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By Thursday, May 2, Betti Maldonado had grown very nervous over her association with the Cayman Group, two investors seeking a piece of developer Wayne Duddlesten's contract to build a city-subsidized hotel near the George R. Brown Convention Center. The men, supposedly wealthy South Americans named Carlos Montero and Marcos Correa, had hired Maldonado back in December to lobby members of the Houston City Council.
On the previous two days, Maldonado's work for the Cayman Group had included pushing cash-filled envelopes on three councilmembers -- one of whom accepted, according to a version of events outlined last week by Maldonado's newly retained lawyer, Dick DeGuerin. Although Maldonado believed her actions were legal, and that she was only distributing campaign contributions on her client's behalf, she had developed a nagging uneasiness about the way she was being asked to conduct business, DeGuerin says.
So Maldonado informed Montero and Correa that she wanted to end her relationship with the Cayman Group. But the pair had one last order of business for Maldonado that Thursday, asking her to follow them to an office building at Ella Boulevard and the North Loop.
Two days earlier, Maldonado had swung by City Hall in her Ford Explorer, picked up Councilman John Castillo, and driven him to the Hyatt Regency a few blocks away. In the hotel coffee shop, they were joined by the man Maldonado knew as Carlos Montero, who excused himself after Castillo and Maldonado ordered coffee and water. Then Maldonado got down to business, presenting Castillo with a single piece of stationery on which was typed two short paragraphs. "Here are the clauses we want in the contract," Maldonado told the councilman, following a script that Montero had laid out for her during an earlier meeting.
The document read: "The Cayman Group shall receive a share, as defined and set forth, of any and all revenues accruing or arising in any way from the Duddlesten hotel projects. Said revenues shall include but not be limited to development fees. The Cayman Group's share of the revenues will be in proportion to the Cayman Group's equity participation in the Duddlesten hotel projects. The Cayman Group shall invest not less than $5 million and not more than $10 million."
According to DeGuerin, as Castillo was inspecting the note, Maldonado reached into her purse, pulled out an unmarked envelope containing $3,000 and pushed it toward the councilman. "And here's an envelope to put that in," she said. Castillo took the envelope without looking inside. When Montero returned, the coffee break concluded. Nothing was said about the envelope as Maldonado drove Castillo back to City Hall.
Later that afternoon, Maldonado returned to the Hyatt coffee shop with Councilman Felix Fraga in tow. This time, Maldonado handed Fraga the typewritten clauses the Cayman Group wanted written into Duddlesten's contract before Montero could leave the table. She also gave Fraga an envelope, which, she explained, contained a campaign contribution.
Fraga pushed the envelope back across the table. "I don't need this," he said. But Montero, insisting that Fraga accept the money, pushed it back. Fraga again demurred. Finally, Maldonado offered to hold onto the money, and the meeting adjourned. As the trio left the coffee shop, Maldonado confided to Montero that she would give Fraga the money when she drove him back to City Hall.
Instead, according to DeGuerin, she said nothing more about it, dropping the councilman off and returning to her office, where she placed the envelope in the top drawer of her desk. (Fraga at first told the Press he had no memory of having an unmarked envelope pushed on him but later confirmed the incident. He did, however, admit to taking $2,000 in cash from Montero and Correa on an earlier occasion.)
On Wednesday morning, May 1, Maldonado was back at the Hyatt, this time with Councilman John Peavy. She managed to stay on-script with Peavy, DeGuerin says, but the result was no better than her encounter with Fraga. Peavy pulled the envelope down below table level, opened it, then handed it back to her without removing the contents.
On Thursday, after telling Montero and Correa she wanted out, Maldonado followed the twosome to the building at Ella and the North Loop, unaware that she had been directed to the Houston headquarters of the FBI.
Once inside, the Cayman Group investors revealed themselves to be undercover agents. In a scene familiar to defendants caught in the FBI's Operation Lightning Strike sting at the Johnson Space Center, Maldonado found herself surrounded by enlarged photos of herself -- photos surreptitiously taken by surveillance cameras. On one wall was a poster with a list of people Maldonado had contacted on behalf of the Cayman Group. DeGuerin says she was also shown videotape of her coffee-shop meetings with Castillo, Peavy and Fraga. Then FBI agent Ron Stern, who before being transferred to Houston helped supervise the agency's 1990 sting of Washington, D.C. Mayor Marion Barry, went to work on Maldonado.
