By Carol D. Leonnig and Dan Keating
Washington Post Staff Writers
Sunday, December 2, 2007
The D.C. government issued more than $44 million in questionable property tax refunds in the past nine years -- more than double the amount that prosecutors have declared to be missing in a massive theft of city money.
A Washington Post analysis of city records identified 160 checks since June 1999 that lacked the court orders that are required for legitimate refunds. The review provides the clearest picture to date of how the alleged tax scam evolved over the years, apparently circumventing internal controls.
Prosecutors have said that Harriette Walters, a mid-level manager at the D.C. Office of Tax and Revenue, approved illegal refunds and shared the wealth with family members and associates. She and five others face federal charges in the case. Meanwhile, the size and duration of the alleged thievery has Congress, council members and many taxpayers questioning why no city officials caught it.
New information from the city's chief financial officer indicates that at least two and as many as four top leaders of the D.C. tax office, including its director, should have personally reviewed the refunds before they were issued. The payments examined by The Post were to fictitious companies or to firms that did not own the properties listed on refund documents.
Federal authorities are examining the same kinds of records scrutinized by The Post and acknowledge they are still trying to determine the depth of the loss. They have publicly flagged 58 checks as fraudulent, totaling $20 million, and warned that losses could mount as the probe continues.
Officials at the U.S. attorney's office in the District, which is leading the investigation, declined to comment on The Post's analysis. U.S. Attorney Jeffrey A. Taylor said "we're still counting" in explaining the status of the federal probe.
The Post analysis includes the checks identified in the criminal charges and others paid to the same firms described as fronts for the alleged conspiracy. The Post included additional checks that have no required court order and that are tied to false property records. Court orders are required for assessment reduction refunds.
The $44.3 million total is $13 million more than previous Post findings; it covers a longer time frame and includes additional payments.
Most refunds were written to fictitious firms, but some were ostensibly to legitimate companies. The Post has contacted more than 40 representatives of the legitimate companies named on the questionable checks, and they said the firms never got the refunds.
The allegations have threatened the previously sterling reputation of Chief Financial Officer Natwar M. Gandhi, who had boosted the District's image on Wall Street. The tax office was the largest agency directly under his supervision, and he was its director from 1997 to 2000, when authorities believe the theft began. In the wake of the scandal, Gandhi ousted the head of the office and four other top managers. A total of 15 employees have been dismissed or put on administrative leave.
The financial records reviewed by The Post do not say who cashed the questionable checks or who signed off on paperwork. Only one other employee in the tax office has been charged: tax specialist Diane Gustus, who reported to Walters. An FBI affidavit says that five more low-level employees helped process fraudulent refund paperwork before it got to Walters but does not address what, if anything, they knew about the alleged scheme.
According to the tax office's policy, all 160 suspicious checks identified by The Post should have been approved by the deputy chief and chief of the office's assessment services division. The most recent people in those jobs, Terez Badger and Susan Lee, were among those put on administrative leave. Badger has declined comment, and Lee has not returned messages regarding the case.
A total of 130 checks -- worth $41.1 million -- should have been reviewed by the director of real property tax administration, a position held in recent months by Thomas Branham, one of those ousted by Gandhi. Branham's attorney has said that Branham played no role in the tax scandal.
Ninety-five of the checks were written for more than $250,000 apiece and should have been moved all the way up to the director of the tax office, a job held by Sherryl Hobbs Newman since 2005.
Hobbs Newman, who was forced out Nov. 7, the day of Walters's arrest, has issued a statement saying she did nothing wrong. She later testified at a council hearing that Walters did not forward the checks to any higher-ups.
Early this decade, the District's Integrated Tax System was rolled out under Gandhi to modernize financial control over revenue. Officials said they have yet to determine why no one noticed that tens of millions in refunds were issued for locations that were not in the $130 million tax system.
So far, six people have been charged with bank fraud, mail fraud and conspiracy. In addition to Walters and Gustus, they are: Walters's brother Richard J. Walters; her niece Jayrece Turnbull; her nephew Ricardo Walters; and her friend Connie L. Alexander.
The Post's analysis relied upon a database of 9,800 property tax refund checks that the Office of Tax and Revenue has issued since June 1999, the oldest computerized records available.
Starting as early as then, the questionable checks typically were issued to legitimate companies and mirrored refunds the firms had been issued years earlier. Nine listed Harriette Walters's extended family members as co-payees who also could cash the check. Some of those people have not been charged, and it is unclear whether they personally cashed the checks or benefited in any way.
During this time, Walters, who had been hired for a clerk job in the District government in 1981, was a rising employee in the tax unit. She was well-regarded by her bosses for her ability to get the job done and resolve taxpayers' complaints.
On July 1, 1999, the city issued a $122,413 tax refund to Taliafaro Inc., a Nashville-based property management company. The refund was not authorized by court order, according to D.C. Superior Court records, and Taliafaro didn't own the specific D.C. property listed for the refund check.
The check listed "R.O. Steven" as a co-payee. Robert O. Steven is one of Walters's relatives. Prosecutors recently asked a judge to bar the defendants from contacting Steven, saying that doing so could interfere with the investigation.
On Aug. 20, 1999, the city issued a refund check for $187,167 to Winkler Co., an Alexandria-based firm that owned and managed some apartment buildings in the city. A company official said the firm has no record of receiving the money. The co-payee on the check was "Steven-Campbell."
Another check, issued to a Nashville property manager, lists "P.A. Steven" as the co-payee. Patricia A. Steven is one of Walters's relatives, and real estate records list her as sharing an address in Edgewater with Robert O. Steven.
All told, from 1999 to early 2001, questionable refund checks worth $2.6 million were issued by the city and listed variations of Walters's relatives names as co-payees. Those names were recorded in check registers as "Steven-Campbell, Inc.," "P.A. Steven Associates," and "P.A. Steven, Esq." The average check amount was $156,000.
Multiple calls to the Stevens' home were not returned. Phone calls to Stephanie Steven, who is listed as once living in the same Edgewater home, also were not returned. Prosecutors have moved to seize two New Jersey homes purchased by Walters and Patricia and Stephanie Steven because authorities say the properties were bought with stolen funds.
From March 2000 to November 2001, a series of seemingly legitimate -- but unauthorized -- checks listed "C.L. Alexander" or "C.L. Alexander, Esq." as the co-payee. The average check amount was $180,000.
Connie Alexander, one of those charged in the case, is accused in court papers of creating a phony company to help cash illegal refund checks from 2004 to 2007.
Over time, especially from 2002 to the present, the pattern of suspicious refund payments appeared to grow in bravado and sophistication and grew to include a handful of companies that prosecutors say were shams created by Walters's family members or friends.
Starting then, refund checks were issued, at a rate of one or two a month at first, to a handful of companies named "Legna Home Services" and "Chappa." Prosecutors have identified the companies in court papers as fronts that were created by Turnbull, Walters's niece. Other phony companies created by her brother and nephew were also recipients of numerous refund checks, according to records and charging papers.
The dollar value for these unauthorized, suspicious checks grew quickly after 2004. From January 2005 to early 2007, the average check amount was $376,000. This year, the amounts got even higher, closing in on a half-million dollars.
The trouble came to light after Turnbull deposited a $410,000 check at a SunTrust Bank branch. The check was issued to First American Home, in care of David Fuss, a D.C. tax attorney. The bank contacted Fuss, who said he had no association with First American or Turnbull and suggested that something was wrong. The FBI then began its investigation.
Staff writer David Nakamura and staff researcher Meg Smith contributed to this report.