The Komisar Scoop Reports & Analysis by Investigative Journalist Lucy Komisar

Wednesday, August 30, 2006

Fees for Friends: Vendetta [Andrew Cuomo Scandal]

Filed under: Government Abuse,Scoops — Lucy Komisar @ 12:11 pm

By Lucy Komisar

Aug 30, 2006 [Part 2]

(See Part 1  The scandal that taints Andrew Cuomo.)

On September 12th, a primary will choose the Democratic candidate for New York Attorney General. The front runner is Andrew Cuomo.

Cuomo seeks to succeed Eliot Spitzer, who made a national reputation by targeting corrupt Wall Street and corporate officials. Spitzer has been publicly denounced by his targets, including former AIG chairman Maurice “Hank” Greenberg, accused of cooking the books to present a fraudulent picture of his company’s financial position.

Andrew CuomoAndrew Cuomo

In December, Cuomo’s father, former Governor Mario Cuomo, announced he was helping to launch a public relations campaign on Greenberg’s behalf. Would Attorney General Andrew Cuomo go after Greenberg? Or other Wall Street and corporate miscreants? A look at his tenure as Bill Clinton’s Secretary of Housing and Urban Development raises serious doubts.

When Cuomo became HUD Secretary in 1997, he axed a federal program that had saved the US $2.2 billion between 1994 and 1997 and reinstituted a system that lost the government money while earning billions for favored friends.

He used the power of his office to target a former HUD official who had assisted his predecessor in operating the successful program. A HUD legal vendetta destroyed the official’s company before the Justice Department finally admitted there was no case and dropped it.

This is Part 2 of “Fees for Our Friends.” [See part one]

Catherine Austin Fitts had been Assistant Secretary of Housing from 1989 until 1991 under Jack Kemp in the first Bush administration. Catherine Austin Fitts sworn in by Jack KempIn charge of the Federal Housing Administration, she discovered that the FHA mortgage system, which insured mortgages to help American families get cheaper homes and apartments, was being abused to create large profits for the political friends of HUD’s managers. She saw evidence of widespread fraud. Kemp fired her when she tried to reform the system.

 

After Bill Clinton was elected President, Fitts and her Washington D.C. company, Hamilton Securities, were hired by the new HUD Secretary Henry Cisneros to deal with the problem of billions of dollars in defaulted mortgages.

Hamilton developed a program to sell defaulted FHA mortgages instead of foreclosing them. Instead of forcing American families out of their homes, HUD would sell the mortgages, and the buyers –from big investment companies to small real estate agencies — would generally work out payment schedules for owners, who could then remain in their homes.

The first big acution was the SouthEast loan sale of multi-family properties in spring 1995. Before it happened, Hamilton had spent months preventing a Maryland mortgage servicer named John Ervin from being hired as a contractor on the SouthEast sale, because it believed he wasn’t qualified. He was furious, because the sale was going to sell the mortgages he had been servicing for HUD. “Servicing” involved collecting mortgage payments and performing other management duties.

The loan sale program was extremely successful. However, the companies that had been making big profits from the old system didn’t like that. [See more details in Part 1.]

The QUI TAM

At the end of Cisneros’s tenure, a stealth attack of judicial complaints and investigtions was launched against Hamilton and Fitts that tied her up in court battles for years and destroyed the company. The assault was promoted by the HUD Inspector General and by the Washington D.C. US Attorney and the Civil Division of the US Justice Department.

John ErvinIn June 1996, a qui tam was filed by Ervin & Associates of Bethesda, Md., owned by John Ervin, accusing Hamilton and two successful bidders, Goldman, Sachs & Company and PNC (BlackRock), of illegal bidding activities.

John Ervin

A qui tam, or “whistleblower suit,” is a legal action under the Federal False Claims Act by which a member of the public charges that an individual or company has cheated the government. If the charge is proved, the private party gets 15 to 30 percent of the judgment.

By law, a qui tam authorized a 60-day investigation which can be extended only if the investigating agency can show a legitimate reason. The qui tam is filed secretly, but upon receipt of a subpoena, the accused must be informed that he or she is a target.

Ervin had been getting some $7 million a year in HUD contracts to service defaulted mortgages and manage foreclosed properties. In the wake of HUD’s loan sale program, his business dropped. In a sealed qui tam complaint, Ervin alleged that Hamilton Securities had provided insider information and rigged bids for Wall Street companies including Goldman Sachs, BlackRock Capital and Ocwen Financial Corporation. He said it was steering loan sales to them.

The Department of Justice delegated the qui tam investigation to the HUD Inspector General, which is expressly prohibited under the statute, since the agency would be investigating itself. Also in violation of the law, the HUD IG did not inform Hamilton it was the subject of an investigation related to a qui tam. Hamilton would not be informed of the nature of the charges against it for four years, even though there were press leaks accusing Hamilton of breaking the law.

In fact, design books published on the Internet had made the procedures for loan sales at issue in the lawsuit more transparent than they had been for previous sales. Dozens of HUD employees, including representatives of the Offices of General Counsel and Inspector General, had been involved i carrying out and reviewing the process. There were charges that Hamilton leaked the amount of bids received by bidders to other bidders during the bid day. This would have had to occur in a sealed hotel room in the presence of HUD employees.

Hamilton wasn’t Ervin’s only target. He had been fired by HUD for not properly dealing with a financial services contract. According to the General Accounting Office, Ervin filed 37 bid protests concerning HUD contracting actions.

In June 1996, he filed a “Bivens” lawsuit against HUD, the Small Business Administration, HUD Secretary Cisneros and other HUD officials charging them with contract favoritism, insider trading and bid-rigging on behalf of certain “Wall Street” insiders. “Bivens” is a suit charging personal corruption by a government official, meaning that he or she is not charged as a government employee and has to pay legal expenses.

In August, he amended the suit to add Helen Dunlap, who ran the loan sales program, and others who he said were part of a conspiracy. Phone and email attempts to reach Ervin to discuss this story and see evidence for his charges were unavailing. His attorney, Wayne Travell of Leach Travell, Vienna, Va., said, “He’s not interested in talking.”

Under the law, if a qui tam is under seal, it’s against the law to tell anybody about it. But, Fitts said, “Ervin took the Bivens documents, which contained charges against Hamilton but did not name Hamilton as a defendant, and sent them to Congress and reporters. Then the HUD IG’s office could leak and say this is all true. If the Bivens lawsuit tracks the qui tam, and the IG’s office is willing to leak, they have you in a vise. You can’t know the allegations against you and you do not have a forum in which you can address them. But they’re free to market them widely.”

She said, “In July (1996), the leaks began. HUD launched a concerted smear campaign.” She believed that HUD officials were telling reporters that Hamilton was guilty of a crime, even though at that time Hamilton was guilty of a crime, even though at that time Hamilton had received no notice of charges. Their anonymous charges would be repeated by reporters for major media who never cited evidence.

Fitts had lunch with Edward Pound of U.S. News and World Report in the sumer of 1996. She said he told her, “I have it on the highest levels from the IG’s office that they have irrefutable evidence of you being guilty of criminal things.” Fitts inquired, “Where is the evidence?In a phone interview, Pound recalled the lunch, but said, “I don’t think she’s characterized what I’m saying precisely.” He declined to say if he got sucy information from the HUD IG.

But a few months later, Pound write in the magazine: “In one case, a senior HUD employee says, Dunlap and another agency official ‘pressured’ a small company to retain Hamilton. The firm, Williams, Adley & Col, paid Fitts’s company $6.6 million but denies it was forced to hire her firm.” That was one of the allegations that went to trial, but no HUD employee came forward with evidence.

