This is the story of how the U.S. Department of Housing and Urban Development decided to hand over the Clifton Terrace Apartments to the "Pride" black, self-help organization, and went ahead with the deal despite a 13-month trial run that was by all HUD assessments a disaster.

In previous articles in this series, The Washington Post reported how three officials of P.I. Properties, Inc., a nonprofit real estate spinoff of Youth Pride, systematically diverted, misappropriated and stole hundreds of thousands of dollars while operating Clifton Terrace, according to records and the former P. I. bookkeeper.

The three officials were Mary Treadwell, former wife of Mayor Marion Barry and with Barry a founder in 1967 of the Pride organization; Joan M. Booth, Treadwell's sister who acted as project manager for Clifton Terrace; and Robert E. Lee Jr., who became general manager of P.I. Properties.

No allegations in any way implicated Mayor Barry.

Today's story, pieced together during a one-year investigation by The Washington Post, examines HUD's role in the early stages of this affair. It is a story of:

How one senior HUD official former Assistant Secretary Hazle Reid (H.R.) Crawford, decided to bestow ownership of Clifton Terrace on the Pride organization through its dormant real estate arm, Pride International, which he mistakenly believed qualified for this kind of deal as a nonprofit firm.

How HUD, following the belated discovery that Pride International was a business formed to make money, allowed Treadwell to take over Clifton Terrace with a hastily incorporated nonprofit firm, P.I. Properties -- despite a formal warning from HUD's general counsel that an entity formed this way "could not be deemed a suitable purchaser."

How HUD officials, over a 13-month period during which P.I. Properties managed Clifton Terrace as a trial run for ownship, repeatedly called the attention of higher-ups to unauthorized and excessive disbursements, improper and questionable expenditures, and slipshod management practices. And how despite the near-unanimous assessment at HUD that the trial had been a failure, Crawford pushed the transfer of ownership through anyway.

How HUD slashed $400,000 from the proposed sale price of $1.2 million when it decided that P.I. Properties -- given the "exorbitant expenses" it was incurring in running Clifton Terrace -- could not afford the higher figure And how it let P.I. take ownership of Clifton Terrace with a unique, no-down payment HUD mortage.

How could HUD have let this deal go through?

Here is the story as assembled from HUD files, interviews with current and former HUD officials, and others who were involved.

On March 15, 1974, Crawford wrote HUD regional administrator Theodore R. Robb that he had decided that Clifton Terrace, which HUD had come to own through default, would be a good candidate for sale to a private management firm.

"I have inspected and analyzed Clifton Terrace Apartments and feel it offers an excellent opportunity to incorporate management with an option for purchase," Crawford wrote.

He instructed the District of Columbia area HUD office to reject any bids to manage the property because he planned to negotiate the deal himself, privately.

Pride International was crawford's choice. He knew the matriarch of Pride, Mary Treadwell.

In April 1974, Treadwell took over management of Clifton Terrace and installed her sister Booth, as project manager.

A month later, HUD officials discovered that Pride International was not, in fact, a nonprofit firm. Under HUD regulations a deal like this one, negotiated privately, can only be consummated with a nonprofit firm.

Informed of this, Treadwell, according to official correspondence, responded that she could organize a nonprofit corporation "in a matter of a few days"

HUD general counsel Robert R. Elliott warned Crawford on May 13, 1974 to consider whether such a hastily formed corporation "does, in fact, constitute the type of entity envisaged by you" for a negotiated sale.

"If it is patently clear that the nonprofit corporation was formed solely to meet the nonprofit criterion," Elliott wrote, "I think the nonprofit purchaser could not be deemed to be a suitable purchaser."

But three days later, on May 16, Treadwell submitted the papers of a new nonprofit corporation, P.I. Properties, to HUD, and a draft of an agreement to sell Clifton TERRACE TO P.I. for $1.2 million was signed the same day.

Crawford announced that title for the property would pass to P.I. at the end of six months "if HUD is satisfied with the performance" of P.I. Properties. During the trial period, he said, P.I. would be expected to manage the property, meet its bills, and make monthly payments to HUD out of rental income.

Problems cropped up almost immediatedly.

