City of Cocoa Housing Investigation

City of Cocoa, Florida
Investigative Report
January 8, 2003
Mclean,Koehler, Sparks & Hammond
Certified Public Accountants/Business Consultants
January 8, 2003
Mr. Anthony Garganese
Brown, Ward, Salzman and Weiss, P.A.
225 East Robinson Street
Suite 660
Orlando, Florida 32802-2873
Re: Investigation of the Affordable Housing Program for fiscal years 2000 and 2001
Dear Mr. Garganese:
You have retained us to review and analyze financial documents and the resulting transactions
relating to the operation of the City's Affordable Housing Program. We understand that members
of the City Council of the City of Cocoa, Florida requested this investigation. Specifically, they
called for an investigation into accounting and procedural irregularities that caused the Federal
Government to refuse to reimburse over $750,000 in general fund expenditures made by the
Housing Department. In addition, they asked that we investigate allegations of fraudulent
activities in the Affordable Housing Program during the fiscal years 2000 and 2001.
A. Scope of the Analysis
Our analysis was made by reference to transactions recorded in the City accounting records for
the fiscal years 2000 and 2001 and related documentation. In addition, we read consultant's
reports and interviewed current and former City employees. We also interviewed program
recipients, service providers and others. We examined housing rehabilitation work product.
We reviewed Donna Renberg's comprehensive report of the issues she uncovered in her
investigation of the Affordable Housing Program. This report is insightful and provides a
detailed review of the issues. This document is included, by reference, as part of our report.
B. Assumptions and Limiting Conditions
1. This report was prepared as part of a formal investigation authorized by the City Council
of Cocoa, Florida and directed by the City Attorney in preparation for possible future
legal proceedings. Under Section ll9.07 (1) 1., Florida Statutes, this document is exempt
from public records disclosure until such time the investigation and all legal proceedings
have been concluded.
2. This report and its conclusions are subject to revision upon the presentation of data that
may have been undisclosed or not available for inspection and/or analysis.
3. Because of the unique nature of fraud and the limited scope of the engagement, fraud
may exist that was not identified in the performance of our procedures.
1122 KenilwortlrOrive, Suite 500
Baltimore, Maryland 2 1 2 0 4 - 2 1 ~ , USA
410.296.6200 Fax: 410.296.6448
www.mksh.com E-mail: info@mksh.com
ATTORNEY WORK PRODUCT- PRIVILEGED AND CONFIDENTIAL
C. Operations of the Housing and Neighborhood Services Division
As background for our analysis, we read Mr. Robert Rowan's report dated November 2001. This
report focused on identification of problems in the housing programs and suggestions to insure
compliance with guidelines in the future. In addition, we read the audit reports prepared by the
outside auditors and reviewed a detailed analysis of housing department customer files, prepared
by Donna Renberg.
We interviewed the following people about their knowledge of the control procedures and their
circumvention:
Mr. Rick Holt- City Manager and former Finance Director
Mr. Clarence Hulse - Assistant City Manager
Mr. Hank Rowan - Purchasing Director
Ms. Donna Renberg - Grants Coordinator
Ms. Donna Heddleston - Accounting Manager
Ms. Mary Jackson- Intake Specialist
Ms. Olive Kirkby- Intake Specialist
Mr. Sandy Hirsch - Building Inspector
Much has been written in the field of occupational fraud and abuse (white collar crime) about the
importance of strong internal controls in any organization. However, the controls must be
implemented and enforced by all levels of management to be effective. It is clear that there was a
serious breakdown in the system of internal control in the housing department operations and the
disbursement of City funds for housing expenditures during the years under review.
The fact that there was a problem within the Housing Division should not have surprised anyone.
All of the signs were there. Auditors discussed issues with and reported findings to Council
Members, grantor agencies, City management, and departmental employees; City employees
questioned and reported violations of policies and procedures to management, management to
executive management, and executive management to Council Members. Reports were written,
discussions and meetings were held, recommendations for changes and improvements were
made, and commitments to implement recommendations were acknowledged; yet the same
problems persisted from year to year. The magnitude of the problem and the dollars involved
surprised most everyone and was the impetus for commissioning our investigation.
Supervisory employees within the Housing Division, primarily Leroy Johnson and Gary Rogers,
acted with almost total disregard for the City's procedural processes. Ineffective Community
Development Department directors either ignored or condoned their activities. Management of
supporting departments (Finance and Purchasing), who perceived their ability to act within their
delegated authority nullified by executive management's (City Manager's) directives contributed
to the problems. These directives were designed to placate perceived political and/or other
special interest agendas fostered by City Council Members' actions.
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Whether these perceptions were based upon reality is irrelevant. The fact that finance,
purchasing, and executive management believed that they could not do otherwise for fear of
reprisal or other personal detriment, significantly contributed to the breakdown in internal
controls that should have prevented the conditions and circumstances that eventually led to the
disallowance of approximately $750,000 in federal program costs.
Members of the outside auditing team remarked that their impression of Johnson and Rogers was
an attitude of total disregard for the rules. Surprisingly, they indicated that Johnson was familiar
with applicable federal regulations. They indicated that he frequently referred to a marked up
copy of the Code of Federal Regulations (CFR) when challenging audit comments raised. They
found Rogers extremely defensive and unreasonable when discussing audit findings.
Within the Housing Division itself, there was no formal written policies for administering the
HOME and CDBG programs. However, the Housing Division did have unwritten review
procedures, client file processing checklists, and standardized forms that existed to ensure that
the program was administered in accordance with federal regulations. In addition, the City had
written purchasing and accounting policies to ensure compliance with state and local laws and
regulations and sound financial management practices (see Tab #5). If followed, the procedures
provided a reasonable level of internal control. Housing Division employees were entrusted with
carrying out their duties within this framework and chose to ignore them.
A review of client files, performed by auditors, consultants, grantor agencies, and City staff,
highlighted multiple problems. They found files that were disorganized, with papers thrown
within, checklists incomplete or not used at all, required supporting documentation missing or
misfiled, and contractual forms not used or not signed.
In addition to the general disarray within the files, which oftentimes made it difficult to
determine what was performed, a closer review identified procedures that were not being
followed. The problems in the files were endemic. Income eligibility was not obtained or
applicants were not eligible at all. Inspections were not performed before work began, during
construction, or after completion, or the contracted work did not reflect the conditions identified
in the initial inspection. "Emergency repair" procedures were undertaken for conditions that
were identified months before the "emergency repair" was performed, suggesting that the
"emergencies" may not have been emergencies after all. Construction contracts, mortgages,
notes, and other agreements were missing, not signed, or processed after the work was
performed. Procurement histories were not in the file, as required by the regulations, or if they
were, they were "sketchy" at most, and not in compliance with the City's purchasing policies.
Although procedures existed for obtaining and documenting required information, procuring
services, and processing payments, they were not followed by Johnson or Rogers. Based upon
the condition of the files and repeated audit findings, neither party took the responsibility or
initiative to ensure that the control procedures that did exist were operating as intended or that
recommendations to audit findings were implemented. Instead, they continued to approve
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purchases and payment vouchers that clearly violated the City's policies and the programs'
regulations.
