Solari as asset manager is managing the liquidation of The Hamilton Securities Group ("Hamilton"). The company was founded by Catherine Austin Fitts in 1994 and began operations on March 22, 1998, after operations in Hamilton ended. 

Hamilton was an employee-owned investment-banking firm, also founded by Catherine Austin Fitts, doing business in Washington from 1990 to 1998.1 Before founding Hamilton, Ms. Fitts was a member of the Board of Directors of Dillon, Read & Co., Inc. and then served as Assistant Secretary of Housing-Federal Housing Commissioner in the Bush Administration. Starting in late 1993, Hamilton served as the lead financial advisor to the Department of Housing and Urban Development ("HUD") in reengineering the Federal Housing Administration portfolio of mortgage insurance and mortgages, including approximately $10 billion of mortgage loan sales of the HUD held single and multifamily mortgages.²

HUD instituted the loan sales program because, prior to the loan sales program, HUD was recovering only about 35 cents for each dollar of mortgage insurance payments it made on defaulted mortgages. The HUD mortgage loan sales program saved U.S. taxpayers in excess of $2.1 billion (in the form of credit subsidy savings), increasing HUD's recovery rate on defaulted loans to about 70 - 90 cents for each dollar expended by HUD. As a result, HUD was able to:
 

•  Contribute $2.1 billion to reduce the federal deficit and to fund ongoing HUD programs,thus    reducing the need for Congressional appropriations;
•  Lower the amount of credit subsidy needed to originate new mortgage insurance; and 
•  Address what HUD’s auditors had considered one of HUD’s most significant material weaknesses. Click here for GAO report stating HUD's material weaknesses. 

Vice President Gore’s Reinventing Government Initiative awarded a Hammer Award for excellence in reengineering government to the HUD loan sales team for cutting red tape, empowering employees to improve service to the Department's customers and lifting the burden of managing and servicing HUD owned mortgages from headquarters and field staff.   The HUD loan sale program was considered a resounding success in both reengineering circles and in the financial markets. Click here for FHA Performance Report. Click here for a link to the GAO report stating HUD's credit subsidy computations were reasonable. Click here to view a list of articles in major business publications about the success of the loan sales program. 

Hamilton was able to:

•  Provide its services with respect to the loan sales at a cost well below what financial  advisors had charged RTC for similar loan sale financial advisory services;

• Provide public access to detailed records and other information on the design and bid process in the form of a “Design Book” for each sale to be used for future sales and other financial investors to increase efficiency, save time, save money, and increase sales proceeds; 

•  Provide due diligence online and by disk, saving millions of dollars in costs to bidders, allowing “little guys” the opportunity to bid without having to expend thousands of dollars to do so.  The due diligence data was provided in “predigested” form to make it more user friendly, further decreasing due diligence costs;

•  Provide opportunities to a broader cross-section of the bidding public through a bid optimization program, which allowed mixing and matching of assets instead of pre-stratified pools based on assumptions about what type of buyer would render the greatest returns on the bids.  The optimization model moved the market to new price levels because it increased the number of bids and the types of bidders who could bid in terms of diversity of size and business type. Therefore, the only way one could win was by pure performance; 

•  Institutionalize permanent loan sales capacity by training HUD personnel to take over as many functions as possible in terms of technology, systems, and professional networks and to hire a broad range of advisors and contractors;

•  Increase the learning speed and quick turnaround among the loan sale team members and field offices around the country through tightly coordinated e-mail communication; 

•  Increase recoveries on non-performing loans substantially above RTC recovery levels; and 

•  Introduce a wide variety of conventional real estate, mortgage banking and securities firms to the opportunity to help HUD introduce open disclosure and competition throughout its $500 billion portfolio of mortgage insurance, mortgages, apartment buildings and homes. 

This was possible because of:
 

•  The institution of HUD and mortgage loan disclosure databases were provided on the Internet and on computer disc at little or no cost to bidders; and

• The introduction of the "Design Book" concept whereby the substance of each mortgage loan sale transaction was documented and approved beforehand by all parties, was maintained under HUD’s control for use in future sales, and was updated by "lessons learned" prepared by Hamilton and HUD/FHA after each sale. Click here for Design Book.

In June of 1996 ³ , a HUD mortgage loan servicing contractor whose business, historically, consisted of servicing HUD held mortgage loans (and therefore was losing business as HUD moved to loan sales), filed a Bivens action, ⁴  Ervin and Associates, Incorporated v Helen Dunlap, et al. naming HUD, the Small Business ⁵ Administration, then-Secretary of HUD Henry Cisneros, and other HUD officials associated with the loan sales program as defendants.  Hamilton was not named as a defendant, although among the allegations raised in this suit were charges that HUD engaged in contract favoritism toward Hamilton and that insider trading and bid rigging activities resulted in favoring certain "Wall Street" bidders for HUD loans.  No detail was provided to explain how any such "insider trading" scheme could have been carried out or what type of information could have been given to one bidder that would have provided a bidding advantage.  The suit involved the characterization of HUD as a "white men's Hell" where minority "8A" contractors were improperly favored over white men and "Wall Street" firms were favored over "little guys."

This complaint was subsequently amended on August 1, 1996, when Ervin and Company filed the First Amended Complaint for Preliminary and Injunctive Relief and Declaratory Relief.  The Amended Complaint, numbering over 200 pages of dozens of charges against HUD, Helen Dunlap⁶  and others, provided a more robust description of the "insider trading" schemes allegedly hatched by Hamilton and a "tag team" of preferred Wall Street bidders.  Specific charges included:
 

•  Misrepresentation of the quality of the single family loans; 
•  Use of a "flawed" bid optimization model that unfairly advantaged large bidders; 
•  Failure to acknowledge that the assets sold in the securitized transaction were "securities" under federal securities laws; and 
•  The selective illegal disclosure of material inside information to favored Wall Street bidders.