On Aug. 2, 1974, HUD senior accountant John Mastradone told P.I. that its report for June -- the first full month of the trial period -- did not contain invoices to back up expenditures totalling $13,329.90.

By Oct. 13, 1974, a HUD task force that had been fromed to look into P.I.'s mounting financial difficulties at Clifton was reporting that P.I.'s claimed yearly costs of $1,900 to operate each of the 285 apartments "appeared to be exorbitant."

The task force's findings led the D.C. area HUD office to calculate that P.I. could not afford the proposed selling price of $1.2 million -- and possibly could not handle a price higher than $386,929. But the task force concluded that Clifton Terrace could not be sold for a price that low without throwing it open to public bidding.

So Crawford met with Treadwell. On Dec. 3, 1974, Crawford wrote Treadwell noting their agreement to cut the selling price for Clifton Terrace to a compromise $800,000.

P.I.'s performance during its trial management of Clifton, meanwhile, was looking worse and worse.

On Dec. 9, B.C. Tyner, director of mortgage insurance for HUD, wrote a memo to William K. Cameron, director of HUD's office of property disposition, urging that "a careful review be made" of unauthorized disbursements for which Treadwell was seeking repayment by HUD.

Tyner also warned that there appeared to be an "identity of interest between the management agent and some of the payees shown on these (P.I. monthly) reports." This was a reference to payments to Youth Pride Economic Enterpises, Landscaping and Gardening division, another Pride Spinoff headed by Treadwell.

On Dec. 19, 1974, Crawford wrote Treadwell that "it would be better for all concerned" to postpone the closing until Jan. 31, 1975. He cited the need to complete repair estimates, a new sales contract and closing papers, and "the press of the holiday season now upon us."

On jan. 17, 1975, Tyner wrote to then D.C. are HUD director Harry W. Staller that he was "seriously concerned about the propriety of these expenditures" for "consultant fees, legal fees, office furniture and equipment, landscaping, carpet for office, computer services and car rental."

Four days later, on Jan. 21, 1975, Cameron also sent a memo to Staller expressing grave concern:

The general consensus is that many of these items are far beyond the realm of prudent business expenses. This is particularly disturbing considering that P.I. Properties is supposed to have expertise in managing inner city projects. It is inconceivable that any project can financially survive the type and number of expenses presently charged against Clifton Terrace."

Cameron ended his memo by asking Staller: "After considering all the pertinent facts, does your office still wish to endorse P.I. Properties as being capable of effectively managing Clifton Terrace . . .?"

A week later, on Jan. 28, Crawford wrote Treadwell "to express my concern about present problems" at Clifton and to point out "several critical situations (which) are evident in your monthly accounting statements." He pointed out that:

"Project disbursements almost always equal or exceed project collections, leaving no income available to HUD." And that escrows for repairs, replacements and tax payments were "substantially in arrears."

Rents had still not been raised to authorized levels, with increases of from $3 to $5 per apartment. Because this had not been done on schedule, Crawford said, the increase rate would have to be stepped up sharply "to make the project financially viable at the agreed-upon price of $800,000."

Although Treadwell had agreed to HUD's demand to maintain 52 apartments at subsidized lower-rent rates, only 39 were then in that situation.

As a result, Crawford wrote, he was again postponing the closing -- this time until April 30, "on a trial period basis." During this time, he said, he expected P.I. to raise its income and curtail expenses so that HUD would receive it s expected monthly payments.

Three days later, Treadwell replied with a biting, five-page letter that rebutted Crawford's claims and then turned the blame for Clifton Terrace's fiscal problems on him and HUD.

"Our most difficult problem has been trying to deal with slips-between-the-lip made by the U.S. Department of Housing and Urban Development," Treadwell said. "Imagine my surprise to find in your letter of January 28 that it was P.I. Properties and not your staff that was slovenly . . . We have begun to turn Clifton Terrace around, and to make it a decent and safe housing complex for people to reside in. Such an effort, after years of neglect, takes money."

As to Crawford's postponing the closing date, she said, "We cannot accept it under what you term a 'trial period basis.' I am saddened even that you chose that language . . . .

"Never having viewed you as a bureaucrat who needed to 'cover the old arse,' . . . I prefer to believe that you have been badly staffed, but I do humbly stand to be corrected," she said.

