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D.C. Financial Officer Describes A 'Major Management Failure'
Fraud Revelations Shake Department's Underpinnings

By David Nakamura and Nikita Stewart
Washington Post Staff Writers
Thursday, November 8, 2007

During seven years as the District government's chief financial officer, Natwar M. Gandhi has built a reputation as a prudent and ethical fiscal steward, a Wall Street favorite who earned national acclaim for helping to steer a near-bankrupt city to stellar bond ratings and revenue surpluses.

Yesterday, Gandhi's reputation was threatened in the wake of one of the largest financial scandals in the city's history. Two employees in the Office of Tax and Revenue, the largest department under Gandhi's authority, were charged with stealing more than $16 million in public funds in an elaborate scheme that spanned several years, beginning under the administration of former mayor Anthony A. Williams.

Within hours, Gandhi's world was turned upside down. Four high-ranking managers in the tax office, including director Sherryl Hobbs Newman, whom Gandhi hired for the post in 2005, resigned at his request. Federal authorities said that their investigation will continue; several other employees have been implicated in the scheme, and government sources said still more are being interviewed.

"This is a major management failure," Gandhi said during a news conference at the U.S. attorney's office, flanked by federal law enforcement officers. Turning to Mayor Adrian M. Fenty (D), Gandhi added: "I take full responsibility."

Fenty, whose first announcement last fall after winning the Democratic primary was to say he planned to reappoint Gandhi to another five-year term, gave him a vote of confidence yesterday. But reaction from other city leaders was more equivocal.

Noting that it was a bank employee, not Gandhi or his aides, who first alerted federal authorities to the fraud, D.C. Council member Mary M. Cheh (D-Ward 3) said of Gandhi's office: "We're supposed to have an operation that is the envy of others. Hmmm. I'm beginning to wonder."

Council member Jack Evans (D-Ward 2), chairman of the Finance and Revenue Committee, said that he and council Chairman Vincent C. Gray (D) would hold an oversight hearing to explore the lapse. Both said yesterday that they maintain confidence in Gandhi.

Gandhi, 67, became chief financial officer in 2000, replacing Valerie Holt. Gandhi was appointed by the mayor, but he has full autonomy under an act passed by Congress during the city's financial crisis of the mid-1990s. He manages a staff of more than 1,000. This year, Fenty and the council increased Gandhi's salary from $186,600 to $279,000 to keep him from accepting a high-paying offer from Amtrak.

Since 2005, the tax office, with more than 400 employees, has been run by Hobbs Newman, who came to the District in 1997 from New York. She was hired by Williams, when he was the chief financial officer, to set up a customer relations department in the tax office. In between, Hobbs Newman served as director of the Department of Motor Vehicles and as secretary of the District under Williams, after he became mayor in 1999.

The two employees charged yesterday -- Harriette Walters, 51, and Diane Gustus, 54 -- worked in the real property division of the tax office, where Walters oversaw the issuance of refunds to commercial and residential property owners who had overpaid. The city collected $1.45 billion in real property tax revenue in fiscal 2007 and refunded $20.7 million, according to data provided by Gandhi's office.

Under the scheme described by federal authorities, Walters and Gustus prepared and approved bogus refund checks that were sent to friends and relatives at sham companies.

Hobbs Newman and the three other high-ranking officials who resigned yesterday -- supervisors Martin A. Skolnik, Matthew Braman and Thomas Branham -- have not been implicated in the wrongdoing. However, Gandhi, who was director of the tax office before becoming CFO, said they should have discovered the fraud. Instead, it came to light only after an employee at a bank alerted authorities. One of the co-conspirators had tried to deposit a check for about $400,000.

"When I was there, I signed refund checks directly," Gandhi said. "I asked for an explanation [for particularly large checks]. That kind of management was not there."

When asked why annual audits of the department did not identify the fraud, Gandhi said that determined, sophisticated criminals can defraud the most vigilant management. Gandhi appointed Ben Lorigo, who has been head of Gandhi's internal investigative unit, as interim head of the tax office.

Gandhi said that officials would review the internal controls designed to detect fraud and that he would ask the Internal Revenue Service and the D.C. Inspector General's office to inspect those procedures.

For Gandhi, the news of the charges came on the day he was to be honored at a banquet held by Governing magazine, which named him one of nine "public officials of the year."

"What makes Gandhi worth such big bucks is the fact that he has come to embody fiscal rectitude in Washington," the magazine wrote.

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