Unbeknownst to Hamilton, at approximately the same time, June of 1996⁷, a sealed qui tam lawsuit ⁸  under the Federal False Claims Act was filed on behalf of HUD against a number of undisclosed parties.  Soon after the filing of the Bivens and qui tam suits, Susan Gaffney, the HUD Inspector General ("IG" or "HUD IG"), launched an investigation of Hamilton and served two subpoenas on the company in August of 1996.  According to later statements made by counsel for the Office of Inspector General ("OIG"),⁹  the government initiated the investigation as the result of allegations raised in the qui tam lawsuit.  The subpoenas requested hundreds of thousands of documents relating to Hamilton's work with HUD. Click here to see the August 6,1996 subpoena and Click here to see the August 22,1996 subpoena.  The vast majority were either HUD documents that HUD already had in its possession or documents that had been supplied to HUD as part of ongoing work or to support HUD OIG audits, in some cases on multiple occasions.¹⁰   In the fall of 1996, the HUD OIG also served a subpoena on eVillages, Inc. a joint venture between Hamilton and Adelson Entertainment Company,¹¹   as a part of its investigation of Hamilton. 

It is worthy of note that from 1996 until the present, HUD and the Department of Justice consistently have taken the position in the Bivens case that the allegations of Ervin and Associates in that action are without merit, notwithstanding the fact that many of these allegations appear to have formed the basis for the investigation of Hamilton.¹²

HUD ACTIONS DURING THE 1996 PRESIDENTIAL ELECTIONS AND THE 1997 FISCAL YEAR FEDERAL BUDGETING SEASON

Hamilton immediately began to work to produce the requested documents.  During ensuing discussions with HUD, it turned out that HUD interpreted the already broad subpoena as encompassing not only materials relating to HUD contracts with Hamilton and the work performed under those contracts, but also proprietary business documents and private financial information unrelated to HUD and HUD contracts. 

In July, 1996, Hamilton became aware that a team of US News and World Report (“USNWR”) reporters was planning a story, to run before the 1996 Presidential election,¹³  about HUD Secretary Henry Cisneros, HUD and the loan sales program.  The essence of the story, according to the reporters, was that HUD under Henry Cisneros was a "scandal tarred" agency and that there were improprieties in the HUD loan sales program.  Click here to related article in From the Wilderness ("FTW").  This allegation surprised Hamilton because, at that very time, Hamilton loan sales team members were involved in exit interviews with auditors from the Denver Office of the HUD OIG ¹⁴ , which had just completed a favorable audit of the program.

The original two purposes of the Rocky Mountain Field Office audit were to evaluate HUD’s process and performance in managing the loan sales program and to examine the calculation of the credit subsidy numbers.¹⁵   Subsequently, the Rocky Mountain Field Office was instructed that Headquarters would be conducting the credit subsidy computation portion of the audit.¹⁶   The Rocky Mountain audit was conducted from January 1996 through September 1996, during which time the audit team reviewed records for previous loan sales and personally observed loan sales in progress. 

In September of 1996, just as the audit team was about to issue a second audit report of findings and recommendations, the OIG Headquarters directed the field office audit team to suspend any further fieldwork.  Based on the information collected and evaluated at that point, the director of the audit team had concluded that the overall loan sales program was successful and that the audit did not reveal any wrongdoing by parties associated with the program.  Click here to see a copy of an affidavit to this effect by the lead auditor of the Denver field office audit team. 

In October of 1996, members of the Hamilton loan sales team made a presentation before Judith Hetherton, counsel for the OIG, and Jim Martin ¹⁷  and Jack Rogers, who were an investigator and auditor, respectively, for the HUD OIG.  Click here to view a memorandum delivered on October 17, 1996 summarizing Hamilton's presentation.  It became clear to Hamilton that the USNWR reporters were unaware of the steps that had been taken to ensure the integrity of the sales.  Hamilton provided a briefing to the USNWR reporters (after checking with the HUD Contracting Office to confirm that this was permissible) in an effort to head off a politically generated “scandal” and wrote a letter to the editor of the magazine complaining that the reporters had drawn conclusions for their article even before their interviews with Secretary Cisneros. 

In a letter dated October 17, 1996 addressed to the Inspector General, the President of Hamilton disclosed what Hamilton had told the reporters and requested an explanation as to why the IG had done an "about face" in light of the favorable testimony before Congress.  Click here to review Congressional testimony by the FHA Chief Financial Officer as to the great success of the loan sale program. ¹⁸   The letter also revealed that Hamilton believed that USNWR had received confidential information concerning the on-going HUD OIG investigation.  The lead reporter from USNWR informed Catherine Austin Fitts that he had been assured, at the "highest levels" of the HUD Inspector General’s Office, that Hamilton and Ms. Fitts were the subject of a criminal investigation and were guilty of criminal violations with respect to the loan sales and that Ms Fitts “would be indicted.”  In a October 22 response letter, the IG denied giving confidential information to reporters, denied that the OIG had had any role in the design of the loan program and refused a requested meeting to discuss the unfounded allegations.

THE FEDERAL GOVERNMENT PLAYS BY ITS OWN RULES AND NOT BY THE RULE OF LAW

In a conversation with the IG in August of 1996, after the issuance of the first subpoena and before the issuance of the second subpoena, Ms. Fitts asked if Ms. Gaffney intended to "bury the Denver audit." The IG responded by saying something to the effect of "How dare you suggest that I would do any such thing? That would be unethical," thus assuring Hamilton that she would let the Denver audit proceed to publication through a process that involved audit and internal control integrity. Subsequently, Hamilton and HUD program officials were informed that the Denver audit would not be released.¹⁹   Accordingly, Ms. Fitts reminded Ms. Gaffney in a telephone conversation of her previous assurances. Soon thereafter, on August 22, 1996, Hamilton was served a second subpoena by the HUD OIG. In a later deposition, Ms. Gaffney indicated that she was not aware of what the recovery rates were before, during and after the loan sales.