Criss-crossing in the mails with Treadwell's letter to Crawford was a note to her from Kenneth Long, director of housing management in the D.C. area HUD office.

"Effective immediately," Long said, no invoices in excess of $200 could be paid by P.I. "without prior approval of the D.C. area office and a purchase order number issued from this office." His order was ignored.

On Feb. 6, Long sent Treadwell a detailed breakdown of disbursements which P.I. had claimed and which HUD said raised "a question of authorization." These totaled $18,426.95. In addition, Long said, $4,093.78 in other areas was being questioned as "excessive."

Five weeks later, Treadwell explained these disbursements away. The questioned $18,426.95 she said, was an accumulation of goods and services each costing$200 or less -- and therefore not requiring HUD authorization. She similarly broke down the "excessive" charges.

HUD asked no further questions.

Nor is there any indication that HUD even caught -- much less obtained an explanation for -- some of the stranger financial manipulations taking place at this time.

A P.I. disbursement sheet filed with HUD for January 1975 includes a hand-written note at the bottom of a computer printout that P.I. paid $15,808.33 to the Internal Revenue Service on Jan. 23 with check number 00037.

On the February disbursement sheets, check number 00037 appears again, listed as $27.12 paid to an Arthur Nelson, also on Jan. 23. The February disbursements then list the other 00037 check, for $15,808.33, as "voided."

But P.I. never made any correction in its income statement, leaving HUD with the impression that the sum had been spent. There is no indication in official correspondence that HUD ever discovered this.

Alvin Catlett Jr., a P.I. bookkeeper during part of 1974 and 1975, acknowledged in an interview last week that he reported the check as disbursed, but never sent it, because Booth had ordered him not to have any cash left over that would have to be sent to HUD. "Sometimes one check and sometimes 10 checks" were written and claimed as disbursements each month in reports to HUD but were not sent, in order to keep disbursements above income, Catlett said.

"We did it because we had to account for the money somehow," said Zellene Laney, the bookkeeper during most of P.I.'s tenure at Clifton, who in a series of interviews with the Post helped trace the alleged theft of hundreds of thousands of dollars by her associates.

Laney, who was sought out by the Post and agreed to talk, she said, largely because she was troubled by what P.I. had done, noted that as a result of the thefts and misappropriations, Clifton Terrace by the spring of 1975 was sinking ever deeper into the red.

On March 18, 1975, Staller wrote Crawford a detailed assessment of P.I.'s performance as manager of Clifton Terrace, citing pros and cons. Writing of positive achievements, Staller said P.I. "has been a socially sensitive property manager."

On the negative side, Staller stated: "Operating expenses have escalated far beyond an understandable increase in costs due to inflation . . . monthly expenditures have exceeded collection in every month of their operation. This has resulted in outstanding bills amounting to $73,000."

P.I. said it was willing to cut per unit annual expenses from $2,030 to $1,600, Staller wrote, but he said this figure "has no rational basis and is seen as a move to placate HUD."

Treadwell's firm continued to incur "unauthorized" and "questionable" expenses "in spite of repeated warnings," he added.

In the final analysis, Staller wrote, the decision on whether or not to sell Clifton to P.I. "turns on cost. We, therefore, conclude that we cannot recommend Pride Incorporated (the name commonly misapplied to any "Pride" spinoff organization) because there are no funds available to cover the income gap required to meet their perceived expenses."

Crawford sent a reply stamped "urgent" to Staller on the same day, stating that "a review of your statement in light of the present financial conditions at Clifton Terrace makes it inappropriate to continue with P.I. Properties, Inc., beyond the present trial management period which terminates on April 30, 1975."

Crawford instructed Staller to develop a list of alternative management agencies "in the event that the possibility of further contract extensions with P.I. Properties is undersirable."

In mid-April, Staller received a memo from Cameron noting that the area office had still not submitted a list of alternative property managers and wondering whether the area HUD office itself intended to take over management of Clifton Terrace after May 1.

Staller bounced the ball back to Cameron, saying that the area office couldn't make such a decision without specific guidance from HUD headquarters because "Pride" might get wind of the plan unofficially and this "could result in Pride charging HUD publicly with bad faith."

