INVESTIGATION INTO FHA MULTIPLE DWELLING PROJECTS THURSDAY, AUGUST 25, 1966 U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMMITTEE ON GOVERNMENT OPERATIONS, Washington, D.C. The subcommittee met at 10:30 a.m. in room 3302, New Senate Office Building, pursuant to Senate Resolution 183, agreed to February 17, 1966, Senator Fred R. Harris presiding. Members of the subcommittee present: Senator John L. McClellan, Democrat, of Arkansas; Senator Fred R. Harris, Democrat, of Oklahoma; and Senator Karl E. Mundt, Republican, of South Dakota. Also present: Jerome S. Adlerman, general counsel; Philip W. Morgan, chief counsel to the minority; Alphonse Calabrese, investigator; and Mrs. Ruth Colquitt, acting chief clerk. Senator HARRIS. The subcommittee will be in order. (Member of the subcommittee present at time of convening: Senator Harris.) Senator HARRIS. Without objection we will place in the record a statement signed by our chairman, Senator McClellan, and ranking minority member, Senator Mundt, permitting us to meet with a quorum not present. UNITED STATES SENATE COMMITTEE ON GOVERNMENT OPERATIONS SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS AUGUST 25, 1966 Pursuant to Rule 5 of the Rules of Procedure which was amended by the Committee on Government Operations for its Senate Permanent Subcommittee on Investigations on June 3, 1965, and re-affirmed on January 12, 1966, permission is hereby granted for the Chairman to conduct hearings in open session without a quorum of two members for the purpose of taking testimony in the matter of the 220 Program of the Federal Housing Authority on August 25, 1966. Signed: JOHN L. MCCLELLAN, Chairman. KARL E. MUNDT, Senator HARRIS. The Chair will now call Mr. Charles Dumont and Mr. Jack Paradise. Would you hold up your right hand and be sworn? Do you and each of you solemnly swear that the testimony you are about to give before this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. PARADISE. I do. Mr. DUMONT. I do. 68-997-66- -9 TESTIMONY OF ALPHONSE F. CALABRESE (Resumed), CHARLES R. DUMONT, AND JACK PARADISE Senator HARRIS. Would you give your name, please? Mr. DUMONT. I am Charles Robert Dumont, from Los Angeles. I am a supervisory auditor at the Los Angeles regional office of GAO. Senator HARRIS. Mr. Paradise? Mr. PARADISE. My name is Jack Paradise. I reside in Glendale, Calif. I am also employed by the General Accounting Office. Senator HARRIS. And at the table with you is Mr. Calabrese? Senator HARRIS. Do you expect to testify with regard to this also? Senator HARRIS. You are the same Mr. Calabrese who has testified previously in this hearing and you understand you are still under oath? Mr. CALABRESE. That is correct. Senator HARRIS. You, Mr. Calabrese, supervised this investigation, as you testified yesterday? Mr. CALABRESE. That is correct. Senator HARRIS. Mr. Dumont and Mr. Paradise, I believe you made an analysis of the Barrington Plaza Enterprises project funds which were deposited in the bank accounts opened by Donovan D. Karnes, Hugh Crouse II, Jack Gorden, Mr. Arnold Provisor, the attorney for Barrington Plaza Enterprises; is that correct? Mr. DUMONT. That is correct. Senator HARRIS. Will you proceed to tell us what your investigation discovered? Mr. DUMONT. Yes, sir. These Mr. Paradise and I have made an analysis of the Barrington Plaza project funds which were deposited in nine bank accounts. funds were deposited in nine bank accounts opened by Donovan Karnes, Hugh Crouse, Jack Gorden, and Mr. Arnold Provisor, the attorney for Barrington Plaza Enterprises. Mr. ADLERMAN. At this point, let us make it clear the Barrington Plaza Enterprises is the group that bought the property from the Lesser Development Corp., and the Lesser people, is that right? Mr. DUMONT. Yes, sir. It is a limited partnership from Ohio, referred to as the Ohio group. Senator HARRIS. Proceed. Mr. DUMONT. At this time, I would like to enter our staff exhibit B-56 which is a schedule prepared by us summarizing the activity in the nine bank accounts. Senator HARRIS. It was prepared under your direction and states the activity accurately? 