Notwithstanding the requirement in Section 3733 of the Federal False Claims Act that when a subpoena ²⁰   is served, the target of a qui tam suit must be informed that it has been named in such a case, the nature of the conduct constituting the alleged violation of false claims law under investigation and the applicable provisions of law alleged to have been violated, Hamilton was not informed that it was named as a defendant in the qui tam action until December of 1997 via conversation between the Department of Justice ("DOJ") with Hamilton's attorneys.

The failure of the DOJ to make the required disclosures to Hamilton was critical to the harm, in terms of both financial losses and harm to business and professional reputation, that Hamilton's business and shareholders suffered. For example, USNWR reporters were insistent that the investigation was a "criminal" investigation and that it had been triggered by serious wrongdoing. In fact, an investigation under the False Claims Act has a far different meaning and appearance for business purposes from the one implied through HUD leaks described to Ms. Fitts by the USNWR lead reporter. We believe that if DOJ and HUD had honored the provisions of the False Claims Act in August 1996, Hamilton would be a prosperous business today and Catherine Austin Fitts would still own her home and her interest in family farmland.

In a meeting between the Department of Justice and Hamilton's attorneys in December 1997, the Department of Justice said that it would communicate to HUD that the investigation did not require that HUD hold back payments owed to Hamilton and that it ought to discontinue duplicative discovery requests.²¹   The DOJ position implied by such promises appeared to contradict actions by the US Attorney's Office and other parts of Justice, as well as HUD representations regarding the actual content of the Department of Justice's communications with HUD.²²

As of March, 2000, Hamilton has still not been informed of the allegations against it. The Department of Justice has obtained the equivalent of approximately twenty-one court ordered extensions of its 60-day statutory period for deciding whether to adopt the case since June, 1996, extending the rollover period from 60 to roughly 1,245 days as of February 1, 2000. To date, the OIG and DOJ have failed, in over three years, to review fundamental documents critical to the operation of the loan sales that demonstrate the falsity of the allegations, and to grasp a basic understanding of how the loan sales worked and who were the winning and losing bidders. According to logs held by the Special Masters indicating the dates and times Hamilton and representatives of the OIG and DOJ have reviewed documents, only two OIG investigators have signed in to review documents over the past 10 months as of February, 2000. Had Hamilton been informed that it was a party to a qui tam over three years ago as required by the law, Hamilton would have been able to publicly respond to repeated, usually inaccurate, press leaks, apparently by HUD sources, as well as to Ervin's allegations. Solari believes that if the government had not circumvented basic disclosure requirements, Hamilton would be an ongoing business. The failure to follow the disclosure requirements of the False Claims Act facilitated a three and a half year trial by leaks and innuendo and hundreds of allegations that never permitted those who were targeted a forum in which to address and refute specific allegations.

Hamilton cannot confirm who filed the qui tam action, since it is still sealed as of this writing (March, 2000). However, based on press leaks and the sequence of events surrounding the filing of the qui tam, including the filing of the Bivens action and other events described below, Hamilton believes Ervin & Associates is at least one relator under the qui tam. In October, 1999, Hamilton discovered through press accounts abouta quarterly report filed by Goldman, Sachs & Co. that the DOJ had informed Goldman Sachs it and certain of its bidding partners had been named in a qui tam action involving insider trading activities in connection the purchase of $4.7 billion of mortgage loans from HUD. In November, 1999, Goldman, Sachs filed an S-1 registration statement for the public offering of its securities with the Securities Exchange Commission divulging more specific allegations against Goldman Sachs in the qui tam suit including:
 

•  Improperly directing government owned notes for prices below that which would have been obtained in full and fair competition;
•  Being given information unavailable to competitors relating to the details of competing bids, the value of the assets sold, and the structure of the sales; and 
• In one instance, Goldman, Sachs and its bidding partners being awarded assets despite not being the highest bidder. 

Hamilton has surmised, but has no independent knowledge to support the supposition, that Goldman, Sachs is a co-defendant with Hamilton on the same qui tam case. 

PUBLICLY STAGED CANCELLATION OF HAMILTON’S CONTRACT, FALSE PRESS LEAKS, LEAKS TO CREDITORS AND MARKETPLACE AND WITHHOLDING OF PAYMENTS DUE HAMILTON FOR SERVICES RENDERED

The disputes outlined and summarized in the Legal History section of the Solari web site arose when the Secretary of HUD cancelled Hamilton’s financial advisory contract for “convenience” on October 17, 1997, as HUD was permitted to do under the terms of the contract, and failed to pay Hamilton the last two installment payments due under the contract. In a separate letter on the same day, the HUD contract officer informed Hamilton that HUD was withholding payments due under the contract, alleging a “breach of the contract” on Hamilton’s part.²³   HUD’s alleged “breach” claim arose as a result of a discrepancy in instructions given to Lucent Technologies, a Hamilton subcontractor, regarding the statement of certain bidders' "floor" bids in two auctions in prior years. Hamilton had informed the Federal Housing Administration (“FHA”) Comptroller and Assistant Secretary/FHA Commissioner about this discrepancy verbally in late November, 1996, and in writing in early December, 1996, ten months prior to the claiming of “breach.”  After addressing the issues raised by HUD with respect to the reported discrepancy, HUD had sought advice from its Office of General Counsel ("OGC") as to whether HUD could continue to work under the contract.  OGC's response was favorable, and Hamilton continued to advise HUD with respect to loan sales and other matters.  Hamilton continued to provide HUD the benefits of use of the optimization model and received positive feedback in weekly performance reports and meetings.

