oversight

Coventry Health Center, Federal Housing Administration Loan Number 016-43071, Coventry, Rhode Island

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-03-28.

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

             AUDIT REPORT




                Coventry Health Center
Federal Housing Administration Loan Number 016-43071
                Coventry, Rhode Island

                   2006-BO-1006

                  March 28, 2006




              OFFICE OF AUDIT, REGION I
                  Boston, Massachusetts
                                                                   Issue Date
                                                                        March 28, 2006
                                                                   Audit Report Number
                                                                        2006-BO-1006




TO:            Ellen R. Connolly, Director of Boston Multifamily Housing Hub, 1AHMLA
               Margarita Maisonet, Director of Departmental Enforcement Center, CV


FROM:          John A. Dvorak, Regional Inspector General for Audit, 1AGA


SUBJECT:       Coventry Health Center
               Federal Housing Administration Loan Number 016-43071
               Coventry, Rhode Island


We reviewed the books and records of Coventry Health Center (project). The objective of our
review was to determine whether Coventry Health Center Associates, L.P. (owner), and-or Sterling
Health Care Management Company, an identity-of-interest management agent, used the project’s
funds in compliance with the regulatory agreement and the U.S. Department of Housing and Urban
Development’s (HUD) requirements. The review was conducted based upon our fiscal year 2004
annual audit plan. The review resulted in one finding.

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 Michael Motulski, Assistant Regional
Inspector General for Audit or me at (617) 994-8380.
Executive Summary
We reviewed the books and records of Coventry Health Center (project) to determine whether
Coventry Health Center Associates, L.P. (owner), and-or Sterling Health Care Management
Company, an identity-of-interest management agent, used the project’s funds in compliance with
the regulatory agreement and the U.S. Department of Housing and Urgan Development’s (HUD)
requirements. The review was performed based upon our fiscal year 2004 annual audit plan.

We found that the project’s owner and/or management agent used project funds for inappropriate
and unsupported disbursements. The inappropriate and unsupported disbursements occurred while
the project was in a non-surplus-cash position and/or in default of its HUD-insured loan. HUD sold
the project’s note and lost more than $6.3 million.



                                     We identified $1,858,100 in questionable cash
 Owner/Management                    disbursements made by the project’s owner and/or
 Agent Improperly Used               management agent between January 1998 and February
 Project’s Funds                     2001. The project’s owner and/or management agent
                                     disbursed these funds and paid for non-project-related
                                     expenses, loan repayments, management fees, and
                                     unnecessary services while the project was in a non-
                                     surplus-cash position and/or in default of its HUD-insured
                                     loan.

                                     The owner and/or management agent caused the conditions
                                     identified above by failing to operate the project in
                                     accordance with its regulatory agreement and other
                                     applicable laws and regulations. The owner and/or
                                     management agent disregarded prudent business practices
                                     and exploited weak management controls.

                                     We recommend that the director of HUD’s Boston
 Recommendations                     Multifamily Housing Hub,

                                          •   Pursue the recovery of double the amount of
                                              questionable cash disbursements to identities-of-
                                              interest as stipulated in 12 U.S.C. [United States
                                              Code] Sec. 1715z-4a.
                                          •   Obtain from the owner justification supporting the
                                              cash disbursements for unsupported costs.
                                          •   Obtain from the owner adequate justification for
                                              disbursements that were deemed unnecessary to the
                                              nursing home.
                                          •   Pursue the recovery of questionable distributions to
                                              non-identities-of-interest.


                                                2
We provided our draft audit report to the auditee for formal
comment on November 10, 2005. On November 21, 2005,
we received a letter from the owner’s counsel dated
November 17, 2005 requesting a 60 day extension to provide
written comment. On November 23, 2005, we replied, in
writing, granting a 15 day extension with a response date of
December 14, 2005. We received no response to our offer to
hold an exit conference. We received the auditee’s written
response through its attorneys on December 14, 2005.
Appropriate revisions were made to the report where
deemed necessary. The complete response is included as
Appendix B




          3
Table of Contents

Management Memorandum                                         1



Executive Summary                                             2



Introduction                                                  5



Findings

1.    Owner and/or Management Agent Diverted Project Funds   8



Management Controls                                          19



Appendixes

     A. Schedule Of Questioned Costs                         21

     B. Auditee Comments and OIG’s Evaluation                22

     C. Key Events                                           84




                                  4
Introduction
Coventry Health Continuum, Inc., was a 344-bed for-profit nursing home located in Coventry,
Rhode Island. The original owner and borrower under the U.S. Department of Housing and
Urban Development (HUD)-insured mortgage was Coventry Health Center Associates, L.P.
(owner), a Rhode Island limited partnership. The mortgage was financed and serviced through
Suburban Mortgage Associates, Incorporated, an identity-of-interest company, through common
ownership. The amount of the HUD-insured mortgage was $15,308,700.

Section 232 of the National Housing Act authorized a mortgage insurance program for residential
care facilities. The Housing and Community Development Act of 1987 extended Section 232
eligibility to the refinancing or purchase of currently insured Section 232 facilities. Federal
regulations at 24 CFR [Code of Federal Regulations] Part 232 contains the program’s regulatory
guidelines.

The nursing home was first established in the early 1980s under the ownership of Coventry
Health Center Associates, L.P. After completion, the nursing home was leased to an operator not
related to the owner. In 1986, the original HUD-insured loan of $8,667,300 was refinanced to
$9,835,000. The owner, through a series of complex company restructurings, had Coventry
Health Continuum (operator), an identity-of-interest company, operate the nursing home in 1987.
A management agent was also brought in during 1987; however, the agent had no identity-of-
interest relationship with the nursing home’s owner or operator.

