amendments, and ensure that grant officers properly

execute the amendments to existing awards. Finally, the Director should ensure that the spend-out schedule used to

evaluate the grantees’ progress mirrors the time frames outlined in the grant agreement, that unexpended balances

that are five years or older be recaptured, and that GTRs and division directors monitor grantees’ performance to

allow for timely expenditure of funds. (Report No. 2004-AO-0001)

Information Systems Security

We completed an audit of the management, operational, and technical controls over the security of the Tenant

Rental Assistance Certification System (TRACS). TRACS is a HUD mission critical financial and program information

system that interfaces with other HUD systems. It receives HUD’s highest ratings for sensitivity and criticality. Its

goal is to collect tenant data for all housing programs and to automatically provide payment for subsidy programs,

where HUD is the contract administrator, based on the contract and tenant data resident in the system. We found the

following deficiencies and weaknesses over TRACS security: (1) access controls over the TRACS data and resources

are inadequate; (2) software configuration management controls are inadequate; (3) adequate security training has

not been provided; (4) audit logs are not being utilized to detect security violations or performance problems, or to

monitor and log user activities; (5) personnel security practices pose a risk of unauthorized access to TRACS; and

(6) segregation of duties performed by key personnel is lacking. The effect of the deficiencies and weaknesses in

controls is exposure of TRACS data to unnecessary risk of loss of confidentiality, integrity, and availability.

The Office of Multifamily Housing has taken action to correct some of the weaknesses identified during our

review. However, additional corrective action is needed. Our report contains recommendations for the Assistant

Secretary for Housing and the Assistant Secretary for Administration/Chief Information Officer to improve controls

over the security of TRACS. (Report No. 2004-DP-0002)

Grantee Original 

Grant 

Award 

Grant 

Increase 

Rate of 

Grant 

Increase 

Original 

Grant 

Period 

(months) 

Time 

Extension 

(months) 

Rate of 

Time 

Extension 

The Tides 

Center $334,945 $1,658,971 495% 36 40 111% 

University of 

Cincinnati 

Medical Ctr. 

$300,000 $1,429,651 476% 42 36 85% 

UPAL (1997) 

$99,650 $495,767 498% 18 47 261% 

National 

Center for 

Healthy 

Housing 

$1,750,000 $7,549,818 431% 48 78 163% 

TOTAL $2,484,600 $11,134,207 

Extensive Award Increases and Time Extensions Awarded Based on Inadequate Documentation
Chapter 6 - Other Significant Audits and Investigations/OIG Hotline 86

The OIG completed a review of selected information systems’ general and application controls in

support of the Fiscal Year (FY) 2003 financial statements audit. Our review was based on the General

Accounting Office “Federal Information Systems

Controls Audit Manual,” and information technology

guidelines established by the Office of Management

and Budget (OMB) and the National Institute of

Standards and Technology (NIST). Our review found

information systems controls weaknesses that could

negatively affect the integrity, confidentiality, and

availability of computerized data. We attributed this to

HUD’s noncompliance with OMB Circular A-130, NIST

requirements and standards, and HUD’s own internal

policies and procedures. These weaknesses are as

follows:

3⁄4HUD’s entity-wide information security planning

and management program does not meet the

minimum set of controls for automated information

resources established by OMB Circular A-130.

3⁄4Controls on the IBM compatible Hitachi mainframes and network do not adequately protect data

and application programs from potential unauthorized modification, loss, and disclosure.

3⁄4Software change management procedures are not

being followed, making HUD vulnerable to the

introduction of unauthorized programs or changes

to application and system software.

3⁄4Inadequate segregation of duties exists in system

security administration, exposing HUD to increased

risk of improper activities.

3⁄4HUD has not followed NIST guidelines for the

development and testing of contingency related

plans, resulting in inadequate assurance that HUD

can recover computer processing operations in the

event of a disaster or other unexpected interruptions.

We recommended that the Assistant Secretary for

Administration/Chief Information Officer ensure that

OMB requirements and NIST guidelines, as well as

HUD’s own internal polices and procedures, are

implemented. (Report No. 2004-DP-0001)

Historically Black Colleges and

Universities Grants

An OIG audit disclosed that Jackson, MS State

University’s Historically Black Colleges and Universities grants did not achieve the goal of the

Homeownership Program to increase homeownership

opportunities for low- and moderate-income individuals in the area surrounding the University. The

University spent over $1.36 million, or 60 percent of

its $2.26 million in grants. Only four of the 30 houses

proposed were completely rehabilitated. The University did not perform adequate analytical reviews to

determine the feasibility of acquiring and rehabilitating the properties or the financial viability of proposed projects. Because the University was not timely

rehabilitating and selling the houses it was acquiring,

the University was maintaining an inventory of vacant

and boarded up houses that may have contributed to,

instead of eliminating, crime and vagrancy in the

area.

Two boarded up houses in Jackson State University’s

inventory.

The University also failed to consider cost

estimates or select the most cost effective projects

for acquisition and rehabilitation. As a result, grant

funds totaling $10,300 were ineligible and $129,683

were unsupported. Further, the University’s procurement practices did not comply with federal or state

procurement and contracting requirements. The

University improperly procured over $765,000 of

goods and services without adequately documenting

the procurements, or having a contract administration

system.
Chapter 6 - Other Significant Audits and Investigations/OIG Hotline 87

The audit recommended that HUD suspend

disbursements and disallow the use of grant funds

until the University can demonstrate accountability

and compliance with the grant agreements. In addition, HUD should require the University to reimburse

ineligible costs, determine the eligibility of unsupported costs, and recapture the remaining grant

balance of $898,000. (Report No. 2004-AT-1002)

Investigations

During this reporting period, the OIG opened eight

investigation cases and closed 10 cases involving

areas of HUD operations that do not fall under specific

program categories. Judicial action taken on these

cases during the period included $23,563,650 in

investigative recoveries, $105,000,000 in funds put to

better use, four indictments/informations, two convictions/pleas/pre-trial diversions, four administrative

actions, and four arrests. The results of some of these

investigations are described below.

Ginnie Mae Fraud

In Charlotte, NC, in Federal Court for the

Western District of North Carolina, defendants Macy

McLean, former vice president of First Beneficial

Mortgage Company (FBMC), James McLean, Jr.,

former president, FBMC, and Paul and Debbie

Zimmerman, FBMC officials, were sentenced based

on previous convictions for participating in a scheme

between 1998 and 2000 to defraud the Government

National Mortgage Association (Ginnie Mae). As

part of the scheme, the defendants created fraudulent,

nonexistent FHA insured mortgage notes totaling $28

million which were passed through to Ginnie Mae

investors and on which Ginnie Mae was required to

make good when the fraud was discovered. Macy

McLean was sentenced to 10-1/2 years incarceration

and five years supervised release. James McLean

was sentenced to 48 years incarceration and 177

years supervised release. Paul and Debbie

Zimmerman were each sentenced to 11 years incarceration and six years supervised release. In addition,

cumulative restitution of $23.5 million was ordered

against all four defendants.

In Greensboro, NC, in Federal Court for the

Western District of North Carolina, defendant

Theodore Peterson, a former certified public accountant (CPA), was convicted for submitting false, fraudulent and material annual financial statements to HUD

and Ginnie Mae for FY 1999. Peterson, who was

indicted in August 2003, must publicly apologize for

his actions in a letter to the local newspaper. According to the plea agreement, Peterson made false

statements to HUD in a 1999 audit letter and reports in

which he claimed that he was a CPA and had performed certain audits of First Beneficial Mortgage

Corporation’s (FBMC) financial statements in compliance with HUD program requirements. Contrary to

Peterson’s audit letter and reports, however, Peterson

was not a CPA as his staff certification had been

suspended. He also failed to perform the tests and

verifications as he represented. HUD/Ginnie Mae

relied on Peterson’s audit letter and reports in extending FBMC’s authority to issue up to $50 million in

government guaranteed, mortgage backed securities.

Had Peterson conducted the necessary tests and

verifications, he would have discovered that FBMC was

engaged in a massive fraud by creating fictitious

mortgages that it sold on the secondary mortgage

market. During the time that HUD/Ginnie Mae relied

on Peterson’s audit letter and reports, FBMC issued

approximately $10 million in government guaranteed

securities backed by fictitious and fraudulent mortgages.

In Tampa, FL, in Federal Court for the Middle

District of Florida, defendant William Jones was

charged with conspiracy to defraud HUD. Forfeitures

were also filed against Jones in the amount of $68.5

million and $9.5 million. As the general manager of

GreatStone Mortgage Company, Jones allegedly

conspired with several other defendants in defrauding

FHA, Ginnie Mae, and warehouse lenders, resulting

in one of the largest schemes and financial losses

involving the Streamline Refinance Program in HUD’s

history. The scheme included predatory lending and

the use of FHA insured loans that had been packaged

and pooled into Ginnie Mae pools. The defendants

allegedly altered and changed borrowers’ names, FHA

loan numbers, and dates, forged signatures on the

altered/counterfeit loan documents, and used the

fraudulent documents to deceive warehouse lenders

by drawing down on their lines of credit. The pro-
Chapter 6 - Other Significant Audits and Investigations/OIG Hotline 88

ceeds were then wired to accounts controlled by the

defendants and ultimately laundered in the Cayman

Islands. The defendants also created fictitious title

companies, Ginnie Mae document custodians, and

Ginnie Mae security trade tickets. FHA was seriously

victimized by this loan origination fraud scheme; FHA

endorsed over 10,000 loans, including thousands of

loans that did not conform to FHA underwriting

guidelines.

GreatStone Mortgage provided fraudulent audited

annual financial statements to Ginnie Mae that failed

to include accurate financial information about the

liabilities of GreatStone. In total, GreatStone packaged and pooled over $40 million worth of loans that

they certified to Ginnie Mae met FHA criteria. These

loans were in fact never insured by FHA, and Ginnie

Mae was forced to repurchase the loans, suffering a

$40 million loss.

Burglary

Defendant Frank DeMarc pled guilty in East

Brunswick, NJ, in Middlesex County Court, to third

degree burglary and fraudulent use of a credit card.

He was sentenced to five years in jail and one year

probation, and was fined $15,000. In April 2003,

DeMarc was arrested for breaking into an OIG

vehicle and stealing an OIG credit card. He then made

several unauthorized purchases with the credit card.

One of the merchants had a videotape of DeMarc

using the OIG credit card; this videotape was used to

identify DeMarc and his accomplice, Christopher

Jones. DeMarc and Jones were indicted in May 2003.

Jones is currently awaiting trial.

Misuse of Official Time

In New Orleans, LA, defendant Cherlyn

Wheeler, a HUD supervisory multifamily project

manager, entered into an abeyance agreement with

HUD. Wheeler agreed to be suspended without pay for

seven calendar days for misuse of official time. An

investigation found that Wheeler visited a casino to

gamble during working hours from May to September

2002. She gambled while on duty and on another

occasion while on sick leave.

Obstruction of a Federal Audit

Defendant Jeffrey Barrett and Independent Realty

Capital Corporation (IRCC) were indicted in Los

Angeles, CA, in Federal Court for the Central

District of California, on one count of obstruction of a

federal audit. Barrett is the owner of IRCC, a mortgage brokering company that handles FHA insured

home loans. IRCC was audited by HUD’s Quality

Assurance Division in June 2001. Allegedly, Barrett

unnecessarily delayed the provision of information and

documentation requested by the auditor, including

employee lists and verifications of employment. He

also provided less information and documentation than

what was requested. In addition, Barrett prevented

HUD from having access to IRCC employees who were

knowledgeable about IRCC’S violations of HUD’s

requirements.

