Between Friends

In November 1993, shortly after he was first re-elected with 91 percent of the vote, Mayor Bob Lanier embarked on a series of unprecedented real estate deals. The significance of the transactions was summed up by Lanier's chief of staff, Dave Walden, in a memo to Margie Bingham, the director of the city's Department of Housing and Community Development.

"This is a simple written reminder of one inescapable fact," Walden offered in an inter-office correspondence dated November 17. "The reputation of the city of Houston and this administration is on the line."

The issue was Lanier's decision to buy and sell nine rundown apartment complexes owned by the quasi-public Resolution Trust Corporation, keeper of the foreclosed assets collected following the collapse of the savings and loan industry.

Ostensibly, the policy goal of what Walden called "the RTC program" was to provide affordable rental housing to working families of modest means. Yet the message from the mayor's chief troubleshooter seemed more in tune with Lanier's past profession as a real estate speculator than his current one as a public servant. In a patronizing tone, Walden emphasized the need to quickly renovate the apartments and to operate them in the black until they could be sold to the highest bidder.

"Your department has to make abso-lutely sure that we go the extra mile," Walden stressed. "If you or any of your employees encounter any difficulties with other city departments ... I am to be advised immediately."

Clearly, Walden was demanding diligence and accountability. What taxpayers got, however, was something considerably less, at least according to an audit recently released by the inspector general of the U.S. Department of Housing and Urban Development. As a result, the city might have to reimburse HUD for more than $1 million worth of federal grants and subsidies that the agency says may have been spent improperly.

The audit found that after the city awarded two contracts to inspect, manage and renovate the complexes, housing officials ignored their duties and allowed the contractor, Duddlesten Management Corporation, unchecked control over $1.1 million in taxpayers' money to repair two complexes on West Bellfort in southwest Houston.

Nearly half of that sum -- more than $450,000 -- appears to have been spent improperly by Cornerstone Construction. Cornerstone, like Duddlesten Management before it merged with a South Carolina firm, is owned by developer Wayne Duddlesten, an old friend of Lanier's and the city's choice to develop a publicly subsidized $155 million hotel near the George R. Brown Convention Center. For handling the city's entire RTCapartment program, Duddlesten's companies were paid fees of roughly $2 million.

The audit, which was triggered by irregularities found by the inspector general in the course of a routine audit of another HUD program, determined that city housing officials, as well as the Duddlesten companies, flouted numerous federal regulations, including procurement laws that prohibit the awarding of so-called "sweetheart deals" to government contractors.

More troubling than the obvious violations, however, are questions the audit raises about the Byzantine relationship between three subcontractors hired by Cornerstone Construction. At the time, all three -- Buffalo Steel, Gulf Con and Gulf Coast Building Supply Inc. -- shared the same Pasadena address. Two of the companies, Buffalo Steel and Gulf Coast Building Supply, were owned by the same man, James Mills. And Gulf Con's relationship with Mills was such that its owner, Pat Rivers, actually signed several checks issued by Mills's steel and building supply companies.

Rivers also received more than $125,000 in checks from Cornerstone, made out directly to him, and he endorsed and cashed two others made out to another individual for $96,000. Auditors could not locate invoices or purchase orders to support the payments. And for reasons even the federal government couldn't ascertain, Mills transferred $203,000 paid to Buffalo Steel and Gulf Coast Building Supply into Gulf Con's bank account.

All told, without having to go through the trouble of bidding for the work, Gulf Con ended up with more than $950,000 of public money. Nice work for a company that had no employees and was formed just three months before the city awarded the Duddlesten Management Corporation a contract to manage rehabilitation of the RTC apartments. Gulf Con, if it still exists, does not have a listing in the telephone book.

Buffalo Steel's credentials were even more dubious: Mills didn't start up that one-man operation until two days after Duddlesten's contract with the city was finalized on November 10, 1993. The company is no longer in business.