61. Mr. DUMONT. Yes, sir. Senator HARRIS. Without objection it will be admitted as exhibit (Document referred to marked "Exhibit No. 61" for reference and may be found in the files of the subcommittee.) Mr. DUMONT. The bulk of the Barrington Plaza funds was handled through two bank accounts at the Crocker-Citizens National Bank, Los Angeles. These accounts are known as the operating and the payroll Two of the nine accounts were security deposit accounts, one at the United California Bank, Beverly Hills, and a later one at the aforementioned Crocker-Citizens National Bank. Our investigation disclosed that the Barrington Plaza Enterprises has mishandled security deposits in violation of the provisions of the mortgagors regulatory agreement. Section 6(g) of the agreement provides that security deposits shall be kept separate and apart from other funds in a trust account, the amount of which shall at all times equal or exceed the outstanding obligations under said account. Senator HARRIS. What is a security deposit? Mr. DUMONT. A security deposit is a sum of money, usually equivalent to 1 month's rent, that is required to be paid by a new tenant. That money is held by the operators of the project and refunded at the end of the tenancy, if there are no outstanding charges against that tenant. Senator HARRIS. That was part of the agreement with John Hancock or with FHA? Mr. DUMONT. The regulatory agreement was with FHA. Mr. DUMONT. Yes, sir. We would like to submit that as our staff exhibit B-57. Senator HARRIS. And that is a true copy of the instrument on file with FHA? Mr. DUMONT. Yes, sir. Senator HARRIS. Without objection, staff exhibit B-57 will be admitted as exhibit 62. (Document referred to marked "Exhibit No. 62" for reference and may be found in the files of the subcommittee.) Mr. DUMONT. It is of interest to note that in the period of time when the Barrington Plaza project was operated by the Lesser interests, the FHA audit report of March 31, 1964, revealed that approximately $100,000 collected from tenants for security deposits through January 31, 1964, had been deposited in their operating accounts and commingled in violation of the mortgagor's regulatory agreement with FHA. The FHA audit report of February Mr. ADLERMAN. At this point, let us make it clear that the regulatory agreement provided that all funds collected as security deposits should be kept separate and apart from all other funds of the project in a trust account, the amount of which should at all times be equal to or exceed the aggregate of all outstanding obligations on the said account. Is that correct? Mr. DUMONT. Yes, sir; that is section 6(g) of the agreement. Senator HARRIS. Then FHA's own audit report of March 31, 1964, revealed that this $100,000, approximately, had not been kept separate as the agreement provided but had been commingled in their operating accounts? Mr. DUMONT. Yes, sir. Senator HARRIS. All right. Mr. DUMONT. Moreover, the FHA audit report of February 19, 1965, reported that the security deposit fund was about $50,000 short. This deficiency was later funded. Senator HARRIS. You have staff exhibit B-58, which is an audit report of FHA, dated February 19, 1965. Is that a true copy of the instrument on file with the FHA? Mr. DUMONT. Yes, sir. Senator HARRIS. It will be admitted without objection as exhibit 63. (Document referred to marked "Exhibit No. 63" for reference and may be found in the files of the subcommittee.) Senator HARRIS. I will read from page 4 of that audit report under item 5, the first paragraph, which states: As reported in our prior audit report dated March 31, 1964, approximately $100,000 collected from tenants as security deposits through January 31, 1964, had been deposited in the mortgagor's operating bank account. What is your staff exhibit number B-59? Mr. DUMONT. This is a letter from the Los Angeles insuring office of FHA to the Washington FHA office informing them that the Lesser security deposit account had apparently been properly and fully funded. Senator HARRIS. That is a true copy of the letter on file with the FHA? Mr. DUMONT. Yes, sir. Senator HARRIS. Without objection it will be admitted as exhibit 64. (Document referred to marked "Exhibit No. 64" for reference and may be