Fenty General Counsel Halted Action Against Bank in Tax Fraud Case

By Carol D. Leonnig
Washington Post Staff Writer
Monday, January 28, 2008

Mayor Adrian M. Fenty's top legal adviser blocked District attorneys from seeking damages from a bank caught up in the massive tax office scandal, a decision that experts say could jeopardize a chance for the city to recover millions of dollars.

Peter Nickles, Fenty's general counsel, ordered the attorney general's office early last month to drop its tentative plan to sue Bank of America for its role in cashing fraudulent city checks.

One of the bank's former employees is among those arrested in the tax investigation, and some experts said that could strengthen the city's case if it files a civil suit to help recover losses. But what could hurt the city's chance of recovering as much as possible, experts say, is putting off a decision to sue.

"Stop work on this," Nickles wrote Dec. 6 in an e-mail to Linda Singer, the attorney general at the time. "This is premature, would interfere with the grand jury and we are not rushing into lawsuits."

Nickles's decision came as the D.C. government was reeling from the loss of at least $20 million in the largest public corruption case in the city's history, a scam that went undetected for at least a decade. Harriette Walters, a former manager in the city's Office of Tax and Revenue, and others are accused of generating hundreds of property tax refund checks to sham companies and cashing them for their benefit.

Walter Jones, a former assistant branch manager at a Bank of America branch in Baltimore, is among 10 people arrested in the case. Jones was charged last month with helping to launder stolen money by accepting and cashing fraudulent checks. Bank of America accepted dozens of fraudulent checks over at least four years, according to court documents.

Several experts in banking liability expressed surprise that the city is not moving faster to pursue claims against Bank of America or others for failing to prevent the fraudulent checking activity. The city is running the risk of being able to recover less taxpayer money because of time limits on such suits, they said. They specifically noted the bank employee's alleged role in moving the money.

"That's devastating," said Jim White, a nationally recognized expert on bank liability and a commercial law professor at the University of Michigan. "Whether it's a case that could be settled for $1 million or $10 million, I don't know, but I don't understand why the city would not proceed."

Among the fraudulent checks cashed through Bank of America were three for a total of $1.1 million in late December 2004, according to court and bank records. Under a three-year statute of limitations that could apply, the city might have lost a chance to go after the money by not filing a suit last month, several experts said.

In an interview, Nickles said he stopped Singer from laying the groundwork for a suit because he didn't want to jeopardize Bank of America's assistance in providing records to federal prosecutors. He said he will decide whether to sue after the criminal investigation is complete and he has a chance to review city records seized by federal agents.

Nickles said he is confident that the city is not at risk of losing money through delay. The time limit does not apply, he said, because the case involves "fraudulent concealment." Nickles did not ask Bank of America for a tolling agreement -- a common step in litigation to essentially stop the clock and protect a party's option to make legal claims during the time it is deciding whether to sue.

"I'm completely comfortable with my decision," Nickles said.

He declined to say whether he thought any suit against Bank of America was a good idea.

Nickles was a longtime senior partner at Covington & Burling before signing on as Fenty's counsel. Bank of America is listed on the firm's Web site as one of its major clients. Nickles said that he didn't know that and that it had no bearing on his decision.

Singer resigned Dec. 17. She declined to comment on the matter. Aides have said that Singer stepped down after repeated clashes with Nickles, a longtime Fenty ally, and what she considered his overstepping of his authority. Fenty then appointed Nickles acting attorney general.

Bank of America was on both sides of many of the fraudulent checks. It handles the city's checking account, so all the checks in question were drawn from that bank. The bank also unknowingly helped cash many of the fraudulent checks, according to FBI affidavits, because the conspirators opened several accounts at the bank in the names of companies that didn't exist and used them to launder the money.

Bank of America eventually became suspicious of Jones's activities, particularly his dealings with Jayrece Turnbull, a niece of Walters's who is accused of being a main player in the conspiracy. The bank's security personnel questioned Jones in late 2006 because he had made several high-dollar-amount transfers of money between Turnbull's accounts, court papers say. The bank dismissed him in February for violating its standards of conduct.

Shirley Norton, a Bank of America spokeswoman, said the bank would not comment on the embezzlement case or the bank's potential liability. She said the bank continues to cooperate with investigators.

SunTrust Bank also cashed some of the fraudulent checks, according to FBI affidavits. But that bank triggered the fraud investigation, authorities said, by taking their suspicions about Turnbull and a $410,000 check to the FBI in July.

According to records and interviews, the debate over suing Bank of America began Nov. 28, three weeks after authorities made the first arrests.

Robert Ludwig, a partner in a D.C. law firm with experience in suing banks, called Alan B. Morrison, Singer's special counsel, and said his firm would be willing to handle such a case for a fee. Morrison began looking into a suit with Singer's and Fenty's approval, and Ludwig wrote a Dec. 4 letter to help Morrison and Singer present a case to the mayor.

"BOA particularly as depositary [bank] would very likely have serious liability for a substantial if not full portion of the loss for the last three years, if not longer," Ludwig wrote. "As discussed, time is of the essence, as each day that goes by, another half-million dollar check deposited in December 2004 potentially will be time-barred."

Nickles wrote Singer two days later ordering her to quit considering the idea. He said he was alerted to the work by the general counsel for Chief Financial Officer Natwar M. Gandhi, who oversees the Office of Tax and Revenue.

Singer disagreed and immediately wrote back, emphasizing two points: The city had a strong case that the banks had not exercised proper care in cashing checks made out to fictitious companies, and a quick decision was needed because a statute of limitations could apply.

"We have a good chance to recoup at least a significant part of the money lost in the fraud," Singer wrote in an e-mail obtained by The Washington Post. "I think we owe it to the Government and the taxpayers to pursue this, and don't know why we wouldn't. It would have absolutely no bearing on the grand jury proceedings as it relates only to the banks' own internal checks."

Nickles fired back minutes later, the records show, stressing that Fenty agreed with him.

"Tim Lynch, who is handling the grand jury, is getting cooperation from [Bank of America] and does not welcome interference," Nickles wrote in the final exchange, referring to the prosecutor on the case. "The mayor has spoken, and I trust you will listen."

Morrison, whom Nickles fired last month, said that he spoke directly with Lynch in his research and that the prosecutor, without urging one course or another, said the city's suit would not interfere with the bank's cooperation.

Nickles said he would not "get into a newspaper exchange with a former employee." He said he spoke with U.S. Attorney Jeffrey A. Taylor but declined to say what Taylor told him.

Taylor declined to comment about the case. In general, he said, his office is "always mindful" of how a suit could affect a criminal investigation but leaves the decision to D.C. officials.

Staff writer David Nakamura contributed to this report.

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