The shadowy figures and irregular transactions outlined in the HUD audit of the RTC program underscore the lack of regard the Lanier administration has for laws designed to protect the public from conflicts of interest and wasteful spending. The latest findings mirror other questionable deals unearthed during audits of other contracts awarded by the city since Lanier took office.

For example, the city still has not replaced two ticket-collection contractors fired in 1995 after a lengthy review by then-city controller George Greanias found that a minority subcontractor, Bayou City Enterprises, had been paid some $400,000 for essentially doing nothing. It was also discovered that the prime contractor on that deal, Municipal Collections, was overpaid as much as $1 million, according to auditors, "with the knowledge and cooperation" of city officials in charge of overseeing the contract.

In July 1995, just before he left office, Greanias released a review of the Greater Houston Wastewater Project, the $1.7 billion state and federally mandated program to rebuild the Houston sewer system. Auditors discovered tens of thousands of dollars in overpayments and questionable costs, as well as a hidden provision in the contract that added $1 million to the amount paid to the city's two management consultants, Montgomery Watson and Brown & Root.

The key revelation from Greanias's audits, as well as from the most recent HUD examination of the RTC program, is that city officials in charge of administering the contracts were asleep at the wheel. Indeed, HUD points out that housing officials basically gave Duddlesten Management a blank check for more than $1 million, which was passed along to Duddlesten's Cornerstone Construction and used with "no contractual control and little or no oversight" by the housing department.

Moreover, HUD expressed alarm that the city displayed "a significant lack of concern" over Cornerstone's being paid every nickel it billed the city for, even though proper documentation supporting the expenses was largely nonexistent. And much to the surprise of the feds, the Lanier administration isn't interested in what Cornerstone's subcontractors were up to, even though HUD has ordered that $450,000 of the funds they juggled among themselves be accounted for and, if necessary, recovered.

There's little chance that will happen. After considering the city's response to the audit, HUD concluded that housing officials simply refuse to take "responsibility or remedial actions" for flagrant violations of federal procurement laws by the Duddlesten companies.

"The city abdicated its responsibility to ensure proper and economic use of public monies," HUD declared.

This, unfortunately, is not unusual either -- particularly when the contractor turns out to have especially close ties to Bob Lanier. Following Greanias's audit, for instance, it took the mayor months to fire Municipal Collections, which was formed by a Lanier campaign gofer named Peary Perry.

Lanier stood up for Perry until the public discourse suggested he sit down and cancel the contract. Perry rewarded Lanier's bizarre gesture of loyalty by suing the city. The breach-of-contract suit will probably not go to trial until at least November, and will likely be watched solely in the event that a witness blurts out that Perry's ticket-collection contract was a reward for his legwork on the Lanier campaign.

Indeed, Municipal Collections did appear to have the inside track on the contract: Perry was the sole beneficiary of changes to the eligibility requirements made by Larry Miller, the city department head who recommended Municipal Collections for City Council approval. Perry later hired Miller's sister, whose husband was an employee of Miller's department.

In a flashback to that fiasco, the HUD auditors sniffed out an unusual chain of events they intimated led to a sweetheart deal for Duddlesten.

It all began in March 1993, when the original contract to handle the RTC deals was drafted. Housing officials recommended Duddlesten Realty Advisors to inspect the RTC complexes and help with the acquisition; Duddlesten Management to lease the units, prepare the rehabilitation budget and manage construction; and the Manley Companies to handle the financing.

Before the contract could be approved by Council, Greanias objected, pointing out that allowing one Duddlesten company to decide what complexes to buy and then giving a second Duddlesten firm the contract to manage the acquisitions might be giving the fox the keys to the henhouse. Housing officials reluctantly agreed to delete Duddlesten Management from the contract and ostensibly started looking for another company to handle those duties.

Eight companies submitted proposals for the new contract; none of them, however, appear to have been seriously considered. The housing department rejected them all and recommended Duddlesten Management again, even though the company never submitted a second proposal. The owner of one established real estate firm who did submit a proposal told the Press that the city never even bothered to return his phone calls.