found in the files of the subcommittee.) Senator HARRIS. You may proceed. Mr. DUMONT. On April 15, 1965, the date of the sale of Barrington Plaza, Barrington Plaza Enterprises, which we will refer to hereafter as "BPE," received $115,403.67 in security deposits which were transferred to them by the Lesser Development Corp. This sum was deposited in a security deposit account at the United California Bank, Beverly Hills, Calif. At this time I would like to enter our staff exhibit B-60 which is a letter from the Lesser Development Corp. to the United California. Bank, instructing them to turn over this $115,000 to BPE. Also we have our staff exhibit B-61, which is a schedule prepared by us showing the activity in the BPÉ account at the United California Bank. Senator HARRIS. And you testify as to their authenticity? Mr. DUMONT. Yes, sir. Senator HARRIS. Without objection, staff exhibit number B-60 will be admitted as exhibit 65 and staff exhibit B-61 as exhibit 66. (Documents referred to marked "Exhibit No. 65" and "Exhibit No. 66" for reference and may be found in the files of the subcommittee.) Mr. DUMONT. The day after the sale was completed, there evidently was a private arrangement made between Lesser and BPE whereby $105,000 from the security deposit account was delivered to Louis Lesser Enterprises, Inc., for 2 weeks, and then redeposited in the BPE security deposit account 2 weeks later. We have staff exhibit B-62 which is a special escrow instruction at the United California Bank containing instructions regarding the $105,000. Senator HARRIS. Where was that filed? Mr. DUMONT. That is from the United California Bank, Beverly Hills. Senator HARRIS. And you testify it is a true copy of the original? Mr. DUMONT. Yes, sir. Senator HARRIS. Without objection it will be admitted as exhibit 67. (Document referred to marked "Exhibit No. 67" for reference and may be found in the files of the subcommittee.) Senator HARRIS. So the $105,000, according to this agreement, was taken out for 2 weeks and then put back in, was it? Mr. DUMONT. Yes, sir. Senator HARRIS. Is that $105,000 out of this $115,000 plus security deposit? Mr. DUMONT. Yes, sir. Senator HARRIS. All right. Mr. DUMONT. The security deposit account at the United California Bank, the BPE account, was closed out by transfers of $75,000 and $20,000 to the Crocker-Citizens National Bank security deposit An additional $2,285 was returned to the tenants. There was also a withdrawal of $18,118.67 for which no explanation has been given as to its disposition. Senator HARRIS. Is that in one check or more than one? Mr. DUMONT. That was one withdrawal, sir. Senator HARRIS. Did you examine the check as to who was the under the check? payee Mr. DUMONT. We found the withdrawal noted on the bank operating statement. This particular bank does not take microfilm pictures of the activity. We were unable to obtain a copy of the check document, itself. Senator HARRIS. And that amount is still unexplained, is it? Mr. DUMONT. That is unexplained, and we were unable to get an explanation from the partners, Mr. Karnes and Mr. Crouse. Senator HARRIS. Very well. Mr. DUMONT. Examination of the security deposit account at the Crocker-Citizens National Bank reveals that of the $95,000 that was deposited, approximately $6,961 was refunded to the tenants, and the balance of $88,039 was withdrawn and utilized in various ways and means by Karnes and Crouse. This account has been commingled in addition by the infusion of approximately $47,936 of rent moneys which were held in certain secret accounts. This $47,936 was also withdrawn by Crouse and Karnes. The day before the final foreclosure took place, a check was drawn by Crouse for $17,244.91, leaving a balance of only $129.06 in the security deposit account at the Crocker Bank. Senator HARRIS. I hand you what has been marked "Staff exhibit B-63" and ask you to identify it. (The document was handed to the witness.) Mr. DUMONT. This is the check that Mr. Crouse wrote drawing out these funds the day before FHA took over the project. It was negotiated for cash at the Continental Bank in Beverly Hills. Senator HARRIS. It is dated May 31, 1966? Mr. DUMONT. Yes, sir. |