In 1994, the $9,835,000 HUD-insured loan was again refinanced to $15,308,700. These funds,
in part, were used to add an additional 34 beds to the nursing home. By 1997, the contract with
the management agent had expired, creating the opportunity for the owner to establish its own
management agent. Sterling Health Care Management Company, an identity-of-interest
management agent, took over as the nursing home’s agent in 1997. At this point, the owner had
full control over the nursing home’s ownership, operations, and management. For the next two
years, the nursing home’s financial condition deteriorated. By August 1999, HUD required
monthly financial monitoring due to the nursing home’s default on its HUD-insured mortgage
and dire financial condition. The note was assigned to HUD on June 28, 2000. By February 19,
2001, the nursing home was placed into receivership.

Before being placed in receivership, the nursing home consisted of three identity-of-interest entities,
controlled and operated through common ownership and management as follows:

       •   Coventry Health Center Associates, L.P. – owner,
       •   Coventry Health Continuum, Inc. – operator, and
       •   Sterling Health Care Management Company - management agent.

Coventry Health Continuum, Inc., operated as Coventry Health Center until October 6, 2000, when
it was changed to Brookside Villa.

HUD sold the project’s non-recourse note for a $6,292,520 loss in September 2002. A detailed
chronological list of key events is outlined in appendix C of this report.


                                                   5
                   The objective of our review was to determine whether the
Audit Objectives
                   owner and/or Sterling Health Care Management Company,
                   an identity-of-interest management agent, used project
                   funds in compliance with the regulatory agreement and
                   HUD’s requirements.

                   To accomplish the audit objectives, we
Audit Scope and
Methodology        •   Reviewed federal requirements, including the Code of
                       Federal Regulations, HUD handbooks, and the U.S.
                       Code.

                   •   Reviewed the project’s files maintained by HUD’s
                       Providence field office. We reviewed the reserve fund
                       for replacement account, mortgage instruments,
                       management certification/management agreement,
                       regulatory agreement, monthly accounting reports, and
                       independent public accountants’ reports for fiscal years
                       ending December 31, 1992, through 2001.

                   •   Performed limited testing of management controls
                       relevant to the audit, through inspection, review, and
                       analysis of documents and records, and evaluated the
                       effects of any exceptions. Our testing was limited
                       because the management controls in place during our
                       audit period were replaced due to the project’s
                       bankruptcy.

                   •   Reviewed the project’s books and records to determine
                       a) the reliability of information and b) the
                       appropriateness of disbursements for the necessity and
                       reasonableness of costs.

                   •   Tested payroll items, payments to individuals, and
                       unusual transactions from the operating account. Our
                       sample was based on high dollar value and risk. Our
                       results relate only to those items reviewed.

                   •   Reviewed 100 percent of disbursements to a) identity-
                       of-interest vendors and individuals; b) non-identity-of-
                       interest vendors providing legal, audit, and accounting



                              6
       services; c) vendors for renovations; and d) activity
       from the project’s reserve for replacement account.

   •   Reviewed the project’s inspection reports performed by
       HUD’s Real Estate Assessment Center on March 6,
       2000, and July 2, 2002.

The audit was conducted between July 2003 and February
2004 and covered the period from May 5, 1995, to August 22,
2003. Our audit fieldwork was conducted on site while the
project was under the control of a receiver. When appropriate,
the audit was extended to include other periods. We conducted
our audit in accordance with generally accepted government
auditing standards.




              7
Finding 1

     Owner and/or Management Agent Diverted
                  Project Funds
The owner and/or management agent of the project directed the payment of $1,858,100 in
questionable cash distributions between January 1998 and February 2001. Of the $1,858,100,
the owner diverted $1,421,859 in operating funds to identity-of-interest entities of the project, of
which $865,121 was paid for non-project-related expenses, loan repayments, and ineligible
services while the project was in a non-surplus-cash position and/or in default of its HUD-
insured loan. The project’s owner and/or management agent violated HUD’s regulatory
agreement by making these questionable cash distributions. The remaining $556,738 paid to
identity-of-interest entities was not supported. In addition, $436,241 in unsupported distributions
was disbursed to non-identity-of-interest entities. The owner and management agent disregarded
prudent business practices and exploited weak management controls. As a result, the project
ceased being a profitable entity and suffered significant financial problems, including a default
on its HUD-insured mortgage in August of 1999. Due to the questionable cash distributions and
the resulting cash flow problems encountered, the project was unable to sufficiently meet its
operating expenses.

On February 19, 2001, the owner petitioned the Rhode Island Superior Court to appoint a
receiver to take over the project’s assets and operations. By the time of receivership, the project
had accumulated nearly $4.6 million and $400,000 in federal and state tax liens, respectively.



                                      The project’s regulatory agreement, paragraph 6, mandated
 Federal Requirements                 that the owner may not, without the prior written approval
                                      of the Secretary of Housing and Urban Development,
                                      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 and make, or
                                      receive and retain, any distribution of assets or any income
                                      of any kind of the project except surplus cash.

                                      Paragraph 13(g) of the regulatory agreement defines
                                      distribution as any withdrawal or taking of cash or any
                                      assets of the project excluding payment for reasonable
                                      expenses incident to the operation and maintenance of the
                                      project.

                                      HUD Handbook 4370.2, REV-1, CHG-1, paragraph 2-10,
                                      section A, states that if the owner takes distributions when
                                      the project is in default or when the project is in a non-




                                                 8
surplus-cash position, the owner is subject to criminal
and/or civil penalties.

Federal regulations at 24 CFR [Code of Federal Regulations]
24.110 permits HUD to take administrative sanctions against
employees or recipients under HUD assistance agreements
that violate HUD’s requirements. The sanctions include
debarment, suspension, or limited denial of participation
that are authorized by 24 CFR [Code of Federal
Regulations] 24.300, 24.400, or 24.700, respectively. HUD
may impose administrative sanctions based upon the
following conditions:

   •   Failure to either honor contractual obligations or to
       proceed in accordance with contract specifications or
       HUD regulations (limited denial of participation);

   •   Deficiencies in ongoing construction projects (limited
       denial of participation);

   •   Violation of any law, regulation, or procedure relating
       to the application for financial assistance, insurance,
       or guarantee or to the performance of obligations
       incurred pursuant to a grant of financial assistance or
       pursuant to a conditional or final commitment to
       insure or guarantee (limited denial of participation);

   •   Violation of the terms of a public agreement or
       transaction so serious as to affect the integrity of an
       agency program such as a history of failure to
       perform or unsatisfactory performance of one or more
       public agreements or transactions (debarment);

   •   Any other cause so serious or compelling in nature
       that it affects the present responsibility of a person
       (debarment); or

   •   Material violation of a statutory or regulatory
       provision or program requirements applicable to a
       public agreement or transaction including
       applications for grants, financial assistance,
       insurance, or guarantees or to the performance of
       requirements under a grant, assistance award, or
       conditional or final commitment to insure or
       guarantee (debarment).