Pound also wrote: “Ervin says that HUD, in collusion with Hamilton, ‘stacked the deck against small investors,’ structuring the note sales so that the ‘big boys’ on Wall Street would win most of the business.” He cited as examples “Goldman Sachs & Co., ‘a very large contributor’ to the Democratic Party, and BlackRock Capital Finance LP, a respected financial powerhouse. Goldman and BlackRock deny any impropriety.”

Pound cited no evidence then and declines to provide it now. In fact, if Pound understood anything about the program, he knew that the computer system did quite the opposite, allowing small players as well as big ones to bid.

Fitts’s lawyer wondered later in a letter to HUD OIG attorney Judith Hetherton how Pound could have quoted from a 1993 Hamilton document, part of a bid proosal, which Hamilton had not given to reporters but which had been provided in confidence to the HUD Inspector General on demand of a subpoena.

On August 6, 1996, Hamilton received the first of many subpoenas in which became years of subpoena warfare. After the first subpoena, Fitts said, she called Susan Gaffney, the HUD Inspector General, and asked if she was going to release the positive audit on the program conducted by the OIG field office in Denver. But Gaffney sat on the audit. She has retired and could not be located for comment.

That year, Cindy Ecker at the HUD Denver IG’s office headed an audit of the loan sales program. After she collected the data, she told loan sales managers that they had done a terrific job and that she was going to write a glowing report. Fitts expected the audit to be issued in August or September. But it didn’t appear. Fitts later found out that Ecker had refused to change her favorable audit and, at the request of the IG, to be critical of the loan sales program.

Fitts’s attorney later got an affidavit from Ecker to the effect that the audit “came to the conclusion that the loan sale program was a tremendously successful example of government re-engineering, which was providing considerable benefits for taxpayers.” Ecker said that, “The Hamilton employees working on the loan sale program appeared to be very honest, intelligent, and dedicated to helping HUD re-engineer itself through the loan sale program.” But she said that “OIG Headquartes began to interfere with the audit,” that “Ms. Hetherton or members of her team insisted that we should find evidence of bid-rigging or other allegations raised by Ervin & Associates.” Ecker Affidavit

Hetherton declined to discuss this or other instances of her involvement in the case. She is now an attorney at the Office of Bar Counsel, District of Columbia Bar, which investigates unethical behavior by attorneys.

Ecker said, “Despite the [Washington IG] investigation team’s insistance, the audit team found no evidence of wrongdoing on Hamilton’s part or by any other company or individual associated with the program. We specifically found no evidence of bid-rigging, fraud or corruption.” She said the field office objected to headquarters’ interference and that the matter contributed to her decision to leave the government.

Cisneros resigned in January 1997 and was replaced by Andrew Cuomo. Cuomo, who had branded himself as a leader in Vice-President Al Gore’s “re-engineering government” movement, abolished Hamilton’s loan sales program and reverted to foreclosiong single-family homes and selling them. Families were “re-engineered” right onto the street. HUD put out big contracts to help manage the growing inventory.

The qui tam lawsuit had been filed with Federal District Court for the District of Columbia and assigned to Judge Charles Richey. The record indicates he was not going to extend the seal which kept the lawsuit secret unless the Justice Department came up with evidence of wrong-doing. Then Richey died suddenly.

In early 1997, Ervin’s qui tam was turned over to Federal District Judge Stanley Sporkin, Stanley Sporkinformer General Counsel of the Central Intelligence Agency.

Stanley Sporkin

Under the law, if the party accused of wrong-doing in a qui tam is subpoenaed, that party must be informed that he or she is the target of a qui tam, even though the complaint is still under seal. In Fitts’s case, the Justice Department and Judge Sporkin took the position thatthe Justice Department could ignore this disclosure provision by delegating the subpoena issuance to HUD’s Office of the Inspector General. Sporkin ignored the statute’s prohibition of delegation of the investigation, saying that Gaffney had independent investigatory authority.

In a hearing closed to Fitts, revealed by transcripts years later, Sporkin noted that the content of Ervin’s qui tam was the same as the Bivens lawsuit. He suggested that two lawsuits be consolidated under one judge. Justice Department attorneys told Sporkin that they couldn’t consolidate, because that would prevent them from taking opposite positions in the two cases. The Department of Justice argued in open court for years in the Bivens case that Ervin’s charges of corruption in the loan sales program were without merit. During the same years, in qui tam closed hearings, Justice took the opposite position, insisting that there was criminality. It was unable to produce any evidence, but kept asserting, “Give us another extension. There’s terrible wrong-doing here.”

The lead supervising attorney was Frank Hunger, head of the Justice Department’s civil division and Al Gore’s brother-in-law. Cuomo was known to be close to Gore.

In October 1997, Cuomo fired Hamilton. He announced to the press that this was “just one case” in a campaign of “zero tolerance for waste, fraud and abuse” at HUD.

Andrew Cuomo at the time
Andrew Cuomo at the timeThe reason for the firing given to Hamilton was a computer glitch that Hamilton had ordered AT&T to fix. AT&T (now Lucent) had assured Hamilton that it could mathematically approximate the program in a way that would obtain within one dollar the same result as a reprogramming. It was wrong. Then AT&T failed to fix
the error a second time, because the technician who was supposed to do it had a heart attack and was transferred when he returned to work. The malfunction caused two loan sales to make $342.8 million when they might have made $346.6 million.

Hamilton reported the events to Assistant Secretary Nic Retsinas and the FHA Comptroller, who informed the Acting General Counsel. Retsinas confirmed that.

Hamilton had a “best efforts” deal with HUD in its advisory contract, not an underwriting relationship. In that case, an advisor is paid a fee and does not share in either the risk of a wrong decision or benefit from an excellent one. That is, it didn’t make a commission on profits, and under its contract it wasn’t obigated to not make any mistakes. In fact, if the computer glitch had been a “failure to perform,” it would have had to give back around $80,000 under the breach clause. Cuomo decided that Hamilton should be penalized for potential opportunity costs.

Fitts explained, “Cash was not lost. If we had not had the glitch and we had chosen other bids and they had all closed with no hitch, then we could have made that much more money.” Some bids normally fail to close, so what was lost was the opportunity to make more profit, maybe. HUD was saying in court that Hamilton’s contract was a flat fee contract advice that penalized Hamilton if it turned out there was any circumstance under which more proceeds could have been earned. HUD argued, in effect, that Hamilton had all the dowside and none of the upside. Sporkin apparently didn’t understand how transactions of this type work, or didn’t care.

HUD withheld $2.1 million due Hamilton for work performed under its contract and invoiced for work done since 1994. Fitts filed a legal motion in Federal District Court for a temporary restraining order to stop HUD’s withholding of Hamilton’s monies. The case was assigned to Judge Sporkin, who would not grant the order.

Cuomo cancelled the Hamilton/AT&T optimized auctions of FHA mortgages. His reason, ironically, was that HUD could not do the loan sales without Hamilton! Even that was not true: HUD’s three other financial advisors had been trained and worked on HUD loan sales with Hamilton. HUD owned all the design books for the sales, which made it easy for a qualified firm to carry out the operation.

Cuomo reinstated the old HUD cash-cow-for-political-friends system. HOmes were foreclosed, suspicious mortgages torn up, and the US Treasury got back 50 percent or less than they had gotten under the loan sales.

Repeated requests to Cuomo’s press secretary for an interview about this story were unavailing.

Hamilton would be subject to eighteen audits and investigations and seven years of litigation, all in violation of qui tam legal protections. Anonymous HUD officials would smear the company without ever offering proof of wrong-doing, and their charges would be repeated by reporters for major media such as The Washington Times and U.S. News and World Report who didn’t cite evidence.