The withholding of contract payments, which still have not been made, together with the inaccurate press reports and leaks of criminal misconduct by Hamilton that accompanied the contract cancellation, appear to be part of an effort to:
 

•  Cancel the HUD loan sales program in order to protect defaulted borrowers.  This protection particularly benefited the large Section 8 apartment management companies²⁴  and their institutional investors, many of whom were concerned with potential for loss of property control and management fees should their loans be sold to third parties. Even though property owners were permitted to bid for their own defaulted loans, the amount they would have had to bid to assure they retained control over the property vastly exceeded the amount they would have expended to work out their loans if HUD continued as lender. Moreover, the loss of management fees adversely affected the stock prices of such companies and, hence, the ability of senior executives to realize capital gains through stock offerings or mergers/acquisitions and from the sale of stock options.²⁵   Cancellation of the loan sales, particularly as HUD started to focus on the Section 8 subsidized portfolio, would protect their stock prices and allow HUD to return to its practice of conducting "back door" 35-cents-on-the-dollar loan-by-loan workout deals with special interest corporations and large individual contributors to the campaigns of legislators who controlled HUD's purse strings.

•  Protect Enforcement Revenues at DOJ and HUD from civil money penalties, debt collection and seizures on the HUD FHA defaulted mortgage portfolio.  The shrinking size of the defaulted mortgage portfolio at HUD was good for homeowners, communities and the FHA fund but ran counter to the programmatic interests of the enforcement community and their state and local counterparts and informants. HUD program staff reported efforts by the HUD OIG to hold loans out from sales at significant loss to the FHA Fund to ensure civil money penalties that were credited to their performance.

•  Seize the place-based software and tools that Hamilton was developing to facilitate investment programs for placement of equity (and related secondary trading) in US emerging markets. Hamilton's software could have been adapted for use by DOJ, HUD and their proprietaries ²⁷  in a manner similar to the adaptation of the stolen Inslaw "PROMIS" software by the DOJ in the 1980s.  Click here for a link to summary information about the Inslaw case. Click here to go to one of a number of opinions handed down in the Inslaw case. Such a seizure also would have ensured that Hamilton's policy advice would not influence HUD's ongoing decision making with respect to mortgage origination, the use of scoring software and formulation and application of various regulations. Such a seizure, and required cleansing of Hamilton's systems of HUD mortgage data, may have also prevented internet accessible conforming of street data on outstanding mortgages and properties with capital markets data on (i) outstanding mortgage backed securities, including tax example housing bonds issued by state and local housing authorities and taxable securities issued by Ginnie Mae, and the mortgage GSEs, Freddie Mac, Fannie Mae and the Federal Home Loan Bank system and (ii) tax shelters, including pools and properties for low income housing tax credits.

The computer optimization model used for calculating auction results in the HUD loan sales was developed by Lucent Technologies (formerly AT&T/ Bell Labs) under exclusive contract with Hamilton to provide optimization technology for use in government loan sales. Similar to complex routing programs developed by AT&T/Lucent for its telecommunications business, the model was adapted to select from among thousands of possible bid combinations for HUD mortgage loans, which would result in the highest sale proceeds to HUD. The model's application to the HUD mortgage loan sales program proved to be an astonishing success.  Click here for a link to FY 1997 U.S. Budget Report on the high success of loan sales program and description of loan sale calculations. It permitted large, medium and small bidders the opportunity to stratify the portfolio to suit their various needs and markets. Typically, in prior mortgage loan sales, sale portfolios had to be stratified for marketing to only one of the various potential markets (securities markets, mortgage markets, property markets). By letting all manner and size of potential interested bidders participate and define their own pools, competition was vastly increased, bringing in substantially higher performance on the loan sales for HUD and the taxpayers. 

The improvement in recoveries was, in fact, so dramatic compared to the then current market that many potential bidders were surprised and concerned about the fierceness of the competition for HUD assets. In addition, model results showed the relative difference in performance among different bidding sectors (i.e., retail v. wholesale, real estate v. capital markets). HUD had expected the traditional HUD stakeholders to have a strong advantage because of their inside knowledge about the programs and the properties. In fact, the bids submitted by traditional HUD players, when optimized alone against bids from other market sectors, were 20-40% lower. Observing the results of the early loan sales was a real "wake up" call to HUD about the value of introducing transparency and competition into all of its programs.

The so-called contract "breach" claimed by HUD involved a floor constraint discrepancy on two loan sales that was reported to HUD. As the result of the discrepancy, the optimization program "thought" certain bids that were, in fact, the high bids, should not be selected because they did not meet the bidders' stated minimum bid award specifications. The result was, potentially, a four tenths of one percent reduction in gross sale proceeds to HUD. In other words, in these two loan sales, the profit to the government, i.e., the proceeds above the amount HUD would have realized had it continued with loan-by-loan workouts, was approximately $342.8 million. Had there been no optimization discrepancy, and had all other things been equal in terms of closings and performance, the government might have saved approximately $3.8 million more than it actually saved. The floor definition discrepancy did result in different winners than would otherwise have been the case. One bidder that would have won certain loans but for the error (as reported by Hamilton to HUD when it originally notified HUD of the error in late November, 1996) was Goldman Sachs.²⁸

HUD DID NOT EXPERIENCE A LOSS AS A RESULT OF THE OPTIMIZATION DISCREPANCY, BUT HUD'S ACTIONS DESTROYED HAMILTON

Contrary to press reports, there was no loss to the government.  These two loan sales generated a profit of $342.8 million, an outstanding performance by any industry or government standards.  Hamilton believed that a discrepancy of less than four tenths of one percent, when discovered in the private markets, would be viewed as de minimis and would not be reported to a typical client.  Hamilton also believed that its performance on the overall loan sale program met its own "six sigma" ²⁹  standard.  Hamilton reported the discrepancy to HUD to ensure compliance with its own admittedly high performance standards and to ensure that the “lessons learned” and “design book” process used to ensure program excellence would not be compromised.  HUD refused and continues to refuse to pay Hamilton for the work the company had already completed at the time of contract termination, even though HUD has accepted all of the benefits that accrued from the acceptance of Hamilton's services.  Further, HUD continues to refuse to perform Hamilton's contract closeout audits³⁰  and pay outstanding obligations owed to Hamilton. 

