oversight

Jardines DE Valencia Housing Cooperative, Rio Piedras, Puerto Rico

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-03-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                    U.S. Department of Housing and Urban Development
                                                    District Office of the Inspector General
                                                    Office of Audit
                                                    Richard B. Russell Federal Building
                                                    75 Spring Street, SW, Room 330
                                                    Atlanta, GA 30303-3388
                                                    (404) 331-3369




March 20, 2002                                      2002-AT-1807


MEMORANDUM FOR:             Minerva Bravo, Director, Multifamily Program Center, 4NHM




FROM:         Nancy H. Cooper
              District Inspector General for Audit-Southeast/Caribbean, 4AGA


SUBJECT:      Jardines de Valencia Housing Cooperative
              Rio Piedras, Puerto Rico

At your request, we completed a limited review of the Jardines de Valencia Multifamily Housing
Cooperative. The basis for the request resulted from deficiencies disclosed during the
independent audit of the Cooperative’s fiscal year 1999 financial statements. The deficiencies
included, among other things, excessive benefits and compensation to or in favor of the
Cooperative’s former Project Administrator. Our objective was to determine the severity of the
deficiencies and if the Cooperative’s funds were used in accordance with the Regulatory
Agreement.

                                      BACKGROUND

Jardines de Valencia Housing Cooperative is a 236 unit non-profit multifamily housing complex
insured under Section 236 of the National Housing Act, as amended. The Cooperative receives
the benefit of interest reduction payments on its HUD insured mortgage loan. In return for
insuring the mortgage, HUD supervises the organization and operation of the Cooperative and
retains the right to take over control of the property and terminate the interest reduction
payments to the mortgagee. As of December 2001, the Cooperative’s mortgage was current.

                             SCOPE AND METHODOLOGY

We interviewed HUD and Cooperative personnel, and former and present members of the Board
of Directors regarding the operations of the Cooperative. We also reviewed HUD’s files,
Cooperative’s records, and the fiscal year 1999 Independent Auditor’s working papers. Our
review covered the period of January 1, 1999, through June 30, 2000. We extended the audit
period as necessary. Our review was limited in scope and not intended to meet all requirements
of Governmental Auditing Standards. We conducted our review from June 2000 to December
2001.




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                                         SUMMARY

The former Project Administrator received excessive benefits of $25,562 from the Cooperative’s
operating funds, falsified payroll records, and performed other improper actions, while
administering the Cooperative. These actions were performed with the assistance of the former
Fee Accountant. Further, some of the Board of Directors were negligent in carrying out their
duties, making the former Cooperative Officials’ actions possible. This caused an unnecessary
burden on the Cooperative’s financial resources. As a result of the improper administration,
during 1997 and 1998, the Cooperative was in a negative surplus cash position.

Please furnish this office a status report within 60 days for each recommendation describing: (1)
the corrective action taken; (2) the proposed corrective action and a planned implementation
date; or (3) why action is not considered necessary. Also, please furnish us copies of any
correspondence or directives issued as a result of the review. Note that Handbook 2000.6, Rev-3
requires management decisions to be reached on all recommendations within 6 months of report
issuance.

If you have any questions, please contract Sonya D. Lucas, Assistant District Inspector General
for Audit, at (404) 331-3369 or Aurora Rodríguez, Senior Auditor, at (787) 766-5540.


Appendices:
      A - Finding and Recommendations
      B - Schedule of Ineligible Costs
      C - HUD Comments
      D - Distribution




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                                                                                      Appendix A

                           FINDING AND RECOMMENDATIONS

Finding – Former Project Administrator Improperly Administered the Cooperative

The former Project Administrator received excessive benefits of $25,562 from the Cooperative’s
operating funds, falsified payroll records, and performed other improper actions, while
administering the Cooperative. These actions were performed with the assistance of the former
Fee Accountant. Further, some of the Board of Directors were negligent in carrying out their
duties, making the former Cooperative Officials’ actions possible. This caused an unnecessary
burden on the Cooperative’s financial resources. As a result of the improper administration,
during 1997 and 1998, the Cooperative was in a negative surplus cash position.

