oversight

                                                            Issue Date
                                                                   March 30, 2004
                                                            Audit Case Number
                                                                    2004-LA-1002




TO:            Cecilia J. Ross, 9DPH
               Director, Los Angeles Office of Public and Indian Housing




FROM:          Joan S. Hobbs
               Regional Inspector General for Audit, 9DGA

SUBJECT:       Housing Authority of the City of Los Angeles
               Management of Legal Matters

                                   INTRODUCTION

We previously completed a review of the Housing Authority of the City of Los Angeles’
(HACLA) procurement activities, including ongoing monitoring and management of
resultant contracts, as they relate to its Resident Management Corporations/Resident
Advisory Councils (RMCs). The review was initiated in response to several citizen
complaints alleging irregularities with HACLA’s RMCs and related contracting
activities. Legal complications have precluded the issuance of a final audit report setting
out the results of this review. However, as part of this review, we also identified
problems related to HACLA’s management of its legal affairs, including failure to advise
HUD of significant legal matters. The results of our review, as it relates to this one
matter, are set out in this audit memorandum. The audit was performed in accordance
with generally accepted government auditing standards.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for
each recommendation without a management decision, a status report on: (1) the corrective
action taken; (2) the proposed corrective action and the date to be completed; or (3) why
action is considered unnecessary. Additional status reports are required at 90 days and 120
days after report issuance for any recommendation without a management decision. Also,
please furnish us copies of any correspondence or directives issued because of the audit.

Should you or your staff have any questions, please contact me at (213) 894-0219
extension 3705.
                                      SUMMARY

During a limited review of the Housing Authority of the City of Los Angeles’ (HACLA)
operations associated with its Resident Management Corporations/Resident Advisory
Councils (RMCs) we identified problems with HACLA’s management of legal matters.
Specifically, HACLA incurred outside legal service fees and also entered into a $1.8
million litigation settlement agreement to resolve an employee lawsuit without obtaining
required prior HUD notification and approval. HACLA also incurred unnecessary and
ineligible attorney fees of $119,440 on behalf of a consultant and $47,227 in unnecessary
attorney fees to monitor information requests and activities of the OIG during our review.
In our opinion, these inappropriate actions were a result of inappropriate executive
decisions and intentional disregard of HUD requirements on behalf of HACLA
management.

                                    BACKGROUND

The Housing Authority of the City of Los Angeles, California (HACLA) was organized
as a Public Housing Authority (PHA) in 1938 to provide low-cost housing to individuals
meeting criteria established by the U.S. Department of Housing and Urban Development
(HUD).

HACLA, one of the largest Public Housing Authorities (PHAs) in the nation, has more
than 60 developments with over 8,000 units and 20,000 residents in its conventional
public housing program. HACLA also administers Section 8 Programs with over 44,000
units and 95,000 residents. Programs administered by HACLA are designed to enable
low-income families, the elderly, and persons with disabilities to obtain and reside in
housing that is decent, safe, sanitary, and in good repair.

OIG Hotline Complaint

In July 2001 and September 2001, OIG received two separate complaints alleging similar
HACLA contracting irregularities with its RMCs including:

        Kickbacks
        Unfair bidding practices
        Nonprofessional and unethical conduct
        Conflicts of interest

Based on the nature of the OIG Hotline Complaints, OIG initiated a limited review
focusing on the allegations received in the complaints. This review has been completed
but other ongoing matters have precluded the issuance of our final audit report related to
these issues. However, although not part of the original complaint review, we did
identify concerns with HACLA’s management of its legal affairs. We reviewed this
matter and have set out the results of the review in this memorandum.




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FINDING - HACLA DID NOT MANAGE ITS LEGAL AFFAIRS IN
          COMPLIANCE WITH APPLICABLE REQUIREMENTS AND
          COST GUIDELINES – INELIGIBLE - $119,440 AND
          UNSUPPORTED - $47,227

HACLA incurred outside legal service fees and also entered into a $1.8 million litigation
settlement agreement to resolve an employee lawsuit without obtaining required prior
HUD notification and approval. HACLA also incurred unnecessary and ineligible
attorney fees of $119,440 on behalf of a consultant and $47,227 in unnecessary attorney
fees to monitor information requests and activities of the OIG during our review. In our
opinion, these improper actions were a result of inappropriate executive decisions and
intentional disregard for HUD requirements by HACLA management.

In accordance with paragraphs 5-2 and 5-3c of HUD Handbook 1530.01 REV 4,
Litigation, a Public Housing Authority (PHA) is required to notify HUD of pending
litigation and obtain written concurrence prior to accepting a settlement offer arising out
of litigation. Additionally, per paragraphs 3-3b(3) and 5-4 of the Litigation handbook, a
PHA must obtain Regional Counsel approval prior to entering any litigation services
contract with a private attorney(s) where the fee is expected to exceed $10,000. Costs are
not allowable for payment from a Federal award unless they are “necessary and
reasonable for proper and efficient performance and administration of Federal awards”
(reference Section E of OMB Circular A-87, Cost Principles for State, Local, and Indian
Tribal Governments). HACLA failed to adhere to these requirements in the management
of their legal affairs as discussed below.

