oversight

Heartland Health Care Center of Bethany, Bethany, OK

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-12-10.

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

                                                              Issue Date
                                                                       December 10, 2004
                                                              Audit Report Number
                                                                           2005-FW-1003




TO:         Herman S. Ransom
            Director, Kansas City Multifamily HUB, 7AHM

            J. Tom Miller
            Director, Oklahoma City Multifamily Program Center, 6IHM



FROM:       D. Michael Beard
            Regional Inspector General for Audit, 6AGA

SUBJECT: Owners of Heartland Health Care Center of Bethany misspent or cannot
           account for the use of $18.7 million in project income.


                                HIGHLIGHTS

 What We Audited and Why

             We audited the Heartland Health Care Center of Bethany (Center), a
             nursing home that had a HUD insured mortgage. The Oklahoma City
             Multifamily staff voiced concerns because the owners did not submit
             annual audits, permitted the property to deteriorate into a substandard
             physical condition, defaulted on the mortgage, and filed for bankruptcy.
             In addition, HUD staff identified possible indications of equity skimming.

             Our audit objective was to determine whether owners or other parties
             managing the Center complied with the project regulatory agreement and
             HUD requirements when disbursing project funds.


 What We Found
             Center officials did not disburse funds in accordance with their regulatory
             agreement. Specifically, Center officials used $2,310,160 for ineligible
             costs, such as loan repayments and late fees and could not support
             $4,508,688 in expenditures. Further, Center officials did not provide
           documentation to support the use of revenue amounting to $11,909,900 for
           3 years.

           Center officials ignored requirements of the regulatory agreement and as a
           result they misspent funds. This ultimately resulted in mortgage default
           and closure of the Center.

What We Recommend


           We recommend the Director of the Multifamily Program Center require
           Center officials to reimburse HUD $2,310,160 for the ineligible costs,
           provide support or reimburse HUD $4,508,688 for the unsupported
           expenditures, and provide support or reimburse HUD for the unsupported
           use of $11,909,900 in revenue.

           We further recommend that the Director take appropriate administrative
           actions and pursue recovery of the funds from Center officials under the
           equity skimming statutes.

           For each recommendation without a management decision, please respond
           and provide status reports in accordance with HUD Handbook 2000.06,
           REV-3. Please furnish us copies of any correspondence or directives
           issued because of the audit.


Auditee’s Response


           The Auditee chose not to comment in a timely manner regarding the
           findings contained in this report. We issued the draft to the Auditee on
           October 14, 2004, for comment and did not have a response as of the date
           of this report. Therefore, we issued the report without an Auditee
           response.




                                        2
                         TABLE OF CONTENTS

Background and Objectives                                                                 4

Results of Audit
      Finding 1: Center officials misspent $6.8 million.                                   5
      Finding 2: Center officials could not support the use of $11.9 million in project   10
                 funds.


Scope and Methodology                                                                     12

Internal Controls                                                                         14



Appendices
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use                      15
   B. Criteria                                                                            16




                                           3
                     BACKGROUND AND OBJECTIVES

HUD provides mortgage insurance for nursing homes, intermediate care, board and care,
and assisted-living facilities. Section 232 of the National Housing Act authorizes the
program.

In February 1997, HUD insured a $4.9 million mortgage on Heartland Health Care
Center of Bethany (Center). Heartland of Bethany, Inc. owned the Center, a 235-bed
nursing home in Bethany, Oklahoma. The parent company of the Center, RM&G, Inc.1
leased the Center and managed its operations as an identity-of-interest management
agent, which HUD approved.

The Center paid for services provided by six identity-of-interest companies. The
identity-of-interest relationships included management agent officials with a financial
interest in five companies. It also included the son of an owner with a financial interest
in two companies besides being the registered agent of four companies.

The six companies provided various services.

    1. Vision Health Care Finance, Inc. provided financial services (loans).
    2. Selective Medical Staffing, Inc. provided temporary staff.
    3. Vision Management, LLC, a consulting firm, provided management, accounting,
       and risk management services.
    4. Vision Protection, LLC provided fire alarm services.
    5. Pathways Rehab, LLC provided rehabilitation therapy services.
    6. Pathways Respiratory Service, LLC supplied respiratory durable medical
       equipment.