Fitts would read about a subpoena in The Washington Times before Hamilton got it. The Times on October 24, 1997, ran an article headlined, “HUD orders fired firm to surrender documents.” The subpoena to which the article referred was served on Hamilton just before 5 pm on the day the article was published. That meant the newspaper had been informed of the subpoena the day before.

Fitts’ lawyer wrote Hetherton, “We can think of no possible source for such information other than HUD’s Office of the Inspector General.” It asked to know which HUD individuals knew of the subpoena and if Hetherton was taking steps to determine who had leaked the information. It didn’t get an answer.

In spite of the qui tam disclosure rule, Hamilton would not be informed that it was named as a defendant in the action for one-and -a-half years, not until December 1997, when its attorneys had a conersation with lawyers in the Justice Department. Even then, Hamilton was not informed of the identity of the complainant or the exact nature of the charges.

The complaint was not unsealed for three-and-a-half years, not until April 2000. And not till December 2000 were the secret court transcripts opened, and then some transcripts were missing. It was the first time Fitts could prove that Ervin had filed the qui tam. It was still another two years before Ervin and the government were required to put forward evidence supporting their claims and before Hamilton and its attorneys could refute them in court.

Fitts said that she and those helping her lived with years of physical harassment and surveillance. She said, “This included break-ins; stalking; having house guests followed; friends, colleagues and family warned not to associate with me; dead animals left on the doormat and worse. My uncle was called by the HUD IG’s office, which tried to persuade him I was a criminal. He got a knock on the door at night at his home, and there were four HUD IG and FBI agents to deliver a subpoena. He was shaken. Our in-house counsel had her tires slashed. Checks sent to her didn’t arrive.”

Another blow came when Hamilton was informed in the fall of 1997 by its errors and omissions insurer, an affiliate of AIG — headed by Mario Cuomo’s friend Hank Greenberg — that the insurer would not pay Hamilton’s legal defense costs, because it believed that Hamilton was gulty of fraud, not covered by the policy. Hamilton finally got AIG to start funding some of the defense in March 1998, but the insurance company insisted on firing Hamilton’s lawyers and putting in attorneys who had no previous experience with Hamilton, its HUD contracts and the case.

HUD refused to process the payment of money due Hamilton from previously closed-out contracts. At the same time that HUD was cutting off Hamiton’s revenues, it required the company to perform time-consuming and costly work to close out other contracts. There was a full court press. The IRS put the Hamilton 40lK under audit in 1997, so Fitts could not use it as collateral to finance required closeout expenses. Finally, for closeout and attorney’s fees, she busted her personal $500,000 401K, thereby incurring $225,000 in taxes and penalties.

She said, “I think it was all intentional, a coordinated plan.” She said, “Under the law, in theory, before irreparable harm is done, you get to know your accuser and can refute the allegations. This was engineered so they could destroy Hamilton’s revenues and my assets before I could address the allegations.”

HUD IG attorney Hetherton convinced Judge Sporkin to approve the appointment of a special master so that all of Hamilton’s files and records would be put under court control. The special master oversaw a raid on Hamilton’s office at 7 Dupont Circle in March 1998 by a team of HUD and FBI aents who seized all documents, computer files and back-up tapes and, according to Fitts, ravaged proprietary programs to an unrecoverable state.

Hamilton had been saving all documents and had not thrown out weeks of trash because of ambiguities in subpoenas. Trash was piled high in bags in the office stairwells and basement. The property manager let HUD and FBI agents into the basement of the buliding, where the agents found empty totems — containers for materials designated to be shredded. The manager saw government agents bring the totems upstairs and fill them with trash and Hamilton documents.

Then the manager saw a wlman named “Judy,” who identified herself as being from the OIG’s office, take photos of the totems. He later swore, “I told her that the totems had not been flled yestereday, like they were then, when I first showed them to the FBI agent.” According to Fitts, the OIOG official, apparently Judity Hetherton, told him, “Shut up, this is none of your business.”

The property manager called Fitts to relate the story. Fitts said, “He told us, ‘They’re trying to frame you. I want to give an affidavit.’ His affidavit describing the incident was turned over to the special master. [property manager’s affidavit]

Meanwhile, Hetherton wrote a letter to Fitts and represented to the court that Hamilton was attempting to destroy evidence. In fact, shredding the accounting files would have have destroyed anything essential, because they were print-outs of what was in Hamilton’s computerized accounting systems, copies of which the IG had seized. As indicated earlier, Hetherton declined to discuss the Hamilton case.

Fitts had been suspicious that mortgages securities were being issued for phantom properties, or at least in amounts in excess of underlying collateral. She explained that an informant had told her, “They take 20 houses in a neighborhood and issue ten mortgages on each house. Then they issue mortgage-back securities with 200 mortgages. They churn defaults, one of the mortgages on each house, to generate the money to pay for debt service for mortgages on 200 houses. You have all these collateralized mortgages outstanding, paying debt service not with legitimate property cash flows but with FHA insurance proceedds. You default the mortgage, the lender makes an insurance claim against FHA, and that gives you cash. You turn the mortgages into the FHA and it gives you use that to pay the debt service on the pool.” It was a Ponzi scheme.

Hamilton had developed what it called Community Wizard software to map neighborhoods and compare the trading value of mortgage-backed securities with street level data on the houses serving as collateral for the mortgages. Fitts said, “It was clear they wanted to steal and destroyo our data bases and tools.” It would have exposed the churn. Years after the Hamilton office was raided and the documents finally turned back from court control, Fitts got back the program documentation books, but many CDs with the most valuable software were gone.

Fitts filed complaints against the HUD IG, supported by the Cindy Ecker and property manager affidavits, with President Clinton’s Council on Integrity and Efficiency, but the Council declined to consider them.

Though Ervin had been fired, his contract cancelled for failure to perform, and though he had filed a Bivens lawsuit against both HUD and its officials, in October 1998, HUD under Andrew Cuomo engineered a two-year, no-bid $825,000 contract for Ervin’s company through Ginnie Mae, the Government National Mortgage Association. It was a substantial amount of money for a small operation qualified to do only low level functions.

Then HUD did a deal with Ervin, settling his lawsuits against HUD for $2 million. As part of the settlement, the government officials accused in the Bivens action who were also named in the qui tam were let off the hook, even though, if the charges against Hamilton being levied in the name of the government by Ervin in the qui tam were true, such officials would also have been guilty. Fitts wondered if Cuomo was financing the litigation against Hamilton through the back door.

Helen Dunlap, who ran the loan sales program, said she thought Ervin was being paid to stop his suit, because “the work of the department was being blocked John’s consistent attempts to disrupt. He had poured molasses into the procurement process at HUD and would have significantly impacted on Andrew’s ability to get things done.” She added, “John has a pattern. This was not his first or second or third lawsuit gumming up the works to where somebody settles. The reason for settlement was the consequences of what were literally a FOIA [Freedom of Information Act request] and a protest a day.” According to this view, Cuomo chose to give in to blackmail.

Hamilton sued Ervin in June 1999 for tortuous interfence with Hamilton’s HUD contract. The qui tam and Hamilton’s case were consolidated by Sporkin at Ervin’s request. The effect was to prevent any hearing of Hamilton’s evidence against Ervin and any legal “discovery” of Ervin by Hamilton and to deny Hamilton a jury trial.

Meanwhile, court filings later revealed that Justice and HUD had provided Ervin with information that he used to file an amended complaint in 1999. Fitts said: “He would file FOIAs and get information from them. He would go on a fishing expedition when under the law he’s not allowed to do it. He repackaged the information and made more allegations that made it possible to continue the fishing expedition. They [Ervin and HUD] were feeing off each other.”

