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
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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
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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.
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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
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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.
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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-
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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).
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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.
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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
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)