Hamilton did not object to HUD’s cancellation of its contract, since any contract with the federal government entitles it to cancel for convenience.  Hamilton did, however, object to what appeared to be an effort to put it out of business.  Hamilton’s business and equity were destroyed because of the combination of events that occurred in sequence.  First, while the contract termination letter asserted a termination for convenience of the government, by separate letter delivered the same day, HUD claimed a breach and apparently gave information to the press that led to news reports that implied the cancellation was for cause.  Then, within days thereafter, the HUD OIG issued a supposedly "unrelated" subpoena that was reported in a Washington Times article before Hamilton received it.  This was followed by a series of additional articles by The Washington Times and other stories reported in The Washington Post and the Wall Street Journal concerning the cancellation of Hamilton's contract and allegations of bid rigging.  There also were repeated references in the press to an ongoing criminal investigation, even though the HUD IG assured Hamilton's attorneys there was no criminal investigation.  HUD political appointees charged with overseeing and running the HUD loan sale programs failed on this occasion to refute Ervin’s various allegations, as repeated in the press ³¹ , including of allegations of “conflicts of interests” in BlackRock Capital's acting as a subcontractor on one sale and a bidder on another.  HUD was in fact well aware of these roles and had approved the hiring of BlackRock even though BlackRock wanted to bid on other sales.³²

These actions, when combined with extraordinary time and resource demands from the HUD investigation (which included the expenditure of several million dollars to produce documents that were already in HUD's possession) and the fact that Hamilton could not represent other clients in addition to HUD because the constant allegations of potential conflicts of interest, made it impossible for the company to build its advisory business, enter into trading relationships and joint ventures and recruit and retain good employees.³³   Moreover, inaccurate press accounts and the fact that Hamilton was under attack by the government made it impossible for Hamilton to raise new capital. 

Hamilton had no choice but to shut down operations and spend full time addressing a time-consuming flood of additional subpoena and new investigation and audit demands. Hamilton's employees, creditors (who consisted primarily of employees and sole proprietorship contractors) and shareholders were severely adversely impacted by the HUD OIG investigation. All of Hamilton's employees lost their jobs with no severance pay. In addition, the negative portrayal of Hamilton in the media affected the unemployed employees' ability to secure new positions when the company closed. Hamilton shareholders lost $100-250 million in equity. Hamilton's relationships with former counsel, HUD employees, colleagues, and creditors were damaged when they became frightened as a result of the subpoenas, demands for information about them by OIG, and negative media coverage. District of Columbia residents were also impacted, since their tax dollars funded unemployment benefits of Hamilton employees.

HAMILTON MAKES A LAST DITCH ATTEMPT TO PRESERVE A VALUABLE BUSINESS

On January 8, 1998, after an unsuccessful appeal to the HUD contracting officer, who denied payment requests by Hamilton, Hamilton filed a Motion for Temporary Restraining Order (“TRO”) in the Federal District Court for the District of Columbia requesting that the court prevent HUD from withholding payment for services rendered under the contract.  When Hamilton filed the complaint, it was notified by the court that the case was assigned to Judge Stanley Sporkin because Judge Sporkin was hearing a “related” case.³⁴   Hamilton's TRO complaint also requested that the court order HUD to stop leaks against Hamilton and provided a description of HUD's actions over the previous two years (including White House efforts [reported by HUD Assistant Secretary of Housing Nicholas Retsinas to Catherine Austin Fitts] to intercede in HUD contracting to prevent HUD from using Hamilton as a financial advisor). 

After several hearings, during which the Assistant U.S. Attorney assured Judge Sporkin that the government had reason to believe Hamilton had committed fraud in connection with the bid optimization discrepancy (which fraud would have invalidated any errors and omissions insurance coverage Hamilton had), Judge Sporkin denied the request for a TRO, understanding that his action would put Hamilton out of business.³⁵   The TRO denial led to the suit filed on March 9, 1998 against HUD before the United States Court of Federal Claims[as well as a later Counterclaim by the Government].

As part of the contract closeout demands by HUD and OIG subpoena requests, Hamilton was once again asked to produce HUD documents for HUD that had been provided to HUD on numerous occasions in the past.  Click here for letter to HUD IG from David Handzo of Jenner & Block regarding Hamilton’s subpoena compliance.  Hamilton prepared to lay off its remaining employees, shut down its operations and liquidate its furniture and equipment (much of which consisted of computer equipment).  Then the HUD OIG filed a Motion to Enter Order for Summary Enforcement of Administrative Subpoena, with Motion and Accompanying Motions for a Temporary Restraining Order (TRO) and Preliminary Injunction against Hamilton in U.S. District Court. (Stanley Sporkin, again).  The Petition to Enforce the subpoenaed ("PTE") grew out of, among other things, the OIG’s insistence that:
 

•  Hamilton turn over certain proprietary financial records, privileged documents and other records that were not required under Hamilton’s contract to be made accessible to HUD and that, Hamilton maintained, were not relevant to the OIG’s investigation; and 
•  Hamilton was not cooperating in providing documentation the OIG sought, a charge that was not supported by the evidence that Hamilton had spent several million of dollars complying with the subpoena and Hamilton's attorneys had engaged in many rounds of letter writing with the OIG explaining its compliance with the subpoena. 

The HUD OIG request for a TRO sought to prevent Hamilton from selling its computer equipment at an auction scheduled for March 10, 1998, notwithstanding Hamilton's assurances that all data relevant to the subpoena had been copied from the computer equipment and stored on tapes and disks at the offices of Hamilton's former attorneys. 