By this time, P.I. had run up $93,566 in unpaid utility bills at Clifton Terrace -- all in HUD's name -- and staller wrote Cameron that "to protect the department's credibility, as well as to save the department from further embarrassment," HUD would pay.

After receiving this, Cameron sent a note to Crawford on April 18, 1975, stating flatly that "fiscal stability is not being achieved at Clifton Terrace." He noted that the mortgage hadn't been paid at all, unpaid utility bills and other expenses amounted to an additional $100,000 and there were no "satisfactory explanations from P.I. Properties."

"On the other hand," Cameron went on, "P.I. Properties, Inc., has worked with the residents of Clifton Terrace and has been successful in resolving many of the problems at the project."

Cameron then attached two letters forCrawford to choose from and sign: one would terminate the sale; the other would extend the closing until May 30 and offer P.I. a six-month moratorium on mortgage payments.

Crawford signed the second letter.

Asked in a recent interview why he had presented Crawford with such drastically different options, Cameron declined comment.

On June 18, Crawford wrote Staller that $43,422.52 in outstanding utility bills should be added to the $800,000 sales price. It then was adjusted downward to $820,400. "I am looking forward to a smooth closing on June 30, 1975," Crawford stated.

The same day, Crawford prepared a memo for the files in which he summed up the background of the impending sale and stated that the HUD general counsel "gave approval to the concept" of the management-purchase of Clifton Terrace by P.I. Properties.

General counsel Elliott wrote a pointed memo to Crawford two weeks later -- a memo which circulated widely among HUD bureaucrats and was seen as Elliott's condemnation of Crawford and a blunt effort to disassociate himself from Crawford's decision -- declaring that "neither I nor my office has 'approved' the sale of Clifton Terrace to P.I. Properties, Inc. . .

"Only you know the basis for your representations, since only you have knowledge as to what arm's length negotiations, if any, occurred between the department and the purchaser. Your determination to reduce the price by about $400,000 is based upon your determination that rents can only be increased enough to support the $800,000 price. In other words, you have determined that rents cannot be raised approximately $10 per unit per month to support the $1.2 million price . . .

"To my knowledge, P.I. Properties has not remitted one dollar to the department during the nine months or so it has managed the property for the department."

Elliott also wrote that although then-HUD Secretary Carla A. Hills was aware of the deal, Crawford should not misconstrue this as Hills' approval. The secretary, Elliott stated, "was merely informed of the terms of the sale, the reasons you stated for deciding to sell, and my opinion that based upon your representations, the sale could legally be made. She stated that she appreciated being informed of the matter."

That same day, Elliott said in a recent interview, Crawford approached him and complained about the memo, saying the only point Elliott need have addressed was the legality of the proposed sale.

This brought the following response from Elliott later the same day: "Per our discussion this afternoon, this memorandum is in lieu of my earlier memorandum of even date. As stated in the earlier memorandum, I concur in the execution of the Clifton Terrace documents previously transmitted."

With this concurrence in hand, Crawford proceeded to close the sale with Treadwell that same day, June 30, 1975.

On Nov. 12, 1975, the city's political elite gathered at Clifton Terrace to celebrate the occasion of P.I. Properties' first mortgage payment to HUD.

"It's six weeks early," Treadwell was quoted as saying in newspaper accounts of the event.

Crawford noted how exceptional this was at a time "when most of our properties are in default."

Mayor Walter E. Washington proclaimed that Clifton Terrace showed "that black entrepreneurship can work in the inner city."

After speeches, the dignitaries adjourned to the project's recreation room where they were served alcoholic beverages ($95.48 -- "Office Expense") and catered food ($476.50 -- "Miscellaneous Operating") charged to project operations.

Two weeks later, on Nov. 26, 1975, a Washington Post columnist lavished praise on P.I. Porperties. "The significant thing is not that Pride is running the mammoth enterprise, but that Pride is turning it around," he wrote. Editorials also were supportive.

What was not publicly known at the time is that P.I. Properties had just borrowed $25,000 to meet its payroll, and owed other creditors $14,117.22, according to the November 1975 report filed later with HUD.

Nor was P.I.'s promising start in making its first mortgage payment early to become a regular event.

The fears of some HUD officials about the Clifton Terrace deal, as it turned out, were more than justified.

The worst was yet to come.