"[Stern] tells her, 'We've got you cold, but we'll make a deal with you: you can plead guilty and we'll try to get you probation, but we need you to continue to help us,' " says DeGuerin.
The alternative, the feds told her, was jail.
Maldonado admitted she had lied about giving Fraga the money in the car and accompanied agents back to her office to retrieve the envelope. After she was returned to FBI headquarters, Maldonado said she was confused and needed to talk to someone. Stern gave her a phone number and said she could speak with Mike Attanasio of the Justice Department's public integrity division in Washington.
Last week, when the Press called the number Stern had given Maldonado, a woman answered with the greeting, "Command post." Attanasio was put on the line but refused to discuss the operation.
During the agents' discussion with Maldonado, they also offered to put her up at a hotel. For the next three nights, Maldonado stayed at the Galleria Guest Quarters on the government's tab. It was there, DeGuerin believes, that agents attached an electronic tracking device to Maldonado's Explorer, which she belatedly discovered on the vehicle's undercarriage last weekend.
On Friday, May 3, Maldonado reluctantly agreed to cooperate. According to DeGuerin, she was told that her next target was former councilman Ben Reyes. The sting had brought Maldonado full circle: it was Reyes who had introduced Maldonado to the Cayman Group.
DeGuerin says Reyes first contacted Maldonado about working for the Cayman Group early last December. "He told her, 'I'm hooking up with this company, and I want you involved,' " says the lawyer. (Reyes has been unavailable for comment, but his lawyer, Mike Ramsey, has said that the former councilman was the initial target of the sting.)
Reyes, who was serving the final month of his 16 years on Council, told Maldonado that Montero and Correa wanted to invest up to $20 million in the hotel and favored Duddlesten's plan because it called for a substantial equity contribution by minorities.
Both men were said to come from well-to-do, aristocratic families. One supposedly was from Chile and had a thick Chilean accent.
"They had all the trappings to look like they had access to that kind of money," says DeGuerin.
At that point, Council was considering Duddlesten's proposal and a competing one from JMB/Urban Development. The prize was the right to build and operate a hotel next to the convention center with rebates of state and local taxes worth up to $70 million, and the lobbying was intense. Duddlesten's pitch was orchestrated by Austin consultant Bill Miller. JMB was represented by Vinson & Elkins lawyer Joe B. Allen, who, like Duddlesten, is a close friend of Mayor Bob Lanier. It was widely believed that the Lanier administration -- and Lanier himself -- favored the JMB plan, which called for the hotel to be operated by a nonprofit corporation under the aegis of the city.
But from the early days of the competition, Duddlesten had held an edge with Hispanics, and Reyes, an ex-officio member of the city's selection advisory committee on the hotel bids, was a prime backer of the developer's project. At one point, Reyes -- in whose district the new hotel would be built -- tried to arrange a lunch meeting between the Cayman Group investors and Councilman Judson Robinson III, another ex-officio member of the selection panel and chairman of the Council's visitors and tourism committee.
Among the many unanswered questions about the sting is the origin and nature of lawyer Isaias Torres' association with the Cayman Group. Maldonado and others say Torres held himself out as the Cayman Group's lawyer and spokesman. Torres has declined comment, but there is little doubt that his offer to Duddlesten of an equity contribution from Hispanics was one of the factors that eventually helped the developer win Council approval of his hotel project.
Between last July, when the city's selection committee conducted a side-by-side examination of the Duddlesten and JMB proposals, and mid-October, when Council received the first detailed presentations, Duddlesten's proposal changed significantly with regard to minority participation.
In July, Duddlesten told the selection committee he would ensure that minority contractors received 30 percent of the hotel's construction contracts and 30 to 40 percent of the professional service contracts. His financing plan called for $18 million in equity from private investors. Duddlesten said that the hotel operator -- at that point, either Hilton or Marriott -- would contribute $10 million of the total, and he would round up the other $8 million.
Duddlesten held out the "opportunity for a minority equity participation," but he offered no specifics on that subject back in July. In fact, it's unlikely Duddlesten had any potential minority investors lined up at that time. If he had, he would have mentioned them.