Prior HUD notification of pending litigation and approval of settlements

In November 1997 the first in a series of three lawsuits were initiated against HACLA by
one of its employees for actions the employee claimed HACLA had taken against her as a
result of “whistle blower” type activities reported by her. HACLA did not notify HUD of
any of the three lawsuits as required by paragraph 5-2 of HUD Handbook 1530.01 REV
4, nor did it notify HUD prior to entering into agreements to settle the lawsuits. These
agreements entered in May 2000 and March 2001 required payment to the employee of
$1,860,000. Additionally, in October 2000 an additional quasi-related lawsuit was filed
against HACLA (see below). Again, HACLA did not notify HUD of the lawsuit even
though significant attorney fees were incurred.

HACLA claimed that there was no requirement to notify HUD of the lawsuits and
settlements as the litigation and settlement was handled by its insurance company. This
claim is not valid. The applicable requirements do not differentiate between litigation
handled by an insurance company and that handled directly by a PHA. Accordingly, all
such litigation must be reported to HUD. This notification is necessary to allow HUD to
fulfill its monitoring responsibilities and maintain awareness of significant matters, which
could affect both the PHA and HUD. Further, HACLA’s claim that settlement costs were




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covered by insurance is not accurate. HACLA was required to pay $236,586 of the
ultimate settlement charges.

HACLA contracted with private attorneys without HUD concurrence and incurred
$119,440 in ineligible charges and $47,227 in questionable charges

HACLA entered into contracts with private attorneys without obtaining prior HUD
written concurrence as required by paragraph 5-4 of HUD Handbook 1530.01 REV 4.
Further, HACLA incurred $166,667 in attorney’s fees which were not reasonable and
necessary and accordingly, ineligible.

In October 2000, a lawsuit was filed against HACLA and a consultant who had done
significant business with HACLA and its RMCs. This consultant, who was also a central
party in the lawsuits discussed above, asked that HACLA pay his legal fees relating to the
lawsuit. HACLA agreed to this and entered a joint defense agreement with the
consultant. On November 17, 2000 in accordance with the joint defense agreement,
HACLA entered into a contract agreeing to pay an attorney selected by the consultant for
an amount not to exceed $25,000 for the consultant’s legal defense. In December 2000,
the consultant replaced his attorney with another law firm, wherein HACLA entered into
another sole source contract with this firm in an amount not to exceed $10,000. It should
be noted that by the time this contract was executed, charges under the contract already
exceeded the maximum price. Accordingly, on February 23, 2001, by which time over
$30,000 in legal fees had been incurred, HACLA’s board agreed to a contract amendment
increasing the maximum contract price from $10,000 to $85,000 (HACLA could not
locate this original contract amendment). In March 2002, the contract was again
amended increasing the maximum payable to $135,000. As of September 2002, the total
paid by HACLA for the consultant’s legal defense under these series of contracts was
$119,440. This includes at least $3,544 in charges for his attorney’s dealings with the
OIG during our audit of HACLA’s operations.

HACLA did not notify HUD of this lawsuit nor request written concurrence to its
contracting with private attorneys for the litigation services involved in this lawsuit. In
fact, documentation available indicates HACLA actively tried to avoid informing HUD
of the suit and obtaining written approval of the contracts. For example, an e-mail
between two HACLA employees, which was located in the contract file, states in part,
“…does not advise entering into a new contract….entering into a new contract with this
law firm would require HUD approval pursuant to HUD REG. 1530.1 Rev., Ch. 5,
Section 5-4 as provided for in the HUD Litigation Handbook.” This demonstrates that
HACLA was fully aware of its obligations to HUD, but chose to disregard them.

When HACLA staff was questioned about paying the consultant’s legal fees, they
claimed it was in the best interest of HACLA and further stated they had obtained a legal
opinion from the City Attorney’s office to support their actions. When asked for a copy
of this opinion, HACLA could not provide it, but instead provided an opinion dated
November 2002, two years after the fact, wherein the City Attorney’s office attempted to
justify the payments on behalf of the consultant. However, in our opinion, the



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justification claimed is not valid. The consultant, under the terms of his contracts with
HACLA and its RMCs, was required to have valid professional liability insurance of at
least $1,000,000. Such insurance, if it had been obtained, should have covered the
consultant’s legal fees and would not have necessitated a joint defense agreement.
However, HACLA had not required the consultant to adhere to his contract and obtain
liability insurance. In fact, based upon information provided by the consultant, such
liability insurance was not obtained until September 2000, five years after he had begun
contracting with HACLA. Payment of legal fees by the consultant, which should have
been his responsibility, is not a reasonable and necessary expense and accordingly, the
$119,440, and any additional related expenses, are ineligible charges for any federal grant
program and must be refunded by HACLA from non-federal funds.