          9
                  Title 12, United States Code, section 1715z-4a, “Double
                  Damages Remedy for Unauthorized Use of Multifamily
                  Housing Project Assets and Income,” allows the Attorney
                  General to recover double the value of any project assets or
                  income that were 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.

                  Title 12, United States Code, section 1735f-15, “Civil
                  Money Penalties Against Multifamily Mortgagors,” allows
                  the Secretary of Housing and Urban Development to
                  impose a civil money penalty of up to $25,000 per violation
                  against a mortgagor with five or more living units and a
                  HUD-insured mortgage. A penalty may be imposed for
                  any knowing and material violation of the regulatory
                  agreement by the borrower, such as paying out any funds
                  for expenses that were not reasonable and necessary project
                  operating expenses or making distributions to owners while
                  the project is in a non-surplus-cash position.

                  The Project’s owner and/or management agent made
Summary of Cash   distributions in the form of loan repayments and payments
Disbursements     for services that were ineligible, unsupported, and/or
                  unnecessary. The owner and/or management agent also
                  paid themselves fees that were not supported by contractual
                  obligation, nor was there evidence of actual services
                  provided. Of the $1,858,100 in distributions, we identified
                  $489,900 in ineligible costs, $992,979 in unsupported
                  costs, and $375,221 in unnecessary and/or unreasonable
                  costs as shown in the following table.




                            10
                                Summary of questionable cash distributions
Payee                          Distribution                            Questioned costs                   Total
                                                                                                          paid
                                                         Ineligible    Unsupported        Unnecessary
    Identity-of-interest
Owner                          Loan payment                  $15,000                                      $15,000
Construction software          Accounting fees                                                $53,880      53,880
Consultants, Inc.              Executive/owners’ fees         89,400                                       89,400
Partnership fees               Executive fees                182,500                                      182,500
Gregory Building Company.      Landscaping fees                               $5,510           54,300      59,810
Management Reality Service     Loan payments                 130,000         120,025                      250,025
My Place, Inc.                 Employee relations                                             267,041     267,041
                               Loan & building
Simon & Windsor Interiors      improvements                   15,000           7,816                       22,816
Sterling   Health       Care   Management fees
Management Company                                            58,000         406,700                      464,700
                               Advertising &
Mount Saint Francis            management fees                                16,687                        16,687
       Sub-Totals                                         $489,900          $556,738        $375,221    $1,421,859
 Non-Identity-of-Interest
Various legal firms            Legal fees                                   $132,721                     $132,721
Various accounting firms       Accounting fees                               147,183                      147,183
Unidentified payees            Various individuals                           136,145                      136,145
Payroll transactions           Operating account                              20,192                        20,192
          Subtotals                                             $0          $436,241              $0     $436,241
                       Grand totals                       $489,900          $992,979        $375,221    $1,858,100

                                              The project was in serious financial decline from 1993 until
                                              receivership in February 2001. During this period, the
                                              project defaulted on its $15,308,700 HUD-insured
                                              mortgage and ran up substantial debt payable to vendors
                                              and federal and state tax authorities. We identified
                                              $1,858,100 in questionable cash distributions between
                                              January 1998 and February 2001.

                                              We determined that the project’s owner and management
                                              agent circumvented their own established policies and
                                              procedures to divert project funds to pay for ineligible,
                                              unsupported, and unnecessary expenses.

                                              The project’s cash flow troubles made it difficult for the
                                              project to meet current operating expenses. As a result,
                                              both financial and living conditions at the project
                                              deteriorated. In January 1998, the Rhode Island Health
                                              Department cited the project for several violations under
                                              state and federal healthcare care guidelines. In addition,
                                              from 1997 to 2001, the project was under the
                                              administration of five different interim and permanent
                                              administrators.



                                                        11
                        From July 1, 1997, until the receivership in February 2001,
                        the identity-of-interest relationships between the project’s
                        owner, operator, and management agent created an
                        environment giving the owner direct control of all aspects
                        of the project. We believe this ability to override the daily
                        operations of each entity contributed to the questionable
                        expenditures of $1,858,100.

                        We identified several identity-of-interest companies having
                        business connections with the project, for example, a
                        payment to the project’s owner for $15,000 while the
                        project was in non-surplus-cash position. The regulatory
                        agreement defines any withdrawal or taking of cash or any
                        assets of the project excluding payment for reasonable
                        expenses incident to the operation and maintenance of the
                        project as a distribution. Distributions to owners while in a
                        non-surplus-cash position are a violation of the regulatory
                        agreement.

                        The project’s owner and/or management agent paid
Construction Software   Construction Software, an identity-of-interest company,
                        $53,880 for services that were not provided. According to
                        the project’s administrator, no services were provided for
                        the payments made. The monthly invoices from
                        Construction Software indicate that the following services
                        were allegedly provided to the project:

                           •    Accounting and general ledger review,
                           •    Review of monthly reports,
                           •    Submission of monthly reports to HUD,
                           •    Review of input for financial statements, and
                           •    Review of quarterly operations report.

                        The project’s administrator said these tasks were performed
                        in house. The administrator acknowledged that
                        Construction Software employees never worked or came to
                        the project at any time, although the company was paid
                        $1,720 per month. Again, no evidence of an agreement or
                        contract was provided for these services. Therefore, we
                        consider the $53,880 as unnecessary.