During December 2002, the operating officer2 turned over operations to Comprehensive
Consultants, Inc., without HUD’s approval. The owners defaulted on the loan on July 1,
2003. HUD foreclosed on August 20, 2004. The principal entities, Heartland of
Bethany, Inc. and RM&G, Inc., filed for bankruptcy in September 2003. The
mortgagee’s claim totaled about $4.2 million and HUD has a solid $626,000 offer for the
property.

The Center was no longer in business at the time of our audit. Therefore, we limited the
objective of the audit to finding out whether owners or other parties managing the Center
complied with the project regulatory agreement and HUD requirements when disbursing
project funds.



1
    RM&G is the first letter of the last names of the three principal owners of Heartland of Bethany, Inc.:
    Messrs. John V. Rich, Jr., Chairman of the Board; Donald Ray Moore, President; and Edwin Leslie
    Gage, Vice President.
2
    Mr. David Forgy was the Chief Executive Officer of RM&G, Inc.


                                                     4
                                  RESULTS OF AUDIT

Finding 1: Center officials misspent $6.8 million.
Center officials used project funds for ineligible and unsupported payments. Specifically,
Center officials used:

        (1) $2,225,779 for loan repayments to an identity-of-interest company and
        (2) $84,381 for ineligible costs such as late fees, duplicate payments, penalties,
            and payments for identity-of-interest nursing home expenditures.

Center officials did not provide supporting documentation for:

        (1) $2,300,943 for wire transfers and checks written to identity-of-interest
            companies and nursing homes;
        (2) $2,014,704 for invoices from identity-of-interest companies; and
        (3) $193,041 for checks issued from the Center’s Bank of Oklahoma account.

Center officials used funds for unreasonable or unnecessary costs and did not maintain
their books and records in a reasonable condition for proper audit. Center officials
ignored regulatory agreement requirements. As a result, Center officials misspent $6.8
million.



            Center officials inappropriately repaid $2.2 million for
                           identity-of-interest loans.
Center officials set up Vision Health Care Finance, an identity-of-interest3 company4to
make loans between the related nursing homes. A Center owner stated they could not
keep track of the loans, between the nursing homes, until they created this company. The
Center owner also stated the Center never made a profit; therefore, the Center never had
surplus cash. Center officials did not have HUD’s approval to repay the loans.

Vision Health Care Finance made the first loan on July 25, 2001. Center officials began
making the loan repayments, by check and wire transfer, to Vision Health Care Finance
on August 15, 2001. The payments continued through and ended on February 3, 2003.
The final payment to Vision Health Care Finance, on February 3, 2003, was the

3
    Identity-of-interest is defined in HUD Handbook 4370.1 Rev 2 as an entity or person having business
    relationships with the project owner or any officer, director, or partner of the mortgagor. For purposes
    of this definition the term "person" includes any individual, partnership, corporation, or other business
    entity. Any ownership, control, or interest held or possessed by a person's spouse, parent, child,
    grandchild, brother, or sister is attributed to that person.
4
    Center officials did not disclose to HUD that Vision Health Care Finance was a related company.


                                                     5
remainder amount in the Center’s operating bank account.5 The total amount the Center
repaid Vision Health Care Finance was $2,225,779.

Center officials did not follow HUD requirements when they made loan repayments to
the identity-of-interest company. HUD Handbook 4370.2 Rev-1 states the Center may
not repay owner loans unless in a surplus cash position. The handbook also states if the
Center repays the loans, from a non-surplus cash position, the owner is subject to
criminal and civil monetary penalties.6 These criminal and civil monetary penalties
include the equity skimming statutes. The Center was not in a surplus cash position;
therefore, violated HUD requirements and is subject to the equity skimming statutes.


           Center officials paid $84,381 for various ineligible costs.
Center officials used project funds for ineligible expenses including paying for owner
expenses, 1-900 calls, expenses of other related nursing homes, personal cell phone
charges, late fees, insufficient fund charges, rotary club membership dues for an
employee, flowers for doctors, a parking ticket, duplicate payments, donations, and
penalties and interest. According to the Center’s regulatory agreement, the Center may
only pay reasonable and necessary operating costs. The above expenses are not
reasonable necessary operating costs therefore are ineligible.

The Center paid the ineligible expenses with checks with exception of the insufficient
fund charges. The Center made payments for ineligible expenses as early as January
1998.7 These payments continued through December 2002.