By early fall, the situation had changed. On October 2, just two weeks before the Council hearing where project presentations were made, Duddlesten received an unsolicited letter from Torres, who announced that he was acting as the "agent" with the authority to "enter into contracts and negotiate financial terms" on behalf of something called the Latin American Enterprise Group (apparently the name then being used by what later came to be known as the Cayman Group). In his letter, Torres told Duddlesten that the Hispanic investors were interested in making an $8 million contribution to his project -- a figure, it so happens, that would allow the developer to meet his $18 million equity projection.
Duddlesten said last week that Torres once introduced him to the potential investors, although, he added, "I [didn't] know who they were, and I still don't." He characterized the meetings as informal and "premature," given that nothing could be guaranteed until he had the development contract with the city in hand. (In a subsequent interview, however, the developer recalled that Torres arranged two meetings with the men at Duddlesten's home. The name "Correa" rang a faint bell, Duddlesten said, but he didn't recall the name "Carlos Montero.")
By mid-January, the tide seemed to be running in favor of Duddlesten. In addition to his expected support from minority Council members, Duddlesten had announced a firm commitment from the Hilton Corporation to operate his hotel and chip in $10 million in equity. With the Council vote looming, competitor JMB made a last-ditch attempt to turn the tide by hiring Hispanic lobbyists Marc Campos and Al Luna. Their first order of business was to point out that Torres' investors were not from Houston. Indeed, Torres admitted that he was representing a group whose primary operations were based in Miami and Los Angeles. That was news to Duddlesten, who said he had assumed Torres' investors were local, and that, in fact, he would only entertain investment from Houston entrepreneurs. The developer maintains that is still true today.
Not long after Reyes first contacted Maldonado, the councilman arranged a meeting at the Hyatt between her and the two Cayman Group investors. There, Correa and Montero "retained" Maldonado to represent them for $1,500 in cash. Ultimately, she received a total of $7,500 from the two bogus businessmen.
"She was to give them a heads-up on who was on Council and who stood where [on the hotel bids]," says DeGuerin. "And, of course, they promised her that she would be their representative in Houston forever. She just became involved in the whole pie-in-the-sky thing. There was word on the street that these guys were drug dealers or something like that -- that otherwise, two Hispanic guys wouldn't have that kind of money to invest. She was appalled by that kind of stereotypical talk. She was angered by that and wanted councilmembers to see that these guys were legitimate."
Maldonado, says DeGuerin, even offered to introduce the pair to Lanier, but they weren't interested. Instead, says the attorney, they wanted to deal with specific Hispanic and African-American councilmembers -- primarily Castillo, Fraga, Peavy, Michael Yarbrough, Jew Don Boney and Gracie Saenz. They asked for introductions and suggested making campaign contributions to the councilmembers. DeGuerin says Maldonado told Montero and Correa that contributions weren't necessary because those councilmembers already backed Duddlesten. But Correa and Montero persisted, DeGuerin says, and finally Maldonado agreed.
According to councilmembers' campaign finance reports, a "Carlos Montero" had already been a generous donor, giving $1,000 to Fraga's Council campaign fund on November 1; $500 to Peavy's account on the same day; and two $1,000 contributions to Castillo on November 4 and December 15. Peavy and Fraga have said they will return those donations. It is unclear whether the councilmembers even knew Montero at the time.
In the weeks leading to the Council vote on January 31, Maldonado arranged for some councilmembers to meet Montero and Correa, usually at the Cayman Group's offices in a condo on Bering Drive near the Galleria. DeGuerin says at least four members of Council -- Saenz, Yarbrough, Fraga and Castillo -- went to the Bering offices in January.
Other meetings were in more sociable settings. Maldonado and Saenz met Correa and Montero for drinks at Damian's Cucina Italiana on Smith Street south of downtown. At one point, DeGuerin says, Maldonado and Correa left the bar while Saenz -- who has said she didn't take any money from the Cayman Group -- remained with Montero to discuss the councilwoman's political future. A woman in a separate party at the restaurant that night says that she noticed a gun beneath the jacket of one member of the Cayman Group as she was being introduced to him.