                        We found evidence within the project’s general ledger and
Consultants, Inc.       cash disbursements journal of payments totaling $89,400 to
                        Consultants, Inc., another identity-of-interest company.
                        The notes detailing the payments showed these payments
                        were for owners’ fees, executive service fees, and loans.


                                  12
                     Contrary to the project’s regulatory agreement, these
                     payments were made while the project was in a non-
                     surplus-cash position and/or after it defaulted on its HUD-
                     insured loan. No agreement between the project and
                     Consultants, Inc., was provided by the project. We
                     determined the total $89,400 in payments to be ineligible.

                     Payments totaling $182,500 were made to the owner’s
Partnership Fees     partners. These payments were noted in disbursement
                     records as partnership or executive fees. The notes to the
                     project’s audited financial statements for 1992 to 1999
                     indicated these fees were part of an executive fee
                     agreement. However, an agreement could not be provided
                     to support these costs. We determined the $182,500 costs
                     to be ineligible.

                     The project’s operator had a landscaping contract with
Gregory Building     Gregory Building Company, another identity-of-interest
Company              entity. Based on an interview with the project’s
                     maintenance staff, we determined that Gregory Building
                     Company subcontracted the effort with Sure Cuts
                     Landscaping. As a subcontractor, Sure Cuts Landscaping
                     performed landscaping services at the project that were
                     previously performed in house. We did not find evidence
                     of a related party interest with Sure Cuts Landscaping. The
                     project’s maintenance staff argued the service was not
                     necessary because they had the equipment and manpower
                     to do the work. In addition, the maintenance staff said Sure
                     Cuts Landscaping spent minimal time performing such
                     tasks as grass cutting, which at times was unnecessary.
                     Because the project had performed the landscaping before
                     contracting with Gregory Building Company for minimal
                     cost, we determined the payments totaling $54,300 to be
                     unnecessary. In addition, we consider one payment to
                     Gregory Building Company for $5,510 to be unsupported
                     due to lack of documentation.

                     Our audit disclosed payments totaling $250,025 to
Management Reality   Management Realty Services, another identity-of-interest
Services             company. No evidence of a contractual agreement between
                     the project and Management Realty was provided. We
                     determined that $130,000 was for the repayment of a loan to
                     the owner, an ineligible expense of the project. These loan
                     payments were in direct violation of the regulatory agreement
                     because the project was in a non-surplus-cash position and/or
                     in default of its HUD-insured loan at the time. We were



                               13
                  unable to clearly identify the purpose of the remaining
                  $120,025 and classified the payment as unsupported.

                  My Place, Inc., owned and operated by the daughter of the
My Place, Inc.    project’s owner, had an employee relations contract with the
                  project. The contract, valued at $9,554 per month, was to
                  provide social services, educational services, administrative
                  consulting services, promotional activities, and a
                  comprehensive child-care program. My Place, Inc., also
                  offered incentive programs for the project’s employees to
                  show appreciation for the staff. My Place, Inc., held parties
                  for the staff and their families, conducted raffles, and
                  provided gifts of nominal value.

                  My Place, Inc., did not provide child-care services. It only
                  provided referrals for child-care needs and for support
                  services on an as-needed basis. It also provided seminars for
                  the project’s staff, which were later subcontracted out to
                  Delta Consultants. Our audit did not disclose an identity-of-
                  interest relationship with Delta Consultants. However, one
                  seminar was presented by the wife of the project’s owner,
                  who was also the mother of the owner of My Place, Inc.

                  As a benefit to employees, we determined that the services
                  were not necessary and reasonable operating expense of the
                  project. In addition, the $9,554 per month costs appeared to
                  be excessive considering that the project was struggling to
                  make payroll and lease payments. The payments occurred
                  while the project was in a non-surplus-cash position and/or
                  defaulted on its HUD-insured loan. For the audit period
                  covered, we identified $267,041 in payments to My Place,
                  Inc., and consider the costs unnecessary.

                  Simon & Windsor Interiors was an identity-of-interest
Simon & Windsor   company also owned by the daughter of the project’s
Interiors         owner. We determined that disbursements totaling $22,816
                  paid to Simon & Windsor were both unsupported and
                  ineligible under the provisions of the regulatory agreement.

                  An invoice did not support one payment for $7,816.
                  Another payment for $15,000 was posted in the project’s
                  general ledger account as a due to/due from Sterling Health
                  Care Management Company and later reclassified out.
                  However, because there was a notation listing this payment
                  as a loan payment, we consider the $15,000 ineligible
                  under the HUD regulatory agreement.



                            14
                       Sterling Health Care Management Company, an Identity-
Sterling Health Care   of-interest company, took over as the project’s management
Management Company     agent on July 1, 1997. From that point, the project’s owner
                       had complete control of every aspect of the project. The
                       owner controlled ownership, operations, and the
                       management agent. As the management agent, Sterling
                       Health Care Management Company was responsible for
                       keeping the project running smoothly and in conformity
                       with HUD’s requirements. The management agreement
                       stated that Sterling Health Care Management Company was
                       entitled to 3 percent of net patient revenue for its services.

                       The project’s administrator said the project’s staff carried
                       out the majority of Sterling Health Care Management
                       Company’s management agent functions. Those functions
                       included such tasks as analyzing and solving project
                       problems, recruiting, hiring, supervising project personnel,
                       and monitoring project operations by visiting the project or
                       analyzing performance reports.

                       According to the administrator, the only contacts between
                       the project’s business office and the management agent
                       were the periodic weekly telephone calls to see how much
                       money came in. The administrator was then directed to
                       disburse checks, and in most instances, the checks were
                       made to identity-of-interest companies.

                       Our review disclosed that Sterling Health Care
                       Management Company did not perform the services
                       required by its management agreement. As a result, it
                       failed to earn its management fees. Instead, the project’s
                       staff and consultants managed the project by performing
                       the services described in Sterling Health Care Management
                       Company’s management agreement.

