Roots of the Sting

Harry Terry was in Dallas one morning in May 1993 when Larry Miller, the chief clerk of Houston's Municipal Courts Department, caught up with him by phone.

Terry, a Houston businessman, was acting as the local agent for West Capital Financial Services, a California-based company awaiting City Council approval of a contract to collect delinquent fines for the city. On the phone, Miller told Terry the contract was "unraveling" and that he had to hustle back to Houston to meet with Sheila Jackson Lee, who at the time was a member of the Houston City Council.

The West Capital contract had already been tagged -- or delayed -- twice by Council, so Terry caught the next flight home and was seated in Lee's office by 3 p.m., the appointed hour. At six o'clock, the councilwoman finally appeared, and Terry could see that his client's contract was in trouble. He recalls that Lee, who has since been elected to Congress, "interrogated" him about his views on affirmative action and the importance of equal opportunity in city business.

She closed the meeting, Terry says, by stressing that Council approval of the West Capital deal was unlikely -- unless the firm had a written agreement with Zinetta Burney and Peggy Foreman, two African-American attorneys, guaranteeing them a piece of the action as minority subcontractors.

Terry was surprised, but not shocked. Then-city attorney Ben Hall had issued a similiar order to West Capital, Terry says. But Hall had wanted the company to hire Bayou City Enterprises, a venture formed by three attorneys who were associates of Hall's.

Terry says he received another phone call the day after Lee set him straight, this time from attorney Enrique Dovalina. He told Terry that someone had suggested he find out if West Capital had room for a few more lawyers in its deal with the city. Terry met with Dovalina and his partner, Arturo Eureste, and agreed to hire them as minority subcontractors. On June 5, 1993, the West Capital contract appeared on the Council agenda once again, and, this time, was approved.

Three years later, the city has cancelled that deal, as well as a second ticket-collection pact with Municipal Collections Inc. Meanwhile, the FBI, initially attracted by the reported irregularities in the awarding of the collections contracts, widened the scope of its investigation to encompass the city's general contracting practices under the administration of Mayor Bob Lanier. It's not yet known if at some point that probe morphed into the recent FBI sting, which apparently was designed to induce minority councilmembers to accept bribes in connection with developer Wayne Duddlesten's plans to build a city-subsidized downtown hotel.

The Justice Department has yet to respond to comments by Dick DeGuerin, the attorney for port commissioner and lobbyist Betti Maldonado. DeGuerin says FBI undercover operatives posing as investors of the Cayman Group duped Maldonado into passing cash-filled envelopes to minority councilmembers. According to DeGuerin, the Cayman Group wanted Council to ensure that a clause guaranteeing it proceeds and an equity share of Duddlesten's project be written into the final contract the developer would negotiate with the city.

Duddlesten's proposal, which promised substantial minority construction and professional services contracts, was already a heavy favorite of minority councilmembers, and may well have won the contract over competitor JMB/Urban Development on its merits. But there's little question that enthusiasm for his project by minority members of Council was enhanced after the developer said he had secured about $8 million in equity from black, Asian and Hispanic investors. At one point, that total included a proposed contribution from the Cayman Group.

Indeed, minority participation has been a critical consideration in the awarding of city contracts throughout the four and a half years of the Lanier administration. Minority and non-minority councilmembers alike have been known to delay votes on contracts over displeasure with the amount of work carved out for minority firms.

"Everybody down there is participating in someone's contract," Harry Terry says. "The administration has allowed certain people unspecified authority to influence minority contract awards."

Who gets city work has been a thorny issue for Lanier, and at times, the public debate has grown tense with protest marches and subtle charges of racism. Almost two years ago, Lanier began meeting with black leaders over their scant share of construction contracts. When word got out that the mayor was going to retool the city's affirmative action ordinance, women and Hispanics weighed in, and the administration found itself struggling for consensus.

In February 1995 -- about four months later than expected -- Lanier introduced the new ordinance, which bucked the national trend by raising the percentage of city work that goes to minority firms. Anglo contractors grumbled a bit, but for the most part, Lanier's new guidelines seemed to calm the waters.

Behind the scenes, however, the conflict has played out differently -- not through city ordinance, but in the angry shadows cast by Lanier's victory over state Representative Sylvester Turner in December 1991. African-American leaders excoriated the Lanier campaign with allegations that it sabotaged Turner's chances by leaking to Channel 13 a story that suggested Turner may have been involved in an insurance scam. When he took office, Lanier eased the burn by appointing Hall, then a Vinson & Elkins associate, as his city attorney. Within the administration, Hall quietly became a minister-without-portfolio for African-American business interests.

In the spring of 1994, Hall was accused of forcing a credit card collection company seeking city business to subcontract some of the job to a minority firm he favored. A city investigation cleared Hall; a Harris County grand jury took no action. A few months later, two Anglo construction contractors appeared before Council to accuse African-American councilmen Al Calloway and Michael Yarbrough of using similar tactics to gain black companies a greater share of city business.

Just before Christmas of that year, while everyone was awaiting word on the new minority-hiring ordinance, Hall's name surfaced again in connection with questionable behind-the-scenes manuevering. The Press reported that the city attorney had played an extraordinary role in trying to get Robert Muhammad, the local minister for Louis Farrakhan's Nation of Islam, a portion of the West Capital collections deal. West Capital managed to fend off the effort, which would have effectively given Muhammad the lion's share of the fees from the contract. Not long after Hall left the city for private practice, West Capital lost its contract.

