Feds look into Fraud at the Port of Seattle

Last updated January 7, 2008 11:16 p.m.

Audit alleging waste, fraud catches U.S. attorney's eye

By KRISTEN MILLARES YOUNG
P-I REPORTER

The U.S. Attorney for Western Washington is conducting a criminal investigation of the Port of Seattle based on a state performance audit of the port's construction management, which found the port wasted $97.2 million during contracts active from 2004 to 2007.

In a letter sent Friday to Washington state Auditor Brian Sonntag, U.S. Attorney Jeffrey Sullivan asked the auditor not disclose the identities of the people who were interviewed for at least three months because such disclosure "may well impede our criminal investigation."

While the FBI did not corroborate that it is taking part in the investigation, Special Agent Robbie Burroughs said the agency investigates cases for the U.S. attorney, who prosecutes those cases.

Emily Langlie -- spokeswoman for the U.S. Attorney's Office in Western Washington, a division of the Department of Justice -- would not comment on which federal enforcement agencies are investigating the matter.

"The letter needs to speak for itself," Langlie said. "Federal law enforcement is very well-skilled, and they will be handling it. ... Generally, they come to our office with what they've discovered, ask us to look at it and then we would determine whether laws have been broken and what should be prosecuted."

Sonntag said representatives from several overlapping federal agencies -- including the FBI, the Justice Department and the Office of the Inspector General for the U.S. Department of Transportation -- "have had some preliminary meetings with some of our folks, to begin asking questions because they want more information and are asking for some of our work papers."

Langlie declined to comment on what shape the U.S. attorney's criminal investigation will take. But Jeff Coopersmith -- a criminal defense attorney with DLA Piper, which he joined after serving as an assistant U.S. attorney -- said the U.S. Attorney's Office "has obligations to look into violations of federal law," such as mail or wire fraud.

Without commenting on the audit findings, Coopersmith said the federal investigators would likely be "looking to see whether in this situation, there have been misrepresentations of material facts, intentional omission of material facts, whether there were kickbacks or bribes. That is the stuff that criminal investigations are made of."

Black's Law Dictionary defines fraud as "a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment."

The federal investigators can use a grand jury to subpoena witnesses and documents, said Coopersmith, who added that proving fraud doesn't have to mean catching someone in the act of pocketing money.

"A scheme of fraud could be depriving others of their intangible right to honest services," said Coopersmith, who said that "employees hiding facts so that people make decisions in a certain way" could qualify.

Above all, the audit found that the staff misled the five commissioners elected to oversee the port, leaving details out of memos that accompanied briefings, which are supposed to inform the commission so it can take action. On Tuesday afternoon, the commission is slated to review a 1994 decision in which it delegated much of its contract oversight to the port staff, which the audit described as proceeding to abuse the power through omission and misrepresentation.

The audit found that former Port Chief Mic Dinsmore and Aviation Director Mark Reis broke state law by negotiating a $125 million third-runway embankment contract with a TTI Construction principal at a steakhouse, keeping its cost within the port's procurement policies through cosmetic changes in order to avoid notifying the commission that the sole bid was vastly over the port's estimate -- and leaving the commission of the loop.

If the federal investigators or the fraud auditor the port plans to hire find fraud, new Port Chief Executive Tay Yoshitani has said he will "deal with it swiftly and appropriately." But on Monday, he said he has no plans to discipline those employees who violated state laws.

"We will be clear on expectations, and if people violated those expectations, we have clear rules going forward, and then we would take severe disciplinary action," Yoshitani said. "But to go back to these people who were working in that environment" -- which he earlier described as "get it done now, worry about the paperwork later" -- "and to take any disciplinary action against them would be, I think, unfair."

On Monday, Yoshitani sent a letter disputing some of the audit's central findings, saying what the audit described -- the port wasting $60.5 million by padding its staff with consultants on a contract that grew from $3.5 million to $129 million without a bidding process -- is consistent with "best industry practices."

During an interview, Yoshitani said he did not mean to say in December that the port agreed with the audit's findings, but rather that it would proceed with the recommendations -- regardless of whether port staff accepts the basis for them.

In its written response to the audit, the port fought, sidestepped or ignored major parts of the auditors' analysis, reserving its most strenuous objections for the audit's identification of 47 different situations that could be indications of fraud.

"The $60 million -- the allegation that that was wasted -- is just unfair and inaccurate," Yoshitani said.

In late December, Yoshitani described how the 1998 contract with Parsons Transportation Group allowed the port to use consultants to complement its staff and fill the gaps of uneven project timing during the third runway's construction.

But the audit's criticism of the port's practices did not deal only with the fact that the contract was reupped annually without competition for 10 years with the approval of the port's five-member elected board of commissioners, who again voted to expand the contract to $136 million in December. The auditors also lambasted the port for paying Parsons for overhead such as office space, as well as general and administrative expenses that the port was already subsidizing.