Of the ineligible costs, the Center incurred $29,962 in insufficient fund charges from
June 2000 through December 2002. The banks automatically deducted the insufficient
fund charges. Officials used the remaining $54,419 to pay for owner expenses, 1-900
calls, personal cell phone bills, and rotary club membership dues, expenses of other
related nursing homes, duplicate invoices, late fees, flowers for doctors, a parking ticket,
and penalties and interest. As a result of the Center not following their regulatory
agreement, they misspent a total of $84,381 for various ineligible costs.




5
    First National Bank Account Number 49482.
6
    Criminal equity skimming statute is 12 USC §1715z-19; Civil equity skimming statute is 12 USC
    §1715z-4a.
7
    Because Center officials could not provide accounting records for 1997, 1999, and 2003, we could not
    determine if the Center paid ineligible charges during these years.


                                                   6
            Center officials paid $2.3 million for wire transfers and
                     checks written without explanation.

Despite regulatory requirements, Center officials distributed project funds to 9 identity-
of-interest companies,8 22 related nursing homes,9 and 3 unknown bank accounts.10
Center officials could not justify $2,300,943 in payments. Center officials made the
distributions by check and wire transfers11 when the property had no surplus cash and
without HUD approval.

Center officials started distributions to the 9 related companies in January 2001,12 the 22
related nursing homes in June 2001, and the 3 unknown bank accounts in December
2002. These distributions continued through December 2002 when Center officials
transferred operations to Comprehensive Consultants, Inc.

Without explanation or supporting documentation, Center officials paid $1,603,548 with
checks and wire transfers to nine related companies. The payments included: (1) checks
to four related vendor companies that totaled $865,298 more than the invoices they
submitted; (2) unsupported wire transfers of $576,250 to six related vendor companies;
and (3) unsupported wire transfers and checks totaling $162,000 to RM&G, Inc.

The Center disbursed $657,395 to 22 related nursing homes without supporting
documentation to show the purpose of the payments. The Center did not obtain HUD
approval to transfer funds to the identity-of-interest nursing homes.

Center officials wired a total of $40,000 to three bank accounts. Officials could not
identify the owners of the accounts or explain the transfers of project funds. Due to time
constraints we did not attempt to determine the ownership of these accounts.

Center officials ignored and did not follow their regulatory agreement when making
distributions, which specifies that only reasonable expenses and necessary repairs may be
paid out of project funds. The regulatory agreement defines distribution: “A distribution
is any withdrawal or taking of cash or any assets of the project… other than for the
payment of reasonable expenses necessary to the operation and maintenance of the
project.” As a result, the Center misspent $2,300,943.




8
     Selective Medical Staffing, Vision Management, Vision Protection, Pathways Rehab, Pathways
     Respiratory, RM&G, Vision Maintenance, Republic Relations, and a Vending Account.
9
     Atoka Colonial, Beggs, Cedar Creek, Cottonwood, Crescent, Cyril, Duncan, Edmond, Healdton,
     Hennessey, Heritage Manor, Hillcrest, Marlow, McAlester, Medford, Perry, Quartz Mountain,
     Ringling, Rosewood, Silvercrest, Thomas, and Wilson.
10
     Bank account numbers 49834, 55620, and 55631.
11
     Includes telephone and Internet transfers.
12
     RM&G, Inc. received the first distribution.


                                                  7
        Center officials did not provide supporting documentation for
              $2 million paid from identity-of-interest invoices.
Five identity-of-interest companies13 submitted invoices to the Center without supporting
documentation. Center officials paid these invoices without obtaining documentation to
support the charges. Center officials should have obtained the documentation to show
services were, in fact, provided and at a reasonable cost.14 Also, Center officials did not
follow their regulatory agreement in maintaining complete records in reasonable
condition for proper audit. As a result, Center officials misspent $2,014,704 paying the
five companies.

Selective Medical Staffing, a related staffing agency, submitted $577,897 in invoices
from February 2001 through October 2002. The invoices did not have any supporting
documentation, such as timesheets with a supervisor’s signature, attached to them. In
addition, the invoices did not identify who worked. They only had the certification15 of
who worked. The invoices also did not indicate a service date to show when the
employee worked. Selective Medical Staffing submitted vague invoices and the Center
paid them anyway.