In November 1993, eight months after housing officials removed Duddlesten Management from the original contract, Council awarded a second contract to the company for leasing and construction management. Inexplicably, the new deal enhanced the potential for conflict by agreeing to pay Duddlesten Management 3 percent of the total rehabilitation costs -- which, by virtue of the first contract, were to be determined by Duddlesten Realty Advisors.

For obvious reasons, that pricing method is prohibited under federal regulations. Nonetheless, Duddlesten Management collected $30,000 in fees while subcontracting the construction management duties to a third Duddlesten company, Cornerstone Construction.

In turn, Cornerstone directly billed and received more than $1 million in public funds. The fact that the construction company never entered into a written subcontract with either the city or Duddlesten Management might explain why Cornerstone doled out the actual work without soliciting low bids, another breach of federal procurement law.

Given all that transpired before they arrived on the scene, it's no wonder Cornerstone's subcontractors were able to receive almost a half-million dollars without proving the work had been performed. Among the more egregious examples identified by HUD:

Almost $12,000 was spent for 58 metal doors that were not part of the original construction budget and, as HUD later discovered, were never installed.

Buffalo Steel contracted with Cornerstone to install fences and gates at the complexes. But firm owner James Mills took $10,000 off the top of the $100,100 contract by issuing a check made out to himself. He then passed the contract along to Gulf Con, saying he did not have time to do the work. Gulf Con's Pat Rivers took another $14,000 off that, and gave the job to two other companies for $77,000 -- $24,000 less than the city paid Cornerstone, all of which was pocketed by Mills and Rivers for doing nothing.

Cornerstone also wrote checks totaling $221,400 either directly to Rivers or to another individual, who signed them over to Rivers to cash.

HUD also ruled that $112,145 paid to Gulf Coast Building Supply for materials was "highly questionable." HUD's suspicions were raised because Cornerstone had clearly contracted with Gulf Con for all materials, and there was no record of why and for what Mills's supply company was paid.

How this all happened, and why it went undetected until much later, is not easy to explain.

Mills's and Rivers's accounts, as captured by HUD, are hardly worth mentioning, except as an illustration of how difficult it is to defend their actions. For example, Mills could offer no reason why most of the $203,000 paid to his firms was transferred to Gulf Con. Mills also explained that he allowed Rivers to sign his company checks because he was a "longtime friend." Rivers chimed in that Mills was allowed to sign Gulf Con's checks, too, though HUD could find no instances of that.

When contacted by phone at Gulf Coast Building Supply in Pasadena, Mills refused to comment on the audit, saying he had not seen the final report from HUD. He politely declined to answer any questions about the work his company did for Cornerstone.

"I don't know who you are, so I don't think I have anything to say about this," he said.

As for Cornerstone, the company could offer few plausible explanations to auditors, and has, in fact, placed its defense in the hands of city housing officials. Max Uzick, the Duddlesten employee who handled the city contract for Duddlesten Management, said last week that he had not seen the final HUD report, nor had he or anyone else been contacted since late last year to assist with the city's response.

In a phone interview, Wayne Duddlesten echoed the city's primary defense that the RTC program -- which involved the purchase, operation, repair and resale of nine complexes -- turned an $11 million profit for the city. Also repeating the city's line, Duddlesten suggested that HUD didn't fully comprehend the complexity of the RTC program.

"As I recall it, I had people in my organization meet with the HUD people last year," Duddlesten said. "You know, I guess we wouldn't be talking about this if they were as satisfied at that time as they wanted to be. That's regrettable, but it doesn't mean we won't quit trying.

"We understand the business, and oftentimes bureaucrats don't. There's a lot of practicality in things like this. I wish there was a Bible and a book that says, 'Here's what to do.' "

Actually, there is: It's called Title 24, Code of Federal Regulations, Part 570. It outlines the administrative requirements for certain federal grants. While Duddlesten arguably can be excused for not knowing the particulars of the regulations, the city cannot. Yet HUD's audit uncovered an incredible ignorance of the law among housing department employees working on the RTC contract.