OIG Hotline

The HUD Office of Inspector General (OIG)

Hotline is operational five days a week. The Hotline is

staffed by six full-time OIG employees, who receive

allegations of waste, fraud, abuse, or mismanagement

in HUD or HUD funded programs. These allegations

are received from HUD employees, contractors, and

the public.

Since October 1, 2003, the Hotline has received

9,120 complaints; 73 percent were received by

telephone, 20 percent by mail, and six percent by email. The Hotline also interviewed four individuals

who visited HUD Headquarters to register complaints

about program operations. Every allegation received

by the Hotline is logged in to a database and tracked.

Of the complaints received, 1,019 were related to

the mission of the OIG and were addressed as Hotline

cases. Hotline cases are referred to OIG’s Offices of

Audit and Investigation or to HUD program offices for

action and response. The following shows the distribution of Hotline case referrals by percentage.
Chapter 6 - Other Significant Audits and Investigations/OIG Hotline 89

The Hotline has closed 591 cases since October 1, 2003. These closed cases had 135 substantiated allegations,

which resulted in 14 administrative sanctions against HUD employees for personnel related violations or investors

for improprieties involved in the purchase of a home. The Department also took 121 corrective actions that resulted

in cost recoveries and HUD funding that could be put to better use. The following illustrates the impact of the corrective actions that the Department took in response to Hotline case referrals.

Other HUD 

Offices

7%

Community 

Planning & 

Development

5%

Single Family 

Housing

11%

Multifamily 

Housing

15%

OIG Audit & 

Investigation

14%

Public and Indian 

Housing 

48%

0

768,030

21,711

58,968 94,521

840,384

30,000

0

0

200,000

400,000

600,000

800,000

1,000,000

Single

Family

Multifamily Public

Housing

CPD

Hotline Dollar Impact From HUD Program Offices

Recoveries $146,232 Funds Put to Better Use $1,667,382
Chapter 6 - Other Significant Audits and Investigations/OIG Hotline 90

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Chapter 7 - Outreach Efforts 91

Chapter 7 — Outreach Efforts

In order to foster cooperative, informative, and

mutually beneficial relationships with agencies and

organizations whose intent is to assist in the accomplishment of HUD’s mission, the OIG participates in a

number of special outreach efforts. These efforts, as

described below, are in addition to our regular

coordination with federal, state, and local law enforcement agencies, other OIGs, and various Congressional Committees and Subcommittees. During these

outreach efforts, we not only present the results of our

audit and investigative work and discuss our goals and

objectives, but we also provide information about the

OIG’s role and function.

3⁄4Inspector General Donohue spoke at the Mortgage

Bankers Association’s (MBA) National Servicing

Conference in San Diego, CA. The IG spoke on two

occasions regarding our joint efforts with the

Federal Trade Commission on the recent Fairbanks

Capital case. The MBA asked to hear from IG

Donohue on our unusual involvement in the

Fairbanks case, since they are the largest third

party servicer in the industry. Executive Assistant

John Dupuy, who accompanied IG Donohue, participated on two different panels — one regarding the

impact of bankruptcy fraud on single family mortgage servicing and the other on the impact of loan

origination fraud and equity skimming. This event

was a continuation of our outreach efforts with the

mortgage community and the MBA.

3⁄4In what was a first contact for the OIG, IG Donohue

attended a board meeting of the National American

Indian Housing Council (NAIHC) at their annual

conference in Washington, DC. This organization

represents Tribal housing authorities in their efforts

to provide decent, safe, and sanitary housing for the

Native American community. The OIG’s role in

combatting fraud and abuse were discussed. As a

result of the meeting, the NAIHC invited the OIG to

speak at their upcoming National Conference in

June 2004, as well as at their regional meetings on

fraud awareness.

3⁄4On the 25th anniversary of the Inspector General

Act, Headquarters OIG invited clients and colleagues to an Open House. Each functional OIG

area set up displays that illustrated the function and

purpose of the OIG Offices of Audit, Investigation,

Management and Policy, and Counsel. HUD Assistant Secretaries, HUD program staff, criminal

justice counterparts, Congressional staff, and staff

from other Offices of Inspector General joined in

celebrating the anniversary of this important

legislation.

3⁄4IG Donohue hosted a management retreat in

Annapolis, MD, for the 57 Inspectors General who

make up the President’s Council on Integrity and

Efficiency and the Executive Council on Integrity

and Efficiency. The theme of the retreat was

“Returning America’s Investment in the IGs.” The

Inspectors General discussed what they consider to

be their measures of success and heard from

external stakeholders including the Office of

Management and Budget (OMB), the General

Accounting Office, the Department of Justice, and

Congressional staff. Among the speakers were

Clay Johnson, Deputy Director, OMB; James

Comey, Deputy Attorney General; and David

Walker, Comptroller General. During times of

relaxation at the retreat, the U.S. Naval Academy

provided tours and held a reception at which

Gordon England, the Secretary of the Navy, spoke

to the group.

IG Donohue greets Comptroller General David

Walker, who addressed the PCIE/ECIE Retreat.
Chapter 7 - Outreach Efforts 92

3⁄4At the invitation of John Weicher, Assistant Secretary for Housing-FHA Commissioner, John Dupuy,

Executive Assistant (EA) to the Inspector General,

spoke at a single family housing lender training

program in Washington, DC. This marks the first

time FHA has conducted a comprehensive single

family training program for the mortgage industry.

Although HUD Homeownership Centers periodically conduct regional training, this program was

the first national level training event. EA Dupuy

discussed the role of the OIG in conducting audits

and investigations of Single Family Housing Programs. Assistant Secretary Weicher’s invitation

reflects an increased and welcome level of cooperation between the two offices.

3⁄4At the Department-wide training on “Managing

Compliance and Monitoring” held in Boston, MA,

and Seattle, WA, numerous OIG managers sent a

powerful message that communication and coordination between OIG and the Department are valuable tools for both HUD program managers and the

OIG in its efforts to identify fraud and abuse. This

conference is the only Department-wide training

program that focuses on the specific responsibilities

of managers in establishing and ensuring compliance and monitoring programs to ensure they are

effective as well as consistent with HUD policies.

3⁄4The HUD Committee on Program Integrity was

recently established to coordinate the Department’s

efforts to minimize the opportunities for the occurrence of fraud, waste, and mismanagement in HUD

programs and to advise the Secretary on policy

matters relating to improving the quality and

effectiveness of all HUD programs and activities.

Inspector General Donohue addressed the

Secretary’s senior staff and said, “We want to

encourage communication and team spirit on

problem-solving between OIG and program offices

through this committee. It’s important that we have

a way to focus managers’ attention on fraud and

abuse in their programs.” Committee objectives

are to: (1) find common issues and objectives and

combine forces to get resolution; (2) raise HUD

staff and program administrator knowledge about

fraud, and provide practical advice to them about

how they can stop or reduce fraud and abuse in HUD

programs; (3) strengthen and streamline processes

used to take actions against program abusers; and

(4) communicate our successes to the public and

HUD stakeholders.

3⁄4Assistant Inspector General for Audit (AIGA) Jim

Heist represented OIG Headquarters at the field

management meeting in Columbus, OH. He made

a presentation on the OIG’s mission and described

the different roles and responsibilities of the

Offices of Audit and Investigation. AIGA Heist also

provided an overview of current audit work affecting the Columbus Field Office and described

ongoing efforts to work more collaboratively with

the Department and align the OIG’s strategic plan

with the Department’s strategic plan.

3⁄4In Milwaukee, WI, Regional Inspector General for

Audit (RIGA) Heath Wolfe and Assistant Special

Agent in Charge (ASAC) Brad Geary made a joint

presentation to an audience of approximately 50

individuals representing Community Planning and

Development entitlement grants throughout the

State of Wisconsin. The presentation focused on OIG

operations and addressed the need for program

oversight; ensuring that housing rehabilitation work

is done properly and that the work is inspected; and

the need to take a proactive approach by contacting

the OIG when problems arise that warrant OIG

attention.

3⁄4By the close of October 2003, audit resolution

training had been provided to HUD Offices in the

Chicago Region. RIGA Heath Wolfe and Administrative Officer Jennifer Houghton completed

training for the remaining offices by wrapping up

their presentations in Chicago, IL, Columbus,

OH, and Cleveland, OH. The presentations’ focus

was the section of the Audits Management System

Handbook which provides information on implementing audit recommendations. The audiences,

made up of HUD program staff, were able to learn

the requirements of the handbook while having an

open forum to address questions relating to the audit

process. Response was positive and HUD staff were

appreciative of the efforts expended in bringing this

training to them.

3⁄4Mid-Atlantic Region Special Agent in Charge (SAC)

Robert Brickley spoke at the Annual Conference of
Chapter 7 - Outreach Efforts 93

the Pennsylvania Association of Housing and

Redevelopment Agencies in Uniontown, PA. The

conference was attended by approximately 40 public

housing agency executive directors, commissioners,

and other officials. The presentation focused on the

role of the OIG Office of Investigation, the types of

cases that we investigate, the investigative process,

and suggestions for preventing and detecting fraud

in HUD funded programs.

3⁄4In Concord, NH, New England SAC Peter

Emerzian and Special Agent Edward Redmond

attended a Federal Law Enforcement Team meeting

sponsored by Thomas Colantuono, U.S. Attorney,

District of New Hampshire. SACs and Agents who

conduct investigations were present to share ideas,

programs, and initiatives related to the missions of

their respective agencies. U.S. Attorney Colantuono

updated the Attorney General’s goals for the year

and thanked agencies for their support.

3⁄4In Waterville, ME, SAC Peter Emerzian, ASAC

Maureen Nelting, Special Agent Brian Gosselin,

and Assistant Regional Inspector General for Audit

(ARIGA) Cristine O’Rourke made a presentation to

executive directors and employees of public housing

authorities in the State of Maine. The presentation

was sponsored by Residential Initiatives for Maine,

a nonprofit group organized by Maine’s local

housing authorities. OIG staff discussed the role of

the OIG, OIG’s authority and mission, how subsidized tenants, landlords, and public housing authority employees can perpetrate fraud, and ways to

detect the fraud. Over 50 representatives from

Maine’s public housing authorities attended.

3⁄4Michael Beard and Lester Davis, RIGA and SAC,

respectively, made presentations at the Southwest

Region HUD Program Directors Retreat. HUD

program directors meet every two months to

discuss HUD program matters and management

issues. RIGA Beard discussed issues relating to

audit resolution, including management tips on how

to respond to audits and how findings are constructed. SAC Davis discussed how HUD program

offices and OIG can work together as a team to

make HUD a more efficient and productive agency.

3⁄4SAC Peter Emerzian and ASAC Maureen Nelting

gave a presentation to members of the Section 8

Administrators Association in Boston, MA. They

discussed the role of the OIG, OIG’s authority and

mission, how subsidized tenants, landlords, and

public housing agency employees can perpetrate

fraud, and ways to detect the fraud. Over 100

representatives from various public housing agencies throughout New England attended the meeting.