Records reviewed by us as well as the comprehensive analysis completed by Donna Renberg,
reveal that time and again Johnson and Rogers ignored and circumvented the procedures. Our
interviews with employees, both current and former, reinforce our observation.
Recurring schemes uncovered include:
Characterizing repairs as "emergency" when they fell outside the definition.
Ignoring established purchasing procedures and placing work with two primary vendors.
Ordering subordinates to sign payment requests as "initiator" to facilitate the approval
process.
Submitting multiple invoices from a vendor for work performed to avoid the City
Council approval process.
Certain recurring obligations are exempt from competitive bidding and therefore not handled by
the purchasing department. Processing a "request for direct payment" form is the approved
payment method. Direct payment items include postage, utilities payments, advertising
expenditures, dues and memberships, travel expenses etc. Payments for construction and
rehabilitation work are far outside the definition of a qualified "direct payment," in our opinion.
We noted numerous incidents where rehabilitation department expenditures were paid using
direct payment request forms.
The Housing Division did not operate within a vacuum, although at times, it appeared as if it did.
In order to contract for services or process a payment, two other City departments were required.
The City's Purchasing/Warehouse Policy and Procedure Manual (Purchasing Policy), approved
by City Council Resolution No. 98-38 (Revised 5/8/00) dictates City purchasing policy. For the
most part, the policy conforms to the procurement requirements of OMB Circular A-102
Common Rule- Uniform Administrative Requirements for Grants and Cooperative Agreements
to State and Local Governments, and even exceeds the dollar thresholds for small purchases and
sealed bids. The regulations require the City to follow its own policies, as long as they conform
to the requirements ofOMB Circular A-102 Common Rule.
The purchasing policy contains adequate checks and balances, segregation of duties, and
multiple levels of approvals before a purchase can be made and a payment can be processed by
the Finance Department. It also specifically denotes how "emergency purchases" are to be
processed.
The purchasing policy specifically mentions CDBG construction contracts in Section 5(V). This
section states that these contracts will generally follow the same procedures as set forth in the
manual, but that additional documentation is required for certain rehabilitation projects. Other
than that, the Purchasing Policy does not differentiate between CDBG and HOME procurement
procedures and other City procurements.
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The purchasing policy requires informal requests for quotations for small purchases ($7,500 or
less). Purchases over $7,500 must be approved by the City Council, and competitive sealed bids
or sealed proposals are to be solicited. Sole source purchases are discouraged and must be
specifically requested by the appropriate department director.
Competitive bidding is not required for "emergency purchases." The City Manager is authorized
to approve emergency purchases, as defined in the Purchasing Policy, not to exceed $25,000.
In April of 1997, the City Council approved resolution 97-18 which authorized the City Manager
to execute form contracts to provide emergency housing repair, subject to a monetary limit of
$10,000. The resolution defined emergency repair as:
"The repair of a single family home that is deemed necessary by the City Manager to
avoid the occurrence, whether threatened or existing, of substantial damage to property
and/or loss of life to a person."
The resolution did not authorize the City Manager to ignore purchasing procedures. However,
the City Manager was authorized to ignore competitive bidding procedures when he decides that
an emergency exists.
A significant factor in the circumvention of the City's purchasing procedures was that the
Housing Division obtained its own quotes for purchases. Oftentimes, the Housing Division only
obtained one quote, issued a requisition to other than the lowest bidder, or to a contractor for
whom a quotation was not in the file.
In many of these cases, a purchase order was never issued, thereby, bypassing the Purchasing
department altogether. If a purchase order was issued, the Purchasing department did not follow-
up and obtain the additional quotations, as specified in the Purchasing Policy, or ensure that the
Housing Division requested the services of the lowest bidder. File reviews also indicated that
purchases were split or amounts lowered in order to fall under the small purchase procedures and
avoid the sealed bid process and additional scrutiny.
Perhaps the most notorious methods of circumventing the purchasing procedure were the use of
the "emergency purchase." Either Leroy Johnson or administrative staff that reported to him,
would procure the services of a contractor, without a purchase order, receive the invoice, prepare
a Request for Direct Pay Form, identify the transaction on the form as an "Emergency Repair,"
obtain the required signatures, and present it to Finance for processing and payment.
Purchasing procedures were not followed in the vast majority of rehabilitation department
expenditures. The purchasing department handled only 14 out of approximately 80 projects
during the fiscal years 2000 and 2001.
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In an interview we conducted with Hank Rowan he addressed this issue and made the following
comments:
He was aware of Johnson's activities but felt powerless to stop him.
Johnson used emergency repairs as a convenient way around established purchasing
procedures.
Johnson and Rogers were the architects of the emergency policy.
Rogers told him in response to his questioning vinyl siding as an "emergency" that once
they got into a project and had the contractor mobilized-"lets fix all the problems."
Rowan's staff resented Johnson because he flaunted his ability to get around the normal
procedures and get invoices processed and paid.
Circumventing purchasing procedures creates the opportunity for fraudulent activities such as
bid rigging and kickbacks. Of course, the City loses benefits gained from the competitive bidding
process.
Donna Heddleston advised that Johnson frequently used a direct pay requisition to attempt to get
payment for favored vendors. Many time she would refuse to process the requests because they
did not comply with establish purchasing procedures. She noted that Johnson would go around
her and obtain approvals from the finance director or the City Manager.
The City Manager, who by Resolution 97-18 and the Purchasing Policy was given the authority
to designate when a repair or purchase was considered an emergency, with authorization from
superiors, Heddleston felt she had no option but to process the payment request.
The problem with this scenario is that neither the Purchasing Policy nor Resolution 97-18 states
that the City Manager's signature on a Request for Direct Pay Form completed, as an
"emergency purchase" is an appropriate manner in which to process an emergency purchase. The
Purchasing Policy is very specific in this regard. Nowhere in this process is a Request for Direct
Pay Form an approved method of payment and nowhere is the City Manager's signature after
the expenditure is made considered to be an approval to circumvent the process.
Why did department directors and managers fail to enforce the policies that were in place and
within the realm of their authority? All were aware that the City's policies were not being
followed. Within the City's chain of command, these violations were reported, but appear to
have been summarily ignored. The perceived political undertone within the City was that
Johnson and Rogers were untouchable and their actions were to be condoned. Therefore, even
though internal controls existed, they were not being followed when it came to the Housing
Division because the control environment within the City did not support them. Johnson
acknowledged in his termination hearing that he violated the City purchasing guidelines.
Johnson, in reference to the purchasing guidelines states, " ....... I guess I'm probably guilty of
some of that .... ".
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Fortunately, the current City administration has taken positive steps to correct the problems
noted. The most significant change has been the hiring of qualified staff for the housing
department.
The City hired Donna Renberg as Grants Coordinator. Renberg impressed us as competent and
knowledgeable of the program requirements. This position reports to the City Manager and is
responsible for monitoring the administrative/reporting aspects of the City's grants and for
performing an annual internal review of each program.
The Housing Division has been reorganized, with the termination and transfer of some
employees and the hiring of new employees. It is still part of the Community Development
Department, which reports to the Assistant City Manager. The former Community Development
Department Director, who was a planner by profession, is no longer with the City. The City has
hired a new director for the department.