According to the audit, the administrative manager for the program "was not familiar with HUD's requirements for procurement of goods and services." He also stated that he was not responsible for making sure Cornerstone properly subcontracted the construction work, and he did not know whose duty it was.

The housing employee in charge of inspecting and verifying the construction work told auditors he only performed one inspection, well before the rehabilitation was complete. He also admitted he did not keep a written documentation of the inspection, but reported the results "orally" to the administration manager.

Perhaps the most inexcusable act of negligence on the part of housing officials -- and potentially the most costly -- was their failure to ensure that Cornerstone and its subcontractors adhered to federal wage laws. Max Uzick insisted the company was not required to, citing a phone conversation he had with a U.S. Department of Labor official. However, no written documentation authorizing an exemption from the wage laws was produced.

"The city apparently relied on the contractor's erroneous recommendation that Davis-Bacon Act prevailing wages did not apply to the construction contracts," auditors wrote in their final report.

According to Darrel Vaught, the assistant inspector general for audits at HUD's Fort Worth regional office, the city will have to prove that wage laws were followed -- or be forced to reimburse from its general fund all of the $1.1 million construction costs.

"There's not much argument on that point," Vaught said, "but the city thinks we should be the ones to find out if the correct wages were paid."

Margie Bingham, the city's housing director, is on sick leave and was unavailable to comment on the audit. That duty fell to Mike Loftin, an assistant director in the department. Loftin says the HUD auditors "viewed things in an overly narrow context" and ignored "the bigger picture of what we were trying to do."

"Some mistakes were made on the project, we're not going to deny that," Loftin acknowledged, while grousing that the "tone" of the audit was overly critical. "But we would like to see a more balanced treatment of the program."

That's not likely to be forthcoming, at least not from HUD. The agency has asked the city to give a complete accounting of construction costs, or pay back the $450,000 in expenses that is so far unsupported. When asked to what end the city had gone to find the money, Loftin replied, "That's under review."

Meanwhile, Wayne Duddlesten is moving forward with plans to develop the taxpayer-subsidized hotel next to the Brown Center. That project has not exactly been beyond reproach, either: The Justice Department is expected to hand down indictments any day now as a result of a sting that used Duddlesten's hotel project as a vehicle. The operation allegedly snared past and current councilmembers accepting bribes offered by federal agents posing as investors in Duddlesten's project. The developer has not been implicated.

In the wake of the HUD audit, two questions are worth asking about the city's contracting policies: First, will the city adhere to federal laws governing the use of millions in taxpayer subsidies earmarked for Duddlesten's hotel? And, who's minding the vault that's been opened for a half-dozen other publicly funded projects launched by the Lanier administration, such as the renovation of the Rice Hotel, the redevelopment of the Fourth Ward by the nonprofit Houston Renaissance and the makeover of the Midtown area?

Lanier's influence on which organizations were chosen to carry out those projects is indisputable, and there exists the appearance of at least two conflicts of interest. Until recently, Julio Laguarta, the founder of Houston Renaissance, served under Lanier on the Planning Commission. Laguarta was removed from the commission after it was learned that he lived outside the city limits. But it could have been argued that he was in violation of the city charter by drawing pay from a city-supported project while sitting on a city board.

The Lanier-appointed chairman of the board for the Midtown Redevelopment Authority is Doug Williams, the $112,000-a-year assistant to the mayor's housing adviser, Michael Stevens. Stevens heads the Houston Housing Finance Corporation, which simultaneously is paying Williams's salary while providing the financial backing for the Midtown project.

Some time back, while Lanier was taking heat over Peary Perry and Municipal Collections, the mayor asked this question of his detractors: "So, am I supposed to do business with my enemies?"

Perhaps not. But shouldn't his friends have to follow the rules?


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