HUD, Justice Department at odds over amnesty plan Proposal targets property owners who get kickbacks

October 01, 1998|By John B. O'Donnell | John B. O'Donnell,SUN STAFF

A U.S. Department of Housing and Urban Development proposal to grant amnesty to owners of HUD-supported properties who collect kickbacks has gotten an icy reception from the Justice Department.

The proposal would complicate criminal and civil fraud prosecutions and undermine a major case that HUD Secretary Andrew Cuomo has cited as an example of his crackdown on waste, Stuart E. Schiffer, a deputy assistant attorney general, wrote to Gary R. Eisenman, the official who sought Justice approval for the program.

And, he said, the support of HUD's chief investigator, Susan Gaffney -- who opposes the idea -- would be necessary.

Gaffney revealed the existence of the proposal at a Sept. 9 Senate hearing where she publicly aired for the first time a lengthy and bitter feud with Cuomo. She accused him of trying to drive her out of the job with "a series of attacks and dirty tricks."

Among other things, she described the amnesty proposal in general terms and said it would "undermine a major investigative effort that involves millions and millions of dollars -- more than 30 cases."

Cuomo subordinates play down the proposal. "There is no department plan for an amnesty program," said Howard Glaser, deputy general counsel. Officials characterized it as a "staff level discussion" aimed at finding a way to handle a lot of cases that could "overload the system," as one said.

They vehemently reject any suggestion that HUD is soft on wrongdoing. "No one has been tougher in the history of HUD than this administration has been on waste, fraud and abuse in the last two years," Glaser said.

The proposal sent to Justice in July by Eisenman, another deputy general counsel at HUD, deals mainly with the owners of HUD-subsidized or insured multi-family rental projects who receive kickbacks from their property managers in exchange for getting the work. But the amnesty program would also apply to vendors, insurance companies and others who pay kickbacks to the owners.

Owners and managers would be given six months to escape civil and administrative penalties by voluntarily disclosing kickbacks and paying the government half the money involved. They also would be able to continue to participate in HUD programs.

They still would be subject to criminal prosecution, though the Justice Department warned that criminal cases would be difficult to bring against people who have already received civil amnesty.

Opposing the proposal, Gaffney wrote to deputy attorney general Eric Holder that it would give "owners and managers who have defrauded HUD projects a clean slate to continue in those programs in the future, regardless of the seriousness of past offenses."

Case-by-case investigation and litigation "will better serve the interests of promoting integrity in HUD programs," she said.

Auditors discovered the practice -- called fee splitting -- in 1995, according to Gaffney. One owner of more than 80 projects had collected $5 million from its managers and had done nothing for the money, she told Congress last year.

After the practice was uncovered, HUD settled with a South Carolina property management firm that had been making payments and the firm began to provide new leads.

The firm had managed properties for several owners, including A. Bruce Rozet, a California millionaire and Democratic Party contributor with a nationwide portfolio of apartment projects.

The government has filed civil fraud charges in San Francisco against Rozet, seeking repayment of $7.5 million in alleged kickbacks involving 90 projects in 25 states and $20 million in penalties and damages. That case, says the Justice Department, would be undermined by the amnesty proposals.

In April, Cuomo announced that the government had expanded its case against Rozet, saying HUD is "moving aggressively to stop all waste, fraud and abuse in our programs."

Rozet has vehemently proclaimed his innocence. Industry lawyers claim that fee-splitting was openly condoned by HUD until 1995. Gaffney acknowledged to Congress last year that "it is unclear whether any civil remedy currently exists to challenge fee-splitting arrangements."

Now, the government is asking the judge in the Rozet case to declare fee-splitting illegal.

The Justice Department told HUD that if the government wins, an amnesty program would be "unwise" because violators could be pursued for repayment of all the funds plus penalties. If the government loses, there will be little incentive for violators to seek amnesty.

Gaffney claimed last month that the idea for the amnesty program originated with an attorney who had represented someone involved in fee splitting.

Monica Hilton Sussman, former HUD deputy general counsel now in private practice, acknowledges that she suggested an amnesty program to Cuomo in early July. But she said she didn't provide her detailed proposal -- which is nearly identical to the HUD proposal -- until after HUD had sought Justice's approval.

Asked if the similarity was merely a coincidence, she said, "It sounds that way." Sussman acknowledged that she had done "some work related to Rozet" at a law firm where she previously worked, but said her current firm, Peabody and Brown, does not represent Rozet, though it represents "a couple of clients" who have received subpoenas in the fee-splitting probe.

Pub Date: 10/01/98

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