The City has hired a new Housing Division Manager. She has experience with housing programs
and appears to be dedicated to improving the process and implementing procedures. The City
also hired a rehab specialist who worked closely with the new manager in getting new
procedures in place. Sadly, this person died, and the position has been refilled.
As a result of these personnel changes, many of the problems identified in other consultant's and
auditor's reports have been alleviated in that policies and procedures are now being followed.
The Grants Coordinator and the Housing Division Manager, in their attempt to complete the
year-end reports for the Department of Housing and Urban Development for project years 1999
and 2000 (corresponding to the City's fiscal years 2000 and 2001) reviewed every
file/expenditure. The City's Grants Coordinator completed her detailed report on this project on
June 11, 2002. This report described, in detail, the rationale for determining whether the costs
involved were allowable and reimbursable under the programs (CDBG and HOME). Although
tedious and time consuming, this process has made significant strides in bringing the City into
compliance with its program requirements and highlighted control issues and procedures that
needed to be addressed.
New applicant file checklists have been created to follow the flow of information and document
that procedures have been completed. These forms are in the files and being used. A written
CDBG and HOME Housing Rehabilitation, Repair, and Replacement Policy has been prepared
by the new manager and approved by the City Council. The new Housing Division Manager and
the Grants Coordinator are closely monitoring applicant files. Intake errors are still being found
but this review process allows problems to be addressed in a timely manner. The manager is
actively involved in the process of ensuring compliance. She is signing off on income
certifications and other forms and her approval is required in order to proceed on items identified
in an inspection. She is working with Purchasing in developing qualified bidders. Pre-
construction meetings are being held, the appropriate parties are signing construction contracts,
mortgages, notes, and other agreements, and liens are being filed. Inspections are being
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performed before, during, and after the completion of work. The only grant related payments
made on Requests for Direct Pay Forms are SHIP down payment assistance; most are being
processed through Purchasing.
Multiple external audit reports indicated that grant draw down requests were not being done in a
timely manner. Public Service expenditures are now being drawn down quarterly and other
expenditures are being drawn down more often than that.
As noted in the City's response to the FY 2001 audit, Finance is requiring a written memo from
the City Manager or Assistant City Manager before processing Request for Direct Pay Forms or
purchase orders that do not follow City policies. With the change in Housing Division staff, this
has not been a procedure that they have had to enforce.
The City Manager believes that his departmental directors and managers should be empowered
to do their jobs in accordance with City policies, laws, and regulations. Therefore, he is in the
process of preparing a policy that would allow department directors to go outside the chain of
command and go directly to the City Council if they believe that the City Manager's directives
are in violation of City policy.
In response to other program compliance issues noted in the FY 2001 audit, the City has
indicated that it has changed its procedures for tracking fixed assets purchased with federal
funds, ensuring contractors' compliance with the Davis-Bacon Act, documenting environmental
certification exemptions, monitoring sub-recipients, and obtaining suspension and debarment
certifications in accordance with the auditor's recommendations. The efficacy of these changes
in ensuring program compliance will be evaluated during the City's FY 2002 audit. However, the
changes in personnel and management's desire to bring these programs into compliance should
enhance the likelihood of that occurring.
In response to a recurring audit report recommendation, City management, with the concurrence
of the City Council, budgeted administrative costs to these programs for FY 2002, and
administrative expenditures have been charged during year.
The City is primarily relying on good employees doing their job. Although procedures have
changed somewhat, mostly the people initiating the transactions have changed. These changes in
people and the heightened awareness (by Council and the public) have no doubt added to the
current success of the program changes. Good people are a starting point, not an end in itself.
Many recommendations for changes in the programs and controls have been proposed to the City
in the consultant's report ofNovember 21, 2001 and in the City's annual audit reports. Many of
these recommendations have already been implemented as noted above. The City, in consultation
with its external auditors, should evaluate the remaining consultant's items in light of the
changes already instituted, and to ensure that the recommended procedures provide for adequate
segregation of duties and other control points to validate any implementation costs, and that the
recommended procedures do not effectuate new compliance issues.
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We concur with the City in its approach to fixing the problems, which starts with the hiring of
employees with sufficient education, training, and skills, to perform the duties and
responsibilities of the positions for which they were hired.
We also concur with the City Manager in his recommendation to develop a procedure whereby
directors can go directly to the City Council, outside of the regular chain of command, to address
perceived violations of City policy by the office of the City Manager. Departmental directors,
managers, and employees alike should be able to perform their assigned duties in accordance
with City policies without fear of retribution.
In addition, City employees must be given the tools to adequately perform their assigned duties.
These "tools" include education, training, information, communication, sufficient levels of
staffing, empowerment, and the support of executive management and the City Council.
To the extent possible, the City should design policies and procedures that incorporate
individuals outside the Housing Division into the daily processing of divisional transactions and
assign responsibility to the individual performing the transaction.
To this end, we offer the following suggestions:
1. Since it is the responsibility of the Purchasing Director to administer all rules and regulations
established by City Council, City Charter, City Code, and all pertinent local, state, and
federal laws concerning purchasing, the Purchasing Director, or his designee, should be
receiving reports that allow him to perform his responsibilities regarding purchasing.
2. A copy of the weekly expenditure approval report should be sent to the Purchasing Director
for his review and follow-up on perceived violations of the purchasing procedures. This
report would identify payments processed without purchase orders (i.e. Direct Pays) and also
allow for monitoring of possible "splitting" of purchases in violation of the Purchasing
Policy.
3. The detailed review of client files indicated that incorrect accounts had been charged for
some program expenditures. Part of this problem arose from inappropriate account titles that
exist within the general ledger account structure. These account titles should be reviewed and
renamed to coincide with the current programs carried out by the City under its various grant
programs.
4. Each year, the Purchasing and Finance Departments should be provided with a list of
approved projects and account numbers, along with a description of the programs and
examples of the types of allowable expenditures. Buyers should use this list when processing
purchase orders and accounts payable clerks when processing payments to ensure that the
appropriate accounts are being used. And as an additional verification that the expenditure
being charged is an allowable cost ofthe project.
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5. Audit reports have identified multiple other compliance and control issues related to these
programs. It appears that some of these issues are related to ignorance rather than a disregard
of the requirements. Therefore, employees of the Finance and Purchasing Departments and
the Housing and Neighborhood Services Division should receive training related to federal
and state procurement, financial, and other program compliance. This should include
attending classes related to OMB Circular A-87 Cost Principles for State and Local
Governments and the Department of Housing and Urban Development grant administrative
requirements.
6. An employee from both the Finance and Purchasing Departments should become an integral
part of the grant monitoring process.
7. The integration of Finance and Purchasing into the monitoring of grant programs should not
be limited to programs administered by the Housing and Neighborhood Services Division.
This grant monitoring is applicable to all federal and state programs administered by the
City. The problems encountered within the Housing Division could occur with any grant
program.
