This is the story of how the U.S. Department of Housing and Urban Development watched for four years while officials of the firm it had picked to run the Clifton Terrace Apartments stole hundreds of thousands of dollars from the tenants and the government, and ran the 285-unit complex into the ground.

Yesterday, The Washington Post reported how HUD decided to hand over Clifton Terrace to P.I. Properties Inc., a real estate spinoff of Youth Pride, the 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 Post reported how three officials of P.I. Porperties 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.

Treadwell has denied all wrongdoing; Lee has refused to discuss specifics; Booth has declined to be interviewed.

No allegations in any way implicated Mayor Barry.

Today's story, pieced together during a one-year investigation by The Washington Post, examines how HUD stayed with the deal for four years despite ample evidence gathered by its own staff that something was very wrong at Clifton Terrace. It is a story of:

How HUD ignored early warnings from its own officials that Clifton Terrace, under P.I. Properties' ownership, was "heading for disaster."

How HUD finally insisted that Treadwell hire a certified public accountant to audit the Clifton Terrace books, but took no notice of the fact that she brought in as the "auditor" her future husband -- who was not a CPA. And how he, according to P.I. officials, did not conduct an audit, but spent weeks combing through books and removing records.

How HUD sent in its own auditors after 2 1/2 years, but Treadwell refused to turn over the Clifton Terrace books. And how HUD auditors finally obtained the Clifton Terrace books, only to conclude that so many records, invoices and checks were missing that books were not auditable.

How a strong woman, Treadwell, intimidated HUD officials -- particularly the middle-aged white men among them -- by using the crudest street language and accusing them of racism. And how she frequently invoked her friendship with then HUD Secretary Patricia R. Harris, who later became secretary of Health, Education and Welfare.

How HUD officials, following a meeting with Harris, decided to delay foreclosing on Clifton Terrace, even though department auditors had concluded that P.I. Properties was "milking" HUD and the HUD area director had recommended foreclosure "immediately."

When we left this story yesterday, P.I. Properties had taken ownership of Clifton Terrace. On Nov. 12, 1975, a celebration was held at Clifton Terrace to mark P.I.'s announcement that it had just made its first mortgage payment -- early.

That was, as it turned out, one of only four mortgage payments made during the four years that P.I. Porperities owned the apartment complex.

By Sept. 7, 1976, HUD officials were plainly worried. HUD's director of loan management, Fred W. Pfaender, wrote to HUD D.C. area director Harry W. Staller:

"In reviewing the payment record of the mortgagor since closing of the sale, I can only conclude that the operation is heading for disaster unless some stringent servicing is accomplished."

Pfaender noted that P.I.'s June 4 1976, mortgage payment -- its final one -- bounced. As of the date he was writing, Pfaender went on, P.I. was behind $105,151.47 in payment due HUD.

"Considering that mortgage payments were not required for the first six months following the sale, such delinquencies are intolerable," Pfaender wrote. He instructed the area office to make an immediate demand for full payments and regular, timely future remittances.

"If the mortgage default has been precipitated by mismanagement resulting in improper and/or inflated expenditures, which drained income that would have been available for debt service payments, I would strongly urge you to request a prompt audit of the mortgagor's operations.

"It may be," Pfaender warned, "that foreclosure will be the only alternative." He asked for a complete explanation of P.I.'s blatant disregard of its obligations."

As 1976 drew to a close, HUD pressured P.I. Properties for an internal audit of its books by a certified public accountant of Treadwell's choice.

She chose Ronald Williams of the Plainfield, N.J., firm of Williams, Williams and Ellois. According to HUD regional inspector general for audit William J. Brown, Williams was not a CPA at the time. "He's a businessman who did a little accountancy on the side," Brown said.

Treadwell also neglected to tell HUD that Williams a former Youth Pride finance officer, was also her future husband (they were subsequently married in September 1977) and that there apparently never was any intention of his performing an audit.

While HUD waited and P.I. kept promising the audit, Williams was combing through the P.I. Properties files, removing records, according to P.I. bookkeeper Zellene Laney and general manager Lee.

Williams took batches of records out of the office, saying he needed them to perform his audit, Lee recalled. "I offered to photocopy them. He said, 'No.' Then I called Mary, and she said it was okay to give them to him," Lee said.

Williams never did submit an audit. "There's not one piece of paper in HUD to show what he did do," HUD auditor Edward Oast said.

