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http://www.chicagotribune.com/news/local/breaking/chi-sec-says-suburb-advisor-committed-fraud-20140625,0,7308527,full.story


SEC says Harvey, advisor committed fraud in hotel deal


The vacant Chicago Park Hotel near Interstate 294 and Halsted Street in Harvey on Friday, June 21, 2013. (Zbigniew Bzdak / Chicago Tribune / June 21, 2013)

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Harvey, IL, United States

By Joe Mahr and Matt Walberg Tribune reporters

8:35 p.m. CDT, June 25, 2014

Federal authorities have accused a troubled south suburb and a controversial municipal advisor of defrauding investors to prop up the ailing town’s finances while lining the pocket of the advisor and saddling taxpayers with millions in debt.

In a civil lawsuit made public Wednesday, the Securities and Exchange Commission alleged that the City of Harvey and longtime advisor Joseph Letke committed fraud in connection with a failed hotel development deal, first reported by the Tribune last summer. The newspaper exposed how Letke worked for both sides in the project involving a developer with a history of lawsuits and liens.

The SEC allegations were contained in a request by the federal commission — established as a watchdog for investors — for an emergency order from a federal judge to stop another round of borrowing by Harvey because its “egregious misuse of bond proceeds” means “it cannot be trusted” to borrow money.

The judge agreed to temporarily halt the suburb’s efforts to issue bonds to borrow money, with Harvey spokesman Sean Howard saying the town “will cooperate fully.” Harvey officials will be able to argue why they can be trusted again at a hearing July 8.

By then, the town could be broke. Records unveiled in the lawsuit show that for years Harvey has been hiding such severe financial woes that it may not be able to pay its bills starting next month. It offers a cautionary tale of what can go wrong with Illinois’ combination of broad borrowing power for towns combined with loose oversight of municipal finances. At least two council members told the Tribune they were kept in the dark about just how dire the suburb’s finances had become.

“I’m astonished. I’m angry. I’m disappointed. I’m just mad,” said Ald. Daryl Crudup, who’s been pushing for months for Harvey to work on its budget.

At the center of the SEC case is Letke, a longtime financial advisor to several suburbs, including Harvey, who has been the focus of reviews from various federal agencies. The U.S. Attorney’s Office and FBI, in what has been termed a criminal investigation, have sought records from Markham, Riverdale, Dolton and Robbins regarding payments to and dealings with Letke or his firms, records show.

The SEC subpoenaed records last fall from Harvey that would shed light on Letke’s role in the failed deal that’s left a hotel half-gutted and in foreclosure.

The Tribune revealed in July the failed deal to redevelop the aging former Ramada Inn off Halsted Street, which sits near Interstate 80 adjacent to a strip club. Developer Satish “Sunny” Gabhawala told the newspaper he was struggling to redevelop the 300-room hotel after banks turned him down for loans. He hired Letke as his corporate accountant, and then approached Harvey for the loans that, in theory, would help turn the hotel into a renovated Holiday Inn with an improved conference center.

Harvey used its power to borrow without voter approval, given to it by Illinois law, to raise about $14 million between 2008 and 2010 — telling investors who bought the bonds that the borrowed cash would be used for the hotel project.

But federal authorities said little of the money was actually used to fix up the hotel, and instead was used in part to pay off past debts for the developer, help the city make payroll and to provide Letke with six-figure fees.

The project began to collapse as debts continued to pile up, the newspaper reported. As contractors clamored for their money and filed liens against the property, Gabhawala secured a $2.3 million, six-month mortgage at 22 percent interest. But the risky move failed, and the lender filed for foreclosure on the property in August 2011. It left a vacant structure, no money and loans that could cost Harvey’s struggling tax base more than $20 million to repay.

Gabhawala, who has recently declined comment, previously told the Tribune he hoped to resurrect the project by selling 100-year-old “Chinese gold bonds.”

Along the way, federal authorities noted this week, Letke or his firms were paid $547,000 by the suburb for acting as its financial advisor for the borrowing deals. The developer paid Letke or his firms an additional $269,000 in compensation that wasn’t disclosed in loan documents — an issue that federal authorities say amounts to misleading investors.

Beyond the six-figure payouts, Letke or his firms were paid more than $1 million from 2008 through 2010 to be Harvey’s comptroller and oversee the books.

Making payroll

The borrowing came at a time when Harvey continued to struggle to make ends meet, even as its longtime mayor, Eric Kellogg, insisted the town’s finances were on the mend.

Records released as part of this week’s lawsuit show that, as early as 2009, one of Letke’s employees warned him the town needed to do something to meet payroll. She suggested Harvey “dip into the bond money” — which federal officials say was a misuse of the cash. Still, a week later, to make payroll the town transferred $290,000 from a pot of cash containing the bond money, according to the complaint.

More hotel-development bond money eventually was transferred to cover day-to-day expenses, totaling at least $1.7 million over the years, records indicate. It wasn’t the only questionable budget action. The Tribune has separately reported how Harvey, as an inner-ring suburb, resold Chicago water to other towns for years without actually paying Chicago for the water. Chicago is now suing to get paid.

Earlier this year, Letke — as comptroller — told council members that drastic cuts would be needed to keep the town afloat through the end of the year. The warning was even more draconian in an April 25 memo, obtained by federal authorities and filed with their case. In that memo, Letke warned the mayor that, without drastic changes, the suburb would not be able to pay its bills starting in July and would not make its debt payments starting in August.

“This is a crisis,” he wrote, later adding: “Time is of the essence.”

The city’s sketchy finances are becoming an open secret at city hall, where Ald. Shirley Drewenski said she felt compelled last week, amid rumors of vendors not getting paid, to ask Letke if the suburb had enough money to cover a grass-cutting bill in her ward. She said Letke told her yes, but his assistant then cautioned her that “we don’t have the money.”

Drewenski said she never heard of Letke’s memo to the mayor specifying shortfalls for next month. Neither did Crudup. He said the closest thing was when Letke pointed to a “financial distress” plan at a committee meeting earlier this year but wouldn’t let anyone read it.

Residents have been left in the dark. Illinois, unlike some states, does little to actively review finances of towns, instead relying on laws mandating annual audits and cities self-reporting figures to the Illinois comptroller. Harvey has been late for years on doing both but faced little repercussion. After a Tribune series in February pointed out those failures, the Illinois comptroller sent auditors into Harvey, accompanied by Cook County sheriff’s deputies, to begin long-overdue audits that remain pending.

The SEC said its investigation also continues.

As for now, the suburb is being advised by Donald Luster, the former Dixmoor mayor forced to leave office in 2004 after being convicted of tax and unemployment benefits violations. He pitched an idea at Monday’s council meeting that was quickly approved: raise the food and beverage tax by 1 percent.

He said it should raise $1 million more a year. It’s unclear how much it will help. Even if the tax starts in July, and brings in twice what Luster estimates, Letke’s projections show that by December, absent other changes, the town would end the year more than $2 million in the hole.