                       A total of $464,700 was paid to Sterling Health Care
                       Management Company. The payments included two
                       disbursements for loan-related activities. One payment for
                       $23,000 was made payable to Sterling Health Care
                       Management Company for a management loan, and the
                       other payment for $35,000 was noted in disbursement
                       records as a loan to Hillside Health Center. Hillside Health
                       Center was another identity-of-interest entity. The project
                       was used as a conduit for loan activity at a time when it
                       was in default on its HUD-insured mortgage. Therefore,



                                 15
                          we consider the loan activity total of $58,000 ($23,000 plus
                          $35,000) to be ineligible.

                          We believe the balance of $406,700 ($464,700 minus
                          $58,000) paid to Sterling Health Care Management
                          Company to be unsupported because there was no evidence
                          of or clear distinction of duties of its personnel and the
                          project’s staff.

                          Our audit disclosed $16,687 in payments to Mount Saint
Mount Saint Francis       Francis Health Center, another identity-of-interest entity.
Health Center             The payments were listed in the cash disbursement journal
                          with various descriptions such as weekly management,
                          weekly payroll, marketing, and management fees.
                          Adequate documentation was not provided to support these
                          payments. Therefore, we considered the payments
                          unsupported.

                          Our audit further identified $436,241 in questionable cash
Disbursements to Non-     disbursements to a non-identity-of-interest vendor and
Identity-of-Interest      individuals for services and other costs that were
Vendor and Individuals    unsupported. These disbursements violated the project’s
                          regulatory agreement. The cash disbursements were for
                          various legal, auditing, and accounting services;
                          unidentified payees; and payroll transactions.

                          On February 19, 2001, the project’s owner was granted an
Project in Receivership   order by the Rhode Island Superior Court to have a receiver
                          appointed to take over the project’s assets and operations.
                          Court records showed the project was unable to obtain the
                          payments from governmental regulatory agencies, which
                          were necessary for it to stay current on its operations. This
                          caused a cash flow crisis that led the project’s owner to
                          seek the protection of the court. Court records did not
                          reveal the true nature for the project’s failure. We believe
                          that the questionable cash distributions were the root cause
                          for the inadequate cash flow problems.

                          The receiver took control of the project’s operation on
                          February 19, 2001. He kept two key business office
                          personnel on staff to assist him with the day-to-day
                          operations. An April 20, 2001, Providence Journal
                          newspaper article quoted the receiver as saying he cut
                          $790,000 from the operating budget. The project’s
                          administrator said that once payments to the identity-of-
                          interest companies stopped, the financial viability of the



                                    16
                    project improved. The receiver remained in control of the
                    project until August 22, 2003, when the project was sold
                    for $10,375,000.



Auditee Comments    We received the auditee’s comments to our audit on
                    December 15, 2005 and are located in appendix B of this
                    report.




OIG Evaluation of   Our evaluation of the auditee’s comments has not changed
Auditee Comments    our audit position. Our responses are located within
                    appendix B of this report, starting on page 60.



Recommendations     We recommend that the director of HUD’s Boston
                    Multifamily Housing Hub assure the owner

                    1A. Reimburses HUD $865,121 for the inappropriate
                        disposition of project assets.
                    1B. Provides documentation to support the $992,979 in
                        unsupported payments cited in this audit report. If
                        adequate documentation cannot be provided, the owner
                        should reimburse HUD for the appropriate amount.

                    We recommend that the director of HUD’s Boston
                    Multifamily Housing Hub, in conjunction with the HUD
                    Office of Inspector General (OIG),

                    1C.    Pursue double damages remedies if the owner does
                           not reimburse HUD for the inappropriate disposition
                           of project assets.

                    We also recommend that the Director of HUD’s
                    Departmental Enforcement Center and/or Associate
                    General Counsel for Program Enforcement

                    1D.    Impose civil money penalties against the owner for
                           the inappropriate disposition of project assets cited in
                           this audit report that violated the project’s regulatory
                           agreement.



                             17
1E.   Pursue administrative sanctions against the owner for
      the inappropriate disposition of project assets cited in
      this audit report.




        18
Management Controls
Management controls include the plan of organization, methods, and procedures adopted by
management to ensure that its goals are met. Management controls include the processes for
planning, organizing, directing, and controlling program operations. They include the systems for
measuring, reporting, and monitoring program performance.


                                      We determined the following management controls were
 Relevant Management                  relevant to our audit objectives:
 Controls
                                      •   Program operations - Policies and procedures that
                                          management has implemented to reasonably ensure that
                                          a program meets its objectives.

                                      •   Validity and reliability of data - Policies and procedures
                                          that management has implemented to reasonably ensure
                                          that valid and reliable data are obtained, maintained,
                                          and fairly disclosed in reports.

                                      •   Compliance with laws and regulations - Policies and
                                          procedures that management has implemented to
                                          reasonably ensure that resource use is consistent with
                                          laws and regulations.

                                      •   Safeguarding resources - Policies and procedures that
                                          management has implemented to reasonably ensure that
                                          resources are safeguarded against waste, loss, and
                                          misuse.


                                      We performed limited testing of management controls
                                      relevant to the audit through inspection, review, and
                                      analysis of documents and records and evaluated the effects
                                      of any exceptions. Our testing was limited because the
                                      management controls in place during the audit period were
                                      replaced due to the project’s bankruptcy. In addition, the
                                      availability of source documents was limited; however, we
                                      determined that the limited data obtained were reliable.

                                      It is a significant weakness if management controls do not
                                      provide reasonable assurance that the process for planning,
                                      organizing, directing, and controlling program operations
                                      will meet an organization’s objectives.




                                                19
                         Based on our review, we believe the following items were
Significant Weaknesses   significant weaknesses:

                         •   Program Operations

                         The project was not operated according to program
                         requirements. The project’s owner and/or management agent
                         disbursed funds that were for non-project-related expenses,
                         loan repayments, unearned management fees, and
                         unnecessary services while the project was in a non-surplus-
                         cash position.