HAMILTON DEFENDS ITSELF ON EVERY FRONT

Also during this period, two “nuisance” lawsuits appeared in state courts.  In December of 1997 a disgruntled property owner filed a complaint with the United States Bankruptcy Court for the Eastern District of Michigan, Stearns Building Limited Partnership v. The Hamilton Securities Group, Inc., naming Hamilton, Goldman Sachs, a BlackRock affiliate and Tradewind International³⁶ .  In connection with a suit filed against HUD by another disgruntled property owner in a Louisiana District Court case (U.S. v Streuby Drumm), Hamilton was served with a broad subpoena duces tecum on or about January 16, 1998 and a deposition subpoena on February 3, 1998. When counsel for the limited partnership defendant was informed that all of Hamilton's documents that would be responsive to the subpoena already were the subject of a HUD OIG subpoena, the plaintiff sought to intervene in the hearing on HUD OIG's Motion to Enter Order for Summary Enforcement of Administrative Subpoena, with Motion and Accompanying Motions for a Temporary Restraining Order and Preliminary Injunction. 

In both of these suits in state court, single asset tax shelter limited partnerships that owned the apartment properties associated with mortgage notes sold by HUD in the loan sales sought to prevent HUD from selling their loans and thereby to prevent action by new mortgage holders to take their properties or enforce their loans.  The language of the complaint in the Michigan action appeared suspiciously similar to language contained in the Ervin & Associates Bivens action against HUD and was based upon confidential information disclosed by Hamilton to the Assistant Secretary and FHA Comptroller.³⁷

HUD INCREASES ITS ASSAULTS UNTIL THE COURT APPOINTS A SPECIAL MASTER ARBITRATOR

At a hearing before Judge Stanley Sporkin on March 5, 1998 just five days before the scheduled auction of Hamilton's furniture and equipment, the dispute over the existence or non-existence of additional documentation and data responsive to the HUD OIG subpoena was resolved by the issuance of an Order Appointing Irving Pollack and Lawrence Storch [of the law firm of Storch & Brenner], at the cost of the government, to act as Co Special Masters.  Storch & Brenner was appointed to take possession of all of Hamilton's responsive and non-responsive, privileged and non-privileged, documents and data and to mediate disputes between the parties over the subpoena.  The Special Masters took possession of the Hamilton’s offices on the Sunday preceding the Tuesday auction and seized all documents and computer equipment. 

At a hearing on March 10, 1998, the day of the auction, Judge Sporkin issued an Order permitting the sale of Hamilton's computers, subject to prior copying and erasure of the hard drives by the government. Hamilton complied with the order notwithstanding the fact that Hamilton had already backed up the tapes of the Hamilton network that contained all of the documents that would have been relevant to the HUD investigation and responsive to the HUD OIG subpoena, and that these and other documents were maintained by its counsel for the benefit of HUD at a cost of thousands of dollars. The OIG insisted that Hamilton make a copy of the hard drive on each individual employee laptop and personal computer in the office and to recover digital images for data that had been deleted in the ordinary course of business. 

Hamilton, which at that point had very limited resources, having laid off employees without paying the final two months payroll, estimated that it would have cost $25,000 to $50,000 to hire a computer team to represent Hamilton's interests in recovering this duplicative data. Not having access to such funds or funds to pay counsel to engage in further negotiations, Hamilton agreed to allow the FBI, on behalf of the HUD OIG, to back up the computers without any supervision by Hamilton. Because the FBI had unsupervised access to Hamilton's data and files and was asked to undertake a tremendous amount of work within a short period of time, it is possible, but unknown at this time, that the FBI may have destroyed proprietary files and databases. The information may be recoverable from backup tapes. However, Hamilton neither has access to the tapes nor the financial resources at this point to reconstruct the files should it gain technical access. In addition, according to an affidavit of a neutral eyewitness who accompanied them through the building in which Hamilton's offices were located, representatives of the HUD OIG tried to manufacture evidence that Hamilton was attempting to destroy hard copy accounting documents that should have been produced to comply with the subpoena.³⁸   [Click here to see Affidavit of Building Eyewitness]  When presented with the affidavit, the OIG filed a Declaration of Jack Rogers, an OIG auditor, attempting to justify the odd behavior. 

At about the time when the FBI had completed copying all of the data on the Hamilton computer network server and released it to a Solari employee, HUD was in the process of ensuring that all Hamilton data was scrubbed off the personal computers sold at auction. While observing the scrubbing, an OIG investigator discovered that the server had been removed the night before and was in Hamilton's possession. When told that Hamilton had taken possession of its own server, the investigator replied that "that knowledge is HUD's -- you can't have it." It was this event, together with the DOJ's letter seizure attempt of the personal assets of Hamilton's remaining employees as well as physical harassment and surveillance around Fraser Court that resulted in the decision to move the server to the offices of Hamilton's legal counsel to ensure that it was safe. Otherwise, there was a risk that there would be no original copy of digital files in Hamilton's possession. The question remains as to why HUD worked so hard to cause Hamilton to be without the services of counsel and to ensure physical control of all documents, ideally with no copies under Hamilton's control.

THOSE ASSOCIATED WITH HAMILTON BECAME TARGETS OF GOVERNMENT INVESTIGATIONS, TAX AUDITS, AUDITS, INQUIRIES, PHYSICAL HARASSMENT, AND SURVEILLANCE

Since the destruction of its operations, Hamilton and its former employees, as well as others who had roles in Hamilton’s operations, have been the subject of numerous IRS and other federal, state and local audits, investigations, and suspicious occurrences.  In one instance, in a DOJ letter to Catherine Austin Fitts, the sole remaining officer of Hamilton, David Gottesman, a Department of Justice commercial litigation attorney, threatened to hold Hamilton and any of its agents personally accountable for any auction proceeds remitted to Hamilton's first lien creditor, which claimed a prior interest in proceeds of the auction of Hamilton's property. This threatening action necessitated retention of creditors' rights counsel and a variety of actions on Ms. Fitts's part to ensure that her personal property and bank accounts were not seized based on "probable cause" or other falsified charges.