It was legal, but it was not the way the qui tam law was designed to be used. Given the detailed information the government already had about Hamilton’s operations, there was no way Ervin could have been telling it something it didn’t already know. It was an error of the court not to rule that Ervin as not an original source.

Hamilton’s lawyer Michael McManus commented, “Qui tams in general are being abused by the Justice Department. They use it as a money-making operation. We’re in tight budgetary times. The govelrnment sees this as an opportunity to make money without having to spend a lot of their own resources to do it. And for any money that flows back into the Treasury, somebody gets a nice pat on the back.”

In August 1999, the FBI, to which the Justice Department had referred the criminal part of the investigation, documented that it had found “no concerns, suspicions, or evidence of collusion involving the HUD loan sales. Even losing bidders did not attribute their lack of success to collusion or other bidders having inside information.” But Hamilton was not informed of this finding until after the court documents were unsealed the next year. It learned it not in the unsealed records, but through a subsequent FOIA request of FBI documents.

Fitts said, “Finally, in September 1999, I was invited by the Department of Justice and the HUD IG to a meeting. It was the most infuriating five hours of my life. No one there had a shred of evidence of any wrong-doing. They hadn’t bothered to read the material on the loan sales. The guys from the HUD IG’s office were too embarrassed to look at me; they were looking at their feet. Here I was, a person who had worked to stop corruption in government, and the HUD IG was trying to destroy me.”

Anthony Alexis, the Assistant US Attorney, said to McManus, “I’m recommending this be shut down.”

Fitts called a lawyer who had dealt successfully with HUD corruption and said, “The qui tam will be unsealed; it’s over.” He replied, “No. Alexis will recommend it; then he will be moved off the case. He may be demoted as punishment for not getting you. A new guy will be moved on, and it will start all over.”

After Alexis made the recommendation, he was removed from the case. In September 1999, Assistant US Attorney Rudy Contreras was assigned to continue the investigation. Alexis did not deny to this reporter that he had recommended the case be dropped, but he declined to elaborate about that or his change of assignment, and he referred questions to a Justice Department public relations official.

So, Fitts and her team set to work launching a website in early 2000 to post legal documentation and summries of what was happening. They posted hundreds of documents from the twelve pieces of litigation. Sporkin had extende dthe seal of the legal 60-day investigation into 1400 days: a four-year assault. But after Fitts started posting the case documents online, the qui tam was suddenly unsealed, and the case began to unravel.

In April 2000, the Justice Department closed its investigation and notified the court that it declined to participate in Ervin’s qui tam. That indicated that Justice did not believe in the alleged evidence. It was months more before Federal District Judge Louis F. Oberdorfer, who replaced Sporkin on the case when the latter left the bench, unsealed the transcripts.

Investigations had been carried out by the Justice Department’s Civil, Criminal and Anti-trust divisions, the FBI, and the US Attorney’s Office in Washington. All the government investigators except for the Inspector General at HUD found that there was no proof of wrong-doing. The HUD IG announced it would continue the investigation. And Cuomo still refused to pay Hamilton the $2.1 million due it.

Cuomo resigned as HUD Secretary in 2001 when George W. Bush took office. Throughout Cuomo’s tenure, HUD’s Single-Family Mortgage Insurance Program remained on the annual General Accounting Office (GAO) list of federal programs vulnerable to waste, fraud, abuse and mismanagement.

The qui tam trial finally began in 2004. Now the Republicans were back in power. Hamilton got information on discovery that showed that the Justice Department knew all along there was no case. The Department had paid an expert to look at the loan sales, and he had informed his client that Ervin’s analysis in the qui tam complaint was invalid, that Hamilton’s numbers were correct and that there had been no damages to HUD.

Fitts said, “It turned out they never had evidence of wrongdoing the whole way along, and they knew it. The whole thing was a scam. Why did the government spend millions of dollars over nine years and never stop when it had multiple chances to dismiss?” Why did Justice want to target Hamilton?

Fitts points out that HUD cases prosecuted by the Justice Department were generating revenues from civil penalties. Ervin would say in a deposition that he referred $40 million of civil money penalty opportunities to Justice. Fitts said, “He got contracts from HUD as part of his mortgage servicing contract, but he actually used them to troll for enforcement opportunities for Justice. A developer told me that they would come in and say, “We’re going to audit you, but we’ll go away if you pay us $25,000.’ It’s greenmail. ‘We’ll settle for $25,000.’ The guy knows he’s innocent, but it would cost him more to fight. The loan sales were hurting their [Justice’s and HUD OIG’s] business.”

Fitts Catherine Austin Fitts todayhad used her own money and liquidated Hamilton’s assets to pay for compliance with court demands; to acquire legal representation for the qui tam litigation; and to seek recovery of the $2.1 million due Hamilton. She estimates the costs at $6 million.

In 2004, Hamilton won a Court of Claims suit that it had filed against HUD in 1998 for payment of its outstanding advisory fees. The judge ruled that the $3.8 million “loss” claimed by HUD/Ervin in the qui tam case was not a sufficient justification to withhold payment and that in any case, HUD’s contract did not obligate Hamilton to deliver an optimization program, much less deliver perfect loan sales results. HUD and Justice appealed the case with permission from the Solicitor General’s Office.

Fitts noted, “They [the government, in the qui tam case] took the position that a contractor was liable for [lost] opportunity costs. Under that rationale, AMS and banks running HUD accounts are responsible for up to $59 billion missing from the government. It’s a hell of a precedent!” [See part one.]

After the Court of Claims found in her favor, Fitts went into Louis Oberdorfer’s Federal District Court in the qui tam case. Before trial started, all but five of the allegations were dropped or found baseless.

Judge Oberdorfer found in Ervin’s favor with respect to the alleged opportunity “loss” of $1.5 million (half a percent of loan sale proceeds) on one of the two loan sales involving the computer glitch that Hamilton had reported to the government. The judge ruled that Ervin was the original source of the evidence presented even though he had learned about it from public records a year after Hamilton’s report of the glitch to HUD and had amended his case to include the information.

The judge found no liability for the original error, only for its repetition in the second HUD loan sale which he considered recklessness on Hamilton’s part. He decided this although undisputed evidence showed that the repetition of the glitch was the fault of Lucent/Bell Labs, Hamilton’s subcontractor, which failed to correct the error as ordered, not Hamilton, and though there had been no material harm to the government.

The judge ruled in Hamilton’s favor on the other counts. The charges of contract fraud, bid rigging and leaking inside information had proved unfounded.

The case was on appeal, when Hamilton’s insurance company, AIG, said it wanted to settle. In the past, Fitts had refused, arguing that Ervin had no evidence. But the case was at a stalemate, with opposing decisions in the Court of Claims and US District Court, and when the government is supporting one side in a civil action, it has deeper pockets than any private citizen. Besides, she thought that rising inflation would wipe out a bigger settlement that came later. She agreed to a resolution in early 2006.

AIG paid the government and Ervin’s insurance company and the government paid Hamilton the money it owed, but after the costs of fighting the case, Fitts got pennies on the dollar. She got millions in insider knowledge.

Tuesday, August 22, 2006

Fees for Our Friends: The Scandal that Taints Andrew Cuomo

Filed under: Government Abuse,Insider Dealing,Scoops — Lucy Komisar @ 1:09 pm

By Lucy Komisar

Aug 22, 2006 [Part 1]

As Secretary of HUD, Andrew Cuomo reversed the policy of selling defaulted mortgages so that families could keep their homes. Instead, he chose to foreclose on mortgages, which meant that families lost their homes and insiders cleaned up on fire-sale priced properties. The US Treasury also lost billions.