An additional $47,227 in outside legal fees was incurred by HACLA without obtaining
prior HUD notification and concurrence. Further, these fees were, in our opinion, not
reasonable and necessary charges. In fact, the charges were for assisting HACLA in
dealing with OIG’s review, including responding to requests for information deemed
necessary for our review. Such interference ended up impeding the efficient conduct of
our review without benefiting HACLA’s housing programs.            HACLA claims the
$47,227 was paid using other non-HUD funds. However, specific documentation needs
to be provided to support this claim and if not substantiated, HACLA would be required
to refund the $47,227 to its federally funded housing programs.

                                AUDITEE COMMENTS

We provided our draft report to HACLA on January 29, 2004 and discussed this draft
with HACLA representatives at an exit conference on February 10, 2004. Additionally,
on February 17, 2004 and March 19, 2004, HACLA provided written comments and
additional information in response to the draft report and the exit conference. We have
included HACLA’s March 19, 2004 (final) written comments in Attachment B to the
report and have summarized them below.

HACLA stated that the questioned legal costs have now been paid from non-federal
funding and provided a schedule to document this claim. Additionally, HACLA stated
that it thought that it had tight controls to monitor outside legal services and ensure that
contractors meet basic contractual obligations. HACLA stated that it has consistently
obtained HUD approval for all substantive legal matters and obtained HUD approval of
legal contracts and settlements as appropriate and that its failure to do so for the items
discussed in our report was an oversight. However, HACLA had concerns about the
report’s discussion of management’s apparent intentional violation of HUD requirements
relating to prior HUD approval of contracts for legal services. HACLA felt that this was
not accurate and asked that the conclusions related to this be removed from the report.

HACLA provided additional comments on the defense of a contractor and stated that
litigation between the Jordan Downs RMC and the Housing Authority was the result of
the contractor stepping forward as a whistleblower and felt it would send the wrong
message to the public if they did not defend him.



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                  OIG EVALUATION OF AUDITEE COMMENTS

Documentation supplied by HACLA to support the use of Non-HUD funds was simply a
spreadsheet claiming to summarize cost transfers to Fund 401 – Non-HUD Funds.
During the course of our audit we documented the use of federal funds for legal costs and
HACLA’s documentation does not serve to support their claim that these transfers were
actually made nor does it identify the source of funding accounted for in Fund 401.
Therefore, additional information and documentation needs to be submitted to
substantiate HACLA’s claimed payment of questioned legal fees from non-federal;
funds. In relation to the sufficiency of HACLA’s controls over legal matters and
enforcement of basic contract requirements, it was apparent (as discussed in the finding)
that these controls and procedures were not adequate to ensure that legal fees were
appropriate, required HUD approval of legal matters was obtained and contractors met
basic contract requirements. Accordingly, HACLA needs to establish additional controls
and procedures that will ensure future compliance in these matters. Further, we believe
that our comments relating to apparent intentional violation of HUD requirements do not
warrant change, as they are supported by e-mails in HACLA’s own files, which clearly
demonstrated an intentional circumvention of HUD requirements. Finally, with respect
to HACLA’s comments regarding the defense of the contractor, the contractor was
required to carry professional liability insurance in his position with the Resident
Management Corporations and should have provided his own defense. Further, in our
opinion, the case was not a simple whistleblower case, but involved serious accusations
relating to the contractor’s activities and actions as they related to fulfillment of his
contractual obligations. (This whistleblower case was a different case than that which
was discussed in the report).


RECOMMENDATIONS

We recommend your office require HACLA to:

A Repay, using non-federal funds, its conventional low-rent program the $119,440 in
  ineligible legal fees incurred in defending its consultant;

B Provide documentation to your office evidencing that non-federal funds were used to
  pay the $47,227 in legal costs relating to our audit and if not substantiated, repay the
  funds to the applicable program;

C Establish procedures to ensure that legal fees are incurred only when they are
  reasonable and necessary for its housing operations and to obtain the required HUD
  approval for outside legal services and legal settlements; and

D Implement policies and procedures to ensure that contractors meet basic contract
  requirements, including obtaining of required liability insurance.




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                                                                          Appendix A

SCHEDULE OF QUESTIONED COSTS AND FUNDS PUT TO BETTER USE



Recommendation                   Type of Questioned Cost                Funds Put to
   Number                 Ineligible 1/         Unsupported 2/           Better Use 3/

        A                       119,440
        B                                                47,227




1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or
   activity that the auditor believes are not allowable by law, contract or Federal,
   State or local policies or regulations.

2/ Unsupported costs are costs charged to a HUD-financed or HUD-insured program
   or activity and eligibility cannot be determined at the time of audit. The costs are
   not supported by adequate documentation or there is a need for a legal or
   administrative determination on the eligibility of the costs. Unsupported costs
   require a future decision by HUD program officials. This decision, in addition to
   obtaining supporting documentation, might involve a legal interpretation or
   clarification of Departmental policies and procedures.

3/ Funds Put to Better Use are costs that will not be expended in the future if our
   recommendations are implemented.




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                   Appendix B

AUDITEE COMMENTS




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