3⁄4Southwest Region SAC Lester Davis and Southwest

Region HUD General Counsel Bill Daley made HUD

Standards of Conduct and Ethics presentations in

New Orleans, LA, Albuquerque, NM, and Fort

Worth, TX. Annual attendance at the Standards of

Conduct presentation is mandatory for all HUD

employees. SAC Davis and Counsel Daley are

scheduled to make this presentation to the 1,000

HUD employees in the 11 Southwest Region field

offices. SAC Davis took this opportunity to discuss

the close relationship OIG has and wants to continue

to develop with HUD program staff. The IG mission

and how it ties into HUD’s mission were also

discussed.

3⁄4SAC Peter Emerzian and ASAC Diane DeChellis

from OIG’s New England Region made a presentation to the investigative arm of the Massachusetts

Inspector General’s Office in Boston, MA. The

presentation provided an overview of OIG’s mission

and investigative priorities, as well as a discussion

of HUD’s programs and HUD funding within the

State of Massachusetts.

3⁄4In Boston, MA, New England Region SAC Peter

Emerzian and ASAC Maureen Nelting were invited

to become members of the newly formed New

England Public Corruption Roundtable sponsored by

the FBI. Federal, state and local agencies that

investigate public corruption in New England

attended the meeting, at which various targets and

investigative strategies were discussed.

3⁄4Assistant U.S. Attorney Mary Jane Harmon (Chief

of the Fraud Section of the U.S. Attorney’s Office),

OIG SAC Lester Davis, and ASAC Michael Kepler

made a presentation to the Houston, TX Area

Mortgage Bankers Association on single family

mortgage fraud. Approximately 65 individuals were
Chapter 7 - Outreach Efforts 94

in attendance. The presentation included ways to

identify mortgage fraud and detailed a joint OIG/FBI

investigation of mortgage fraud in the Houston area.

3⁄4In Dover, NH, SAC Peter Emerzian and Special

Agent Edward Redmond attended a meeting of all

employees of the Dover Housing Authority (DHA) as

well as two Dover Police Department officers

assigned to the DHA. The meeting was held to

address the problems of unauthorized individuals

residing in DHA subsidized units.

3⁄4Barry McLaughlin, SAC, and Heath Wolfe, RIGA,

Chicago Regional Office, made a presentation to all

program directors in HUD’s Detroit, MI Field

Office. The presentation covered the mission and

functions of both the OIG and the Office of Investigation. RIGA Wolfe also discussed the chapter of the

Audits Management System Handbook concerning

implementing recommendations. ARIGA Tom

Towers of the Detroit Field Office also gave a

briefing on how to handle public inquiries for audits

and investigations.

3⁄4Special Agents Jeffrey Pittano and Daniel Harding

attended a crime awareness and prevention meeting

at Brooklyn Homes, a public housing community in

the Brooklyn District of Baltimore, MD. In attendance were residents from the local community,

members of the Housing Authority of Baltimore

City, project management, family support services,

Baltimore City Police, the District Court for

Baltimore City, and the Mayor’s Office. The

various agencies met to discuss and make plans to

resolve rising drug trafficking problems and

concerns over unauthorized persons occupying units

in the Brooklyn community. Agents Pittano and

Harding made a presentation on the mission, goals,

and purposes of the OIG. The meeting and presentation gave OIG staff the opportunity to establish a

bridge of communication and partnership between

the OIG, project management, and the local government.

3⁄4SAC Peter Emerzian and Special Agent Gene

Westerlind made a presentation to the Shewsbury,

MA Housing Authority. They discussed the role of

the OIG, OIG’s authority and mission, how subsidized tenants and landlords can perpetrate fraud,

and ways to detect fraud.

3⁄4At the invitation of the Louisiana Legislative Auditor, RIGA Mike Beard made a presentation to the

Louisiana Council of Public Housing Authorities in

Lafayette, LA. The audience consisted of 130

housing authority executive directors, assistant

executive directors, and authority board members.

RIGA Beard discussed the Inspector General Act

and recent Public and Indian Housing audit reports

and investigations, as reported in the September 30,

2003 Semiannual Report to Congress.

3⁄4SAC Peter Emerzian and Special Agent Gene

Westerlind met with the executive board of the

Worcester, MA Housing Authority and public

safety officers to discuss the possibility of creating

a tenant fraud initiative. During the meeting, SAC

Emerzian and Agent Westerlind discussed the role

and authority of the OIG and provided guidance in

establishing the Worcester Tenant Fraud Task

Force.

3⁄4Director of State Operations Derek Gasiorowski

hosted a HUD Home Sales Seminar for brokers and

lenders in Detroit, MI. Field Office Director Toni

Schmiegelow made opening remarks and introduced OIG ARIGA Tom Towers, who discussed the

OIG’s mission and emphasized the current work

being done in relation to Single Family Mortgage

Insurance Programs. Following his presentation,

ARIGA Towers fielded questions from the 90 individuals in attendance.

3⁄4ARIGA Ron Farrell addressed 65 attendees at the

fall quarterly meeting of the Ohio Conference of

Community Development in Columbus, OH. His

presentation introduced the group to the OIG’s

mission and objectives as they relate to community

planning and development. He discussed what to

expect during the audit process as well as audit

planning and selection and the audit resolution

process. The group was extremely interested in the

findings developed during the three Community

Housing Improvement Program audits that were

conducted by the Columbus Audit Office a few

years ago, the resulting recommendations and how

they were implemented, and what has been done to

improve the program.
Chapter 7 - Outreach Efforts 95

3⁄4Mid-Atlantic Region Special Agents Daniel Ellis

and Frank Aeillo and ASAC Rene Febles spoke

before the Interstate Realty Management Corporation (IRMC) in Philadelphia, PA. IRMC employs

hundreds of individuals who work for multifamily

developments that are insured by and receive

subsidies from HUD. Their presentation consisted of

techniques that can be used by IRMC employees to

detect fraudulent representations during the recertification process of Section 8 tenants. IRMC employees, site managers, district managers, and maintenance employees who work at various sites around

the country attended the presentation.

3⁄4ASAC Herschell Harvell met with Long Beach, CA

police chief Anthony Batts and Long Beach Housing

Authority executive director Lavern Duncan to

discuss the proposed Long Beach Section 8 Compliance/Enforcement Initiative. ASAC Harvell gave an

overview of OIG’s organizational structure and

resources, the purpose/mission of the Section 8

Initiative, and the strong interest for a collaborative

law enforcement effort in implementing and executing this Initiative. Chief Batts applauded OIG’s

efforts and promised to utilize all resources available to the Long Beach Police Department to

ensure its success. Chief Batts also committed to

coordinating a subsequent meeting to include the

FBI, DEA, U.S. Marshals Service, Department of

Homeland Security, State Probation and Parole,

Long Beach Code Enforcement, and the Long

Beach Housing Authority to discuss strategies for

coordinating the various law enforcement efforts.

3⁄4ASAC Rene Febles and Special Agent Frank Aeillo

of the Mid-Atlantic Region conducted a one-day

presentation to employees of the Chester, PA

Housing Authority. Approximately 50 employees

were present to hear how the OIG is fulfilling its

mission pertaining to Section 8 fraud. The presentation demonstrated some of the common frauds as

well as important documents on which OIG Agents

rely. The Chester Housing Authority is currently

under a court ordered receivership. The Authority’s

operations are expected to revert back to the board

of commissioners and a permanent executive

director by July 2004; this presentation was requested in anticipation of the transfer of control.

3⁄4Midwest Region ARIGA Ron Farrell and Special

Agent Gary Berry participated in the Ohio Housing

Authorities Conference in Newark, OH, which

was attended by executive directors of Ohio housing

authorities. ARIGA Farrell discussed the mission of

the OIG and current priority items being undertaken

by the Office of Audit. Special Agent Berry discussed the role of the Office of Investigation and the

networking OIG Agents do with local police departments.

3⁄4ASAC Lori J. Chan and ARIGA Clyde Granderson

made a presentation to Old Republic Title Company,

Western Division, in San Jose, CA. Approximately

30 individuals were present from their Nevada,

California, and Arizona offices. The participants

included the company’s operations officers, senior

vice presidents, and the Office of General Counsel.

ASAC Chan and ARIGA Granderson gave an overview of HUD, FHA, the OIG, FHA fraud schemes,

and fraud prevention tools.

3⁄4In New Haven, CT, ARIGA Cris O’Rourke and

ASAC Diane DeChellis of the New England Region

attended the winter meeting of the Connecticut

National Association of Housing and Redevelopment

Officials. The topic of their presentation was

identifying and preventing fraud. They also discussed the OIG’s mission and audit/investigative

priorities.

3⁄4ASAC Anthony Meeks met with Commander Rod

Uyeda, Pasadena, CA Police Department, and

discussed collaborative efforts on behalf of OIG, the

Pasadena Police Department, and other state and

federal agencies to establish goals and parameters

for combating criminal violations being committed

in various subsidized housing developments in the

Pasadena area. Commander Uyeda was very

receptive to OIG’s methodology regarding efforts to

maintain the integrity of HUD subsidized housing

programs. Future meetings between OIG and the

Pasadena Police Department are planned to finalize

a multi-agency compliance enforcement initiative.

3⁄4ASAC Marc Montague was the guest speaker at the

quarterly meeting of the Eastern Washington

Escrow Association (EWEA) in Spokane, WA.

Approximately 50 members of EWEA attended the
Chapter 7 - Outreach Efforts 96

meeting during which ASAC Montague gave a

presentation on single family loan origination fraud,

predatory lending, and the common schemes used

in committing FHA and conventional loan fraud.

3⁄4The Chicago Region’s ARIGA Ron Farrell and

Special Agent Jennifer Howell from the Columbus

Office participated in a HUD meeting with representatives from the Division of Real Estate and

Professional Licensing for the State of Ohio

Department of Commerce. The discussion emphasized the shared concerns of federal and state

officials regarding predatory lending and property

flipping.

3⁄4Kansas City Region ASAC Michael Powell and

Special Agent Karen Gleich spoke at the Iowa

National Association of Housing and Redevelopment

Officials in Des Moines, IA. Approximately 75

people attended the presentation and were briefed

on current OIG initiatives affecting public housing

authorities. Topics included tenant fraud in public

housing, Section 8 tenant fraud, and the Fugitive

Felon Initiative.

3⁄4ASAC Marc Montague was a guest speaker at the

2004 conference of the Cascade Chapter of the

National Association of Housing and Redevelopment

Officials (NAHRO) in Clackamas, OR. Approximately 100 NAHRO members from Oregon and

Washington State attended the conference. ASAC

Montague made a presentation about combating

Section 8 tenant fraud and how public housing

agencies can provide quality referrals to the OIG.

3⁄4Loretta Burns, a Forensic Auditor in the Fort Worth

Region, spoke to the Texas Land Title Association at

its Regional Seminar in Austin, TX. Approximately 75 title attorneys and escrow officers in the

title industry doing business in the Central Texas

Region were in attendance. Burns’ presentation on

single family fraud schemes was part of a continuing education track entitled “Legalities of Title:

Risky Business,” designed primarily for attorneys in

the industry.

Forensic Auditor Loretta Burns making presentation at Texas

Land Title Association.

3⁄4Special Agent David Carter made a presentation to

the Riverside Police Department’s Command staff

and 60 members of the Riverside Crime-Free

Multi-Housing Program who collectively provide

housing to several thousand residents of Riverside,

CA. Agent Carter discussed the OIG’s authority and

mission, how subsidized tenants can perpetrate

fraud, and ways to detect fraud. He further discussed collaborative efforts to pursue and combat

criminal activity and examples of violations taking

place within public housing and HUD subsidized

facilities.