The Center did not have supporting documentation for $604,451 in payments to Vision
Management. Vision Management submitted $623,995 in invoices from August 2000
through November 2002. The Center only had supporting documentation for $19,544. A
Center owner, and owner of Vision Management, described Vision Management as a
consulting firm. The $604,451 supposedly consisted of $541,054 for management,
accounting, and risk management fees and $63,397 for life insurance and various items
Vision Management purchased for the Center. Center officials could not provide
justification for the $541,054 in fees nor any supporting documentation for the $63,397.

The Center did not have supporting documentation for $3,683 in Vision Protection
invoices. Vision Protection was an identity-of-interest fire alarm company. The Center
had a total of $15,029 in Vision Protection invoices from August 2001 through August
2002 but support for only $11,346 of the invoices.

Pathways Rehab was an identity-of-interest respiratory therapy services company. The
Center did not provide supporting documentation for $971,112 in Pathways Rehab
invoices. However, the Center had only paid $811,964 of the unsupported invoices.

The final related company was Pathways Respiratory, a respiratory durable medical
equipment supplier. The Center paid $16,709 for invoices with no support. They paid
these invoices without a description of the goods purchased.


13
     Selective Medical Staffing, Vision Management, Vision Protection, Pathways Rehab, and Pathways
     Respiratory.
14
     Project Owner’s and Management Agent’s Certification, paragraph’s 3(d), 4(a), and 4(f).
15
     Such as LPN, etc.


                                                  8
In total, the Center paid $2,014,704 for unsupported invoices from five related
companies. The Center’s regulatory agreement specifically states that records shall be
maintained in reasonable condition for proper audit. Also, the Center’s Project Owner’s
and Management Agent’s Certification states the Center should have obtained
documentation to support that the goods and services obtained were provided and at a
reasonable cost. The Center failed to abide by these requirements.


             Center officials did not provide an explanation for
                             $193,041 in checks.
The Center’s December 2002 Bank of Oklahoma bank statement identified $193,041 in
cleared checks. However, the Center did not provide documentation to identify the
purpose or the payee of the checks. As a result, the $193,041 is unsupported and
misspent.

Conclusion


              In conclusion, the Center misspent $6.8 million for ineligible and
              unsupported expenditures. Center officials did not follow their regulatory
              agreement requirements, which resulted in misspending project funds and
              mortgage default.



Recommendations


              We recommend the Director of the Multifamily Program Center:

              1A. Require the Center to repay $2,310,160 for ineligible expenditures.

              1B. Require the Center to either repay or provide supporting
                  documentation for $4,508,688 in unsupported expenditures.

              1C. Pursue and/or support the initiation of a civil action under Title 12,
                  United States Code, Section 1715z-4a, against the principals of the
                  owner and management agent, if they are not responsive to HUD’s
                  requirements to repay or support ineligible or unsupported
                  expenditures as contained in recommendations 1A, 1B, and 2A of
                  this report.

              1D. Initiate administrative sanctions against the principals of the owner
                  and management agent involved in Center operations.


                                           9
Finding 2: Center officials did not support the use of $11.9 million
in project funds.
Center officials received $11,912,333 in project revenue from Medicare and Medicaid
from February 1997 through December 1999.16 However, officials could not provide any
documentation to support how they used the project revenue. Center officials failed to
keep their records to prove they used project revenue for authorized purposes. Therefore,
the use of the revenue is questionable.



The Center earned $3,356,740 in revenue from February 5, 1997, through December 31,
1997. Center officials could not provide any documentation to support the use of funds.
However, Center officials did provide 7 months of the management agent’s general bank
account statements. The management agent commingled funds from the Center and its
other related nursing homes in this bank account and could not provide adequate records
to identify the funds. Therefore, we could not determine how the agent used the Center’s
funds.

From January 1, 1998, through December 31,1998, the Center received $4,750,366 in
revenues. The only documentation the Center provided was a set of 1998 financial
documentation.17 Center officials did not provide invoices to show how they spent the
revenue. However, with the limited documentation provided, we identified $2,433 in
ineligible costs that we included in Finding 1. The remaining $4,747,933 is unsupported
costs.

For calendar year 1999, the Center received $3,805,227 in project revenues. The Center
did not provide any support for the use of these funds.