Meanwhile, Controller George Greanias had begun auditing the collection contract held by Municipal Collections Inc., whose principals include Peary Perry, the Lanier campaign worker whom Turner has alleged to be the source of Channel 13's election-eve report. Greanias fanned the outrage of black leaders by halting payment to the minority subcontractor, Bayou City Enterprises. According to the controller's audit, the company had been paid nearly $500,000 in fees for little or no work.

Lanier stood fast in support of Bayou City before bowing, somewhat reluctantly, to public sentiment and canceling the subcontract. Lanier was almost as disinclined to fire Municipal Collections in August, after Greanias announced the company may have been paid $1 million too much. Greanias also urged the Lanier administration to investigate how Municipal Collections was awarded the city business, as well as the origin of an unusual clause in the contract language that gave Bayou City Enterprises 19 percent of the collection fees.

Lanier declined, unencumbered by much Council interest in the issue, and has since allowed the dispute to proceed to the courtroom. The city has been sued separately by Municipal Collections and West Capital, both of whom have indicated displeasure with what Harry Terry calls "the price of doing business in Houston, Texas."

From a contractor's standpoint, the price can be quite high. Terry says he followed the city's usual procedure for hiring a minority contractor by choosing a handful of possibilities from the city's list of certified vendors. But then he ran into what he playfully calls "tier-platting, bureacratic viscosity."

"We received indications from the legal department that what we had done toward choosing minority subcontractors didn't matter," Terry recalls. "The city tells you unilaterally how it will be done."

Terry says the city nixed his choices, and to gain Council approval, West Capital had to agree to pay 8 percent of its contract proceeds to Burney & Foreman, the law firm Sheila Jackson Lee had recommended. West Capital was also obligated to pay another 8 percent to attorneys Arturo Eureste and Enrique Dovalino.

Before West Capital's contract was cancelled early last year, payouts to the two subcontracting ventures totaled about $400,000. Not bad, considering that, according to Terry, West Capital had little use for anything more than a part-time attorney, much less two separate entities carrying out identical duties.

"There wasn't any work they could do," Terry says. "We had technology that did all the work. So we had to fabricate a rationale in order to justify giving them a percentage. It was just a reality that was part of getting the contract."

West Capital's experience closely mirrors that of Municipal Collections, which has made no secret of its disgust over the share of its contract that went to Bayou City Enterprises. After the collection deal was awarded in April 1993, a rift developed between the two companies, and their principals tried to use their perceived political clout to gain advantage.

Municipal Collections' Perry took his grievances directly to Lanier. According to sources, Lanier sought to appease Perry by sending him to Ben Hall, who drew up an agreement whereby Municipal Collections would withhold $11,500 from Bayou City's monthly fee and, in exchange, handle some of the subcontractor's responsibilities.

That seemed to keep everyone happy until September 1994, when Shackelford called Hall, who set up a Saturday meeting at City Hall with Lanier. Shackelford, who would later fail miserably to convince Greanias that Bayou City had done any work on the contract, complained that his firm wasn't being paid enough. A source close to Municipal Collections' operation blames that meeting for triggering the investigatory heat from Greanias, and, beginning early last fall, from the FBI.

"Shackelford said they were doing all this work, but weren't being paid," the source says. "The next thing we know, we've got George Greanias and a zillion auditors descending on us."

That was 18 months ago. Those subsequently questioned by the FBI in the collections investigation say the feds haven't visited them lately, and the last time they did, it was obvious their interest had yet to peak.

"By the time I talked to them for the third time, they were asking me about stuff I had no idea about," says a West Capital executive visited by the FBI.

Interestingly, the feds apparently weren't interested in the behavior of councilmembers during that initial investigation, which seemed to center around Hall, Perry and Larry Miller, the municipal courts director. It seems safe to say that the FBI had changed its tack late last fall, when the convention center hotel project began to dominate the City Hall agenda.

In December, then-councilman Ben Reyes introduced Carlos Montero and Marcos Correa, undercover FBI operatives posing as the Cayman Group, to Maldonado, who is a consultant for minority businesses. Maldonado then met with several minority councilmembers, and, on behalf of the Cayman Group, offered them cash payments in exchange for their support of two clauses the investors wanted added to the city's final contract with Duddlesten. In a twist straight out of Bayou City Enterprises' unprecedented contractual arrangement, the contract language assured a portion of hotel revenues for the Cayman Group.

Reyes, who was sharing an office with Montero and Correa after he left Council in January, introduced the "investors" to at least one other person, Austin state Representative Dawnna Dukes.

Dukes has acknowledged to the Chronicle that she met Montero and Correa this year. Dukes also owns a minority consulting business, and the two men told her they were interested in investing in projects in Austin and San Antonio.

Dukes said Montero and Correa told her they had already negotiated an investment in the Houston hotel project. The lawmaker says she ended her association with Montero and Correa in late February, after she asked them to sign an agreement that her work on their behalf would not violate any laws.

Dukes' association with the Cayman Group, however brief, suggests that perhaps the FBI's operation may be wider in scope than the Duddlesten hotel project. Indeed, the feds also may have been interested in at least one other high-dollar contract in Houston.

Last week, two councilmembers told the Press that during their questioning by the FBI on the morning of May 9, agents asked about something called "Mirage." At least one councilman took that as a reference to Mirage Resorts Inc., the Las Vegas gambling-palace outfit that was partners two years ago with Lanier friend Charles Hurwitz's Maxxam Corporation in a since-shelved proposal to build a downtown casino-hotel.

Councilman Robb Todd says that when the FBI mentioned "Mirage" to him he asked, "Why? Are you trying to tie this into the casino deal?"

The agents, Todd says, replied that Mirage was "just a name" they had heard mentioned.

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