At none of those meetings in December and January, says DeGuerin, did Maldonado see the Cayman investors offer or give money to any councilmember. But the attorney says Montero and Correa told Maldonado that they had given $2,000 to Fraga and Michael Yarbrough.
Fraga has acknowledged meeting with Maldonado and "a couple of fellows, either Hispanic or Hispanic-looking" on February 1, the day after Council voted unanimously -- with two abstentions -- to go with the Duddlesten project. Fraga says he had met the men once before, at an introductory breakfast arranged by Maldonado "to get more familiar with their part of the project."
"They looked like, to me, to be investors," the councilman says. "My God, I never suspected they were anything else."
Fraga says the men each gave him $1,000 in cash, ostensibly as a contribution to the councilman's congressional campaign against incumbent Gene Green. Fraga claims he was unaware that federal campaign finance law prohibits cash contributions of more than $100, and he gave the money to his wife, who was acting as his assistant campaign treasurer. "I think she went to the bank the next day" to deposit it in his campaign account, he adds.
But that $2,000 did not appear on the campaign finance reports Fraga was required to file between February 1 and his March 12 primary contest with Green. Nor did it appear on his post-election report.
Yarbrough, Castillo and Peavy have all declined comment since news of the sting broke last week.
DeGuerin says Montero and Correa continued to employ Maldonado after Council approved the Duddlesten project, claiming they wanted to ensure their clauses would be written into the final package the developer would negotiate with the city. That was the purpose of the meetings Maldonado arranged with Fraga, Peavy and Castillo at the Hyatt coffee shop on April 30 and May 1.
After the FBI sting was revealed to her, Maldonado went looking for Reyes, who had been sharing office space with the Cayman Group. But according to DeGuerin, Maldonado found that Reyes had already moved out of the Bering Drive condo, and when she finally tracked him down, the former councilman advised her that Montero and Correa were "no good" and he wanted nothing further to do with them.
In the meantime, the FBI ordered Maldonado to make another run at Peavy, and this time equipped her with a hidden microphone when she met the councilman for a late lunch on Friday, May 3, at the Wyndham Warwick. Once again, Maldonado tried to give a cash-filled envelope to the councilman. And once again, DeGuerin says, Peavy refused the gift.
Over the weekend, Maldonado had second thoughts about cooperating. On Monday, May 6, she contacted defense lawyer Ron Woods -- the former U.S. attorney here -- and DeGuerin, who had won a hung-jury verdict on behalf of the lone Lightning Strike defendant who stood trial. DeGuerin says he was immediately struck by the similarities between Lightning Strike and the operation that ensnared Maldonado. His new client, he adds, had never heard of Lightning Strike.
Woods and DeGuerin placed a conference call that day to the Justice Department's Attanasio, advising him that Maldonado would continue to cooperate only if she were not charged with any crime and received complete immunity. Attanasio refused.
DeGuerin theorizes that after the call, the FBI realized its cover was about to be blown. Duddlesten says he was first contacted by the FBI on Wednesday, May 8 -- while he was meeting with Hilton executives who had flown in from Los Angeles -- and notified of the investigation and told he was not a target.
The following morning, FBI agents fanned out across the city, knocking on the doors of all 14 councilmembers before eight o'clock. All were asked whether they had accepted money to influence their vote on the hotel project. Some of the agents' other questions suggested that the FBI's interest in City Hall was wider in scope than the hotel contract.
It is unclear whether the hotel sting was an outgrowth of the FBI's earlier investigation into a ticket-collection contract the city awarded to Municipal Collections, a company owned by a former Lanier associate Peary Perry. According to one person who the FBI questioned repeatedly in connection with the ticket-collection contract, investigators seemed especially interested in an unusual clause that guaranteed 19 percent of Municipal Collections' proceeds to minority subcontractor Bayou City Enterprises. But that source believes the feds almost immediately broadened their probe from the Municipal Collections deal to the city's contracting practices as a whole. The agents, he said, specifically mentioned Maldonado and other City Hall regulars with influence.
The Justice Department has steadfastly refused to comment on any facet of the sting, apparently conceding the early public relations battle to DeGuerin.
"I wish we could talk," lamented one assistant U.S. attorney, "because DeGuerin is beating our brains out in the media.