On September 12th, a primary will choose the Democratic candidate for New York Attorney General. The front runner is Andrew Cuomo. Andrew Cuomo

Cuomo seeks to succeed Eliot Spitzer, who made a national reputation by targeting corrupt Wall Street and corporate officials. Spitzer has been publicly denounced by his targets, including former AIG chairman Maurice “Hank” Greenberg, accused of cookingthe books to present afraudulent picture of his company’s financial position.

In December, Cuomo’s father, former Governor Mario Cuomo, announced he was helping to launch a public relations campaign on Greenberg’s behalf.

Would Attorney General Andrew Cuomo go after Greenberg or other high-profile miscreants? A look at his tenure as Bill Clinton’s Secretary of Housing and Urban Development raises serious doubts.

When Cuomo became HUD Secretary in 1997, he axed a federal program that had saved the U.S. $2.2 billion between 1994 and 1997 and reinstituted a system that lost the government money while earning billions for favored friends. He fired a former HUD official whose company designed the program.

That wasn’t the only money big money lost. When Cuomo was secretary, HUD reported that $59 billion was missing! It couldn’t say where they money went, because it failed to produce audited financial statements.

The Department of Housing and Urban Development is renowned for corruption. Historically, fraud has been so pervasive and blatant that the Sopranos episode on it was disturbingly realistic.

Season 4, Episode 46: Senator Zellman, Maurice Tiffen and Tony meet at a Russian Bath House and hatch the latest investment scheme to defraud New Jersey HUD (this is a federal sponsored program, not New Jersey, Housing and Urban Development). All Maurice’s minority organization has to do is take ownership and mortgages on dilapidated properties and the NJHUD will assume the lending risks involved. In the end, everybody will leave with a piece of the pie.

Jack Blum, Jack Bluma Washington lawyer, in the mid-1970s was the chief investigator for Senator Frank Church’s subcommittee on multinational corporations. He exposed the Lockheed bribery scandal and other examples of corporate corruption. Later, he headed Senator John Kerry’s investigations into Iran Contra drug connections and the corrupt bank, BCCI. Blum says, “I know about HUD since the 1970s — the fake mortgages. It’s been going on forever. She [the former HUD official] doesn’t understand that what she got caught up in is part of a pattern.”

This story starts in 1989 with Catherine Austin Fitts, then a savvy Wall Street investment banker. Catherine Austin Fitts at the time

Fitts, who everyone called “Austin,” had an establishment pedigree. She was graduated from the Wharton School of Business at the University of Pennsylvania in 1978. She was a partner at Dillon Read, the white shoe investment firm headed by Nicholas Brady, where she made a name for herself when she recapitalized the New York City subway and bus systems and arranged funding for the City University of New York. A February 23, 1987 Business Week article called her the “Wonder Woman of Muni Bonds.” She was a high-profile, successful, Wall Street Republican who knew a lot about financial management.

Fitts got the chance to join the new George H.W. Bush administration as Assistant Secretary of Housing. She recalls, “When I told Nick Brady [who’d become Bush’s Treasury Secretary] that I was going to work at HUD, he said, “You can’t go to HUD — HUD is a sewer.”

Catherine Austin Fitts is sworn by Jack Kemp to be his Assistant Secretary. Catherine Austin Fitts sworn in by Jack Kemp

She discovered Brady was right. Working for HUD Secretary Jack Kemp, she saw him run the agency to generate fees for friends.

One of them was Andrew Cuomo. Fitts says that in 1989, Kemp ordered her to allocate “Section 8” rental subsidies without a competitive process. These were subsidies that went directly to builder/landlords for apartments they would rent at below market rates. She says that when she refused to award subsidies illegally, they were surreptitiously approved by staff while she was out of town. She got them stopped by appealing to the HUD General Counsel. One of Fitts’s deputies told her later that the illegal payments were for Cuomo’s Housing Enterprise for the Less Privileged (HELP).

A spokesperson for Kemp declined to comment on the record. Chris Greer, then head of the HUD Inspector General’s audit team, said, “This is an accurate description. It amazed us in OIG [Office of Inspector General] at the time as Congress was in midst of holding hearings on the HUD scandal involving the Mod Rehab [Section 8] program. There is little evidence about Cuomo on this as Fitts stopped the deal.”

When Bill Clinton was elected President, he appointed former San Antonio mayor, Henry Cisneros, to head HUD. HUD then awarded a contract to Fitts’s company, Hamilton Securities, to reform the system of dealing with FHA defaulted mortgages.

But Cisneros was forced out by a convenient sex scandal – lying about the amount of, but not the fact, of payments to a former girlfriend. Cuomo, appointed to take Cisneros’s place, was not held to the same standard. After Cuomo was nominated for the post, he lied in a form filed with the Senate Banking, Housing, and Urban Affairs Committee by failing to admit that he had been under investigation by federal banking regulators for bank fraud, for participating in a group that surreptitiously tried to take over a Florida savings bank. Attorney General Janet Reno, who had spent at least $9 million in a four-year investigation of Cisneros’s girlfriend problem, declined to look into Cuomo’s link to bank fraud.

This story begins with Fitts’s discovery of the Bush fees for friends operation, because that’s what Cuomo reverted to after Cisneros left.

Fitts had been appointed to run HUD’s Federal Housing Administration (FHA), which insures mortgages so that homebuyers can borrow at reduced rates. Or so that landlords can offer below-market rents for tenants.

In 1989, HUD had $320 billion in mortgage insurance outstanding and was originating $50 to $100 billion of new mortgage insurance a year. Its largest fund provided mortgage insurance for single family homes. It also provided mortgage insurance for apartment buildings, hospitals, and nursing homes.

If the borrowers defaulted on FHA insured mortgages, the government would take over the loans. HUD could foreclose and sell the properties on the market or it could hire contractors to collect rent and manage the properties.

Dealing with billions of dollars in defaulted mortgages, Fitts discovered that the big-time beneficiaries of the HUD system were political friends. Sometimes, insiders kept their properties even though they did not pay their mortgage debts. Or defaulted mortgages and foreclosed homes were sold to favored investors at below market prices. Or friends got big contracts to manage large inventories of defaulted properties. These scams lost taxpayers billions of dollars every year, skimming off monies that were supposed to be returned as refunds to homeowners with FHA mortgages or to support government programs for affordable housing.

But the system was designed to hide such dodgy operations. When Fitts arrived at HUD, she discovered the books were a mess. She ordered an accounting of FHA finances, including of HUD mortgages and properties in each city. She discovered that, “The data base would show you had a building on a property. You’d go to that place and get off the plane and there was nothing there. We also had neighborhoods where you had significant default patterns that didn’t make any sense — properties that defaulted one, two, three times in a year. You’re losing huge amounts of money and neighborhoods were being harmed and it didn’t make any sense.”

She persuaded Secretary Kemp and the Office of Management and Budget of the need for audited financial statements. She helped design and draft the HUD Reform Act of 1989, which required the agency to publish annual audits. It was the basis of a later law requiring all federal agencies to do the same. Greer confirmed that, adding, “What I liked most about Fitts when she was at HUD as Assistant Secretary and later as a contractor was the fact that she was a stickler for accountability and financial integrity. She did much to improve that at HUD.”