3⁄4In Arlington, TX, OIG hosted the quarterly meeting of the Southwestern Region Inspectors General

Council. The guest speaker was Gaston L. Gianni,

Jr., Federal Deposit Insurance Corporation Inspector General and Vice Chair of the President’s

Council on Integrity and Efficiency (PCIE). Among

the topics that IG Gianni discussed were performance measurements, return on investment,

working with other IG offices, peer reviews based

on statutory law enforcement legislation, and future

challenges facing the IG community. IG Gianni

stressed the importance of performance measurements and return on investment as they relate to the

IG community. The Office of Management and

Budget and the Bush Administration would like

government agencies to be more efficient and

productive, using private businesses as examples.

He mentioned that as a group, the PCIE has a lot of
Chapter 7 - Outreach Efforts 97

work to do to figure out how to properly measure

the work of the various Offices of Investigation.

3⁄4In College Park, MD, Special Agents Daniel

Harding and Jeffrey Pittano attended a crime

awareness and prevention meeting in the Lakeland

District, a public housing and Section 8 community.

In attendance were the Mayor of College Park, the

city council, neighborhood watch participants,

Prince George’s County Police Department, Prince

George’s County Park and Planning Police, residents, University of Maryland students and staff,

media, property managers, and owners. The

various agencies met to discuss and make plans to

resolve the increasing drug trafficking problems

and concerns over unauthorized persons occupying

units in the Lakeland community. Local authorities

believe two recent homicides were committed by

subjects that are believed to be unauthorized tenants

within the community. Agents Harding and Pittano

made a presentation on the mission, goals, and

purpose of the OIG. The meeting and presentation

gave OIG staff the opportunity to establish a bridge

of communication and partnership between the OIG,

project management, and the local government.

3⁄4Special Agent Glen Wirtanen addressed a HUD

sponsored “Home Mortgage Fraud and Foreclosure Prevention Seminar” in Decatur, GA, that

was attended by approximately 250 local real estate

agents, bankers, and mortgage professionals. The

seminar addressed the growing problem of loan

origination fraud in the FHA mortgage insurance

program, and remedies available to reduce this type

of fraud. Presentations by the local HUD

Homeownership Center staff provided the audience

with numerous “red flags” that might be present if

a loan is based on false or fraudulent information.

In addition, an Assistant U.S. Attorney gave examples of cases that have been successfully prosecuted in the Northern District of Georgia.

3⁄4Senior Special Agent Mike Wilson, Criminal

Investigation Division, and Executive Assistant John

Dupuy conducted a mortgage fraud course held by

the MBA in New Orleans, LA. They made presentations on the role of the OIG in fighting mortgage

fraud and provided case examples. Supervisory

underwriting, quality assurance, and fraud control

staff from national lenders were in attendance.

3⁄4OIG Special Agent Robert Torelli of the Jacksonville, FL Field Office addressed approximately 200

members of the Florida Association of Mortgage

Brokers and discussed mortgage fraud. The group

was comprised primarily of mortgage company

owners, loan originators, real estate agents, and

mortgage bankers. Specifically, Agent Torelli

discussed detailed loan fraud indicators, various

fraud schemes, including straw purchases, and

criminal penalties for engaging in loan fraud. He

also provided members with useful fraud related

web sites, and simple and logical ways to determine

the veracity of information provided to obtain loans.

3⁄4OIG Special Agent Angela Stewart from the Atlanta

Office made a presentation to the Alabama Association of Housing and Redevelopment Authorities

and HUD staff at their Fall Workshop. Agent

Stewart gave an overview of tenant fraud and the

documentation needed to prosecute false statements, statutory requirements, and the timeframe

and loss requirements for presentation to the U.S.

Attorney’s Office. She also stressed the need for

law enforcement to keep each other informed of

successful prosecutions, and how important it is to

disseminate this information to the public.

3⁄4OIG made a presentation to the Financial Crimes

Working Group in Buffalo, NY. This group is made

up of approximately 75 federal, state, local, private,

and Canadian law enforcement agencies and

companies that investigate and prosecute individuals

and criminal organizations that perpetrate financial

crimes. The group was organized to exchange

information on these individuals and organizations

in an effort to eliminate duplication of investigative

efforts and to best utilize investigative resources.

The presentation educated the group on the OIG

mission and our role in the investigative community.

Included in the presentation was a montage of the

HBO series “The Sopranos” in which the characters depicted a property flipping scheme that was

based on an actual case from the New York/New

Jersey Region.

3⁄4Fort Worth Region Special Agent Amy Durso spoke

at the Missouri Association of Regional Public

Housing Authorities at Bennett Springs, MO. She

discussed the variety of cases worked by OIG and
Chapter 7 - Outreach Efforts 98

went into greater detail about Section 8 tenant

fraud.

3⁄4The OIG Office in Phoenix, AZ, hosted the Regional IG Counsel meeting. Topics included interaction with the Arizona U.S. Attorney’s Office and

other possible prospective venues. IG Offices from

HUD, the Postal Inspection Service, the Departments of Education, Veterans Affairs, Defense,

Health and Human Services, and Justice, the Social

Security Administration, and the Treasury Inspector General for Tax Administration were present

and participated in the meeting.
Chapter 8 — Review of Policy Directives 99

Chapter 8 — Review of Policy Directives

Reviewing and making recommendations on

legislation, regulations, and policy issues is a critical

part of the OIG’s responsibilities under the Inspector

General Act. During this six-month reporting period,

the OIG reviewed 124 policy Notices. This chapter

highlights some of the OIG recommendations on these

Notices as well as other policy directives.

Notices of Funding Availability

(NOFAs)

Fiscal Year 2004 SuperNOFA:

Community Development Technical

Assistance

HUD issued a SuperNOFA to provide assistance to

achieve the highest level of performance and results

for four separate community development programs:

(1) HOME (Home Investment Partnerships) Program;

(2) Community and Housing Development Organization (CHDO) HOME Program; (3) Homeless Program;

and (4) Housing Opportunities for Persons with AIDS

(HOPWA). The Notice stated that applicants might

apply for one, two, three, or all four of the Community Development Technical Assistance Programs.

Approximately $25.1 million was available. We

commented on this NOFA because HUD needs assurance that requirements stated under the administrative provisions of the Act are included in the NOFA.

Section 209 of the Act states that none of the funds

provided in this title for technical assistance, training,

or management improvements may be obligated or

expended unless HUD provides the Senate and House

Committees on Appropriations a description of

proposed activity and a detailed budget estimate of the

costs associated with each program, project, or

activity as part of the budget justifications.

The Department was still reviewing the comments and had not issued the SuperNOFA at the end of

this semiannual reporting period.

Housing Choice Voucher Family SelfSufficiency Program

The Housing Choice Voucher Family SelfSufficiency Program NOFA announced the availability

of $48 million to fund counselors to assist families to

obtain housing.

We did not concur with this NOFA because Public

Law 108-199 provided restrictions on funding with

which the NOFA did not comply. The Public Law

requires that before any funds are disbursed, a risk

assessment must be conducted and appropriate

controls implemented to mitigate any identified risks.

The Public Law also specifies that the funding

announcements must describe the maximum amount

of funding available. In addition, the Public Law

mandates that the Secretary require housing agencies

to submit accounting data for funds disbursed by

source and purpose.

The Offices of Public and Indian Housing and the

Inspector General mutually agreed to change the

NOFA. Public and Indian Housing revised the draft

NOFA and mandated that grantees follow the controls

needed to mitigate program risks, established accounting controls over reporting, and specified the

maximum amount of available funds.

Public and Indian Housing has improved the

control structure to obtain a higher probability that

housing agencies will use funds to assist the targeted

population. The NOFA should be issued in April 2004.

Computer Match Agreement

Computer Match Agreements Between

HUD/SSA and HUD/IRS

HUD issued two Computer Match Agreements to

increase the accuracy of tenant reported information.

One Agreement was between HUD and the Social

Security Administration (SSA), and the other was

between HUD and the Internal Revenue Service (IRS).

The HUD/SSA Agreement proposed to increase the

accuracy of tenant reported income and the validity of
Chapter 8 — Review of Policy Directives 100

borrowers obtaining insurance for FHA mortgages.

The HUD/IRS Agreement provided HUD with the

mailing addresses of taxpayers to assist HUD in its

effort to collect debts owed to the United States. The

HUD/SSA Agreement would provide indicators of

potential under/overreported income that will require

additional verification to identify inappropriate

(excess or insufficient) rental assistance, and perhaps

administrative or legal actions. Both Agreements

would assist HUD administrators who rely on the

accuracy of tenant reported data to determine applicants’ and participants’ eligibility for, and level of,

housing benefits.

We noted a need for the Computer Match Agreements to include a statement that will allow the

Office of Inspector General to have access to test

results. The Agreements present the legal authority

that permits tax return information disclosed to HUD

for use by officers and employees of HUD. We requested the following statement to be added to the

Computer Match Agreements: “The results of the

match may be used by the Office of Inspector General for investigative/audit matters pursuant to the

Inspector General Act.”

HUD added our statement to the Agreements and

we therefore concurred in their issuance.

Notices

Revision to Notice on Guidance on the

Application of the Uniform Relocation

Assistance and Real Property

Acquisition Policies Act of 1970

HUD prepared a Notice announcing changes in

the Department’s policy regarding the Uniform

Relocation Assistance and Real Property Acquisition

Policies Act of 1970, as amended in HOPE VI projects.

The Offices of Public and Indian Housing (PIH) and

Community Planning and Development (CPD) determined that changes were necessary to address issues

that have arisen regarding implementation of the

HOPE VI Program.

We nonconcurred with the Department’s decision

to make rule changes without providing for public

participation. The Department is required to publish

Notices of Proposed Rulemaking in the Federal

Register and give interested persons an opportunity to

participate in the rulemaking process. These proposed rulemaking changes cannot be made in a

change to an internal Notice, but must be made

through the Federal Register process described

herein and in CFR 24 Part 10, Rulemaking Policy and

Procedures (paragraphs 10.1 through 10.3).

HUD’s Offices of CPD and General Counsel

agreed with our assessment and made the appropriate

changes to the Notice to comply with the CFR.

Congressional Report

Report to Congress Regarding

Revitalization Area Designations

HUD prepared a report to Congress regarding

revitalization area designations. The purpose of these

area designations is to expand affordable

homeownership opportunities by offering HUD owned

single family properties for sale at a discount price.

These properties are located in neighborhoods that

either: (1) consist of families with very low incomes;

(2) have a disproportionately high concentration of

foreclosed HUD held properties; or (3) have a low

homeownership rate.

We nonconcurred with this Congressional report

because it did not adequately define the term “revitalization area” pursuant to 12 U.S.C. 1710. We found

the definition for “high concentration” area failed to

address what was considered a high rate of default.

Therefore, it was not clear which areas could be

designated as revitalization areas.

To improve the process, we recommended that

the new definition for “revitalization area” include

the statements: “...in comparison with the concentration of such assets in surrounding areas; or being

detrimentally impacted by eligible assets in the

vicinity of a revitalization area.” These statements

are key to a proper designation of “revitalization

area.”