But for his efforts, Williams was paid over $12,000 from P.I. funds, according to Laney.

Treadwell, in a recent interview, denied that Williams had removed any records, and said he had performed not an audit but a "systems analysis" for P.I.

Williams, reached at his office in New Jersey by telephone and apprised of the allegations that he had removed records said: "That's a bit absurd." He denied everything and declined further comment.

On Jan. 18, 1977, HUD's then area director James Clay wrote Treadwell, asking for the audit and requesting that the full amount then due HUD, which he said was $149,651, "be remitted immediately."

Treadwell fired back Feb. 9 with a stinging, six-page letter, accusing Clay of "attempting to cover-ass with a new (Carter) administration by use of a hastily contrived letter."

She claimed that Clay's figure of 149,651 was "incorrect." Although she did not supply her own figure, she conceded that "we are substantially in arrears" and laid the blame on HUD for a variety of complex reasons.

Treadwell concluded by telling Clay, "It is frivoulous (sic) of you to assume that we have the amount of $149,651" with which to pay the arrears.

At this point, frustrated in his efforts to pry an audit report out of Treadwell, Clay finally -- more than 2 1/2 years after P.I. took over Clifton Terrace -- dispatched two HUD auditors, Oast and William Foster, to find out what was going on.

The auditors quickly discovered that was not going to be easy.

"Most people put up a front about an audit; they say, 'Come on in, take your time, we have nothing to hide,'" Foster recalled. "Treadwell made it clear we were not wanted, accused us of trying to drum up something to make P.I. Properties look bad because it was minority owned."

Foster, who is black, said that Treadwell cursed them, demanded that they return with letters from HUD, and then said her books were unavailable because they were tied up with her own auditor.

Days later, when he was able to get past the obstacles and take his first look at the books, Foster said, he wished at once that he was not there.

Invoices were missing. So were canceled checks. The bank accounts had not been reconciled in years. Subsidiary ledgers did not balance with master ledgers, and no one could seem to find six to nine months worth of crucial records.

"It was by far the worst mess I'd ever seen," said Foster, who had been conducting federal audits for 10 years.

After two months, a supervisor "cut short" HUD's audit attempt, complaining that it was taking too much time to examine books that apparently were unauditable, Foster said.

When their report came out on May 27, 1977, the HUD auditors concluded:

Costs were charged to Clifton Terrace "which were unncessary for project operations."

Costs were charged to Clifton Terrace that should have been charged to other projects P.I. Properties was managing.

There were no indications that project management solicited bids in order to obtain the lowest prices.

Documentation of expenses "was inadequate."

The report recommended that P.I. Properties establish better financial controls.

HUD also asked Treadwell to provide justification or make restitution for a number of P.I. expenditures.

Treadwell attempted to explain some of these away, and claimed that the project was reimbursed for others.According to Laney, however, no genuine restitution was made. Treadwell merely transferred money from one of P.I.'s bank accounts to another.

"At the time Treadwell wrote her letters about reimbursing the questioned disbursements," said Helen McGlauchlin, chief of HUD's D.C. area office loan program, "there was no way for HUD to determine whether or not they were fake. The auditors didn't know that P.I. had so many different checking accounts. The auditors were shown one or two different accounts and that's all any of us thought existed."

As she paused during a conversation with a reporter and contemplated P.I.'s performance at Clifton, McGlauchlin slowly shook her head and said, "I swear to God, they were ripping it off in every direction."

Paul Adams, HUD assistant inspector general for investigation, was asked whether auditors' discovery of missing P.I. records -- those allegedly removed by Williams -- aroused any suspicion in his section.

"It's very unusual to have missing records," Adams replied. "But this in itself is not cause for an investigation. In this case, the auditors came up with missing records and there was nothing they or we could do. How could we investigate records that weren't there?"

Lee, in a recent interview, termed the audit "less than a slap on the wrist," Several HUD officials called it a sham.

Some HUD officials, however, were deeply disturbed by the results of the attempted audit.

Pfaender recalled that in the months following the audit, "I came to the conclusion that we were being milked by P.I. Properities at Clifton Terrace. I asked Sam Weisbach, one of our best accountants, to dig into the records. I felt that audit was a sham. There was nothing to it.

"Sam made up a spread sheet. It confirmed my feeling that we were being milked. I remember Sam saying, 'Jesus Christ, we're being milked. Its a classic case.' It was a classic milking operation. The HUD audit had been poor."