Fitts had many run-ins with Kemp Jack Kemp todayover what she came to see as fees for friends. In one case, she said, Kemp wanted to provide financial relief to Puller Mortgage, an Indiana company which in 3-and-a-half years had originated more than $400 million in FHA mortgage insurance on multi-family properties. The majority of the mortgages were for projects where the first year-and-a-half to three years’ payments were deducted in advance from the money supplied, so no payments had to be made until rents came in. But Fitts discovered that the portfolio already had an 18-percent default rate. She asked her staff how that could possibly be. They informed her nervously that company founder Ken Puller was a major Republican contributor. Fitts ruled that Puller Mortgage would not get special financing to cover the suspicious losses. She said that Kemp, furious, summoned her to his office and shouted, “How dare you shut Puller down!”

A Kemp spokesman declined to comment. Chris Greer said, “Puller Mortgage was a very bad lender costing HUD millions of dollars over the years. HUD did provide such relief on several occasions. Puller was subject to many audits and investigations, and Fitts was involved in discontinuing that relief and getting him debarred. Puller definitely had Republican connections.”

Fitts repeatedly opposed political favors, and in August 1990, after 18 months, Kemp fired her.

HAMILTON

When Fitts left HUD, she started the Hamilton Securities Group, Inc.,Hamilton Securities Group a Washington investment bank that developed specialized financial software and provided financial advisory and investment banking services for public and private clients. The firm was named after the first U.S. Treasury Secretary, Alexander Hamilton, whom Fitts admired because he had insisted on paying the debt of the Confederation of States that preceded the nation’s founding.

She was still highly thought of in top official circles. Bush’s Treasury Secretary Nick Brady asked her to serve as a Governor of the Federal Reserve, but she declined. John Sununu, Bush White House Chief of Staff, had her appointed to the board of Sallie Mae, the government-sponsored corporation that helps provide financing for student loans. Harry Albright, selected by New York District Attorney Robert Morgenthau to resolve the failure of Washington’s First American Bank, which involved former Defense Secretary Clark Clifford and the corrupt, money-laundering bank, BCCI, put her on a board to help with the clean-up. Albright had been Chairman of Battery Park City Authority when Hamilton was its financial advisor. Albright says now, “I thought highly of her; I thought she was a person of great integrity.” Hamilton’s software and database innovations prompted Federal Reserve Chairman Alan Greenspan to invite it to brief Federal Reserve staff about its research into institutional equity investment in real estate.

Then Fitts got another chance at HUD reform. After Bill Clinton became President, Hamilton in 1994 won a competitive bid to serve as the lead financial advisor to the FHA under HUD Secretary Henry Cisneros.

By the time the Clinton team came in, defaults on HUD-insured properties were so enormous, that HUD staff was unable to handle the servicing of mortgages transferred to it when it paid insurance claims by the original lenders. There was $12 billion in defaulted mortgages: $4 billion on single-family homes and $8 billion on multi-family projects. Hamilton’s analysis at the time showed an industry average recovery rate on defaulted single-family mortgages of 75 cents on the dollar. But in 1993 and 94, HUD had a recovery rate of only 35 cents. Based on this loss, HUD would need huge Congressional appropriations to continue to issue mortgage insurance for the homes and apartment buildings Americans needed.

When FHA took back defaulted single-family mortgages, in most cases it foreclosed, took physical possession of the properties and sold them. Until the sale, it would hire a contractor to manage the properties. Hamilton began to consider whether HUD should switch from a policy of foreclosing to a policy of selling the mortgages. That would keep many people from losing their homes and would also help neighborhoods, since when properties were empty and deteriorated, community housing values dropped.

Reviewing information on HUD mortgage portfolios, Hamilton found patterns that Fitts later realized showed systemic fraud. They could have been Sopranos stories. It appeared that some mortgages were financing homes with appraisals inflated above market prices, that some defaulted mortgages or foreclosed homes owned by HUD were being passed back to private parties at below market values, and that some mortgages for ghost properties.

She also suspected money laundering. She said, “We found one HUD-owned multi-family mortgage in 1994 that had been in default for 11 years, with no debt service payments, and yet the property had a cash flow.” She explained, “HUD was intentionally not collecting payments in situations where there was sufficient cash flow to do so. Why? On several occasions, I had owners tell me that they had been promised various things outside of their contracts. Then they would freeze and not explain. These side deals seemed to have more weight than the actual contracts.”

Fitts said, “I believe that one of the reasons that some people in the business wanted to continue the practice of foreclosing on defaulted mortgages rather than selling them is that on foreclosure, the mortgage is extinguished. If a fraudulent mortgage is sold, the buyer acquires evidence of the fraud.”

Traditional beneficiaries of the existing system included big time developers and property management companies such as the Harvard Endowment-owned National Housing Partnership (NHP), Andrew Farkas’ Insignia, and mortgage bankers such the NHP-affiliated Washington Mortgage (WMF). NHP managed a complex web of private partnerships that had been set up as real estate tax shelters.

Fitts wanted to break up the monopoly system that allowed a select group to make money at taxpayers’ expense. She wanted to broaden participation in mortgage auctions to enable local interests that might know and care about their own towns and neighborhoods to acquire properties at fair market prices.

She wanted to stop insider deals. She said, “I’ll never forget meeting with owners of apartment properties with mortgages that had been acquired by HUD, mostly because they were in default. When we explained we planned to sell their mortgages at competitively bid sealed auctions, they went wild. They said, ‘But we have a deal.’ When I would say, ‘Can you be more specific?’ they would shut up and walk away. Everything was run according to deals, and we weren’t allowed to know what they were. A couple of people came to me and swore that 100, 200, 300 properties were transferred secretly to this or that guy as part of a political deal. That would help explain the low recovery rates.”

Hamilton developed and instituted a computer program Hamilton Securities Community Wizardthat optimized the sale of defaulted FHA mortgages, making it much easier for a more diverse pool of bidders to participate. It did this with its own analytic software tools and with optimization bidding software which it contracted from AT&T’s Bell Labs (now Lucent Technologies). The bids were put into a computer model which figured all possible combinations and calculations and then picked the bids that made the most money for the FHA. The new bidding system, which included online access to portfolio and bidding information, meant that HUD attracted new investors interested in buying defaulted mortgages and therefore got higher recoveries on those mortgages. Fitts said, “The big, medium guys and little guys had never competed so directly before in the distressed mortgage markets. It drove the competition off the charts. You couldn’t out-game it.”

Fitts explained, “If you’re a securities firm, you want to buy a lot at once, say $300 million worth to sell in the mortgage-backed securities market. If you’re a mortgage firm, you may want to buy one by one, but of a certain size. If you’re a small real estate firm, you’re happy to buy one. If you’re a large real estate firm, you may want all of HUD’s mortgages on certain types of properties in several places.”

Hamilton’s first large HUD loan sale, “the SouthEast,” in spring 1995 was a roaring success. The big winner was GE Capital which, along with some small bidders, paid $710 million for a portfolio that HUD staff had valued at only $286 million. The performance stunned both traditional HUD constituencies and Wall Street. Fitts recalls, “When I told the HUD IG audit team the results, there was a long silence, and then Chris Greer, the head of the team, said, ‘What this means is that we have been getting screwed all along. By a lot.’” Greer confirmed that.

Fitts said, “By running the inside baseball game, HUD had been losing a huge amount. This was a wakeup call to guys at HUD that when you have transparency and competition you could significantly improve recovery rates.” It meant that Congress could appropriate less money to fund new mortgage insurance.