HUD made changes with which we agreed, and

the Congressional Report was finalized as of the close

of the semiannual reporting period.
Chapter 9 - Audit Resolution 101

Chapter 9 — Audit Resolution

In the audit resolution process, the OIG and HUD

management come to an agreement as to the needed

actions and timeframes for resolving audit recommendations. Through this process, we hope to achieve

measurable improvements in HUD programs and

operations. The overall responsibility for assuring that

the agreed upon changes are implemented rests with

HUD managers. This Chapter describes some of the

more significant pending issues where resolution

action has been delayed and where management

decisions were revised. It also contains a status

report on HUD’s implementation of the Federal

Financial Management Improvement Act of 1996. In

addition to this Chapter on audit resolution, see

Appendix 2, Table A, “Audit Reports Issued Prior to

Start of Period With No Management Decision at 3/

31/04,” and Table B, “Significant Audit Reports

Described in Previous Semiannual Reports Where

Final Action Had Not Been Completed as of 3/31/

04.”

Delayed Actions

Audits of HUD’s FY 1991 through

2003 Financial Statements

First issued June 30, 1992. HUD has been preparing consolidated financial statements under the

requirements of the Chief Financial Officers Act for

13 years beginning with Fiscal Year (FY) 1991.

Various internal control weaknesses have been

reported in these audits. In our most recent audit

report for FY 2003, we were able to express an

unqualified opinion on HUD’s principal financial

statements. The results of our FY 2003 report on

internal controls were consistent with results reported

in Semiannual Reports from prior years. While there

has been progress, material weaknesses continue

with respect to the need to: (1) complete improvements to financial systems; and (2) improve oversight

and monitoring of subsidy calculations and intermediaries’ program performance. Corrective action plans

to resolve these issues have continued to change over

the last decade.

Audits of FHA’s FY 1991 through 2003

Financial Statements

First issued March 27, 1992. FHA has been

preparing financial statements for 13 years under the

Chief Financial Officers Act, beginning with FY

1991. The audit of FHA’s FY 2003 financial statements

discussed problems similar to those that have been

reported since the audit of FHA’s FY 1991 financial

statements. The audit continues to recognize that FHA

needs to: (1) improve its information technology

(primarily accounting and financial management

systems) to more effectively support FHA’s business

processes; and (2) continue to improve early warning

and loss prevention for single family insured mortgages. A weakness reported since the FY 1992

financial statement audit relates to the need for FHA

to enhance the design and operation of information

systems’ general and application level security

controls. FHA’s latest action plan continues to report

progress toward resolving these remaining longstanding issues, with final actions targeted over the

next one to three years.

Housing Authority of the City of

Miami Beach, Section 8 and Public

Housing Programs

Issued October 20, 2000. The Authority mismanaged its Section 8 and Public Housing Programs and

incurred over $1 million in questioned and ineligible

costs. Specifically, the Authority spent over $795,000

of its Section 8 reserves for questionable public

service activities, including police protection, recreation, and code enforcement that the City should have

provided from its local tax revenues. Also, the

Authority spent over $2 million in a failed effort to

construct a women’s and children’s housing resource

center, including nearly $210,000 in excessive fees

and permits paid to the City. The delayed project put

the Authority at risk of losing most of the $5.8 million

in bond funds originally committed to the project, and

deprived the low-income community of needed

housing and social services. In addition, the Authority
Chapter 9 - Audit Resolution 102

had not complied with HUD requirements concerning

Section 8 rent reasonableness, lease execution, and

utility allowance payments, and had not implemented

corrective actions to comply with procurement

requirements. We recommended that HUD require the

Authority to: (1) obtain additional supporting documentation or recover the $1 million paid to the City;

(2) submit evidence that it has the financial capability

and commitment to complete construction of the

center within a reasonable time; and (3) establish the

necessary controls to improve its operations.

On February 13, 2001, the OIG agreed with

management decisions proposed by the Florida State

Office for the 14 report recommendations. HUD has

obtained final action on 10 recommendations. However, HUD did not meet the February 13, 2002 target

completion dates for the remaining four recommendations that are now over two years past due.

We referred the audit to the Acting Deputy

Assistant Secretary for Administration and Budget/

Chief Financial Officer because of the untimely final

action. HUD, Authority, and City staff met to discuss

the impasse. In March 2004, the City and the Authority reached tentative agreement to offset the questioned and ineligible costs by waiving payments in lieu

of taxes, and by credits to future development fees.

The Authority still plans to construct the resource

center but on a different site, and will obtain an

appraisal for sale of the original site. The Authority

has also contracted with a consultant to calculate and

make the final payments due the tenants. HUD and the

Authority have not finalized target completion dates.

(Report No. 2001-AT-1001)

Significant Revised

Management Decisions

Section 5(a) (11) of the Inspector General Act, as

amended, requires that the OIG report information

concerning the reasons for any significant revised

management decision made during the reporting

period. During the current reporting period, there

were significant revised management decisions on

two audits.

Detroit Housing Commission HOPE

VI Program

Issued May 16, 2001. The Detroit Housing

Commission did not maintain an effective system of

controls over its contracting process for its HOPE VI

Program. The Commission improperly used or

inappropriately approved payments of over $12 million

in HUD funds (HOPE VI, Development, and Comprehensive Grant Program) for construction or professional services. We recommended that the Commission provide detailed work specifications supporting

the work included in 46 unsupported change orders

totaling over $12 million that were identified during

the audit. We agreed with HUD’s initial management

decision that involved reviewing all the change orders

to determine the disallowed costs.

Subsequently, HUD proposed that it would procure

the services of an independent engineering firm to

review the contractors’ work, and submit all necessary documentation to support the eligibility of the

unsupported change orders. We concurred with HUD’s

revised proposal; however, we requested a revised

management decision because this represented a

change to the previously agreed upon management

decision to look at all change orders. Under the

revised proposal, the engineering firm will only look

at all change orders over $100,000 (18), and prorate

the percent unsupported to the remaining change

orders under $100,000 (28). HUD’s Office of Public

Housing Investments submitted a revised management decision on March 4, 2004, with which we

agreed. Based on the engineering firm’s results, we

agreed with HUD that the final disallowed costs would

be $4,986,619, a reduction of $7,073,837 from the

original questioned amount. HUD will work out a

repayment schedule with the Commission. The

revised date for completing this action is June 30,

2011. (Report No. 2001-CH-1007)

City of Lynwood, CA Community

Development Block Grant (CDBG)

and HOME Investment Partnerships

(HOME) Program

Issued August 19,1999. The City of Lynwood did

not fully comply with HUD rules and regulations
Chapter 9 - Audit Resolution 103

regarding its Community Development Block Grants.

Therefore, we recommended that the grantee: (1)

submit for approval all required documentation to

support the eligibility of about $700,000 paid to the

Lynwood Entrepreneur Development Academy

(LEDA) for job creation and retention activities; (2)

submit for approval the required documentation

establishing the eligibility of over $73,000 paid for

trainees that were located outside the grantee’s city

limits; and (3) return to its letter of credit from nonfederal funds the amount that the grantee is unable to

support in the two previous recommendations.

On March 11, 2004, the OIG received a revised

management decision from the Office of Community

Planning and Development (CPD) which states that

based on the HUD Office of General Counsel’s

determination that there is some “evidence that LEDA

and Lynwood Business Institute did engage in job

creation/retention activities, in an area that was

predominantly low- and moderate-income, and

achieved some results, we do not believe there is a

good likelihood that an enforcement action to reduce

the City’s CDBG funding would be sustained by a

court, based solely on a lack of adequate documentation. Accordingly, we do not believe a viable basis

exists to reduce the City’s CDBG funding. Instead, we

recommend that, if CPD elects to treat the matter as

actionable under 24 CFR §570.910(b), it utilize

alternative remedies available under that section that

would be designed to avoid a repetition of the violation.” The revised management decision would be to

require the City of Lynwood, in accordance with CFR

24§570.910(b), to submit to CPD for its review and

approval, an outline of the City’s recordkeeping

procedures prior to undertaking any future economic

development activities. Such procedures would have to

be in compliance with applicable regulations. This

submission by the City would have a due date of April

30, 2004. Failure to provide this information in an

approvable format, prior to use of funds for future

economic development activities, could result in a

condition on the use of funds provided. The final

action target date is May 31, 2004. The OIG agrees

with the revised management decision. (Report No.

1999-SF-1003)

Los Angeles Community Development

Bank Economic Development Initiative

Grant/Section 108 Loan Guarantee

Program

Issued September 25, 2002. The Los Angeles

Community Development Bank (LACDB) had not fully

complied with HUD regulations and Economic Development Initiative (EDI) Agreements. Accordingly, one

of our recommendations was that HUD require the

City of Los Angeles to require LACDB to restrict any

future loans or investments involving the use of EDI

grant funds only to businesses within or willing to

relocate into the Empowerment Zone (EZ) target

area. In January 2003, the Los Angeles Office of CPD

agreed with our recommendations and provided

documentation showing that the City had instructed

LACDB not to approve any loans or investments

involving EDI grant funds unless the businesses were

within, or willing to relocate to, the EZ target area.

Based on this action, the subject recommendation was

closed. Subsequent to closing the recommendation,

several events, such as the closure of LACDB, transpired. Therefore, in November 2003, OIG requested

that CPD reopen the subject recommendation and

provide a revised management decision to reflect

these events and to ensure the protection of HUD’s

interests and the integrity of the EZ Program. In

February 2004, CPD agreed to reopen the recommendation and provided a revised management decision.

Pursuant to the revised management decision, CPD

sent a letter to the City of Los Angeles requiring it to

submit a strategic plan detailing its intended use for

the remaining Section 108 loan guarantee funds for

HUD’s review and approval. As a result, HUD will be

assured that the $199 million in remaining Section 108

loan guarantee funds will be put to better use, and that

the integrity of the EZ Program will not be undermined. We concurred with the revised management

decision and closing action. (Report No. 2002-SF1003)
Chapter 9 - Audit Resolution 104

Federal Financial Management

Improvement Act of 1996

(FFMIA)

FFMIA requires that HUD implement a

remediation plan that will bring financial systems into

compliance with federal financial system requirements within three years or obtain Office of Management and Budget (OMB) concurrence if more time is

needed. FFMIA requires us to report, in our Semiannual Reports to the Congress, instances and reasons

when an agency has not met the intermediate target

dates established in their mediation plan required by

FFMIA. In April 1998, HUD determined that 38 of its

systems were not in substantial compliance with

FFMIA. At the end of FY 2003, the Department

continued to report that four of its 46 financial management systems were not in substantial compliance

with FFMIA. Our audit of HUD’s FY 2003 financial

statements cites additional financial management

system weaknesses, which address how HUD’s

financial management systems remain substantially

noncompliant with federal financial management

requirements. With the implementation of the FHA

Subsidiary System, the Department became substantially compliant with the FFMIA Standard General

Ledger provision and is moving in the direction of

becoming FFMIA compliant with: (1) federal financial

management systems requirements; and (2) federal

accounting standards. The FHA Subsidiary General

Ledger Project is a multi-phase project to be completed by December 2006.
Appendices 
APPENDIX 1 - AUDIT REPORTS ISSUED

Internal Reports

Administration Audit Reports

2004-DP-0001 Fiscal Year 2003 Review of Information Systems Controls in Support of the Financial Statements Audit, 12/01/2003.

Chief Financial 

Officer

2004-FO-0003 Audit of the U.S. Department of HUD’s Financial Statements for Fiscal Years 2003 and 2002, 12/19/2003. Better Use: $1,430,000,000.

Government 

National 

Mortgage 

Association

2004-FO-0002 Audit of the Government National Mortgage Association’s Financial Statements for Fiscal Years 2003 and 2002, 12/19/2003.

Housing

2004-BO-0001 Review of the Home Equity Conversion Mortgage Program, New England Region, 02/10/2004. Better Use: $221,570.

