HUD details alleged violations by Montebello

Housing and Urban Development officials have accused struggling Montebello of numerous violations, including giving affordable housing grants directly to individuals rather than through approved entities and failing to determine whether those who got the grants were truly needy.

One homeowner who applied for funds meant to allow low-income households to fix up their homes admitted owning four pieces of property in Hawaii. But the city did not take those assets into account when determining the applicant’s eligibility.

Those accusations were among 31”serious regulatory violations” HUD notified the city of in a letter obtained Friday by The Times. HUD warned Montebello officials that they needed to “take immediate action to correct existing program deficiencies” and “radically rethink” their “approach to program administration.”

HUD has already informed officials that they may have to pay back up to $5 million in questionable spending and has taken the highly unusual step of suspending funding to the city until it can provide more documentation of its use of federal dollars.

The letter, however, goes a step further by citing specific examples of wrongdoing.

It’s another blow for a city that is facing possible insolvency later this year and is the subject of several outside probes.

The FBI has launched an investigation of financial dealings in Montebello, and the U.S. attorney’s office has subpoenaed records pertaining to the way the city spent HUD money. Meanwhile, state Controller John Chiang has sent auditors into the city, and the Los Angeles County district attorney’s office is probing another financial mystery: what happened with more than $1 million that flowed through “off the books” city bank accounts discovered earlier this year.

Montebello City Councilman Frank Gomez said HUD’s findings were one more sign that “the way the city has been doing business for probably several decades was inappropriate.”

Added acting City Manager Larry Kosmont, brought in this spring to clean up the city: “Clearly, things were not done well.... The only thing we can do going forward is fix it.”

Officials said they have a meeting scheduled Monday with HUD representatives to try to map out solutions and are planning to hire a new consultant to oversee future programs. They blamed a consultant who was fired in the spring for many of the problems.

Last week, the city also filed a lawsuit against Danny Ku, a developer who received $1.3 million in HUD money to build affordable housing in a mixed-use project on Whittier Boulevard.

In 2009, the city gave HUD a copy of an agreement with the developer that had signatures and dates that appeared to have been “inappropriately cut and pasted” from another document, according to the inspector general’s report. “Upon further inquiry,” the report said, “the city confirmed there actually was no approved” agreement.

City officials have accused the developer of defrauding the city by artificially inflating the amount he allegedly paid for the land and getting a kickback through a real estate company he controlled.

Other HUD findings included:

• That the city did not keep records of what it spent federal money on and did not have proper internal controls in place to make sure it was using funds in accordance with federal law.

• That out of more than $700,000 the city handed out in home rehabilitation funds, it had proper documentation for only $175,000.

• That a second developer that had received $1.3 million in HUD funds returned the funds to the city before construction began, but the city did not report to HUD that the money had been returned and did not give it back.

• That when HUD officials asked the city for information about a company it was contracting with, Rehab Financial, city officials said they had no accounts with the firm. That was false: Officials were doing business with Rehab Financial, whose former president has since pleaded guilty to federal charges of embezzling money from multiple cities. But in what HUD called a violation of federal regulations, the city had no written agreement with the company.

Michael Huntley, the city’s director of economic development, blamed many of the city’s problems on the former consultant in charge of the programs, who has been fired. He said she was the one who had subcontracted with Rehab Financial. HUD said in its report that it is moving to prohibit the consultant from doing business on federally funded programs in the future.

Huntley said the city plans to go through the files of all individuals who received funds to make sure they were eligible. But he conceded that if Montebello can’t document that the money was spent properly, the city will have to pay it back to HUD.

He said he believes the city will be able to come up with a plan that will satisfy HUD. He was more optimistic than former City Manager Peter Cosentini, who reported to council members that he wept when he first learned in April of the problems with HUD.

jessica.garrison@latimes.com

abby.sewell@latimes.com