8. In order to ensure the veracity of financial information included in programmatic reports and
reimbursement requests, and to expedite the timely processing of reimbursement requests for
all federal and state programs, a procedure should be implemented for reconciling, on a
monthly basis, general ledger account balances to award program records. This process
should be a joint effort between the Finance Department and the Grants Coordinator.
9. The procedures for completing the newly designed checklists included in the applicant files
should include the initials of the person performing the procedure in addition to the date
performed. In this way, responsibility for the activity, and its compliance to program
requirements can be assigned.
1 0. The Purchasing Department should make potential contractors aware that services should not
be performed or goods delivered without a purchase order and that invoices will not be paid
unless accompanied by a valid City assigned purchase order number.
11. During the bidding process and at pre-award conferences, contractors should be notified that
work is not to be started until a Notice to Proceed is issued.
12. The Housing Division should supply applicants with an informational packet that describes
the process from application through the end of construction. The document should list the
step-by-step process so that the applicant is aware that no work is to be performed on their
residence until certain procedures have been performed and documents signed. Any noted
deviation from this process should be reported to a designated employee outside of the
Housing Division.
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13. For the time being, the Grants Coordinator should continue to review client files in detail to
provide an added assurance that the Housing Division is following policies. This detailed
review can taper off as time goes by, providing that the results of these reviews warrant such
an action.
14. As demonstrated by the activities of Johnson and other members of the housing department,
no system of internal control can be relied upon to stop deliberate malfeasance by
management or perpetrated through the collusion of two or more employees. If a managerial
employee directs others or chooses himself to process a transaction in a non-routine manner,
such a request is likely to be followed, and in all likelihood, it will not be reported to a third
party. This possibility of a "management override" will depend, for the most part, on how
employees are instructed to react to a manager's request to circumvent a normal processing
procedure.
To prevent this from occurring, employees should be instructed to formally
document any "unusual handling" of a transaction. However, the reporting of
overrides as a control feature could itself be overridden. To minimize this
probability, management should set clear policies whereby reporting the
circumvention of the system is accepted by employees, and by disciplining any
employees who do not comply with this policy. In reality, "whistle blowing,"
especially when one's boss is involved, is not a popular activity, so some risk of
noncompliance may always be present.
Use of a "Hot Line" should be considered by the City as a means to allow
employees to report control system overrides and acts of fraud and abuse
anonymously.
D. City Council
The City of Cocoa Charter clearly states in Article III Section 4(b) " ... The city council and the
members thereof shall deal with the city offices and employees who are subject to the direction
and supervision of the city manager, solely through the city manager. The city council and the
members thereof, shall not give orders to any such officer or employee, with publicly or
privately." Article IV Section 3(a) notes, "The city manager shall be the chief executive officer
and head of the administrative branch of the city government ... The city manager shall have the
power to hire, suspend, or remove any city employee or officer except those approved by the city
council."
We encountered numerous examples of Council members exceeding their level of authority.
Council members used their ability to fire the City Manager as a means to force the hiring of
Johnson and his retention when it was obvious that he was not performing his duties properly.
Johnson used his relationship with certain council members to threaten other employees.
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Telephone message books for the period October 1999 through October 2001 indicate that
certain City Council members telephoned Johnson frequently. On the surface at least, it appears
that these calls are inconsistent with the requirements of the City Charter. Additional
communications, if any, via Jolmson's pager, voice mail or when he was available to take a call
would, of course, increase the incident rate.
#Calls
Alex Greenwood 29
Bruce Tate 63
Mike Blake 19
Donna Renberg advised that Council members, Tate, Greenwood and Blake were observed
meeting with Johnson in Johnson's office on numerous occasions. Ifthe members were meeting
together, they may have violated the Florida Sunshine laws. Certainly, these actions are
inconsistent with the City Charter provisions noted above and legitimized Johnson's assertions
about his influence with the Council.
Despite Johnson's disregard for the City's policies and procedures, Bruce Tate testified on his
behalf at his termination hearing. This act could be construed as a violation of the above-
mentioned City Charter rules and supports the allegations of Johnson's influence with Council
members.
City Council members face a challenge when they balance the requirements of the City Charter
with their desire to be informed and involved in City Business. In the interests of efficient
management, we suggest that City Council members adhere to a strict interpretation of Section
III and IV of the charter.
E. Leroy Johnson
The next section of this report will address the activities of Leroy Johnson. Our investigation
indicates that Johnson was ill qualified for his position, subject to intense personal financial
pressure and purposely circumvented established control requirements.
Johnson was the CBDG coordinator for the City during the period under review. He was hired
December 1996 and terminated for cause on November 2, 2001. He has deep roots in the Cocoa
community and significant political ties to present and former City Council members.
We have been advised that Johnson was hired over strong objections of the then City Manager,
Terry Seawell. On the other hand, his future supervisor, Gary Rogers, gave him a strong
endorsement. When we compared his resume to the position description, we noted significant
gaps in his experience. The City's job description noted a minimum qualification of "three years
of direct experience in CDBG is required." In addition," ... knowledge of CDBG program and its
implementation requirements. Knowledge of HUD rules and regulations governing the CDBG
program. Knowledge of local, state and Federal laws, rules and regulations governing the CDBG
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program ... " Johnson's resume does not address CDBG experience. (Tab 1 -Job Description -
CDBG Coordinator, Johnson's application for employment and resume)
By all accounts, Johnson enjoyed the support of City Council members, Bruce Tate, Mike Hill,
Alex Greenwood and Jewell Collins. Our interviews with City employees, both current and
former, confirmed that Johnson traded on this influence to circumvent the control systems.
Interviewees informed us that certain Council members routinely interfered with City personnel
in the performance of the their duties. Comments provided by City Employees include:
Ken Koch, former director of the Community Development Department, indicated that
Johnson's political connections thwarted disciplinary actions for insubordination and poor
job performance.
Ann Fadullon, former Director of the Community Development Department, cited instances
where Johnson intimidated Terry Seawell (former City Manager) by calling Council
members and reporting information contradictory to information provided by Seawell.
Fadullon noted that Johnson boasted about providing insider information to the City
Council on members of the Police and Fire Departments. Fadullon advised that Johnson
showed her his pager and states," see they're paging me, I'm not calling them."
Clarence Hulse, Assistant City Manager, stated that Johnson advised him that he had
influence with three council members and could get Hulse fired. Hulse indicated that
Johnson used his relationship with Tate to try to get him fired on numerous occasions.
Hulse reported that the City Council became privy to Hulse's confidential conversations
with Johnson.
Rick Holt, City Manager, advised that there was intense pressure from Council members to
protect Rogers and Johnson. Holt stated that he received veiled threats from Tate about
keeping Rogers and Johnson in their positions. Holt advised that a council member, Rudy
Stone threatened Terry Seawell with termination if he didn't hire Johnson.
Terry Seawell, former City Manager, refused to comment on his relationship with Rudy
Stone. He cited a confidentiality agreement he signed as part of his termination process.
Seawell did indicate that he found Johnson's qualifications lacking. He allowed that it
would have been very difficult politically and may have put his job in jeopardy if he tried to
fire Johnson. He said that Mike Blake informed him in a closed door meeting that he
wanted Rogers as director and Johnson in the CBDG department. He confirmed there was
political pressure from Mike Blake, Bruce Tate Jr. and Alex Greenwood to keep Johnson in
his position.