Former Project Administrator Received Excessive Benefits

Paragraph 6 of the Regulatory Agreement states that the Mortgagor shall pay no compensation or
fee except for necessary services and except at such rate as is fair and reasonable in the locality
for similar services. HUD’s guideline, Multifamily Housing Circular Letter 95-001, allows for
payment of Christmas bonuses in accordance with Puerto Rico law. In particular, it establishes
that payment of bonuses higher than the 2 percent required by the Puerto Rico law is permissible.
However, HUD policy provides the following thresholds:

       1.   Owners shall consider the project’s financial capacity when granting the bonus.

       2.   The amount paid shall be reasonable and within the amount generally paid by the
            industry.

The Cooperative’s 1997 to 1999 HUD approved budgets reflected an administrator’s salary of
$34,800. The budgets did not include benefits such as car allowance, Christmas bonus, and
unused vacation. However, the former Project Administrator’s actual compensation included
base salary, Christmas bonus and unused vacation reimbursements. As a result of the Christmas
bonuses and unused vacation reimbursement, the actual salary received by the former Project
Administrator exceeded the budgeted amount by $10,042 for 1997 and $9,523 for 1998. His
1999 salary did not exceed the amount budgeted because he resigned in November 1999 and was
not paid the Christmas bonus or for unused vacation time.

In addition to the 1997 HUD approved budget, the former Project Administrator and the
Cooperative executed a contract dated May 2, 1996. The contract provided for a monthly car
allowance of $460 or $5,525 annually. However, the former Project Administrator received
$412 biweekly or $5,200 in excess of the contract amount. A comparative administrator
received $100 monthly for car allowance, while another did not receive a car allowance. The
current Project Administrator receives a car allowance of $300 monthly.




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Former Project Administrator Falsified Payroll Records

The former Project Administrator’s salary checks were issued to various third party payees
during periods of 1995 to 1999. Some salary checks were issued jointly to him and a third party
housing management agent without the knowledge or consent of the third party. Also, between
1995 and 1999, in addition to his name and social security number, the former Project
Administrator used four different names and social security numbers on his personal income tax
forms and/or informative tax return forms to conceal the compensation he received from the
Cooperative. A Cooperative employee informed us that the former Project Administrator
explained that in order for him to receive full disability benefits from the government, the
Cooperative’s records could not document his employment.

We reviewed the former Project Administrator’s personal bank account records from December
17, 1997, to January 14, 2000, and the Cooperative’s records to trace the payments he received
from the Cooperative. From September 1998 to November 1999 his salary/management fee
checks were issued in the name of a ghost employee and fictitious housing management entity.
His annual withholding statements were also issued in the name of the ghost employee and
included a social security number other than his. The table below identifies the amounts paid to
various payees. The amounts identified only include the base salary/management fees. From
November 1995 to March 1996, the salary checks were issued jointly to the former Project
Administrator and a third party housing management agent. However, the W-2 was issued in
the name of the former Project Administrator.

      Year      Payee’s Name                                                       W-2 Totals

      1995      Former Project Administrator                                         $39,3121
      1996      Former Project Administrator                                          10,4801
      1996      Former Project Administrator                                          27,935
      1997      Former Project Administrator                                          34,1161
      1998      Ghost Employee                                                        19,6521
      1998      Fictitious Management Entity                                          17,245
      1999      Fictitious Management Entity/Former Project Administrator             31,9952

       1.    Various social security numbers were used.
       2.    The former Project Administrator’s social security number was used.

In regards to the fictitious housing management corporation, on September 1, 1998, the former
Project Administrator, representing CDM Housing Management Inc executed a contract with the
Cooperative. The contract displayed a Department of State Corporations Registry number
stamp; however, the number was registered to Cristal del Manantial, Inc. According to the
Puerto Rico Department of State Corporations and Trade Marks Registry, Cristal del Manantial,
Inc. was a for-profit corporation the former Project Administrator registered on February 21,
1996, as its sole incorporator and resident agent. The Certificate of Incorporation documented
the nature of business was to pursue any legal businesses or acts in which the corporation could
organize. Based on the information obtained, the former Project Administrator used the
registered corporation’s number and acronym (CDM) to misrepresent a legitimate housing
management corporation and conceal his income received from Jardines de Valencia Housing
Cooperative. The 1999 informative income tax report contained his social security number, but
the name of CDM Management.

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The Cooperative’s former Fee Accountant assisted the former Project Administrator in
concealing the compensation while administering the Cooperative. Additionally, the former Fee
Accountant drafted the 1995 to 1999 personal income tax withholding statements and
professional fees informative tax returns with names and social security numbers other than the
former Project Administrator’s knowing they were false. The Cooperative’s Administrative
Secretary stated that the former Fee Accountant completed the annual income tax withholding
forms by hand and instructed her to type the forms with the incorrect social security numbers and
names. The Administrative Secretary said she questioned the former Fee Accountant about
using the incorrect social security numbers, but was instructed to insert the numbers he provided.
The Administrative Secretary said that she followed the instructions of the former Project
Administrator and former Fee Accountant because she was afraid of losing her job.