                         •   Validity and Reliability of Data

                         The project’s owner and/or management agent did not
                         maintain accurate books and records.

                         •   Safeguarding Resources

                         The project’s owner and/or management agent failed to
                         safeguard the project’s resources when it disbursed more
                         than $1.8 million for ineligible, unsupported, and
                         unnecessary expenses.




                                   20
                                                                                         Appendix A


Summary of Questioned Costs
     Recommendation                 Type of questioned costs
        number               Ineligible costs 1/   Unsupported costs 2/

           1A                     865,121
           1B                                                $992,979



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 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.




                                               21
                                           Appendix B


Auditee Comments and OIG’s Evaluation
Ref to OIG Evaluation   Auditee Comments




Comment 1




                          22
                                           Appendix B


Ref to OIG Evaluation   Auditee Comments




                          23
                                           Appendix B


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                          24
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




Comment 5




                          25
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




Comment 6




Comment 5




Comment 7




Comment 7




Comment 7




                          26
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          27
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments

Tab A




                          28
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          29
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          30
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          31
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          32
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          33
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          34
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          35
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          36
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments

Tab B




                          37
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          38
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          39
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          40
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          41
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          42
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          43
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          44
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          45
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          46
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          47
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          48
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments

Tab C




                          49
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          50
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          51
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          52
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments

Tab D




                          53
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          54
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          55
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          56
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          57
                                           Appendix B



Ref to OIG Evaluation   Auditee Comments




                          58
                                           Appendix B


Ref to OIG Evaluation   Auditee Comments




                          59
                                                                                   Appendix B


                          OIG Evaluation of Auditee Comments


Comment 1   We disagree that Coventry Health Continuum, Inc., the operator/lessee, was not
            subject to the restrictions outlined in paragraph 6(b) of the Regulatory Agreement
            for Multifamily Housing Projects. Although the auditee is correct in the wording of
            the regulatory agreement, based on our interviews and audit work, the same parties
            controlled the owning entity, operator, and management company. For example,
            John Montecalvo held various positions within these entities and ran the day-to-day
            activities of Coventry Health Continuum, Sterling Health Care Management and
            Construction Software Inc.

            Also, based on interviews, the officers for Coventry Health Continuum did not have
            an active role in the operations of the nursing home, yet the entity signed as the
            owner on HUD documents that brought Sterling Health Care Management into the
            organization. Overall direction came from Antonio L. Giordano, a general partner.
            Based on the day-to-day activities performed by this owner, we often could not
            determine for which entity he was making decisions. For this reason, we are treating
            all the entities as one and holding the acts of each commonly owned entity to the
            requirements of the owner’s regulatory agreement. Any separation of these entities’
            responsibilities was only for the clear circumvention of regulations by the owner.

            We have added attachment H to show the relationship between the owner, operator,
            management company, and related companies.

Comment 2   Coventry Health Continuum repaid various loan amounts to identity-of-interest
            companies while the project was in a non-surplus position and-or in default of its
            HUD insured loan, without HUD approval. HUD Handbook 4370.2, chapter 2,
            clearly outlines an owner’s responsibility regarding repayments advanced by
            owner’s, or affiliates of owner’s, as required by the HUD regulatory agreement.
            These advances cannot be repaid unless they are scheduled and approved in advance
            by HUD.

Comment 3   As stated in comment 1, the Management Agent’s Certification Agreement supplied
            in the auditee’s response expired on June 30, 1996, and was superseded by a
            subsequent Management Agreement signed and dated April 1, 1997 (see attachment
            A). Section 4 of the revised agreement entitled “Special Fees” does not provide for
            compensation to Consultants, Inc., or Giordano, Assalone, and Confreda
            (Partnership Fees). Therefore, $89,400 in fees paid to Consultants, Inc., and
            $182,500 paid to Giordano, Assalone and Confreda (Partnership Fees) were clearly
            ineligible.

Comment 4   HUD’s receipt of monthly accounting reports did not constitute approval of the
            project’s actions. The auditee’s response suggests that HUD conducted long term
            ongoing monthly monitoring of project disbursements. This was not the case. The
            local HUD office officially requested monthly accounting reports on August 19,



                                             60
                                                                                    Appendix B


            1999, one month after the owner defaulted on its HUD insured loan. Although cash
            disbursement data was submitted, detailed supporting documentation was not
            required. Therefore, HUD had limited understanding or visibility of project activity.

Comment 5   We identified $132,721 (see attachment C) in various legal and $147,183 (see
            attachment D) in accounting firm payments for the period January 1998 through
            December 2000. During our audit we were not provided nor could we locate
            supporting documentation for the numerous payments. The substantial legal and
            accounting fees paid by the project do not appear to be necessary and/or reasonable
            given the size of the operation. Also, some of these services were to be provided by
            the management agent.

            Furthermore, $53,880 was paid to Construction Software, Inc., an identity-of-interest
            company. Construction Software, Inc., was paid for services that the auditee’s
            response described as systems specialization. However, according to various
            monthly accounting reports submitted to HUD, the services were described as either
            consulting, management fees, service contract, or purchased services. Construction
            Software, Inc., invoices billed to the project described the services as accounting
            related. The invoices further detailed the services as follows:

                   1.   Accounting and General Ledger Review.
                   2.   Review of Monthly Reports.
                   3.   Submission of Monthly Reports to HUD
                   4.   Review of Input for Financial Statements
                   5.   Review of Quarterly Operations Report.

            The services provided by Construction Software, Inc., duplicated those that were to
            be provided by the management agent that was receiving a management fee. The
            management agreement, signed and dated July 1, 1997, between Coventry Health
            Continuum, as the “Owner,” and Sterling Health Care Management Company, LLC,
            as the “Manager” (see attachment B), stated that the management agent was
            responsible for providing all financial aspects of the operation of the facility
            including operating and management statements showing all income, expense and
            cash flow and management review.

            Details of expenditures of $136,145 to unidentified payees (see attachment E), and
            payroll transactions totaling $20,192 (see attachment F) are provided at the end of
            our response.