Donna Renberg, CDBG coordinator, advised that she resigned her position with the City in
June 2000 because she recognized that Council members were protecting Johnson, to the
detriment of the City. She agreed to apply and return to City employment only after
Johnson was terminated.
Hank Rowan, Purchasing Director stated that Johnson had such great political connections
and influence that people who crossed him were at risk of losing their job.
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Donna Heddleston, accountant, indicated that Johnson had a relationship with three council
members, Bruce Tate, Mike Blake and Alex Greenwood. In her opinion, Johnson
intimidated her superiors by threatening to use his influence to have them fired if they did
not go along with his wishes.
Johnson experienced serious financial setbacks before and during his employment at the City.
Johnson had considerable debts and obligations outside of his basic living expenses.
Johnson's salary ranged from $32,000 in 1996 to $38,000 in 2001.
Child Support
Johnson was under severe financial pressures due to child support payments. A garnishment
notice filed in April 1997 in Brevard County shows that he was over $29,000 in arrears for
child support. After the usual payroll deductions inflated by garnishments of approximately
$240 per week, his average weekly disposable income for the period October 1999 to
September 2000 and October 2000 to September 2001 was $274 and $317 respectively. (See
Tab 1 -Johnson's pay register and garnishment document)
Federal Tax Liens- Deficiencies in Income Tax Payments
We examined a copy of a Federal Tax Lien Notice totaling $106,506 for unpaid individual
taxes for 1989. We examined lien releases issued by the IRS during 2001 for 1986 and 1989
income taxes totaling $120,044. While we are not privy to Johnson's payments to the Internal
Revenue Service, typically the IRS requires substantial payments on tax liabilities to release
liens. (See Tab 1- Internal Revenue Service lien and releases)
Home Foreclosure
Johnson's home on Porpoise Street was lost to foreclosure in September 2000. Theresa
Harper (Johnson's future wife) purchased this home from Dick Pierre on October 25, 1997.
(See Tab 1 -Brevard County- Certificate of Sale)
Real Estate License Revocation
The Florida Department of Business and Professional Regulation revoked Johnson's real
estate license in 1994 for cause. (See Tab 1 -Florida Department of Public Records)
Research indicates that financial pressure is a key ingredient in employees' decisions to commit
fraud or participate in bribery and kickback schemes. Johnson's financial problems are classic
examples of the types of financial pressures cited in the research on white-collar crime.
The City of Cocoa Personnel Policy Handbook notes, " As a public employee, you must be
attentive to the perception of conflict of interest whether it does or does not exist." Additionally,
"You are encouraged to report to your department director, through your supervisors, if you
Page 14 of27
maintain or begin a personal or business relationship, which may be perceived by others as a
conflict of interest in the performance of your job function."
The handbook defines a conflict of interest as "Beginning or maintaining a personal or business
relationship which may adversely affect the exercise of independent judgment in dealing with
City suppliers of goods and services, fellow employees or the general public."
Johnson was either employed by or was a business or personal associate of Richard Pierre -
Pierre Investments, Torn Scarp - Jason Inc. and Luke Range- United Builders of East Florida
Inc., who conducted business with the Housing Department during Johnson's tenure. Johnson's
dealings with these men and their organizations posed a potential conflict of interest.
It is clear that Johnson had a duty to notify the personnel department of this appearance of a
conflict of interest. If Johnson had notified the personnel department, the City could have
reviewed those transactions for compliance with conflict of interest laws and regulations
established by the State and City.
Pierre Investments - Richard Pierre
Johnson's employment with this organization began in 1991 on a part time basis, according to
data received during the employment process. Johnson's resume confirms his employment but
indicates it began in 1993 and does not mention that it was part time.
Three IRS form 1 099s found in Johnson's desk after his termination revealed that he received at
least $30,000 in compensation from Richard Pierre, while an employee of the City.
1997-$7,700
1998- $9,190
1999- $12,615
(See Tab 2 -Johnson's Internal Revenue Service form 1099)
Our review of Johnson's payroll records from October 1999 to September 2001 and interviews
with Ann Fadullon and Ken Koch confirm that Johnson never took leave for more than a day or
two at a time. This compensation may have been earned during regular business hours.
Telephone log summaries indicate that Pierre left over 80 messages for Johnson during his
period of employment.
We reviewed the housing department transactions with Richard Pierre that Johnson facilitated:
Johnny Clayton - 500 Blake Ave.
Page 15 of27
o Richard Pierre purchased the property on February 7, 1997 for $13,000.
o Richard Pierre sold the property on November 11, 1997 to Johnny Clayton for
$39,900.
o Johnson reviewed and authorized the City down payment assistance loan of
$3,683 to Clayton.
Verna Wilson - 625 Peachtree St.
o Richard Pierre purchased the property in December 1997 for approximately
$13,000.
o Richard Pierre sold the property to Verona Wilson on February 20, 1998 for
$46,900.
o Johnson reviewed and authorized the City down payment assistance loan of
$4,243 to Wilson.
HelenS. Wynn- 23 Travis St.
o Richard Pierre purchased the property for approximately $19,000 on January 4,
1999.
o The City purchased the Wynn home for $38,000 from Pierre approximately six
months later l using program funding.
o The City expended over $21,000 in 2000 for further repairs to this property.
The owner of 23 Travis Street, prior to the sale to Mr. Pierre, was Mr. Jeff V arndell. Mr.
V arndell indicated to us in an interview that he felt he was the victim of unethical and possibly
illegal behavior by Johnson. He memorialized his concerns in a memorandum to Robert Torelli,
Criminal Investigator for Housing and Urban Development.
Varndell stated that he inquired of Johnson about the possibility of selling his house to the city.
Johnson informed him that the city would not purchase his two-bedroom home because it was
considered too small. Johnson introduced him to Pierre, who purchased the property for $19,000
in January 1999. According to Varndell, Johnson wrote the contract of sale. As part of the
purchase Pierre received two parcels of land, lots #3 and #4 and the house. Varndell advised us
that the house was in "move-in condition," and questioned why the city spent so much money on
the acquisition and rehabilitation of the house.
Richard Pierre sold the city lot #4 and the house for Ms. Wynn in July 1999 for $38,000.
Varndell advised that the house encroached on lot #3, which he believes is still owned by Mr.
Pierre. We could not locate a survey in the files and Varndell advised that his attempts to obtain
the survey were also unsuccessful.
Pierre appears to have at least doubled his investment in .. In our
opinion, Johnson's relationship with Pierre is a clear conflict of interest and possibly in violation
of State and City laws and regulations. Johnson addressed this appearance of impropriety in his
termination hearing stating that Pierre made a significant investment in the property. Johnson
Page 16 of27
denied receiving any benefit from this transaction. Johnson states, " ... go look at this house ...
the owner spent a bunch of money, the investor spent a bunch of money, on the house."