"As a result, the contractor and its subcontractors are reaping windfalls under this arrangement, and the (port) is paying substantially more than it would need to pay if it had simply hired employees to fill these positions," the auditors wrote. The port is paying as much as 216 percent of what it would have paid to fill the positions with regular staff, the audit found.

Yoshitani said that approving consultants' billing rate increases without reviewing them "needs to be changed," but said of the other "incidentals -- like working in our office -- I view that as part of the negotiations," which took place under Dinsmore.

Dinsmore could not be reached for comment Monday, but he told the Seattle P-I in late December that "I have no doubt that there is nothing of substance in anything that has been alluded to. Let the process show what I just said to be true."

When asked whether he thought the audit contained nothing of substance, Yoshitani said: "I don't know. He was here when all that was happening, and I wasn't, but just based on the findings, on the suggestions that we were vulnerable to fraud, I have to bring closure to it, and the only way I can bring closure to it is to follow up on some of those areas where the auditors suggest vulnerability of fraud."

The audit described a port staff that let money leak from contracts big and small; that failed to rein in late and costly projects and the contractors who ran them; that intentionally altered contracts to avoid state law's public bidding requirements and, when those rules were followed, steered such contracts to preferred bidders, manhandling the rules and the port's own procurement policies to guarantee their reward. It was during the course of those actions that the port may have committed fraud, the audit said.

The audit, the scope of which included examining how well the port kept its records, also found that the port had altered documents needed for the audit, patching holes in records, correcting mistakes and eliminating inconsistencies as it went along.

In his letter Monday, Yoshitani said staff did not alter records but rather "did catch up on backlog filing and documentation."

"The information was not changed, it was updated; it wasn't altered, it was updated," he said. "I guess you could make the case that updating the report is altering the report, but that's not the way we looked at it."

The port's response to the audit's findings does contain "some pushback," Yoshitani conceded. "That's where the cultural change has to take place. In the final analysis, I am the CEO, so they have to comply with what I want. What I want is compliance with statutes, with our policies, and there are certain policies that need to be reviewed."

Tummy rubbing at the Port of Seattle

Chummy culture at port costs taxpayers
Staffers, contractors may be too friendly, audit says
By JENNIFER LANGSTON
P-I REPORTER

When port employees, consultants and contractors work for years on a complicated project such as Sea-Tac Airport's controversial third runway, it's natural to become friendly.

But a recent state audit found that chumminess got in the way of good business practices, potentially shortchanging federal taxpayers and airline travelers who help fund improvements.

One top Port of Seattle consultant and construction contractor had their own shorthand -- "tummy rubbing" -- for informally negotiating how much the port should pay for unexpected work at the airport, a recent state audit found.

"It's their way of talking about a quid pro quo -- that we're all friends and we'll take care of each other," said state Auditor Brian Sonntag, whose office commissioned the audit.

That coziness didn't always extend to relationships between port staffers and the elected commissioners to whom they're accountable. Auditors found commissioners were easily misled and manipulated, with some staffers expressing open disdain for their governance role, said David Cotton, a consultant who performed the audit.

In one extreme example, a port employee told an aide that a commissioner who had asked for talking points could go "piss up a rope," officials confirmed. He was fired last fall.

Another staffer initially refused to draft a resolution on commission interns until the commissioner who asked for it came back with two more votes in his pocket.

Port Chief Executive Officer Tay Yoshitani has the hard task of changing port culture, which for years, he said, emphasized getting projects done and responding to customers' desires rather than complying with all policies governing contracting rules.

The audit concluded the port's construction program wasted millions, failed to negotiate rigorously with contractors, appeared to favor certain businesses and sometimes broke state law when awarding contracts. A lack of controls created a climate in which kickbacks or bribes could have occurred, the report found. Though finding criminal fraud was beyond the audit's scope, the Justice Department is now investigating that question.

Yoshitani, who took the organization's helm last year, said the findings made more sense when he considered the past 15 years of port history. It was a time of unprecedented expansion to keep the port competitive -- pouring nearly $1 billion into seaport development, cleaning up contamination, upgrading airport terminals and starting the third runway project.

"It's like the boa constrictor that swallowed a baby elephant that's kind of working its way through," he said.

Others link the cultural climate to former CEO Mic Dinsmore, who declined to comment for this story. The hard-charger valued loyalty, disliked bad news, tightly controlled information and often dropped names of his extensive business and social connections, port officials and outside observers say.

"It was all about keeping good relationships with the people you were working with -- it was that kind of clubby atmosphere, and too few commissioners questioned it," said Fletch Waller, an ex-commission candidate who served on port advisory boards over a 15-year period.

In conducting a survey on seaport customer service, he found employees largely concerned about keeping their jobs and not making waves. Sometimes, Waller said, that led to expensive public investments that made little sense but kept shipping companies or warehouse customers happy.