Comment 6   The auditee’s response indicated that these disbursements would normally be for
            the continuum’s share of shared expenses. We could not determine the
            reasonableness or necessity of these costs based on available documentation.
            Details of expenditures to Mt. St. Francis Health Center are provided at the end of
            our response (see attachment G).




                                             61
                                                                                    Appendix B


Comment 7   The auditee’s response implied that HUD performed lengthy ongoing monitoring
            through monthly accounting reports of Gregory Building, My Place, Inc, and
            Simon and Windsor Interiors. This was not the case. HUD began monitoring the
            project only after it defaulted on its HUD insured loan. As stated in comment 4,
            the submission of monthly accounting reports to HUD did not constitute approval
            of the project’s actions.

            Based on information outlined in the audit report we consider the payments of
            $54,300 to Gregory Building as unnecessary, and $5,510 to be unsupported. In
            addition, the monthly fees of $9,554 paid to My Place, Inc., were excessive and
            unnecessary for the project. Also, we consider the payments of $7,816 and
            $15,000 to Simon and Windsor to be unsupported and ineligible, respectively.
            Finally, repayment of loans to affiliates during a period when the HUD loan was
            in default or the project was in a non-surplus cash position was a violation of the
            HUD regulatory agreement, and therefore, ineligible.




                                             62
                  Appendix B

                 Attachment A




Comment 1




            63
      Appendix B
     Attachment A




64
      Appendix B
     Attachment A




65
                  Appendix B
                 Attachment A




Comment 3




            66
      Appendix B

     Attachment B




67
      Appendix B
     Attachment B




68
      Appendix B
     Attachment B




69
      Appendix B
     Attachment B




70
      Appendix B
     Attachment B




71
      Appendix B
     Attachment B




72
      Appendix B
     Attachment B




73
                  Appendix B

                 Attachment C




Comment 5




            74
                  Appendix B

                 Attachment D




Comment 5




            75
                  Appendix B

                 Attachment E




Comment 5




            76
      Appendix B
     Attachment E




77
                  Appendix B

                 Attachment F




Comment 5




            78
                  Appendix B

                 Attachment G




Comment 6




            79
                                                                                 Appendix B

                                                                                Attachment H

                        Antonio L. Giordano Related Entities

1. Antonio L. Giordano, Inc.
    (Real estate business)
    Giordano interest
    RI Office of Secretary of State records indicate the officers as follows;
    President: Antonio L. Giordano
    Vice President: Antonio L. Giordano
    Secretary: Janice M. Strang, dates of service unavailable
    Treasurer: John J. Montecalvo, dates of service unavailable

2. Construction Software Inc.
    (Computer systems business)
    Giordano interest
    RI Office of Secretary of State records indicate the officers as follows;
    President: John J. Montecalvo, From 2000 to 2004
    Secretary: Janice M. Strang, From 2001 to 2004
    Treasurer: Antonio A. Giordano, From 2001 to 2004, (Son of Antonio L. Giordano)

3. Consultants Associates, Inc.
    (Real estate consulting firm)
    Giordano interest
    RI Office of Secretary of State records indicate the officers as follows;
    President: Antonio A. Giordano, From 2001 to 2003, (Son of Antonio L. Giordano)
    Vice President: Mary D. Gentili, From 2001 to 2003, (Daughter of Antonio L. Giordano)
    Secretary: Madonna D. Giordano, From 2001 to 2003, (Daughter of Antonio L.
    Giordano)
    Treasurer: Antonio A. Giordano, From 2001 to 2003, (Son of Antonio L. Giordano)
    President: Casimir Kolaski, From 2004 (Former Director of HUD Providence Office)
    Secretary: Janice M. Strang, From 2004

4. Consultants, Inc.
    (Real estate consulting firm)
    Giordano interest
    RI Office of Secretary of State records indicate the officers as follows;
    President: Antonio A. Giordano, From 2000 to 2004, (Son of Antonio L. Giordano)
    Vice President: Mary D. Gentili, From 2002 to 2004, (Daughter of Antonio L. Giordano)
    Secretary: Janice M. Strang, From 2000 to 2004
    Treasurer: John J. Montecalvo, From 2000 to 2004

5. Coventry Health Associates
    (Nursing home owner)
    Giordano interest
    General Partner: John Assalone, Sr. dates of service unavailable
    General Partner: Pasquale Confreda, dates of service unavailable


                                              80
                                                                                  Appendix B
                                                                                 Attachment H
     General Partner: Domenick Delvecchio, dates of service unavailable
     General Partner: Antonio L. Giordano, dates of service unavailable
     General Partner: Robert Rocchio, dates of service unavailable

6. Coventry Health Continuum, Inc.
    (Nursing home operator)
    Giordano interest
    President: John J. Montecalvo, dates of service unavailable
    President: John Assalone, Sr., 2001
    Vice President: Pasquale Confreda, 2001
    Secretary: Pasquale Confreda, 2001
    Treasurer: Pasquale Confreda, 2001

7. Coventry Sewage Associates
    (Private sewer line in which serviced Coventry Health Center)
    Giordano interest
    RI Office of Secretary of State records indicate the officers as follows;
    General Partner: Antonio L. Giordano

8. Gregory Building Company
    (Construction company)
    Giordano interest
    RI Office of Secretary of State records indicate the officers as follows;
    President: Antonio A. Giordano, From 2001 to 2004, (Son of Antonio L. Giordano)
    Vice President: Peter Castriotta, From 2001 to 2004
    Secretary: Madonna D. Giordano, From 2002 to 2004, (Daughter of Antonio L.
    Giordano)
    Secretary: Mary D. Gentili, 2001, (Daughter of Antonio L. Giordano)
    Treasurer: Mary D. Gentili, From 2001 to 2004, (Daughter of Antonio L. Giordano)

9. Hillside Health Center Associates, LP
    (Nursing home owner)
    Giordano interest
    RI Office of Secretary of State records indicate the officers as follows;
    General Partner: Consultants Inc. (See above)