After the purchase from Pierre, Johnson hired contractors and authorized the disbursement of
over $21,000 for additional rehabilitation expenditures. The magnitude of these additional
expenditures contradicts Johnson's assertion that Pierre made substantial improvements to the
property. (See Tab 2- See Timeline, Varndell memo, related Travis Street documents and
mortgage documents for down payment assistance)
Jason Inc.
During 2000 and 2001 Jason Inc. was paid approximately $382,000 for repairs to approximately
50 homes. A significant amount of the money was spent for siding, soffit, fascia and windows.
Jason also did some roof work as well as occasional interior renovation and repair. HUD
reimbursed none of their work.
Jason Inc.'s primary business is the installation of windows, siding, and soffit and fascia
materials. Except for windows, this material is considered cosmetic and never an emergency
repair. HUD is on record to that effect.
Jason Inc. received favored status when it came to paying their invoices. Jason's invoices
totaling $183,000 and representing 47% of all their invoices were paid within two days of the
invoice date. It is highly unusual that vendors who contract with state and local governments get
paid so quickly. City employees stated that Johnson would "run around" the office seeking
approval for payment of the Jason invoices. (See Tab# 3- Chart of payments)
Jason Inc. was formed in March of2000 in Florida. The owners and officers are:
William A. Wallace Jr. -President- Director
Thomas J. Scarp Vice President- Director
Richard Pou -Vice President
Wallace, Scarp and Pou have been in the home rehabilitation and siding business for many years.
All three sold siding for Southern Exteriors. Over the years Wallace and Scarp owned a number
of other construction companies, some of which, did business with the City of Cocoa.
Mike Selig, a Cocoa real estate developer, informed us that Johnson worked for Thomas Scarp
prior to his employment with the City. Thomas Scarp explained that he has known Johnson for
many years but he was never his employer. He thought highly of Johnson and had considered
hiring him just prior to Johnson's employment with the City. According to Scarp, Johnson was a
real estate broker who brought customers for Scarp's home building business. Employees
repmied that Johnson was frequently seen in the company of Scarp - more so than any other
contractor. Johnson, on more than one occasion, picked up checks made payable to Jason Inc. on
behalf of Scarp.
Page 17 of27
--------------- ...
A small percentage of the work performed by Jason Inc. was awarded to them through a
competitive bid process managed by the City of Cocoa purchasing department. During our
review of the bids we uncovered what may have been a bid-rigging scheme perpetrated by the
officers of Jason Inc.
The Bid Schedule included in TAB #3 illustrates seven bids received during 2000 and 2001
wherein Jason Inc. and Southern Exteriors were bidders. In each case Jason Inc. was the low
bidder.
We have been advised by Southern Exteriors that the persons signing the bid documents listed in
the table below were not affiliated with Southern Exteriors at the date of signing. All the listed
persons most certainly knew Wallace, Scarp and Pou.
Southern Exteriors Bid Signature Date of termination
Signed
February 2000 Daryl Jones March 1999
August 7, 2000 Richard Pou October 1999
October 21, 2000 Phil Melanson October 2000
Mr. Daruso, the owner of Southern Exteriors has advised that his Company strongly discourages
bidding on government rehabilitation work. His Company does not bid on government work or
rehabilitation work because they feel that they cannot compete against "the low price/low quality
operations that normally bid on this work."
He was shocked that I had in my possession quotations from his Cocoa office signed by
Gene Pearson just prior to his termination.
He indicated that Gene Pearson ran the Cocoa office until he was fired and sued by
Southern Exteriors. The allegation in the civil complaint is that Pearson prepared
proposals, using Southern Exteriors forms (while an employee) and then offered a
counter proposal using a Company he owned.
He advised that both William Wallace and Tom Scarp had worked for him. He noted that
he caught Scarp stealing and that he fired him rather than going through the prosecution
route. He said that Wallace, Scarp and Pearson knew one another.
City employees found a copy of an executed real estate contract dated January 8, 1999 between
Tom Scarp and Richard Pierre in Johnson's desk. This document suggests that Johnson may
have had a financial relationship with both parties.
Johnson used his position within the City to circumvent the bidding process which gave him the
ability to award work to Jason Inc. with no oversight. In our review of inspector's reports, we
noted example after example of Jason Inc. performing non-critical soffit and fascia work not
identified in the inspector's reports.
Page 18 of27
We requested that Mr. Wallace provide access to his cash disbursement records to resolve
allegations that there were financial transactions between Jason, Inc. and Johnson. In a meeting
on September 10, 2002, Mr. Wallace refused access citing his attorney's advice. This response is
contradictory to Mr. Wallace's statement to the City Council on May 28, 2002 wherein he states,
"Jason Inc. has nothing to hide" and is ready to cooperate with the City.
United Builders ofEast Florida, Inc. (United)
During 2000 and 2001 United was paid approximately $285,000 for construction related work by
the Housing Department. In addition, the City spent $60,000 to purchase four building lots from
Mr. Range.
Luke Range, the owner of United, is an associate and business partner of Leroy Johnson (based
on Brevard County records of Edward Jones vs. Johnson wherein Range is also a named
defendant in a contract dispute). Donna Renberg advised that Range was a frequent visitor to
Johnson's office.
Range purchased five building lots on Prospect Street during September 1999 for development.
Sale data obtained from Brevard County indicates that the sales price was $47,500, an average of
$9,500 per lot. During the summer and fall of 2000 Johnson authorized $18,328 to have fill dirt
delivered to the lots and the sites leveled and cleared in preparation for construction. In addition,
Johnson's had the City pay for appraisals, impact fees and utilities hookups for the lots, totaling
$8,862. To our knowledge no contractual obligation existed for the City to pay for these items.
Once the lots were ready for development, Johnson authorized $15,000 per lot in land acquisition
assistance for each lot, the maximum CDBG grant available. Not only did the City pay for
Range's development costs of approximately $5,400 per lot, it then disbursed $15,000 per lot to
him from the general fund. Johnson caused the City to pay $20,400 per lot ($15,000+$5,400),
which Mr. Range purchased for $9,500 less than one year earlier.
The only appraisal found in the files was for lot #6, which appraised the lot at $15,000. However,
this appraisal is suspect because it appears to have been prepared after the house was erected on
the property. The appraiser notes, "The estimated market value is as of 8/30/2000. This is the
date of recording of the notice of commencement for building on the subject site. Please note that
a new home has been subsequently constructed on the subject site." In addition, City officials
have informed us that the comparables cited in the report are in housing areas that are
substantially more desirable than the subject property. Finally, Brevard County estimated the
land value at $12,760 in January 2001.
Johnson used his position within the City to circumvent the bidding process which gave him the
ability to award work to United with no oversight. Range was awarded substantial City contracts
in direct violation of the City procurement procedures.
Page 19 of27
Johnson continued to hire Range despite persistent complaints about poor quality work,
particularly roofing problems. These complaints were cited by recipients during our interviews
and are reported in the sections," Inspector's Reports- Jon Wolfersberger" and "Interviews with
Recipients." There is no reasonable explanation why Johnson would continue to work with a
contractor that has received repeated complaints from customers and City building inspectors.
The examples of shoddy work, which we inspected, were apparent to even the most casual
observer.
