LEWISTON — The city may be forced to pay $180,000 to two federal agencies over fraudulent loans made in 2007 and 2008 to former developer Travis Soule.

City Administrator Ed Barrett said city councilors will consider accepting the proposed federal settlements at their meeting Tuesday.

The city would pay $140,000 to the Department of Housing and Urban Development, plus a $40,000 civil penalty to the U.S. Department of Justice.

“The good news is that the reimbursement to HUD will not come from city property taxpayer resources, but in a reduction in the federal grant,” Barrett said.

However, the $40,000 penalty will have to be paid from the city’s General Fund.

If councilors agree, the HUD claim will be paid by reducing the city’s HOME grant by $46,000 per year for three years. The city gets about $175,000 each year to promote building and renovating affordable housing, which is down from the $350,000 to $360,000 the city had been receiving in federal funds in 2007 and 2008, during the time Soule orchestrated his fraudulent deals.

According to Barrett, when HOME grant funds are not spent, the city is permitted to save the money for future years. There is a balance of $450,000 in those savings, which he said will help mitigate the repayment to HUD and will allow the city to continue granting HOME funds to qualified applicants at its current rate.

“It’s certainly easier, given our economic situation,” he said, to use savings to return the HUD funds. In the past several years, he said, “we’ve eliminated 30 positions and are struggling to keep our services going.” He believes those circumstances will be taken into account when HUD looks at the city’s proposed repayment schedule.

In July 2011 Soule pleaded guilty to federal charges of fraud and embezzlement in a scheme to transfer federal housing funds to his personal bank accounts. He was sentenced to 14 months in prison.

Soule obtained bids from various contractors for rehabilitation of three Pine Street properties. He filed fraudulent applications to the city of Lewiston for loans under HUD’s HOME program, which is aimed at improving availability of affordable housing for low-income families.

He took the loan money for his own use by forging subcontractors’ signatures and depositing some of the checks into his personal checking account.

City inspectors at the time failed to check the properties to make sure the work had been completed, including the installation of new heating equipment.

The fraud came to light when apartment house tenants complained they still had no heat in their apartments.

Barrett said the Department of Justice could seek up to three times the amount of money the city loaned to Soule — about $540,000 in penalties to the city. Instead, they offered the city a $40,000 penalty.

“I think they took a number of factors into account,” Barrett said. “The city immediately made law enforcement and HUD aware of the situation as soon as we were aware. That helped mitigate the situation and we cooperated fully with all the investigations and the court cases.”

The city agreed in 2007 to loan $200,000 in HOME funds to Soule’s company, Pine Properties LLC, to help him renovate three Pine Street apartment buildings.

According to the agreement, Soule was supposed to submit contractor invoices for the work when it was finished. The city issued Soule $180,000 in two-party checks — requiring signatures from both Soule and his contractor before the checks could be cashed.

The city learned in 2008 that much of the work Soule had submitted claims for had not been completed, and that he had either forged contractor’s signatures or obtained their signatures by misrepresentation.

Barrett said city employees were interviewed extensively by federal investigators but none were charged. None of the employees involved are still employed by the city, he said, and the entire City Council has since turned over.

The city manager at the time of the fraud was Jim Bennett, who is now the city manager in Presque Isle. 

Bennett left Lewiston in 2009. While he remembers a visit from the Department of Justice, he said the investigation really got underway after he left.

“It sounds like the system that was in place had a little bit of a loophole for somebody to take advantage,” Bennett said, adding that he was glad to hear the staff was cleared and had nothing to do with the fraud.

“We all know that with any system, it’s virtually impossible to guarantee, with somebody who wants to take and be a crook, it’s nearly impossible to prevent somebody from doing it,” he said.

“Did the city do as good a job monitoring as it should have done?” Barrett asked. “It’s clear we could have done a better job. We relied too much on two-party checks, and some were forged and the folks on staff at the time did not sufficiently inspect the properties.”

The city was a victim, he said. “We have changed our procedures in community development to make sure that something like this doesn’t occur in the future.”

For example, before checks are issued, city officials do inspections and verify in detail that the work has been performed.

Barrett said the proposed Department of Justice settlement is the best option for the city because it will avoid the possibility of future legal costs and higher financial liability if the city is forced to go to court. 

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