10. Hillside Health Center, LLC
     (Nursing home operator)
     Giordano interest
     RI Office of Secretary of State records indicate the officers as follows;
     Manager: John J. Montecalvo, From 2000 to 2003




                                              81
                                                                                   Appendix B
                                                                                  Attachment H

11. Management Reality Services
     (Real estate management agent)
     Giordano interest
     RI Office of Secretary of State records indicate the officers as follows;
     President: Mary D. Gentili, From 2003 to 2004, (Daughter of Antonio L. Giordano)
     President: Mona Renchan, 2002
     President: Juliette A. Vaccaro, 2001
     Vice President: Mary D. Gentili, 2002, (Daughter of Antonio L. Giordano)
     Secretary: Mary D. Gentili, From 2002 to 2004, (Daughter of Antonio L. Giordano)
     Secretary: Janice M. Strang, From 2001 to 2004
     Treasurer: Antonio A. Giordano, From 2001 to 2004, (Son of Antonio L. Giordano)

12. Mount Saint Francis Associates.
     (Nursing home owner/operator)
     Giordano interest
     RI Office of Secretary of State records indicate the officers as follows;
     General Partner: Antonio L. Giordano

13. My Place, Inc.
     (Employee relations firm)
     Giordano interest
     RI Office of Secretary of State records indicate the officers as follows;
     President: Mary D. Gentili, From 2001 to 2004, (Daughter of Antonio L. Giordano)
     Vice President: Madonna Giordano, From 2001 to 2004, (Daughter of Antonio L.
     Giordano)
     Secretary: Janice M. Strang, From 2001 to 2004
     Treasurer: John J. Montecalvo, From 2001 to 2004

14. Simon and Windsor Interiors
      (Interior design firm)
      Giordano interest
      RI Office of Secretary of State records indicate the officers as follows;
      President: Mary D. Gentili, From 2001 to 2004, (Daughter of Antonio L. Giordano)
      Vice President: Antonio A. Giordano, From 2001 to 2004, (Son of Antonio L. Giordano)
      Secretary: Janice M. Strang, From 2001 to 2004
      Treasurer: John J. Montecalvo, From 2001 to 2004

15. Sterling Health Care Management Company, LLC
      (Nursing home management agent)
      Giordano interest
      RI Office of Secretary of State records indicate the officers as follows;
      Manager: John J. Montecalvo, From 2000 to 2003




                                               82
                                                                                  Appendix B
                                                                                 Attachment H

16. Suburban Mortgage Associates Inc.
     (State of Maryland public records)
     Giordano interest
     President: J. Walsh Richards, From 1978 to present
     Vice President: Antonio L. Giordano, From 1978 to 2003
     Vice President: Edmond Richards, dates of service unavailable,
     Vice President: Kimberly Papuchis, dates of service unavailable
     Vice President: David N. Eaton, dates of service unavailable
     Treasurer: Ngyuet M. Pham, dates of service unavailable

17. Woodland Manor Improvement Association
     (Operates private sewer which serviced Coventry Health Center)
     Giordano interest
     RI Office of Secretary of State records indicate the officers as follows;
     Director: Antonio L. Giordano, From 2002 to 2003
     Director: Pasquale Confreda, From 2002 to 2003,
     Director: Domenic DelVecchio, From 2002 to 2003,
     President: Pasquale Confreda, From 2002 to 2003
     Secretary: Pasquale Confreda, From 2002 to 2003
     Treasurer: Antonio L. Giordano, From 2002 to 2003




                                              83
                                                                                       Appendix C


Key Events
The following is a chronological list of significant events that have taken place since the
inception of the project:

October 15, 1981, initial construction of the nursing home was financed by a mortgage insured
under Section 232 (Federal Housing Administration No. 016-43038), which was given final
endorsement by HUD in March 1984 for $8,667,300. At the same time, the owner obtained a
Section 223(d)-insured operating loss loan (working capital) for $1,167,700.

October 1981, a syndication of associates was effected through First Winthrop Corporation.
The general partners of the associates were Antonio L. Giordano and several individuals (the
Giordano Group). The Giordano Group also was the original limited partner. The Giordano
Group remained general partners, and the owner, a District of Columbia limited partnership, was
admitted as limited partner.

March 1984, after final endorsement, another amendment to the partnership agreement was
filed, under which the members of the Giordano Group withdrew as general partners and became
special limited partners. Winthrop Financial Co., Inc., an affiliate of First Winthrop Corporation,
became sole general partner.

June 1, 1984, the nursing home was leased to Coventry Nursing Care, Inc., an operator that was
not affiliated with the owner or related businesses.

June 1986, the original Section 232-insured first mortgage and the operating loss loan were
refinanced, pursuant to Section 223(a)(7), by a new Section 232-insured first mortgage in the
amount of $9,835,000 (Federal Housing Administration No. 016-43050).

April 1987, Winthrop Financial Co., Inc., withdrew as general partner due to disputes, including
litigation, between the Giordano Group and First Winthrop Corporation. An agreement was
reached along with the termination of the operating lease with Coventry Nursing Care, Inc.

May 5, 1987, HUD suspended processing of an April 30, 1987, transfer of physical assets for
failure to provide required audited financial data regarding the operating loss loan. Later that
month, the owner was suspended from participation in HUD housing programs pending
completion of an investigation relating to alleged activities of an entity under his control as
general contractor regarding several Rhode Island nursing homes.

July 8, 1987, the owner effected a transfer of physical assets without HUD approval. This had
the effect of restructuring ownership interests of the partnership by moving the Giordano Group
from limited partners to general partner. The transfer removed Winthrop Financial Co., Inc., as
general partner and special limited partner to limited partner. Consideration for the transfer and
resulting restructure was $1.00. A transfer in itself is not improper; however, the fact that HUD
was not aware of the transaction is. There was potential risk to the government because HUD
was not given the opportunity to review the action, especially in light of HUD defining the
project as financially troubled.


                                                84