In a series of sales run by Hamilton between 1994 and 1997, HUD sold 98,640 single-family mortgages and 1,093 multi-family mortgages that represented $10 billion in mortgage debt. Recovery rates on these defaulted mortgages were 70 to 90 percent, up from HUD’s previous 35 percent. These sales generated more than $2.2 billion, allowing HUD to issue more new mortgage insurance at a lower cost. An article in the April 10, 1995 issue of Barron’s, declared, “Believe It or Not, HUD Finally Does Something Right for Taxpayers.” (The reporter, James McTague, no fan of the agency, wrote that leaving a mortgage loan at HUD for servicing was like leaving your car on the side of the Cross Bronx Expressway for a tune-up.)

The higher recovery rates would also affect homebuyers positively. Fitts explained, “If you charge mortgage insurance premiums and make a profit in the single-family fund, you are supposed to refund that back to the people financing the homes. If you have a mutual mortgage insurance fund and run it at a lower-than-optimal recovery rate, it is a way of cheating the largely non-defaulting single-family borrowers, as a group, out of their premium refunds to support lower premiums for the high-risk multi-family borrowers, whose mortgages had higher default rates. HUD is charging more money than necessary for the single-family premiums. They skim off the premium profits and transfer it to their pals in the housing sector. This hurts millions of Americans using FHA mortgage insurance to finance their homes.” America’s home-owners were being cheated.

“While the loan sales were a great success for taxpayers, homeowners and communities,” she noted, “it turned out that they were a significant threat to the traditional interests that fed at the trough of HUD programs, contracts and mortgage operations.” HUD officials and investors realized that the loan sale program was going to be a success and lead to changes in control over the multi-family mortgage portfolio, transferring it into the hands of high bidders rather than the good ole boys who had had so much influence over HUD for years.

Fitts explained, “You had a variety of parties making money on HUD’s holding onto large portfolios of defaulted loans. And we were now requiring investors like Harvard Endowment to pay full price for the mortgages on their own assets. That meant they had to finance the projects at 70 to 90 percent rather than 35 percent of the old debt. That affected the insider developers and property management companies.”

In January and April of 1996, still under Cisneros, a new HUD contract was awarded to Hamilton to serve as the FHA’s lead financial advisor for $10 million a year for two years. HUD also appointed three other firms — Merrill Lynch, Cushman & Wakefield and Ernst & Young — as financial advisors.

That year, Cindy Ecker at the HUD Denver IG [Inspector General] office began an audit of the loan sales program. After she collected the data, she told loan sales managers that they had done a terrific job and that she was going to write a glowing report. Fitts expected the audit to be issued in August or September. But it didn’t appear. Fitts later found out that Ecker had refused to change her favorable audit and, at the request of the IG, to be critical of the loan sales program.

Michael Stegman worked as head of the HUD Office of Policy Development and Research and then was acting Chief of Staff at the end of the Cisneros term and beginning of Cuomo’s tenure. He is now Director, Center for Community Capitalism, at the Institute of Private Enterprise, the University of North Carolina. He said the Hamilton project was “really innovative and, from what I recall, was returning to HUD more money on the dollar than was existing methods for disposing of HUD-held assets.”

But policies that benefited homeowners and taxpayers didn’t seem to be HUD’s priority. Fitts recalled, “In 1995, we were finding many places where the costs of rehabbing the property underlying defaulted single-family mortgages held by HUD was significantly cheaper than building new public housing or continuing to renew project-based assistance on private apartment buildings.” She went to see an official of the Hope VI new public housing program, which is very expensive on a per-unit basis. Fitts pointed out that HUD could spend $50,000 per unit to rehab single family-homes owned by the FHA rather than spending $150,000-250,000 including HUD overhead to create new public housing in the same community. Fitts said that the official replied, “But how would we generate fees for our friends?”

PROTECTING FEES FOR FRIENDS

Andrew Cuomo had been appointed HUD Assistant Secretary of Community Development (CDP) under Cisneros. In 1996, Inspector General audit chief Chris Greer was in a meeting with Cuomo and HUD IG Susan Gaffney. Cuomo told them that he was planning to get rid of Fitts and Hamilton Securities.

Andrew Cuomo at the timeAndrew Cuomo, at the time

Greer recalled, “It had to do with some audits we were doing. There were proposals that would affect a bunch of folks in New York that had a lot of money and who could help Cuomo. One proposal was called ‘mark to market’ and had to do with the Section 8 [rental subsidies] program. I was managing all the multi-family programs at the time. Cuomo wanted to do away with what we tried to put in place, the ‘mark to market’ program. It would have killed a HUD tax-avoidance program.”

Mark to market means assigning a value based on the current market price. Fitts explained, “Mark to market aimed to deal with a huge problem that was starting to rear its ugly head in the mid-90s when the bad decisions of the previous 30 years caught up with HUD. It had issued 30-or 40-year mortgage insurance to finance multi-family properties for low-income tenants. It had also issued Section 8 rent subsidy contracts that were project-based [awarded to the owner, not the tenant] to support the same projects. The amount needed pay interest on the debt had climbed above the rents collected by the projects, so in many cases HUD subsidies had increased the Section 8 rents to above-market rates in order to support the HUD-insured debt. Then in the mid-90s, the Section 8 rent contracts expired. HUD renewed the contracts on a year-to-year basis and sometimes issued tenant-based, as opposed to project-based vouchers.”

She noted, “Tenant-based vouchers were unpopular with project owners, because tenants could go to other projects and take the subsidies with them. Hamilton advised HUD that, long-term, the wisest strategy was to keep Section 8 rent subsidies at market rates and take a one-time loss on the HUD-insured debt so that the properties could be refinanced at market rates in the private markets. This strategy, however, would have had a dramatically adverse impact on the project owners such as NHP, whose properties would no longer be propped up by the government.”

Fitts explained the tax issue: “Many of the multi-family mortgages were on apartment buildings that had been financed as tax shelters. Since HUD programs gave rent subsidies to developers rather than tenants, the developers could use HUD mortgages to finance the buildings based on the value created by the subsidies. The tax shelter partnerships used to finance the properties were able to get tax write-offs on the full value of the properties — including that portion of the value created from the subsidy and financed with the HUD mortgages. If the partnership defaulted on the mortgage, HUD might tear up or reduce the mortgage owed, but then investors would be forced to recognize the debt forgiveness as income.” And they would have to pay more taxes.

She said, “Cuomo wanted either to give the defaulting owners more subsidies or reengineer their mortgages, or both, in such a way that bolstered the value of the buildings and let investors keep healthy tax deductions. In other words, he wanted either to pay higher than market rents in the form of Section 8 subsidies, or insure higher than market debt, all at the expense of the taxpayers, in order to avoid the tax consequences to the owner of financing the projects at market rates. Instead of saying what’s best for the community and taxpayers, to produce affordable housing at the lowest cost to taxpayers, he said, ‘How can we generate fees for our friends.’ There was a tax shelter refinancing pork fest.”

Greer pointed out, “If there had been ‘mark to market,’ it would treat the HUD Section 8 program like private mortgages in private industry and market them at their true values. You wouldn’t have inflated subsidies, and you would have had more subsidies to give more people. Or you would save tremendous amounts of money that could be used for other purposes. Billions of dollars. Hamilton was a driver on that along with a couple of other folks in HUD. But Cuomo didn’t do it. Money was wasted on these mortgages, the money that went into the fat cats’ pockets.”

He added, “Cuomo clearly had no use for Austin Fitts. The fights with Fitts were political. Everything Cuomo did was political; he was a totally political animal. He ran the CDP [Community Development Program] block grant in HUD for a long time and fixed the system so awards would be made to places he wanted them made to for political reasons, primarily in New York, because he had his eyes on going back and running for governor.”

Greer was a civil service employee and couldn’t be fired, but when a buyout was offered in 1997, he quit the agency in disgust.