The Center’s regulatory agreement states that the records shall be maintained in
reasonable condition for proper audit at all times. The civil equity skimming statute18
states if the Center cannot establish that the use of project funds were made for a
reasonable operating expense or necessary repair of the project, double the value may be
recovered.




16
     We cannot say with certainty this amount includes all revenue received. The Center did not provide
     sufficient documentation to determine the actual amount of revenue received. Therefore, we relied on
     Medicaid and Medicare sources to determine the amount of revenue.
17
     This included a balance sheet, statement of operations, detail trial balance, corporate invoice transfer,
     corporate check transfer, month-end check register, month-end invoice register, and a month-end
     accounts payable aging schedule.
18
     12 U.S.C. §1715z-4a.


                                                      10
Conclusion


             The Center could not provide documentation for how it used $11,909,900
             in project revenues. Regulatory requirements directed Center officials to
             maintain complete records. They failed to do this. In addition, if the
             Center cannot prove the use of project funds, HUD may recover double
             the value.


Recommendations



             We recommend the Director of the Multifamily Program Center:

             2A. Require the Center to repay or support the $11,909,900 in project
                 revenues earned.

             2B. Pursue and/or support the initiation of a civil action under Title 12,
                 United States Code, Section 1715z-4a, against the principals of the
                 owner and management agent, if they are not responsive to HUD’s
                 requirements to repay or support ineligible or unsupported
                 expenditures as contained in recommendations 1A, 1B, and 2A of
                 this report.

             2C. Initiate administrative sanctions against the principals of the owner
                 and management agent involved in Center operations.




                                          11
                         SCOPE AND METHODOLOGY

Our audit objective was to determine whether owners or other parties managing the
Center complied with the project regulatory agreement and HUD requirements when
disbursing project funds. To accomplish the objective, we:

         •   Interviewed HUD officials, Center officials, Center’s receiver, Medicare
             representatives, Oklahoma State Department of Health representatives, and
             Oklahoma Health Care Authority representatives;
         •   Reviewed relevant HUD regulations and guidelines;
         •   Examined records provided by Center officials; and
         •   Reviewed the Center’s accounting records provided.

Medicare and Oklahoma Health Care Authority representatives provided revenue
information stating the Center received approximately $29.9 million from February 1997
through the early part of 2004.19 However, the Center did not provide sufficient
documentation to show how Center officials spent the project revenue. Therefore, we
could not determine if the Center spent all revenue according to HUD requirements.
Although we served a subpoena to obtain all accounting records, the Center provided
only the following:

     •   1997 – 7 months of the management agent’s general bank account statements;
     •   1998 – 1 full calendar year set of financial reports;20
     •   1999 – Nothing;
     •   2000 – 1 full calendar year set of financial reports, bank statements from February
                through December, and invoices;
     •   2001 – 6 months of financial reports, bank statements for the year, and invoices;
     •   2002 – Bank statements for the year and invoices; and
     •   2003 – Bank statements for 2 months, which showed the bank accounts closed.

We were not able to review the vast majority of the 2003 information. Center officials
transferred Center operations to a third party, Comprehensive Consultants, Inc. (CCI).
HUD did not approve this transfer of operations. CCI maintained the operating records
during 2003. However, we were not able to obtain the operating records because the
Department of Health and Human Services subpoenaed these records through a grand
jury.




19
     The Oklahoma Health Care Authority representative stated the Center has a year to file Medicaid
     claims. Therefore, payments after the facility closed are legitimate.
20
     This included a month-end check register, month-end invoice register, and a month-end accounts
     payable aging schedule.



                                                   12
We conducted our fieldwork between February and August 2004 in Oklahoma City,
Oklahoma. Our audit period generally covered the period from February 5, 1997,
through December 2003, when the Center closed.

We conducted the audit in accordance with generally accepted governmental auditing
standards.




                                         13
                          INTERNAL CONTROLS

Internal Control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the
systems for measuring, reporting, and monitoring program performance.



               We did not review internal controls because the Center closed in
               December 2003.




                                            14
                               APPENDICES

Appendix A

           SCHEDULE OF QUESTIONED COSTS
          AND FUNDS TO BE PUT TO BETTER USE


              Recommendation
                  Number              Ineligible 1      Unsupported 2
                     1A                   $2,310,160
                     1B                                    $ 4,508,688
                     2A                                    11,909,900
                    Totals                $2,310,160      $16,418,588



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 polices or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured
     program or activity when we cannot determine eligibility at the time of audit.
     Unsupported costs require a 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.