2004-DE-0001 Nationwide Review of Indemnification for Claims on Single Family Insured Loans, 12/15/2003. Better Use: $60,200,000.

2004-DP-0002 Application Control Review of the Tenant Rental Assistance Certification System, 02/25/2004.

2004-FO-0001 Audit of the FHA’s Financial Statements for Fiscal Years 2003 and 2002, 11/25/2003.

2004-PH-0001 Procedures for Filing Uniform Commercial Code Continuation Statements, 11/26/2003.

2004-PH-0002 Philadelphia Homeownership Center, Quality Controls Over Single Family Loan Insurance Process, Philadelphia, PA, 02/20/2004. Questioned: 

$401,959; Better Use: $144,944.

Lead Hazard 

Control

2004-AO-0001 Award and Administration of Lead-Based Paint Hazard Reduction Grants, 02/06/2004. Questioned: $385,587; Unsupported: $385,587; Better Use: 

$27,401,989.
Public and 

Indian Housing

2004-AT-0001 Public Housing Agency Development Activities, 01/13/2004.

2004-BO-0006 Portability Features of the Section 8 Housing Choice Voucher Program, 01/15/2004. Questioned: $8,997.

2004-PH-0003 HUD’s Oversight of the Philadelphia, PA Housing Authority’s Moving to Work Program, 03/17/2004. Better Use: $50,160,000.

Housing Audit Memoranda*

2004-AT-0801 Officer Next Door and Teacher Next Door Programs, 10/07/2003.

2004-KC-0801 Corrective Action Verification, Housing Subsidy Payments, Office of Housing, Audit Report No. 00-KC-103-0002, 12/22/2003.

2004-KC-0802 St. Louis Office of Multifamily Housing’s Monitoring of its Construction Analyst Contracts, 03/02/2004.

2004-KC-0803 Owner’s Salary, Timberlake Care Center, Section 232 Nursing Home Review, Kansas City, MO, 03/04/2004. Questioned: $150,000; 

Unsupported: $150,000.

External Reports

Community 

Planning and 

Development

Audit Reports

2004-BO-1003 City of Springfield, MA, Selected Activities Funded through the CDBG, HOME and UDAG Programs, 11/07/2003. Questioned: $842,719; 

Unsupported: $27,905.

2004-CH-1002 Waukesha County, CDBG and HOME Investment Partnership Programs, Waukesha, WI, 11/26/2003. Questioned: $573,160; Unsupported: 

$463,734; Better Use: $472,800.

2004-FW-1003 City of New Orleans, LA, Section 108 Loan Program, Jazzland Theme Park, 03/15/2004. Questioned: $7,685,703; Unsupported: $6,386,760; 

Better Use: $52,000,000.

2004-KC-1001 East Meyer Community Association, Use of HUD Grant Funds, Kansas City, MO, 11/24/2003. Questioned: $849,693, Unsupported: $122,843.

2004-NY-1001 Empire State Development Corporation, CDBG Disaster Assistance Funds, New York, NY, 03/25/2004. Questioned: $49,000.

2004-NY-1002 Lower Manhattan Development Corporation, CDBG Disaster Assistance Funds, New York, NY, 03/25/2004. Questioned: $102,900; Unsupported: 

$86,050.
Housing

2004-BO-1002 Family Living Adult Care Center, Biddeford and Saco, ME, 11/04/2003. Questioned: $3,143,261; Unsupported: $62,494.

2004-BO-1006 Nuestra Casa, Project Management Operations, Hartford, CT, 02/18/2004. Questioned: $371,430; Unsupported: $1,630.

2004-DE-1001 Last Star Homes, HUD Section 8 Project-Based Multifamily Housing, Browning, MT, 01/16/2004. Questioned: $9,582; Unsupported: $1,192; 

Better Use: $2,874,826.

2004-DE-1002 Treehouse Mortgage, LLC, Non-Supervised Loan Correspondent, Denver, CO, 03/11/2004.

2004-FW-1002 Jester Trails Apartments, Multifamily Project, Houston, TX, 02/26/2004. Questioned: $154,287; Unsupported: $14,214; Better Use: $2,133,843.

2004-KC-1002 Timberlake Care Center, Use of Project Funds, Kansas City, MO, 03/10/2004. Questioned: $93,782; Unsupported: $23,113.

2004-LA-1001 Keystone Mortgage and Investment Company, Non-Supervised Loan Correspondent, Phoenix, AZ, 03/24/2004. Better Use: $4,307,344.

2004-PH-1003 The Congress of National Black Churches, Inc., Housing Counseling Program, Washington, DC, 02/19/2004. Questioned: $944,646; 

Unsupported: $423,584.

2004-PH-1004 Carbondale Nursing Home, Section 232 Project Operations, Carbondale, PA, 03/25/2004. Questioned: $1,261,301; Unsupported: $97,631.

2004-SE-1002 Scheller-Hess Yoder and Associates, Non-Supervised Loan Correspondent, Portland, OR, 01/09/2004. Questioned: $266,619; Unsupported: 

$184,232; Better Use: $6,989,423.

2004-SE-1003 Uptown Towers Apartments, Portland, OR, 03/26/2004. Questioned: $57,949; Unsupported: $2,042; Better Use: $2,880.

Policy 

Development 

and Research

2004-AT-1002 Jackson State University, Historically Black Colleges and Universities Grant, Jackson, MS, 02/18/2004. Questioned: $905,067; Unsupported: 

$894,767; Better Use: $898,235.

Public and 

Indian Housing

2004-AT-1001 Housing Authority of the City of Cuthbert, GA, Administration of Housing Development Activities, 01/15/2004. Questioned: $327,326.

2004-AT-1003 Housing Authority of the City of Fort Lauderdale, FL, Administration of Housing Development Activities, 03/19/2004. Questioned: $249,025; 

Unsupported: $86,324.

2004-BO-1001 Housing Authority of the City of Hartford, CT, Disposition of Vacant Land at Charter Oak Terrace, 10/30/2003.

2004-BO-1004 Danbury, CT Housing Authority, Capital Fund Program, 12/05/2003. Questioned: $1,964,509; Unsupported: $60,000; Better Use: $390,681.

2004-BO-1005 Springfield, MA Housing Authority, 12/10/2003. Questioned: $33,646,616; Unsupported: $31,479,834; Better Use: $411,362.

2004-CH-1001 Kankakee, IL County Housing Authority, Section 8 Housing Program, 11/26/2003. Questioned: $691,514; Unsupported: $437,117; Better Use: 

$2,232,180.

2004-FW-1001 City of Little Rock, AR Housing Authority, Procurement and Asset Control, 01/26/2004. Questioned: $248,211; Unsupported: $248,211.

2004-FW-1004 Housing Authority of the City of Corpus Christi, TX, Financial Management of HUD Programs, 03/26/2004. Questioned: $4,052,302; 

Unsupported: $3,020,430.

2004-LA-1002 Housing Authority of the City of Los Angeles CA, Management of Legal Matters, 03/30/2004. Questioned: $166,667; Unsupported: $47,227.
2004-PH-1001 Bucks County Housing Authority, Utilization of Tenant-Based Section 8 Funds, Doylestown, PA, 11/13/2003.

2004-PH-1002 Allegheny County Housing Authority, Public Housing Drug Elimination Grant Program, Pittsburgh, PA, 01/16/2004. Questioned: $1,377,586; 

Unsupported: $761,950.

2004-PH-1005 Petersburg, VA Redevelopment and Housing Authority, Non-federal Entities, 03/25/2004. Questioned: $620,236; Better Use: $1,320,733.

2004-SE-1001 Complaint Regarding the Seattle, WA Housing Authority’s Procurement for Section 8 Project-Based Vouchers, and Conduct Issues Regarding 

Conflict of Interest and Lobbying, 10/22/2003.

Housing Audit Memoranda*

2004-CH-1801 Carter Manor Apartments, Multifamily Equity Skimming, Cleveland, OH, 12/05/2003. Questioned: $275,000.

Public and 

Indian Housing

2004-AT-1801 Hialeah, FL Housing Authority, Administration of Housing Development Activities, 02/18/2004.

2004-AT-1802 Saraland Manor Apartments, Gulfport, MS, 03/05/2004.

2004-AT-1803 Jacksonville, FL Housing Authority, Administration of Housing Development Activities, 03/09/2004.

2004-BO-1801 Boston, MA Housing Authority, Capital Fund Program, 12/16/2003.

2004-FW-1801 Logansport, LA Housing Authority, Louisiana Legislative Auditor’s Report, 01/30/2004. Questioned: $120,440; Unsupported: $120,440.

2004-NY-1801 City of Oneida, NY Housing Authority, Citizen Complaints, 11/19/2003.

2004-PH-1801 Philadelphia, PA Housing Authority, Executive Director’s Sick Leave and Annual Leave Conversion, 01/07/2004.

* The memoranda format is used to communicate the results of reviews not performed in accordance with generally accepted government auditing standards, to close out 

assignments with no findings and recommendations, to respond to requests for information, to report on the results of a survey, to report interim results, or to report the 

results of civil actions or settlements.
TABLE A

AUDIT REPORTS ISSUED PRIOR TO START OF PERIOD WITH

NO MANAGEMENT DECISION AT 03/31/04

REPORT NUMBER & TITLE REASON FOR LACK OF MANAGEMENT DECISION

ISSUE DATE/

TARGET FOR

MANAGEMENT

DECISION

Nothing to report.
TABLE B

SIGNIFICANT AUDIT REPORTS DESCRIBED IN PREVIOUS SEMIANNUAL REPORTS

WHERE FINAL ACTION HAD NOT BEEN COMPLETED AS OF 03/31/04

REPORT

NUMBER

REPORT TITLE

ISSUE

DATE

DECISION

DATE

FINAL

ACTION

1997-CH-1010 Major Mortgage Corporation, Section 203(k) Rehabilitation Home Mortgage Insurance Program, Livonia, 

MI 09/17/1997 01/06/1998 06/01/2005

1999-FO-0003 U.S. Department of HUD Fiscal Year 1998 Financial Statements 03/29/1999 09/30/1999 Note 1

1999-SF-1003 City of Lynwood, CA, CDBG & HOME Programs 08/19/1999 12/16/1999 05/31/2004

1999-DE-0001 Nationwide Review of HUD’s Loss Mitigation Program 09/30/1999 03/31/2000 Note 2

2000-FO-0002 Federal Housing Administration, Audit of Fiscal Year 1999 Financial Statements 02/29/2000 08/09/2000 12/31/2005

2000-FO-0003 Attempt to Audit the Fiscal Year 1999 Financial Statements, U.S. Department of HUD 03/01/2000 09/29/2000 Note 2

2000-SF-0001 Single Family Production 03/30/2000 01/19/2001 Note 1

2000-KC-0002 Housing Subsidy Payments 09/29/2000 02/21/2001 09/30/2005

2000-SE-0003 Final Report of Nationwide Audit, Use and Disposition of Residual Receipts 09/29/2000 08/15/2001 Note 1

2001-AT-1001 Housing Authority of the City of Miami Beach, FL 10/20/2000 02/13/2001 Note 1

2001-SF-1802 Audit of HUD Earthquake Loan Program (HELP) Funds 02/08/2001 06/14/2001 Note 1

2001-FO-0002 Federal Housing Administration, Audit of Fiscal Year 2000 Financial Statements 03/01/2001 07/24/2001 12/21/2006