Other matters
It is possible that Johnson was operating as a real estate broker even though his license was
revoked. Data found in his desk by City employees indicate that he was in some capacity
involved in real estate transactions while employed by the City:
Executed real estate contract dated January 8, 1999 between Tom Scarp (Vice president of
Jason Inc.) and Richard Pierre
Rental agreement dated January 9, 1999 between Michael Blake and Margaret Miller for
property located at 918 Poinsett Dr.
Contract for sale by Jason Corp. (predecessor corporation to Jason Inc.) to the City of
Cocoa dated October 13, 1998. Description of the property is "Factory Street Lot"
A non-executed contract between Cathy Spafford, a former City of Cocoa building official
(purchaser) and Thomas W. Wallace Jr. (president of Jason Inc., a City vendor) for 650 W.
Timuquana Dr., Merritt Island
(See Tab # 4 - Timeline, Schedule of Development Expenses, Settlement sheets and related
documents)
F. Inspector's Reports- Jon Wolfersberger
These reports were used to provide a comparison between problems identified by the inspector
and rehabilitation repairs completed by the contractors. We performed this analysis on 13
reports. Problems identified in seven of the reports and photos indicate that critical problems
were left untouched while cosmetic work was performed on the residence.
As discussed previously, many of the direct pay requests particularly ones for siding/soffit/fascia
work contained notations that they were "emergency repairs". HUD stated "siding is never an
emergency".
We noted instances where work was performed which was not identified as necessary on the
inspector's report. We also noted examples of obvious poor workmanship. Examples of the
results of our analyses follow:
Page 20 of27
Bell, Mary Ann
The Inspector's report noted that the roof needed replacement and file photos show a large hole
in the roof. Bathroom photos show tiles being held together with duct tape.
No work was done on the aforementioned, however Jason Inc. did soffit/ fascia work, and siding
and gutter work, which was not identified as necessary on the inspector's report. This work was
deemed an "emergency repair". Johnson and Phil Caruana, city building inspector signed off in
the "Work Verified" stamp.
Copeland, Wallace
United was paid $7,150 in October 2000 to upgrade the electric and install central heating and air
conditioning. No inspector's reports were in the file prior to the date the air conditioning work
was completed.
Photos taken by City staff in December 2000 show that the work was incomplete. Large flexible
ducts are exposed in a closet. The duct in the kitchen hangs in front of the kitchen cabinets.
Clearly this doesn't meet the most basic standards of workmanship. Johnson and Phil Caruana
signed off in the "Work Verified" stamp (See Tab# 6 for supporting documents)
James, Fonda
The inspector's report states, "Integrity of roof structure over main living area is questionable. A
licensed roofing contractor should be consulted. Flat roof over utility room and porch should be
replaced." This wording suggests a significant hazard, however no repairs were done to address
this problem.
Jason Inc. painted the exterior of the house installed vinyl soffit and fascia and covered the
carport ceiling in vinyl. This work was deemed an "emergency repair" and signed off by Johnson
and Caruana in the "Work Verified" stamp
Blackmon, Elouise
The inspectors report noted the following:
A!C does not function.
Licensed electrician should conduct inspection.
Licensed roofer needs to inspect the roof.
None of the requested work was completed. However, Jason Inc. installed soffit and fascia. This
work was deemed an "emergency repair" and signed off by Johnson and Caruana in the "Work
Verified" stamp (See Tab# 6 for supporting documents)
Page 21 of27
Singleton, Louise
The inspector's report states that a central heating and air conditioning system should be
installed. The inspector's report dated March 2001 states that the home is without heat. Central
heating and air conditioning was not installed.
Jason Inc. installed soffit and fascia. This work was deemed an "emergency repair" and signed
off by Johnson and Caruana in the "Work Verified" stamp. (See Tab # 6 for supporting
documents)
Jones, Connie
The inspector's report stated that the property needed a roof replacement and carpet. Instead she
received new windows and soffit/fascia work, completed by Jason Inc. This work was deemed an
"emergency repair" and signed off by Johnson and Caruana in the "Work Verified" stamp.
Smith, Chester
The inspector's report stated that plumbing, roof and electrical inspections should be conducted.
It appears that none were done.
As usual, Jason Inc completed soffit and fascia work. This work was deemed an "emergency
repair" and signed offby Johnson and Caruana in the "Work Verified" stamp.
G. Interviews with Recipients
Interviews with eleven recipients of assistance were completed. The interviews were
supplemented with our inspection of the work and photographs.
We were informed of work that had not been completed, shown evidence of installation of
substandard materials and work that was deficient. Additionally, some recipients stated that the
problems that brought them into the program were still not addressed even after the City had
spent thousands of dollars in repairs on that property. Recipients reported frustration about
Johnson's inability to respond to complaints about contractor's repairs. Olive Kirkby stated that
Johnson would receive up to 10 complaints a day but he would rarely return requests for call
back
Following is a summary ofthe interviews:
Chandler, Javongia
Ms. Chandler received over $29,000 in rehabilitation repairs. Repairs included new windows,
soffit and fascia, roof, kitchen and other repairs. Soffit/fascia work was not listed as an item in
need of repair on the inspector's report.
Page 22 of27
One of the contractors, Duncan Builders, was paid $9,500 for repairs. The $9,500 payment
included $2,000 for repairs that Duncan failed to complete although Johnson verified it as
complete.
We obtained photographs of the incomplete repairs:
Replace laundry room door with metal door- $650 -Photos prove that the wooden door
was not replaced and is falling apart.
Sheetrock in hall closet needs repair/ replacement - $300 - Photos show water damage
and Ms. Chandler stated that they had never replaced that sheetrock.
Shower leaks- $400- Ms Chandler said that no work was done in the shower.
(See Tab# 7 for supporting documents)
Bright, Willie
Ms. Bright stated that she requested assistance for the following:
Rats/ squirrels coming into her attic.
A/C not working.
Roof leaks.
Old drafty windows.
No carpet /tile in the halls.
Ms Bright said that she still has rats, no air conditioning or heat and her roof still leaks. We
obtained photographs of water damage caused by the leaking roof, bare floors, possible electrical
hazards and ingress areas for rats/squirrels.
Disbursement records indicate that Jason Inc replaced soffit and fascia and replaced the
windows.
Ford, Thelma
Ms. Ford received over $31,000 in rehabilitation repairs over several years. Overall she is
satisfied with the program.
We believe that United was paid twice for the den repairs, once on September 9, 1999 for $1,200
and again on August 3, 2000 for $2,250. Ford confirmed that ceiling repairs were performed only
one time.
See Tab # 7 for supporting documents
Page 23 of27
Battle, Shauni
Ms. Battle received $10,825 in rehabilitation repairs for a new roof and soffit/fascia work.
According to Battle, the roof replaced by United in February, 2001 still leaks.
Copeland, Stacey
Ms. Copeland received $18,746 in rehabilitation repairs for kitchen repairs, upgraded electric,
roof and other repairs.
Ms Copeland was very upset about the quality of the workmanship at her house by United
Builders. We noted a panel in the kitchen with a large hole. We discovered that there was no
particleboard or other support in back of the facing material. Kitchen cabinet handles have fallen
off even though kitchen repairs were done in May 2001. Also, she continues to have leaks from
her roof, which was repaired in August 2000.
