Housing and Urban Development Secretary Samuel R. Pierce Jr., responding to an inspector general's report, has chastised departmental officials for altering documents and thus reducing the estimated value of seven housing projects being sold to a private firm in a controversial transaction.
HUD negotiated the sale without competitive bidding to a firm that includes Edward Weidenfeld, chief counsel for President Reagan's campaign committee, and his wife Sheila, former press secretary to first lady Betty Ford.
After Sen. William Proxmire (D-Wis.) asked HUD to justify the planned sale last May, HUD employes made several additions to official documents so that the New York-area projects appeared to be worth significantly less than the department's earlier estimates, according to the report.
The HUD officials involved were planning to submit the altered documents to Proxmire's Appropriations subcommittee within days when HUD Inspector General Charles R. Dempsey intervened, warning in a report that such action "could constitute a criminal act."
In a memo to Federal Housing Commissioner Philip Abrams, Pierce said that although the Justice Department has reviewed the matter and decided not to prosecute, some of the officials may have to be disciplined. The employes involved said the way they made the revised estimates was a well-intentioned mistake.
"I am extremely dismayed and cannot understand why or how this situation was allowed to occur," Pierce wrote. "I am sure that you are fully aware of the potentially damaging and embarrassing effect this action could have had on the department."
The report also shed new light on the way in which the company negotiated to buy the seven defaulted projects for $11 million without the knowledge of potential competitors.
Sheila Weidenfeld owns 20 percent of the firm, First American Housing Preservation Corp. of Suffern, N.Y., and her husband represented the company in negotiations with HUD.
Lance Wilson, Pierce's executive assistant, told investigators that he and his wife have been friends of the Weidenfelds for years. Wilson said he had asked HUD's New England administrator not to mention two Connecticut projects to certain prospective buyers of HUD properties because the agency wanted to sell the buildings in a package to First American, according to the report.
Another Pierce aide told investigators that one of the interested real estate firms, Krupp Brothers of Boston, "were Democratic Party supporters."
Wilson said that he was not involved in the negotiations with First American and that Pierce knew "absolutely nothing" about the sale until it was publicized, according to the report.
After the proposal was reported by The Washington Post in May, HUD announced that it would accept bids from other real estate firms. But the only other bidder, Krupp Brothers, withdrew after protesting that it didn't have access to the same information as First American, which was awarded the projects for the same price it negotiated earlier. HUD said it gave Krupp the relevant information, but the firm has filed a lawsuit seeking to overturn the sale.
Although most HUD projects in default are sold at public auction, HUD and the Weidenfelds have maintained this was a straightforward arrangement to sell several rundown properties by combining them with desirable projects. The report does not suggest that anyone from First American was involved in lowering the projects' apparent value.
Proxmire said last week that it was "alarming to think that the falsification of documents to be submitted to Congress should be treated so casually by some HUD employes." The alterations, which by one estimate lowered the appraised value of the buildings by $3.5 million, "appeared to be made to support the agreed-upon sales price," the report said.
Roy E. Demmon, executive assistant to Abrams, handled much of the negotiations for HUD. The agency tentatively agreed in March that First American would receive a below-market mortgage at 11 1/2 percent interest, a second mortgage for repairs at 2 1/2 percent, permission to convert two buildings to condominiums and about $4 million in tax benefits that could be sold to outside investors.
The inspector general later called this a risky venture that would allow the firm as much as a 35 percent return on investment.
At Proxmire's request, Demmon's office assembled the official estimates of what the projects would bring on the open market from HUD field offices in New York, New Jersey and Connecticut. HUD said at the time that this was about $600,000 more than the sales price.
Margaret C. McCulla, an aide to Demmon, told investigators that she and Demmon decided these complex estimates would confuse the subcommittee, according to the report.
McCulla said that two other HUD employes here made new estimates and that she typed these on the official forms, already signed by field office personnel. McCulla said Demmon had reviewed the documents but probably failed to notice the additions, according to the report.
Demmon told investigators that he "was not involved in any discussions regarding the alterations" and did not know about them until the inspector general intervened, according to the report.
In an interview last week, Demmon called the episode "absolutely ridiculous" and said he intended only to clarify confusing documents before they were sent to Congress. He said he did not realize the changes had been made on the original documents and that in retrospect, "it was an asinine way to do it. It was doubly confusing."
Demmon said the documents "were never used, they were never sent to anybody, they were strictly internal documents that never got out of [the office]." McCulla said in an interview that it did not occur to her that changes she typed in might be misinterpreted.
HUD's field office had estimated the value of one building in Newark at about $1 million. McCulla typed in: "The best available indication of the market value of this project is the offer of [First American] to buy it all cash for $500,000. Accordingly, the project should be valued at $500,000 or somewhat higher."
For three other projects originally valued at several million dollars, McCulla added that each building had a "negative" value because it would cost First American more to repair them than the projects were worth.
Demmon said the new estimates placed the projects' market value at $3.5 million less than the field offices had determined, according to the report. This, he said, "made the First American proposal look better."
Demmon said in the interview, however, that "I don't know what that statement refers to. I don't remember saying that." He said he still had no idea what some of the additions meant.
Ten field office employes later said they disagreed with the added language, and most said they would not have approved the changes, according to the report.