We believe certain members of the Cooperative’s Board of Directors were negligent in carrying
out their duties at the Cooperative. The Board’s former President and Vice-President signed
disbursement checks that were intended for the former Project Administrator, but were issued
payable to a ghost employee. Also, the former President admitted signing checks in blank
without verifying them. The Administrative Secretary stated that she asked the former Project
Administrator about the use of other names, but he said not to worry because the Board of
Directors knew about it and approved it. In a 1994 letter to the Board of Directors, the former
Project Administrator requested for his salary to be paid separate of payroll. The letter also
stated that such a status would allow him to continue his disability status with Social Security.
The former Board members approved the agreement.

Other Improper Actions of the Former Project Administrator and Fee Accountant

We noted additional deficiencies involving the former Project Administrator from 1978 to 1999.

a)     The 1999 fiscal year end adjustments included $797 charged as a payroll tax expense.
       However, the $797 represented an accounts receivable for a personal loan to the former
       Project Administrator.

b)     The health plan for an ex-employee and his wife was improperly charged to the
       Cooperative for 10 years. The employee retired in 1989 and was authorized health
       coverage for 1 year after retirement. However, the Cooperative continued paying the
       health insurance from 1991 to February 2001, when the coverage was finally terminated.
       From 1999 to 2001, the monthly premiums ranged from $139 to $187. We determined
       that the Cooperative paid $4,207 from January 1999 to February 2001 for the retired
       employee’s health insurance plan.

c)     There was a lack of internal controls over the laundry revenue collections and accounting.
       The Cooperative’s employees informed us that the laundry revenues were collected twice
       a month. However, the funds remained in the former Project Administrator’s possession
       until deposited at month end. There is no assurance laundry revenues were properly
       accounted for and safeguarded.




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HUD Comments

The Director of the Caribbean Multifamily Program Center concurred with the amount of
$25,562 indicted in the report.

Recommendations

We recommend you:

1A. Instruct the Cooperative to seek repayment from the former Project Administrator to
    reimburse the Cooperative for the $25,562 of excessive benefits received.

1B. Debar the former Project Administrator and former Fee Accountant from future
    participation in HUD related programs.

1C. Debar the former President and Vice-President of the Cooperative’s Board of Directors
    from future participation in HUD related programs.




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                                                                                                      Appendix B

                                  SCHEDULE OF INELIGIBLE COSTS



                                 Recommendation                          Ineligible1

                                            1A                              $25,562




1
    Ineligible costs are not allowed by law, contract, HUD or local agency policies or regulations.



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               Appendix C

HUD COMMENTS




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                                                          Appendix D

                                      DISTRIBUTION


Principal Staff
Regional Directors
OIG Staff
Area Coordinator, San Juan Office,4NS
Director, Multifamily Program Center, 4NHM
Acquisitions Librarian, Library, AS

Sharon Pinkerton, Senior Advisor
Subcommittee on Criminal Justice
Drug Policy and Human Resources
B373 Rayburn House Office Building
Washington, DC 20515

Stanley Czerwinski, Associate Director
Resources, Community, and Economic Development Division
U.S. General Accounting Office
441 G Street N.W., Room 2T23
Washington, DC 20515

Steve Redburn, Chief Housing Branch
Office of Management and Budget
725 17th Street, NW, Room 9226
New Executive Office Building
Washington, DC 20503

The Honorable Joseph Lieberman
Chairman
Committee on Government Affairs
706 Hart Senate Office Building
United States Senate
Washington, DC 20510

The Honorable Fred Thompson
Ranking Member
Committee on Governmental Affairs,
340 Dirksen Senate Office Building
United States Senate
Washington, DC 20510




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The Honorable Dan Burton
Chairman
Committee on Government Reform,
2185 Rayburn Building
United States House of Representatives
Washington, DC 20515

The Honorable Henry A. Waxman
Ranking Member
Committee on Government Reform
2204 Rayburn Building
United States House of Representatives
Washington, DC 20515

Andy Cochran
House Committee on Financial Services
2129 Rayburn House Office Building,
Washington, DC 20515

Clinton C. Jones, Senior Counsel
Committee on Financial Services
U. S. House of Representatives
B303 Rayburn House Office Building
Washington, DC 20515




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