Clay, the area HUD director, also began urging a crackdown on Treadwell.

"The monthly accountings just received . . . reveal that the financial status of the project is far more serious than we had been led to believe in our conversations with the owner and management," Clay wrote to Pfaender on June 20, 1977

"In view of the above," Clay concluded, "it is our opinion that the lack of responsible and efficient management as reflected by the audit findings and the monthly accountings, indicate that foreclosure would be in the best interest of the Secretary and we hereby recommend that such action be taken immediately."

On June 22, Pfaender reported Clay's recommendation to HUD Assistant Secretary for Housing Lawrence B. Simons and two days later, on June 24, 1977 Simons reported it to the new HUD secretary Harris.

Within a few days of receiving Simons' memo with its indication that Clay was urging immediate foreclosure on Clifton Terrace, Harris met with Clay at HUD headquarters. Clay and HUD regional administrator Thomas Maloney said the meeting, which took place sometime between June 29 and July 7, 1977 was an impromptu one.

"As we were walking down the hall, the secretary (Harris) came out of the elevator," Maloney recalled. "I told her there was something she ought to know." Maloney said he related Clay's distress with Treadwell, "who was acting like she had immunity because she was a close friend of Pat Harris."

According to Maloney, Harris was "furious" when she heard this. "She said, 'I've known Mary Treadwell Barry for some time and I can't believe that she'd use a friendship that way,"' Maloney recalled.

Treadwell acknowledged that she had a long friendship with Harris, and that Harris had done some personal legal work for her. Treadwell denied, however, seeing Harris while she was secretary, or trading on their friendship.

But some of the HUD officials interviewed had a different recollection. They said Treadwell's invoking the name of Harris and an earlier sponsor, H.R. Crawford who had left HUD under a cloud in January 1976, was one of the techniques she used successfully to cow HUD bureaucrats.

Treadwell also often used the crudestd street language, a belligerent tone and accusations of racism to intimidate HUD officials, particularly the middle-aged white men among them, a number of officials related.

"Mary was able to Mau-Mau her way through my predecessors, especially the whites, by coming on strong as a black militant," said Clay, who is black. Former general counsel Robert R. Elliott recalled attending a meeting with Treadwell and several HUD officials, during which Treadwell whirled on a middle-aged, white bureaucrat and snapped, "Kiss my ass." The official, Elliott said, "just crumbled; he didn't have any idea how to deal with this powerful woman."

"She used to smile at us before going to the meetings with HUD," bookkeeper Laney recalled. "She asked if we wanted to bet on her. When she got back, she had whatever it was she wanted."

One HUD source said Treadwell so unnerved officials that several "were almost willing to give her whatever she wanted just to get her to leave a meeting."

In any event, despite Harris' expression of disbelief that Treadwell would trade on their friendship, when the HUD secretary ushered Clay into her office that day, she asked him why he had recommended foreclosure at Clifton Terrace.

"'Have you done everything you can to save the project?' she asked me," Clay said. "I said no, I hadn't."

The meeting ended, according to Maloney, with Clay telling Harris, "I guess we could give them 90 days to get their act together." And on July 11, Clay wrote to Treadwell, telling her:

"A decision has been made to withhold foreclosure of the mortgage on Clifton Terrace at this time."

Thus,, although HUD auditors had reported that they could produce only an incomplete analysis because records were missing from P.I. Properties' books; although Pfaender and Weisbach had concluded that P.I. was "milking" HUD; although Clay had recommended that HUD-take drastic action "immediately," HUD delayed again.

Meanwhile, on July 13, 1977, HUD area office staff member Jack Gifford inserted a scribbled memo into the files, noting that he had received a phone call from a tenant stating that "P.I. Properties were hauling refrigerators, stoves, toilets, plumbing parts, etc.," out of 1350 Clifton St. NW, one of the projects's three buildings. Gifford said he called Joan Booth, who told him that the tenant may have "observed normal replacement activity going on."

Late in July, 1977, Treadwell mounted a new counteroffensive. She began flooding the area HUD office with a steady stream of letters, telling of changes she was instituting at P.I. and Clifton: the board of directors was being altered; a procedure was established for seeking bids on all contracts; monthly financial reports were being prepared; questioned expenses were being reimbursed; an audit by the prestigious accounting firm of Arthur Anderson & Co. was under way; Williams, Williams and Ellois was performing "all management systems work."