                                         15
Appendix B
                                     CRITERIA

Regulatory Agreement

Paragraph 6(b)
Owners shall not without the prior written approval of the Secretary:
Assign, transfer, dispose of, or encumber any personal property of the project, including
rents, or pay out any funds except from surplus cash, except for reasonable operating
expenses and necessary repairs.

Paragraph 9(c)
The mortgaged property, equipment, buildings, plans, offices, apparatus, devices, books,
contracts, records, documents, and other papers relating thereto shall at all times be
maintained in reasonable condition for proper audit and subject to examination and
inspection at any reasonable time by the Secretary or his duly authorized agents.

Paragraph 13(g)
A distribution is any withdrawal or taking of cash or any assets of the project… other
than for the payment of reasonable expenses necessary to the operation and maintenance
of the project.



Project Owner’s and Management Agent Certification

Paragraph 3(d)
We (Agent) agree to refrain from purchasing goods or services from entities that have
identity-of-interest with us unless the costs are as low as or lower than arms-length open-
market purchases.

Paragraph 4(a)
The Agent agrees to assure that all expenses of the project are reasonable and necessary.

Paragraph 4(f)
The Agent agrees to maintain copies of such documentation and make such
documentation available for your inspection during normal business hours.




                                            16
HUD Handbook 4370.1 Rev 2, Reviewing Annual and Monthly Financial
Reports, Glossary

Identity of Interest
This term applies to an entity or person having business relationships with the project
owner or any officer, director, or partner of the mortgagor where the costs of products or
services might not be determined through arms-length negotiation. Such a relationship
should be construed to exist when the owner and the product or service provider are not
the same person but (1) the project owner; or (2) any officer or director of the project
owner or (3) any person who directly or indirectly controls 10 percent or more of project
owner's voting rights or directly or indirectly owns 10 percent or more of the project
owner; is also (1) an officer or director of the management agent; or (2) a person who
directly or indirectly controls 1.0 percent or more of the vendor. For purposes of this
definition the term "person" includes any individual, partnership, corporation, or other
business entity. Any ownership, control or interest held or possessed by a person's
spouse, parent, child, grandchild, brother or sister is attributed to that person.


HUD Handbook 4370.2 Rev. 1, Financial Operations and Accounting
Procedures for Insured Multifamily Projects

2-11.   REPAYMENT OF OWNER ADVANCES

      A. Advances made for reasonable and necessary operating expenses may be paid
from surplus cash at the end of the annual or semi-annual period. Such repayment is not
considered an owner distribution. It is considered a repayment of advances. Repayment
of owner advances when the project is in a non-surplus cash position will subject the
owner to criminal and civil monetary penalties. (See Appendix 1, Criminal Statutes.)


Equity Skimming Statutes

12 USC 1715-4a
The double damages remedy (12 U.S.C.A. Sec 1715z-4a, 1997) is a civil remedy for
unauthorized use of multifamily housing project assets and income. It applies to any
person who uses assets or income in violation of the regulatory agreement or regulation.
Use of assets or income in violation of the regulatory agreement or any form of
regulatory control as may be imposed by the Secretary shall include any use for which
the documentation in the books and accounts does not establish that the use was made for
a reasonable operating expense or necessary repair of the project and has not been
maintained in accordance with the requirements of the Secretary and in reasonable
condition for proper audit.

In any judgment favorable to the United States entered under this section, the Attorney
General may recover double the value of the assets and income of the project that the


                                            17
court determines to have been used in violation of the regulatory agreement or any
applicable regulation, plus all costs relating to the action, including but not limited to
reasonable attorney and auditing fees.

12 USC 1715z-19
The equity skimming penalty (12 U.S.C.A. Sec 1715z-19, 1997) is a statute that provides
criminal penalties: fines of not more than $500,000 and imprisonment of no more than 5
years. It applies to an owner, agent, or manager of a multifamily property who willfully
uses rents, assets, or income for purposes other than to meet reasonable and necessary
expenses during a period when the mortgage note is in default or the property is in a non-
surplus cash position.




                                              18