The port has a dual, even schizophrenic, mission: It's a public agency and a competitive economic engine that creates private sector jobs. In the past, Yoshitani said, the pendulum swung too far in the latter direction.

The former executive at ports in Oakland, Calif., Los Angeles and Baltimore said he intends to bring about cultural change in Seattle "very carefully."

"My style of management is not to be a regulator but to be an inspirer," he said. "To keep that entrepreneurial spirit as well as the compliance piece, I need to get them understanding it's the right thing to do, and I need to get them feeling positive about it."

It also involves being clear about rules to be followed and holding people accountable, he said. Part of his approach will rely on restructuring, creating additional oversight of construction projects and standardizing procedures.

Cotton said Yoshitani appears to be trying to change the tone at the top. But defensive responses to some findings make him question the organization's commitment.

"Whether he can change the culture or the culture changes him remains to be seen," Cotton said. "I certainly wish him success."

Among the findings that troubled auditors was the way port staff handled change orders -- additional work created when plans change or unexpected conditions surface.

They're common in large projects such as the third runway. But because contracts already have been awarded, additional costs are usually settled without a competitive process.

Auditors say there should be a negotiation in which engineers and managers review a contractor's proposal and perform independent estimates to make sure prices are reasonable.

In one baggage-screening project, the audit looked at 215 change orders totaling $2,777,552. The final "negotiated" amount was identical to the contractor's proposal 87 percent of the time, it found.

Auditors called it an "extraordinary coincidence" that suggested rigorous cost evaluations and meaningful negotiations hadn't taken place. It's impossible to quantify how much money could have been saved if they had, the report said.

Port officials argued a construction company managing the project handled negotiations with subcontractors, which weren't reflected in port files. Additional documentation largely failed to support that claim, auditors said.

A practical balance has to be struck between reaching a fair price and efficiency, said Steve Goldblatt, associate professor and former chairman of the University of Washington's Department of Construction Management. "To spend inordinate amounts of time or money, or both, to try to get those things precisely nailed down is not in the public interest," he said.

Nonetheless, port officials are now requiring that all change orders be approved by contracting professionals -- an extra set of eyes. It's also requiring staff to fully document negotiations to managers. A strong message has been sent that "tummy rubbing" is not an acceptable practice, said Dakota Chamberlain, who is managing the port's response to the audit.

The port also is following one of the audit's top recommendations -- hiring a chief procurement officer to ensure contract awards, purchasing decisions and subsequent changes follow all policies and law. Yoshitani wants that person to be perceived not as an ogre out to stop work, but as someone who can help other departments with compliance.

The office would add a professional buffer between hired contractors and port project and construction managers. "That will be an excellent check and balance ... so the guys out in the field working day to day with the contractors are not the same people approving change orders," Port Commission President John Creighton said.

Since the audit's release, the five-member port commission has begun to flex its atrophied muscles.

Staff members bent over backward if you wanted a trip to China, former elected officials said. In the past, inquiring about an issue was likely to generate a brief memo, a careful staff briefing or a flood of information that was too voluminous to digest.

"It's the role of commissioner as hood ornament," said former port Commissioner Alec Fisken. "They were to be tolerated and taken on trips and trotted out for receptions."

Keeping commissioners appropriately informed is a balancing act at every port, Yoshitani said. "We're constantly trying to push 10 pounds of information into a 5-pound bag," he said.

The commission is now revising a bedrock document outlining how much money staff members can spend on their own and how often they're required to ask for approvals.

In the past, once commissioners approved a large project, low-level staffers could make big-money changes as long as the project's total cost wasn't exceeded, the audit found. In the future, the commission likely will demand a stronger oversight role.

The commission is currently withholding its approval of large projects -- such as a pending $400 million-plus rental-car facility and garage -- until substantial progress has been made on audit recommendations.

TUMMY RUBBING

Here's how a Port of Seattle consultant with WHH Construction and a project manager for Gary Merlino Construction Co., a Sea-Tac Airport contractor, resolved their differences over how much more the port should pay for unforeseen work on emergency generator enclosures and power systems.

Contractor's proposal:

$80,000

The port's estimate:

$50,000

On Jan. 18, the consultant e-mailed the project manager to say some costs were OK, but "still laughing at the rest ... (actually you and SE do have something coming so lets figure that out via tummy rub in lieu of you all documenting what is undocumentable.)"

On Jan 25, the contractor wrote: "Gee you're starting to wear me down on this. NOT." He offered $65,000; the consultant countered with $54,500.

The contractor's response: "You're getting closer but not close enough. Total of 62 for the both of them. Write it up and we're done."

The port consultant replied: "If it starts with a '5' we're there."

The change order was made final for $59,999

Sources: Performance Audit Report: Port of Seattle Construction Management; e-mails and port documents