Rouse, Martha
Ms Rouse received $7,750 in roof repairs in September 2000 from United.
The City unnecessarily paid for these roof repairs because Sun State Exteriors Inc. (Tom Scarp,
now with Jason Inc.) had repaired this roof in October 1998 for $4,800 and warranted the
materials and labor for 1 0 years. Furthermore she continues to have leaks after her roof was
repaired a second time in September 2000. These leaks have caused additional interior damage.
The City paid $12,550 for roof repairs in less than two years and the recipient still has leaks
causing further damage to her home.
See Tab # 7 for supporting documents
H. State Housing Initiative Program (SHIP)- Down Payment Assistance -Ritz
Condominiums
This Ritz condominium project was rife with allegations of fraud and abuse from its inception.
Residents and others represented that the construction quality was very bad. Residents reported
massive plumbing leaks and electrical problems. Although appraisals exist indicating unit values
of$50,000-60,000, we have been advised that they should have sold for $30,000 to $40,000.
The City invested approximately $200,000 in down payment assistance for about 40 citizens to
purchase units in this ill-fated development. Donna Renberg and Chenita Joiner have advised us
that the customer files indicate a total disregard for eligibility and other requirements. It is
alleged that many of the people who received assistance money did not have income adequate to
meet underwriting standards for a mortgage thus setting up the project for failure from the
beginning.
Page 24 of27
The City required recipients to participate by contributing at least $500 towards settlement costs.
A Glow Title Company representative indicated to us that the $500 was not received in many
cases although the City provided $5,000 in down payment assistance based on the belief that
participants made the required payments.
Johnson was in the thick of the controversy. He was instrumental in the approval process and
attended many of the closings. Numerous unsupported allegations have been made that Johnson
accepted payments to qualify people for down payment assistance. In addition his immediate
family members worked at the condominium.
This series of transactions raises a number of red flags that could point to a scheme to defraud
the City, the purchasers and the lender.
See TAB # 8 for supporting documents
I. Alco-Rest
During a review of files from the Johnson/Rogers era in Chenita Joiner's office, we came across
a copy of a cashier's check for $12,600 drawn June 23, 1999. This check copy was stapled to the
back of direct payment request #24472 dated July 22, 1999.
See TAB # 9 for supporting document
This check is suspicious because ofthe following:
It is a cashier's check drawn on The Huntington National Bank
o Alco-Rest is shown as the remitter.
o Alco-Rest Inc. used the Barnett Bank for its checking account.
The check is made payable to "LVS" and printed by hand on the Xerox copy is the word
"rent"
o The only rent obligation disclosed in the audited financial statements for the
years ending June 30, 1999 and 2000 was for warehouse space, which indicated
that lease expense as less than $2000 for the year.
This "rent" check was not part of the expense reimbursement request and may have been
attached to the other copies by mistake.
The auditor indicated in his report that internal controls were "limited." Based on our review of
his report dated June 30, 2000, we would offer that the controls were almost non-existent. We
are particularly concerned because he commented, "Cashier checks were drawn on the bank
account. These checks were either cashed or held and re-deposited in the bank account.
Leroy Johnson is a known associate of the owners of the Alco Rest facility. The City provided
significant funding to Alco Rest over the years that Johnson was an employee.
Page 25 of27
J. Gary Rogers
Johnson received a strong endorsement from Rogers, his future supervisor, on a City of Cocoa
Application Referral and Disposition Form dated December 2, 1996. Rogers wrote," I know Mr.
Johnson and his capabilities are more than sufficient to expect a tremendous result from his
hiring for the CDBG Position." Rogers further states," Mr. Johnson knows our programs and the
people of Cocoa very well and in as much as CDBG primarily focuses on Real Estate and
Construction and customer relations; his background uniquely qualifies him for this position."
Rogers described himself as an expert in the assisted housing field. He noted in testimony
offered at Johnson's termination hearing that "I have 25 years of verifiable in-the-trenches
experience with block grant. I don't know of another person in this state that knows block grant
better that I do. At his termination hearing he stated, "I don't know anybody in Florida that
knows as much about HUD as I do .... "
We do not understand how Rogers, with his decades of experience, could not have known of the
problems that Johnson was creating for the City. We must conclude that Rogers chose to ignore
the problems, to the detriment of the City and its taxpayers. Clearly, his poor performance in
supervising Johnson was a major factor in his dismissal by the City.
(Tab 1 -Application and Referral Disposition Form prepared by Gary Rogers 12/2/96)
Conclusions
As noted previously there was a massive breakdown in the internal controls over the operations
of the Housing department. It is our opinion that Leroy Johnson used threats and intimidation to
routinely circumvent established city and government purchasing procedures for the housing
programs. His actions were the root cause of the City losing approximately $750,000 in funding
by the federal and state government. His direct supervisor, Gary Rogers, is also directly
responsible for the City's losses because he did nothing to stop Johnson. Rogers either
participated with or condoned Johnson's activities
Johnson repeatedly usurped his responsibilities to the City, the taxpayers and the housing
department customers by his:
Failure to review recipient's files for eligibility.
Failure to properly assess the critical needs of recipients in lieu of cosmetic or
unnecessary repairs.
Approval of work that was partially complete or shoddily done.
Awarding contracts without benefit of competitive bidding to a select group of
contractors with whom he had an association.
We would be remiss if we did not mention that City Council members and the City management
team could have stopped Johnson's activities. They must shoulder some ofthe responsibility for
this massive loss of taxpayer money and disservice to program recipients.
Page 26 of27
------------
Other than the payments from Mr. Pierre, we did not find any direct evidence that Johnson
received payments from the contractors that benefited from his activities. However, his actions
were consistent with the actions of someone who is using a position of authority for personal
gain. Johnson had the motive (financial stress) and the opportunity to demand kickbacks from
Pierre, Scarp, Range, The Ritz Condominium developers and the owner of Alco Rest. We base
this conclusion on the following facts:
1. Johnson was heavily in debt and didn't have the economic means to pay these debts, a
common motivator for perpetrators of economic crimes.
2. Jolmson's position afforded him the opportunity to direct City business to preferred
contractors with no supervision, opening the door to kickbacks and bribes.
3. Johnson had an apparent conflict of interest because of his prior employment or
association with Jason Inc, United Builders and Richard Pierre.
4. Johnson repeatedly circumvented the control process by use of the emergency repair
justification and direct payment process for the benefit of Jason Inc., United Builders.
5. Johnson ordered that repairs be performed on homes where the inspector's reports had
not identified those items as needing repairs.
6. Johnson ignored problems that posed hazards to residents and their property in lieu of
repairs that would be considered cosmetic.
7. In spite of complaints of poor work, Johnson continued to request the services of United
Builders.
We recommend that our investigative report be referred to the Florida Department of Law
Enforcement for consideration as the basis for initiating a criminal investigation into bid-rigging,
bribery and kick back schemes that may have occurred.
Best Regards,

Principal
Director, Financial Investigations Services
Page 27 of27

City of Cocoa Housing Investigation

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