The HUD OIG also served a subpoena upon Ms. Fitts' elderly uncle in Portsmouth, New Hampshire, even though he had voluntarily agreed upon request of the FBI in Washington to send requested documentation, which consisted of financial records of a transaction between Fitts and her uncle involving the sale of her interest in a family-owned farm that helped defray Fitts’s legal costs to manage the investigation and subpoenas.³⁹   Another subpoena was served upon the president of the company employed to conduct the auction of Hamilton's furniture and equipment.  That subpoena sought detailed information on the identities of the auction purchasers of Hamilton's assets.  Subpoenas also were served on Hamilton's former counsel, Jenner & Block, which resigned for nonpayment of its legal fees, and Brand, Lowell & Ryan, counsel in connection with the TRO action in Federal District Court.⁴⁰

In total, Hamilton has spent in excess of $2 million responding to the HUD subpoena and managing press inquiries generated by government leaks.  DOJ has claimed to be investigating both civil and criminal matters involving Hamilton.⁴¹   After more than three years of “investigation” DOJ has taken no formal action against Hamilton, although both DOJ and HUD continue to request documents and Hamilton cannot access its documents (and Ms. Fitts cannot access many of her own personal and business records) without arranging in advance for admission to a storage room located at the Special Master’s offices.  During the two-year period in which the documents have been held at the Special Master's offices, Hamilton has not been permitted to remove any original documents, including extra, duplicate copies already in existence.

The question to ask oneself is what is driving the investigation?  Since the beginning of the investigation, Hamilton has repeatedly asked the government, through various formal and informal requests and on many occasions, precisely what are the nature, focus, intent, and purpose of this investigation?  Hamilton believes, based in part, on the SEC disclosure by Goldman, Sachs, that the primary allegations under investigation are those that would create a probable cause case for a large asset seizure from successful HUD loan sale bidders, including insider trading and bid-rigging. 

HAMILTON GOES ON THE OFFENSIVE

Hamilton has filed several court motions in an attempt to defend and protect itself and reduce the long-term and overwhelming cost of litigation.  In June of 1999, Hamilton filed a civil suit against Ervin & Associates in the Superior Court for the District of Columbia Hamilton v. Ervin alleging tortious interference with potential business advantage, tortious interference with contractual relations, and abuse of process.  Subsequently, Ervin & Associates removed the case to the District Court for the District of Columbia.  When Hamilton challenged the removal to federal court, Judge Stanley Sporkin ruled that Hamilton's attempt to remand the case to state court would have to wait until the unsealing of the qui tam; this ruling is directly contradictory to controlling case law. 

In actions related to the PTE pending in the district court, in July, 1998 and September, 1998, Ms. Fitts filed a Motion to Quash and a Motion to Compel in the U.S. District Court for the District of Columbia with respect to a HUD OIG subpoena of her personal financial records.  These actions challenged the subpoena pursuant to the customer challenge provisions of the right to Financial Privacy Act of 1978.  On May 21, 1999, Hamilton filed Motion to Unseal File [Qui Tam] and Opposition to Attorney General’s Request for Extension of Time.   In its motion, Hamilton requested that the qui tam suit be unsealed so the company could refute the allegations.  The motion also requested that the court prevent the government from extending its deadline, also referred to as a “rolling over,” to decide whether or not to adopt and pursue the qui tam action. 

HAMILTON FIGHTS THE GOVERNMENT TO OBTAIN INFORMATION WHICH PROVES HUD KNEW THAT ALLEGATIONS WERE FALSE FROM THE START

Hamilton also filed a FOIA Appeal on June 16, 1999, in the District Court for the District of Columbia requesting that the government turn over OIG audit reports on the HUD mortgage loan sales program. Hamilton has fought, unsuccessfully so far, to obtain access to the very documents that would help to clear its name and bring an end to the investigation. As described above, in the spring and summer of 1996, at Hamilton's suggestion and with HUD's cooperation, the Denver field office of the HUD OIG conducted a comprehensive audit of the HUD loan sales program, both with respect to the offering, bidding and sale procedures and to determine whether HUD's methods of calculating budget savings (called "negative credit subsidy") from the loan sales were reasonable. The Denver audit team completed its audit work for the IG's final comment and approval and reported to Hamilton in its closing interview in the summer of 1996 that the team had drawn highly favorable conclusions about the loan program and Hamilton's performance. The Denver team expected the final audit reports to be issued soon thereafter. 

Despite the close involvement of OIG headquarters staff with the development of the HUD loan sales program and the favorable preliminary audit report from the Denver office, the OIG headquarters staff elected to pursue the investigation of Hamilton and not issue a final audit report.  [Note that the General Accounting Office did, however, in August, 1999, issue a GAO Report generally supporting HUD's method of calculating credit subsidies for the HUD loan sale program.]  In a private meeting with Catherine Austin Fitts and her counsel, the head of the GAO section that lead the audit stated that they felt the $2.1 billion credit subsidy savings calculations were understated.  This is in direct contradiction to the position that the HUD IG is alleged to have taken with Congressional staff that the $2.1 billion savings from the loan sales are “fabricated.”