2001-FO-0003 Audit of HUD Fiscal Year 2000 Financial Statements 03/01/2001 07/18/2001 Note 2

2001-SF-1803 Supportive Housing Program Grant, Los Angeles, CA 03/23/2001 07/24/2001 Note 1

2001-FO-0004 Review of HUD’s Internal Controls Over Fiscal Year 1999 Annual Performance Data 03/28/2001 07/24/2001 Note 2

2001-NY-1002 Belmax Management Corporation, Management Agent, Brooklyn, NY 04/17/2001 07/13/2001 Note 1
2001-SF-1804 Supportive Housing Program Grant, County of Orange, Santa Ana, CA 05/09/2001 09/26/2001 Note 1

2001-CH-1007 Detroit, MI Housing Commission, HOPE VI Program 05/16/2001 09/13/2001 06/30/2011

2001-PH-0803 Philadelphia, PA Homeownership Center, Single Family Disposition Activities 06/14/2001 06/14/2001 10/11/2004

2001-AT-0001 Nationwide Audit, Results on the Officer/Teacher Next Door Programs 06/29/2001 01/29/2002 07/30/2004

2001-FW-1005 Harmony House, Inc., Harrison, AR, Supportive Housing Program 08/27/2001 12/21/2001 Note 1

2001-AO-0003 Drug Elimination Funds Used For Creative Wellness Program 08/29/2001 01/22/2002 Note 2

2002-SF-0001 Nonprofit Participation, HUD Single Family Program 11/05/2001 08/30/2002 Note 2

2002-CH-1801 Housing Authority of the City of Evansville, IN 01/29/2002 05/18/2002 05/15/2005

2002-FO-0002 Federal Housing Administration, Audit of Fiscal Years 2001 and 2000 Financial Statements 02/22/2002 05/30/2002 12/31/2006

2002-NY-0001 Nationwide Audit, Asset Control Area Program, Single Family Housing 02/25/2002 06/17/2002 10/15/2004

2002-FO-0003 U.S. Department of HUD, Audit of Fiscal Years 2001 and 2000 Financial Statements 02/27/2002 08/16/2002 07/31/2004

2002-PH-1001 City of Williamsport, PA, CDBG and Home Investment Partnership Programs 03/19/2002 09/04/2002 Note 1

2002-BO-1001 City of Worcester, MA, CDBG Program 03/27/2002 08/29/2002 07/01/2005

2002-BO-1003 Newport, RI, Resident Council, Inc. 04/30/2002 09/16/2002 01/15/2008

2002-AT-1002 Housing Authority of the City of Tupelo, MS, Housing Programs Operations 07/03/2002 10/31/2002 04/30/2010

2002-AT-1003 National Scholarship Service and Veteran’s Opportunity and Resource Center, Atlanta, GA, Supportive 

Housing Program

07/25/2002 10/21/2002 02/28/2005

2002-KC-0002 Nationwide Survey of HUD’s Office of Housing, Section 232 Nursing Home Program 07/31/2002 11/22/2002 06/30/2004

2002-SF-0801 Home Investment Partnership Program, City of Stockton, CA, and San Joaquin County, CA 07/31/2002 12/06/2002 Note 2

2002-FW-1002 Houma, LA Housing Authority, Low-Rent Housing Program, Cash and Procurement Controls 09/18/2002 01/16/2003 08/01/2004

2002-AT-1808 Homeless and Housing Coalition of Kentucky, Inc., Frankfort, KY, Outreach and Training Assistance 

Grant 09/20/2002 03/31/2003 Note 2
2002-NY-1004 Ironbound Community Corporation, Newark, NJ, Outreach and Training Assistance Grant and Public 

Entity Grants 09/23/2002 03/31/2003 Note 2

2002-NY-1005 The Legal Aid Society, New York, NY, Outreach and Training Assistance Grant and Public Entity Grant 09/23/2002 03/31/2003 Note 2

2002-DE-1005 Crossroads Urban Center, Salt Lake City, UT, Outreach and Training Assistance Grants 09/25/2002 03/31/2003 Note 2

2002-SF-1003 Community Development Bank, Los Angeles, CA, Economic Development Initiative Grant/Section 108 

Loan Guarantee Program 09/25/2002 01/27/2003 Note 2

2002-AT-1005 North Carolina Low-Income Housing Coalition, Inc., Raleigh, NC, Outreach and Training Assistance 

Grant and Intermediary Training Assistance Grant 09/27/2002 03/31/2003 Note 2

2002-AT-1006 Ridgeview Manor Apartments, Hopkins, SC 09/30/2002 11/19/2002 09/30/2004

2002-BO-1004 Anti-Displacement Project, Springfield, MA, Outreach and Training Assistance Grant 09/30/2002 03/31/2003 Note 2

2002-DE-1002 Affordable Housing and Homeless Alliance, Honolulu, HI, Outreach and Training Assistance Grant and 

Intermediary Outreach and Training Assistance Grant 09/30/2002 03/31/2003 Note 2

2002-FW-1003 New Mexico Public Interest Education Fund, Albuquerque NM, Outreach and Training Assistance Grant 

and Public Entity Grant 09/30/2002 03/31/2003 Note 2

2002-PH-1002 Virginia Poverty Law Center, Richmond, VA, Outreach and Training Assistance Grant 09/30/2002 03/31/2003 Note 2

2002-PH-1003 Delaware Housing Coalition, Dover, DE, Outreach and Training Assistance Grant and Intermediary 

Training Assistance Grant 09/30/2002 03/31/2003 Note 2

2002-PH-1004 Tenants’ Action Group of Philadelphia, PA, Outreach and Training Assistance Grant 09/30/2002 03/31/2003 Note 2

2002-PH-1006 Legal Aid Bureau, Inc., Baltimore, MD, Outreach and Training Assistance Grant 09/30/2002 03/31/2003 Note 2

2002-PH-1007 Legal Aid Bureau, Inc., Baltimore, MD, Outreach and Training Assistance Grant 09/30/2002 03/31/2003 Note 2

2002-SF-1004 Low-Income Housing Fund, Oakland, CA, Intermediary Training Assistance Grant 09/30/2002 03/31/2003 Note 2

2002-SF-1006 Legal Aid Society of Honolulu, HI, Outreach and Training Assistance Grant 09/30/2002 03/31/2003 Note 2

2002-SF-1007 Southern Arizona People’s Law Center, Tucson, AZ, Outreach and Training Assistance Grant 09/30/2002 03/31/2003 Note 2

2003-DE-1002 Delta, CO Housing Authority, Low-Rent Housing and Section 8 Housing Assistance Payments Programs 10/07/2002 01/29/2003 12/31/2004
2003-DE-1001 Sicangu Wicoti Awanyakepe Corporation, Rosebud, SD, Indian Housing Block Grant Program 10/08/2002 02/28/2003 07/31/2005

2003-AT-1801 South Carolina Regional Housing Authority No. 3, Barnwell, SC 10/09/2002 02/06/2003 09/30/2004

2003-CH-1003 Tenants United for Housing, Inc., Chicago, IL, Outreach and Training Assistance Grants 10/29/2002 03/31/2003 Note 2

2003-DP-0801 Annual Evaluation of HUD’s Information Security Program 10/30/2002 01/21/2003 Note 2

2003-SE-1001 Community Alliance of Tenants, Portland, OR, Outreach and Training Assistance Grant 10/31/2002 03/31/2003 Note 2

2003-KC-1801 University Forest Nursing Care Center, University City, MO 11/14/2002 02/24/2003 Note 2

2003-SE-1002 Tenants Union, Seattle, WA, Outreach and Training Assistance Grant and Intermediary Training 

Assistance Grant 12/02/2002 03/31/2003 Note 2

2003-AO-1001 National Center of Tenants Ownership, Washington, DC, Intermediary Training Assistance Grant 12/03/2002 03/31/2003 Note 2

2003-CH-1007 City of Minneapolis, MN, Empowerment Zone Program 01/03/2003 08/08/2003 06/08/2004

2003-AT-1001 Northwestern Regional Housing Authority, Boone, NC, Public Housing Programs 01/09/2003 06/02/2003 01/09/2005

2003-FO-0002 Federal Housing Administration, Audit of Fiscal Years 2002 and 2001 Financial Statements 01/21/2003 05/22/2003 Note 1

2003-CH-1008 City of Cleveland Heights, OH, Housing Preservation Program 01/23/2003 06/10/2003 05/15/2004

2003-PH-1002 Philadelphia, PA Housing Authority, Contracting and Purchasing Activity 01/27/2003 06/11/2003 04/30/2004

2003-CH-1009 City of Cincinnati, OH, Empowerment Zone Program 01/28/2003 08/08/2003 05/03/2004

2003-FO-0004 Audit of HUD’s Financial Statements, Fiscal Years 2002 and 2001 01/31/2003 05/22/2003 02/28/2005

2003-NY-1001 Marion Scott Real Estate, Inc., Management Agent, New York, NY 02/12/2003 06/13/2003 06/04/2004

2003-FW-1001 Housing Authority of the City of Morgan City, LA, Low-Rent Program 02/21/2003 06/20/2003 08/17/2004

2003-BO-1001 Farmington Health Care Center, Farmington, CT 03/07/2003 07/15/2003 07/15/2004

2003-KC-1005 Choice Enterprises, Inc., Denver, CO 03/10/2003 08/15/2003 08/13/2004

2003-BO-1002 People to End Homelessness, Providence, RI, Outreach and Training Assistance Grant 03/12/2003 03/31/2003 Note 2
2003-KC-0801 Inappropriate Homeownership Center Instructions, Denver, CO 03/18/2003 08/08/2003 05/18/2004

2003-AT-1002 Procurement of Management Agents, Puerto Rico Public Housing Administration, San Juan, PR 03/21/2003 07/17/2003 09/30/2004

2003-CH-1010 Coshocton, OH Metropolitan Housing Authority, Section 8 Housing Program 03/21/2003 05/30/2003 06/30/2011

2003-AT-1003 Fairfield, AL Housing Authority, Housing Programs 03/24/2003 07/22/2003 07/01/2004

2003-KC-1803 Richmond Terrace Retirement Center, Richmond Heights, MO 03/24/2003 06/19/2003 04/30/2004

2003-NY-1003 Empire State Development Corporation, New York, NY, CDBG Disaster Assistance Funds 03/25/2003 07/16/2003 01/15/2005

2003-CH-1014 Coshocton, OH Metropolitan Housing Authority, Public Housing Program 03/28/2003 07/28/2003 04/30/2047

2003-DE-0001 HUD Office of Multifamily Housing Assistance Restructuring’s Oversight of the Section 514 Program 

Activities 03/31/2003 03/31/2003 Note 2

2003-CH-1016 City of Cleveland, OH, Empowerment Zone Program 04/25/2003 09/11/2003 Note 2

2003-FW-1004 Spanish Village Community Development Corporation, Houston, TX, Citizen Complaint, Upfront Grant & 

HOME Loan 04/28/2003 08/18/2003 02/18/2005

2003-CH-0001 HUD’s Oversight of the Empowerment Zone Program 05/07/2003 09/11/2003 09/30/2005

2003-BO-1003 City of Bridgeport, CT, Home Investment Partnership Program 05/16/2003 09/16/2003 09/16/2004

2003-FW-1804 Congressional Request, Housing Authority of the City of San Angelo, TX 05/23/2003 09/05/2003 08/02/2004

