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
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)