An examination of the records and interviews with scores of HUD officials, as well as former P.I. bookkeeper Laney, makes clear that, at maximum, some cosmetic efforts were being made.

By autumn, however, it was evident that Treadwell had no plans to change her methods of operation:

On Oct. 3, HUD area housing director Kenneth Long wrote to her, asking when he could expect to see the Arthur Anderson audit, which she had promised for Sept. 1.

On Oct. 5, Clay wrote to her, expressing his "regret" that she had not found it "convenient" to show up for a meeting the day before and noting that "several serious outstanding issues" still required "immediate attention."

On Oct. 17, Long recorded a meeting he and Treadwell held and said she had promised, again, to hire a new project manager "in the near future" and to have Arthur Anderson & Co. perform an audit "sometime in November 1977."

A representative for the Anderson firm said, however, that although they had discussions with Treadwell at about this time, they were never retained to perform an audit and were never contacted again.

On Nov. 21, Long wrote to Treadwell, noting that "we have had no response from you to our recent telephone calls and letters" and that none of the promised monthly accounting reports had yet arrived.

"Unless we receive your response to all of the above within seven days, we shall recommend that foreclosure proceedings be immediately undertaken," Long said.

On Nov. 29, Clay sent Treadwell a telegram advising her that she had 30 days in which to cease managing Clifton..

On Dec. 7, Treadwell responded, saying, "I believe I am aware of the reasoning involved in your decision." But, she continued, Clay had not been aware at the time of "the plan which I have packaged for Clifton Terrace."

This plan, it developed, was to turn Clifton Terrace into a training laboratory for minority real estate management -- under the tutelage of P.I. Properties -- with HUD providing subsidization and the Department of Labor paying for the training.

The next day, Clay wrote to Simons, seeking his "guidance and direction . . . It has become painfully clear," he said, "that with P.I. Properties as owners managers, this project is not going to be in a position to become financially viable for a longer period of time."

During the first few months of 1978, senior HUD officials were drafting various stern letters to Treadwell, telling her, in essence, that the department's patience had been strained beyound the limit and they were left with no choice but foreclosure. But none of these drafts was sent.

This was a time during which Deputy Assistant HUD Scretary Marilyn Melkonian was, in her own words, "bending over backwards" to keep Treadwell and Clifton Terrace together.

According to two officials who said they had urged Melkonian on repeated occasions to foreclose immediately, she allegedly replied, "You guys just don't seem to understand -- foreclosure isn't even an option." Melkonian has denied that she made such statements.

Melkonian said she had made "absolutely clear" to Treadwell that "foreclosure very definitely was an option." However, she added, Secretary Harris did not want to take a drastic step like foreclosure on "a record established under a Republican administration. We wanted to make a fresh start."

On May 12, after numerous telephone calls and letters to Treadwell vainly seeking her approval for two area office staff members to examine the project books, Gifford and Edward Jones appeared at the P.I. office at Clifton. A P.I. employe refused to let them in, stating that he had no permission from Treadwell.

On May 17, the following note from Gifford was inserted into the files, referring to a phone call from a tenant: "He said that there was no management there; that Mrs. Booth had left and that there was only a girl there who told people there weren't any vacancies and a man who is doing something with the rents. (I couldn't understand just what he said about the man; it sounded like 'he is ripping off the rents.')".

On June 7, the D.C. Department of Licenses, Investigations and Inspections informed P.I. that its application for an apartment house license had been denied. Division Chief Chester McKenzie noted that P.I. had housing code and fire prevention violations and had failed to pay an annual registration fee.

On June 14, 1978, Melkonian wrote a four-page memorandum to Harris "to summarize briefly the reasons for my recommendation that the Department proceed with foreclosure." She noted the fact that P.I. was now $344,451 in arrears in mortgage payments owned to HUD.

Late in June, Pfaender wrote to Assistant General Counsel Bert J. Deutsch, asking him to initiate foreclosure.

On July 17, members of the Clifton Terrace Tenant's Association, who had struggled to get P.I. Properties out, wrote to Harris, welcoming the impending foreclosure as "long overdue" and advising her, in underlined typing: i

"Any assertion by P.I. Properties that they represent the interests or concerns of the tenants of Clifton Terrace race or low-income tenants in general, is a LIE and a DUPE of monstrous proportions."

The tenants also requested "an immediate and thorough investigation and accounting of all monies and materials belonging to this complex that have been misplaced or misused by P.I. Properties."