2003-SE-1003 Seattle, WA Housing Authority’s Administration of the Welfare-to-Work Section 8 Tenant-Based 

Assistance Program 05/29/2003 09/26/2003 06/30/2004

2003-AT-1004 Historic Westside Village, Section 108 Loan and Economic Development Initiative Grant, Atlanta, GA 06/06/2003 09/26/2003 03/31/2006

2003-CH-1017 Housing Continuum, Inc., Homebuyers Assistance Program, Geneva, IL 06/13/2003 10/10/2003 07/31/2004

2003-KC-0001 Survey of HUD’s Administration of Section 3 of the HUD Act of 1968 06/24/2003 07/10/2003 12/31/2004

2003-KC-1006 Horizon Consulting, Inc., Lansdowne, VA 06/24/2003 10/20/2003 05/31/2004

2003-FW-1806 Colonial Oaks Apartments, Houston, TX 07/03/2003 07/03/2003 10/01/2004
2003-BO-1004 Brockton, MA Housing Authority, Review of the Portability Features of the Section 8 Housing Choice 

Voucher Program 07/17/2003 10/16/2003 09/15/2004

2003-CH-1018 Chicago, IL Housing Authority, Outsourced Property Management Contracts Review 07/18/2003 01/14/2004 12/31/2005

2003-NY-1802 Safe Space, Inc., Housing Opportunities for Persons With AIDS and Supportive Housing Programs, New 

York, NY 07/24/2003 11/21/2003 05/21/2004

2003-CH-1019 Fayette County Housing Authority, Section 8 Housing Program, Connersville, IN 07/25/2003 11/19/2003 07/23/2004

2003-AT-1006 Puerto Rico Department of Housing, State Home Investment Partnership Program, San Juan, PR 07/30/2003 12/24/2003 06/30/2004

2003-KC-1007 Management Solutions of America, Inc., Atlanta, GA 07/31/2003 10/20/2003 05/31/2004

2003-AO-0004 Review of the Department of HUD’s Staffing 9/30 Initiative 08/14/2003 11/03/2003 09/30/2004

2003-DE-1006 Colorado Coalition for the Homeless, Supportive Housing Program Grants, Denver, CO 08/26/2003 12/31/2003 04/15/2004

2003-DP-0001 Public and Indian Housing Information Center (PIC) System 09/10/2003 01/08/2004 10/29/2004

2003-FW-1005 Housing Authority of the Seminole Nation of Oklahoma, Procurement of Housing Rehabilitation Services, 

Land, and Mobile Homes, Wewoka, OK 09/10/2003 01/08/2004 12/29/2004

2003-DE-1005

MortgageStream Financial Services, LLC, Non-Supervised Direct Endorsement Lender, Greenwood 

Village, CO 09/15/2003 01/14/2004 04/30/2004

2003-NY-1005 Empire State Development Corporation, CDBG Disaster Assistance Funds, New York, NY 09/30/2003 01/28/2004 03/31/2007

2003-NY-1006 Lower Manhattan Development Corporation, CDBG Disaster Assistance Funds, New York, NY 09/30/2003 01/28/2004 04/30/2004

AUDITS EXCLUDED: NOTES:

24 audits under repayment plans. 1 Management did not meet the target date. Target date is over 1 year old.

21 audits under formal judicial review, investigation, or legislative solution. 2 Management did not meet the target date. Target date is under 1 year old.

3 No management decision.
TABLE C

INSPECTOR GENERAL ISSUED REPORTS WITH

QUESTIONED AND UNSUPPORTED COSTS AT 03/31/04

(DOLLARS IN THOUSANDS)

Reports Number of Audit 

Reports

Questioned 

Costs

Unsupported 

Costs

A1 For which no management decision had been made by the commencement of the reporting period 21 30,490 23,070

A2 For which litigation, legislation or investigation was pending at the commencement of the reporting 

period 6 13,149 4,799

A3 For which additional costs were added to reports in beginning inventory 5,115 0

A4 For which costs were added to non-cost reports 0 0 0

B1 Which were issued during the reporting period 32 61,997 45,589

B2 Which were reopened during the reporting period 0 0 0

Subtotals (A + B) 59 110,751 73,458

C For which a management decision was made during the reporting period 27139,797 23,730

(1) Dollar value of disallowed costs:

Due HUD

Due Program Participants

152

15

14,801

22,690

1,179

20,487

(2) Dollar value of costs not disallowed 4

3

2,306 2,064

D

For which management decision had been made not to determine costs until completion of litigation, 

legislation or investigation 6 14,046 4,883

E For which no management decision had been made by the end of the reporting period 26

<77>4 

56,908

<23,329>4 

44,845

<13,337>4 

____________________

1 9 audit reports also contain recommendations with funds to be put to better use.

2 3 audit reports also contain recommendations with funds due program participants.

3 4 audit reports also contain recommendations with funds agreed to by management.

4 The figures in brackets represent data at the recommendation level as compared to the report level. See Explanations of Tables C and D.
TABLE D

INSPECTOR GENERAL ISSUED REPORTS

WITH RECOMMENDATIONS THAT FUNDS BE PUT TO BETTER USE AT 03/31/04

(DOLLARS IN THOUSANDS)

Reports

Number of Audit 

Reports Dollar Value

A1 For which no management decision had been made by the commencement of the reporting period 9 23,952

A2 For which litigation, legislation or investigation was pending at the commencement of the reporting period 3 520,302

A3 For which additional costs were added to reports in beginning inventory 203,405

A4 For which costs were added to non-cost reports 2 20,120

B1 Which were issued during the reporting period 18 1,642,163

B2 Which were reopened during the reporting period 0 0

Subtotals (A + B) 32 2,409,942

C For which a management decision was made during the reporting period 141766,584

(1) Dollar value of recommendations that were agreed to by management:

Due HUD

Due Program Participants

9

2

7

539,567

226,598

(2) Dollar value of recommendations that were not agreed to by management 1

3

419

D

For which management decision had been made not to determine costs until completion of litigation, legislation or 

investigation

2 6,302

E For which no management decision had been made by the end of the reporting period 16

<24>4 

1,637,056

<752,432>4 

____________________

1 9 audit reports also contain recommendations with questioned costs.

2 2 audit reports also contain recommendations with funds due program participants.

3 1 audit report also contains recommendations with funds agreed to by management.

4 The figures in brackets represent data at the recommendation level as compared to the report level. See Explanations of Tables C and D.
EXPLANATIONS OF TABLES C AND D

The Inspector General Act Amendments of 1988 require Inspectors General and agency heads to report cost data on management decisions and final 

actions on audit reports. The current method of reporting at the “report” level rather than at the individual audit “recommendation” level results in 

misleading reporting of cost data. Under the Act, an audit “report” does not have a management decision or final action until all questioned cost items or 

other recommendations have a management decision or final action. Under these circumstances, the use of the “report” based rather than the 

“recommendation” based method of reporting distorts the actual agency efforts to resolve and complete action on audit recommendations. For example, 

certain cost items or recommendations could have a management decision and repayment (final action) in a short period of time. Other cost items or 

nonmonetary recommendation issues in the same audit report may be more complex, requiring a longer period of time for management’s decision or 

final action. Although management may have taken timely action on all but one of many recommendations in an audit report, the current “all or 

nothing” reporting format does not take recognition of their efforts.

The closing inventory for items with no management decision on Tables C and D (Line E) reflects figures at the report level as well as the 

recommendation level.
HUD OIG Operations Telephone Listing

Office of Audit

Headquarters Office of Audit, Washington, DC 202-708-0364

Region I, Boston, MA 617-994-8380

Hartford, CT 860-240-4800

Region II, New York, NY 212-264-8000

Albany, NY 518-464-4200

Buffalo, NY 716-551-5755

Newark, NJ 973-622-7900

Region III, Philadelphia, PA 215-656-3401

Baltimore, MD 410-962-2520

Pittsburgh, PA 412-644-6372

Richmond, VA 804-771-2100

Region IV, Atlanta, GA 404-331-5001

Birmingham, AL 205-731-2630

Miami, FL 305-536-5387

Greensboro, NC 336-547-4001

Jacksonville, FL 904-232-1777

Knoxville, TN 865-545-4400

San Juan, PR 787-766-5540

Region V, Chicago, IL 312-353-6236

Columbus, OH 614-469-5737

Detroit, MI 313-226-6280

Region VI, Fort Worth, TX 817-978-9309

Houston, TX 713-718-3199

New Orleans, LA 504-589-7267

Oklahoma City, OK 405-609-8606

San Antonio, TX 210-475-6895

Region VII, Kansas City, KS 913-551-5870

St. Louis, MO 314-539-6339

Region VIII, Denver, CO 303-672-5452

Region IX, Los Angeles, CA 213-894-8000

Phoenix, AZ 602-379-7250

San Francisco, CA 415-436-8101

Region X, Seattle, WA 206-220-5360
HUD OIG Operations Telephone Listing

Office of Investigation

Headquarters Office of Investigation, Washington, DC 202-708-0390

Region I, Boston, MA 617-994-8450

Manchester, NH 603-666-7988

Meriden, CT 203-639-2810

Region II, New York, NY 212-264-8000

Buffalo, NY 716-551-5755

Newark, NJ 973-622-7900

Region III, Philadelphia, PA 215-656-3410

Baltimore, MD 410-962-4502

Pittsburgh, PA 412-644-6598

Richmond, VA 804-771-2100

Washington, DC 202-501-0486

Region IV, Atlanta, GA 404-331-5001

Miami, FL 305-536-3087

Greensboro, NC 336-547-4000

Jacksonville, FL 904-232-1777

Memphis, TN 901-544-0644

Nashville, TN 615-736-1013

San Juan, PR 787-766-5872

Tampa, FL 813-228-2026

Region V, Chicago, IL 312-353-4196

Cleveland, OH 216-522-4421

Columbus, OH 614-469-6677

Detroit, MI 313-226-6280

Indianapolis, IN 317-226-5427

Minneapolis-St. Paul, MN 612-370-3106

Region VI, Arlington, TX 817-652-6980

Albuquerque, NM 505-346-7394

Houston, TX 713-718-3197

Little Rock, AR 501-324-5409

New Orleans, LA 504-589-6836

Oklahoma City, OK 405-609-8601

San Antonio, TX 210-475-6810

Region VII, Kansas City, KS 913-551-5866

Omaha, NE 402-492-3159

St. Louis, MO 314-539-6559

Region VIII, Denver, CO 303-672-5350

Billings, MT 406-247-4080

Salt Lake City, UT 801-524-6090

Region IX, Los Angeles, CA 213-894-0219

San Francisco, CA 415-436-8108

Phoenix, AZ 602-379-7255

Sacramento, CA 916-498-5220

Las Vegas, NV 702-388-6141

Region X, Seattle, WA 206-220-5380

Portland, OR 503-326-5404
Report fraud, waste and mismanagement in

HUD programs and operations by:

All information is confidential and

you may remain anonymous.

Sending written information to:

Calling the OIG Hotline: 1-800-347-3735

Faxing the OIG Hotline: 202-708-4829

Department of Housing and Urban Development

Inspector General Hotline (GFI)

400 Virginia Ave., SW, Room C-120

Washington, DC 20024

Emailing the OIG Hotline: hotline@hudoig.gov

Internet: http://www.hud.gov/complaints/fraud_waste.cfm
No. 51 HUD-2004-06-OIG

Semiannual Report to Congress

as of March 31, 2004

www.hud.gov/offices/oig

U.S. Department of Housing and

Urban Development