Cuomo was asked for an interview about his role in the events described here, but repeated requests to his press secretary were unavailing.

In October 1997, Cuomo fired Hamilton. He announced to the press that this was “just one case” in a campaign of “zero tolerance for waste, fraud and abuse” at HUD.

The reason for the firing given to Hamilton was a computer glitch that Hamilton had ordered AT&T to fix. When AT&T failed to fix it, because the technician who was supposed to do it had a heart attack and was transferred when he returned to work, the malfunction caused two loan sales to make $342.8 million when they might have made $346.6 million. When Hamilton discovered AT&T’s error in late 1996, it ordered the program fixed and reported the event to Assistant Secretary Nic Retsinas and the FHA Comptroller, who informed the Acting General Counsel. Retsinas confirmed that. However, the first time the error was made, it wasn’t exactly “fixed.” Lucent assured Hamilton that it could mathematically approximate the program in a way that would the same result as a reprogramming within one dollar. It was wrong.

Hamilton had a “best efforts” deal with HUD in its advisory contract, not an underwriting relationship. An advisory contract involves a best efforts relationship where the advisor is paid a flat fee for its advice and does not share in either the risk of a wrong decision or benefit from an excellent decision. That is, it didn’t make a commission on profits, and under its contract it wasn’t obligated to not make any mistakes. In fact, if the computer glitch had been a “failure to perform,” it would have had to give back around $80,000 under the breach clause.

Cuomo decided that Hamilton should be penalized for potential opportunity costs. Fitts explained, “Cash was not lost. If we had not had the glitch and we had chosen other bids and they had all closed with no hitch, then we could have made that much more money.” Some bids normally fail to close, so what was lost was the opportunity to make more profit, maybe.

Cuomo cancelled the Hamilton/AT&T optimized auctions of FHA mortgages. His reason, ironically, was that HUD could not do the loan sales without Hamilton! Even that was not true: HUD’s three other financial advisors had been trained and worked on HUD loan sales with Hamilton. HUD owned all the design books for the sales, which made it easy for a qualified firm to carry out the operation.

Cuomo reinstated the old HUD cash-cow-for-political-friends system.

Catherine Austin Fitts nowFitts said, “Cuomo took the profits from the loan sales and used them to justify huge new [mortgage insurance] originations, creating a huge housing bubble with the elimination of down payments, encouraging people who could not afford houses to buy them. Defaults went up.” And now instead of working out the defaulted single-family mortgages, he was foreclosing. There was a spike in families losing their homes and investments. But contractors and people handling property management and disposition made money. And there was sharply reduced recovery for the government.

She thought, “Maybe they want to keep doing property disposition, because when you sell the mortgage, the buyer gets the file and sees what goes on. If you foreclose, the mortgage can be torn up and disappear. If there was fraud on the mortgage, you don’t want the file transferred or sold.”

Fitts had been suspicious that mortgage securities were being issued for phantom properties, or at least in amounts in excess of underlying collateral. She explained that an informant had told her, “They take 20 houses in a neighborhood and issue ten mortgages on each house, then they issue mortgage-backed securities with 200 mortgages. They churn defaults, one of the mortgages on each house, to generate the money to pay for debt service for mortgages on 200 houses. You have all these collateralized mortgages outstanding, paying debt service not with legitimate property cash flows but with FHA insurance proceeds. You default the mortgage, the lender makes an insurance claim against FHA, and that gives you cash. You turn the mortgage into the FHA and it gives you cash and you use that to pay the debt service on the pool.” It was a Ponzi scheme.

Two independent investigations a few years later provided more detail about HUD corruption under Cuomo. The General Accounting Office (GAO), the investigative arm of Congress, now called the Government Accountability Office, and a hearing of the Senate Governmental Affairs Investigative Subcommittee, in 2000 found that the Department was allowing lenders in the federally-insured mortgage business to engage in fraud and “flipping” that left homebuyers with crumbling houses and unaffordable mortgage payments. The fraudsters would buy property, often in poor neighborhoods, make cosmetic repairs and get puffed up property appraisals based in part on falsified documents attesting that homes had been renovated. They would sell them at high prices, with inflated mortgages, to unsuspecting buyers who trusted the appraisals. The owners of the houses quickly discovered their state, but often couldn’t afford to repair their homes, or pay the mortgages, so the mortgages were foreclosed, generating fees for property managers. And “flipped” again. It was the fraud dramatized by the Sopranos.

The hearing found that HUD exercised lax oversight over lenders. “This hearing is about government letting people down,” Sen. Richard Durbin, an Illinois Democrat. He said HUD had been “failing to keep an eye on these lenders.” Cuomo rejected the blame.

CUOMO’S HUD SUDDENLY CAN’T FIND BILLIONS

But that wasn’t the only Cuomo scandal. In fiscal year 1998, HUD had “undocumentable adjustments” of $17 billion: that is, $17 billion could not be accounted for. In fiscal 1999, HUD announced that it required $59 billion of “undocumentable adjustments” to balance the books and that it would not provide audited financial statements as required by law. It had lost track of $59 billion! Cuomo did not order the HUD IG to investigate the reason for the missing billions or to try to get the money back. In the following fiscal year, HUD declined to disclose the amount of the new “undocumentable adjustments.”

The contractor blamed for losing track of the money was a financial software company named American Management Systems, Inc. AMS had been founded in 1970 by five individuals who met while working in the Defense Department. HUD had paid AMS $206 million since 1993 for management of its internal accounting and financial control software.

AMS was a very special company. Its president had been Charles Rossotti, Charles Rossottiwhom then-Treasury Secretary Robert Rubin had named in 1998 to serve as Commissioner of the Internal Revenue Service. Rossotti got a special waiver to keep his AMS stock, and neither Rubin nor Rossotti seemed to see a conflict of interest when the IRS awarded contracts to AMS. Awarding new contracts would have been a violation of federal acquisition regulation, but top Clinton officials got around it by engineering a renewal of old AMS contracts that existed before the appointment rather than issuing new ones. Rossotti continued at the IRS under Bush II until 2002 and then joined the Carlyle Group as senior adviser for information technology.

Cuomo resigned as HUD Secretary in 2001 when George W. Bush took office. Throughout Cuomo’s tenure, HUD’s Single-Family Mortgage Insurance Program remained on the annual General Accounting Office (GAO) list of federal programs vulnerable to waste, fraud, abuse and mismanagement.

Part 2: The Vendetta

* * * *

Postscript

In September 2004, Assistant FBI Director Chris Swecker warned of an epidemic of mortgage industry fraud that could become “the next S&L crisis.” Under Reagan deregulation in the 1980s, fraud by savings and loans — including one whose board included Neil Bush, the then Vice-President’s son — cost taxpayers $132 billion.

MAKING FEES FOR HIMSELF

When Cuomo fired Hamilton and ended the mortgage auctions, two of the biggest beneficiaries were the National Housing Partnership (NHP) and Andrew Farkas’ Insignia. Farkas Andrew Farkasbecame one of Cuomo’s major fundraisers in his unsuccessful run for the 2002 Democratic nomination for New York governor. Cuomo needed a job in 2003 and found a lucrative one at Island Capital, which Farkas founded that year. Cuomo advised developers in Dubai (the United Arab Emirates), and lobbied for development of a luxury waterfront project in the U.S. Virgin Islands which community groups opposed, because they said the buildings were too high and would block public access to the shore. Cuomo reported 2003 income of $288,983, but with $660,238 from Farkas, that jumped to $819,473 in 2004. Cuomo told Anna Schneider-Mayerson of The New York Observer that he took the job, because, “I didn’t want to do work that would bring me into the HUD world, so to speak.”

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