On July 31, 1978, P.I. Properties filed a motion for a preliminary injunction to stop HUD from taking over Clifton Terrace. P.i.'s attorney claimed that the problems at Clifton Terrace were HUD's fault. The agency had failed to live up to its agreements, had failed to support P.I.'s efforts and had misled it, the motion said.

In newspaper accounts, Treadwell said she was being used as a "scapegoat," and that HUD's foreclosure action "is a typical example of how and why HUD ends up being the nation's slum landlord."

In arguing against the motion for a preliminary injunction, Melkonian cited HUD's concern about "the overwhelming evidence of poor management" at Clifton Terrace by P.I. Properties.

Melkonian added that the District of Columbia had spent about $100,000 for heating oil, trash removal and other utilities, and that HUD had advanced P.I. more than $90,000 for the same, and more than $100,000 for real estate taxes.

Meanwhile, on Aug. 8, the D.C. corporation counsel filed criminal charges against P.I. Properties for 300 violations of city housing, fire, zoning and licensing regulations.

According to city prosecutors, these included fire alarm systems out of order, fire placards and extinguisher's missing, defective electrical wall switches, and apartments infested with roaches, bedbugs, lice, termites and flies.

Treadwell claimed the housing code violations were HUD's fault. She told reporters she was "very upset" that the criminal charges filed against P.I. "couldn't have been put at the foot of the person where they belong -- the secretary of HUD."

On Aug. 21, 1978, U.S. District Court Judge George L. Hart Jr. gave HUD immediate control over Clifton Terrace and refused to stop the foreclosure sale.

The tenants are entitled to "descent and sanitary housing," Hart said, but "many are living in a pigpen."

The next day, the U.S. Court of Appeals upheld that order, and on Aug. 23, 1978, HUD acquired Clifton Terrace by being the only bidder at the foreclosure auction. Private security guards were sent to the project and seized records of P.I. Properties. A new management firm was brought in.

On Nov. 9, 1978, P.I. Properties Inc. pleaded no contest to violating 65 housing, fire, zoning and licensing code regulations.

The maximum penalty was $19,500 and two years' imprisonment, D.C. Superior Court Judge Edmond T. Daly fined the corporation $550.

Assistant Corporation Counsel Howard Horowitz said at the time "I doubt we'll see a cent of that." A check this month showed the fine was unpaid.

Following inquiries by The Washington Post, HUD auditors early this year began an extensive accounting "review" of the performance of P.I.

A number of HUD officials seem at a loss to explain in retrospect how the Clifton Terrace debacle could have been allowed to drag on so long.

"The HUD area office was imperfect, at best," conceded James Clay, an area office director during the period.

"In the total bureaucratic scheme of things, there's so much coming in -- or having to come in -- from so many sources, I can understand how slippage can occur," said Harry Staller, another former director of the area HUD office. "which is not to excuse it."

Samuel Weisbach, the recently retired HUD senior accountant, took a more severe view. "The entire operation was so slipshod that operationally, there was absolutely no excuse for carrying them nearly as long as we did," he said.

Pfaender, whose memos indicate that he was more dogged than most of his colleagues in seeking early foreclosure, said in an interview that despite his persistence, "the decision making had been moved up to the secretary's (Harris) level.

"We'd been told that the secretary had a deep interest in D.C. housing," Pfaender said. "So, there wasn't much more that could be done. This is a prime example of civil servants trying to get their bosses to react -- and the bosses wouldn't move."

Harris told a breakfast meeting yesterday that she had spent very little time working on the Clifton Terrace case and that she felt HUD's foreclosure action had actually been swift. She explained that the government had to build its case carefully in order to avoid losing in court and to regain ownership of the project.

Former secretary James T. Lynn, who headed HUD at the time that P.I. Properties received Clifton Terrace on a trial basis, said yesterday, "I guess I knew about it at the time; I should have; but I don't really remember."

And Carla A. Hills, HUD secretary when the sale was consummated, said, "I'm ashamed to say -- and maybe I hide behind an excuse -- that there were thousands of projects and I don't remember any of it. I don't even remember the name of the project."

Former assistant secretary Crawford, who arranged the sale of Clifton to P.I. Properties, said in recent interview, "If I had to do it all over again, I'd do the same thing."

Two hours later, after part of the findings outlined in these articles had been presented to him, Crawford said he had changed his mind.

"It's obvious, he said, "that there was thievery going on there."