In support of the FOIA appeal, Hamilton filed an affidavit by the lead auditor for the HUD OIG's Denver audit team confirming the favorable findings regarding the HUD loan sale program and the pressure put on the Denver audit team by Headquarters to change its findings and conclusions as well as the lead auditor’s decision to leave government as a result of the experience.  A hearing on the FOIA appeal was scheduled for January 31, 2000.  However, on January 15, just over two weeks before this hearing was to be held Judge Stanley Sporkin, who went on senior status during 1999, abruptly announced his retirement, effective immediately, leaving no one to hear his cases.⁴² (Click here to view FTW article mentioning role of Judge Stanley Sporkin in a case involving his role as CIA General Counsel; Click here to see a recent article in The Washington Post on the same case.) 

WHY DID ALL THIS HAPPEN TO HAMILTON?

Continuously, as we reacted to the series of events, we asked ourselves, "why?" Why is there such non-disclosure, lack of cooperation, harassment, and delay? The Solari team does not have all the answers. What we do know is that Ervin & Associates and its affiliates ("Ervin") earned about $7 million a year servicing mortgages for HUD before the loan sales program cut the size of the portfolio, and that the company's business was dramatically adversely affected by this loss of business. And that since the fall of 1996, HUD has let over $900 million in contracts for the servicing of the HUD FHA single family portfolio, which would not have been necessary had HUD proceeded to liquidate the portfolio as planned in the HUD Loan Sales Program.

We also know that Ervin collected information about HUD program properties while performing a mortgage servicing contract that it claimed was not covered by its HUD contracts and was, therefore, proprietary information and that the company intended to sell or otherwise use that information in connection with work with owners and other stakeholders. When HUD claimed a right in this information, Ervin filed a complaint against HUD. 

We know that Ervin had developed a working relationship with HUD enforcement groups in the course of providing information for equity skimming investigations against landlords. 

We know that HUD enforcement staff were concerned that the HUD loan sales were reducing their cash inflow from equity skimming cases as HUD held loan inventories decreased from loan sales.  Between 1989 and 1994, Ervin won more than $25 million in HUD contracts.  It was also interesting to discover that Ervin has filed approximately thirty-seven (37) contract disputes with the General Accounting Office since 1996 and more than 60 Freedom of Information Act requests with HUD.  Despite the obvious conflicts of interest, the HUD OIG chose to initiate and continue its investigation, overruling its own audit team, apparently based solely upon Ervin's allegations. 

We also know that a Washington Post reporter who interviewed Ervin in 1998 reported that Ervin had a staff of 17 who appeared to be working on this litigation and supporting media and lobbying efforts. The reporter's question to us was "who is financing all of this?" We did and still do not know. We do know that his outside legal expenses and media representation appeared to be substantial. We also know that the story on which this reporter spent an estimated 250 hours of research, was never run. 

We have heard allegations that HUD officials have complained to industry representatives that there has been pressure to award contracts to Ervin & Associates. If true, such an action is known as contract "steering," an allegation made by Ervin against HUD officials and Hamilton. We also know that $900 million in contracts for managing HUD single family properties/mortgages have been let since the shut down of the loan sale program caused a build-up in single family inventory.

We know that once the qui tam complaint is unsealed we can calculate how much those behind it anticipated profiting from qui tam action. The profit potential under the False Claims Act would have been quite substantial. Federal policy appears to prohibit government contractors like Hamilton to earn fees based upon the savings they generate for the benefit of the government and taxpayers. In contrast, "informants" who feed enforcement and operations like the DOJ Asset Forfeiture Fund can earn 25% or more of the value of HUD related assets seized by the government.

Last but not least, we know that since Hamilton's contract was terminated, the trend of steadily diminishing financial fraud and diminishing profits for special interests has reversed dramatically. The question that needs to be answered is, who made money at the taxpayers' expense from these policy changes? Whose profits (in the form of HUD contracts, in single family and multifamily asset management and workouts, and new single family and apartment financing and subsidy renewals) escalated from the cancellation of the HUD loan sales programs? Note that while HUD expends massive effort and resources litigating over the relatively paltry $2 million owed to Hamilton, HUD has let a $900 million contract for management of the HUD single family portfolio, which would be decreasing or non-existent if the loan sales program had not been shut down. With the mortgage bubble in full swing and money laundering enforcement in mortgage banking and homebuilding non-existent, how is Wall Street better off? And how is Wall Street and the GSE's better off with no public transparency between street level housing and mortgage data and outstanding mortgage backed bonds, asset backed securities, tax shelters and related stocks and derivative portfolios?

THE COST TO TAXPAYERS

Thousands, perhaps hundreds of thousands, of pages of documents have been filed with various courts regarding the aforementioned cases. Based upon our estimates, we believe taxpayers have spent over $40 million on the federal government's targeting of Hamilton and the loan sales program, which we believe is at least in part an effort to (a) implicate Hamilton and HUD in loan sales "scandals" which led to canceling the sales, (b) create a potential for a record-breaking seizure of assets from successful bidders⁴³  and (c) steal valuable place-based disclosure software. This cost excludes the anticipated $250 million to $500 million a year it will cost taxpayers as the result of the cancellation of the HUD loan sales program.⁴⁴   And it does not take into account another $5-10 billion that Hamilton had estimated would have been available if the full mortgage insurance and mortgage portfolio at HUD had been re-engineered to benefit taxpayers instead of special interests groups. 

We believe you should be aware of how our government is spending our money. After three and one half years, no charges have been brought against Hamilton or Catherine Austin Fitts. Even though HUD has every reason to believe (because HUD program offices ran the program and program control and representatives of HUD Office of General Counsel and the OIG headquarters audit team were directly involved in the design of the program and were present for or invited to the bid room activities) that the HUD loan sales in which Hamilton participated were conducted under the most rigorous industry standards and under the direct supervision and control of HUD employees, the investigation continues as to whether Hamilton has participated in bid-rigging and insider trading. 

WHY WE DECIDED TO DISCLOSE OUR STORY TO THE PUBLIC

Solari has posted all the legal documents in our cases and related cases that were made available to us. We believe that open disclosure is the best way to help others answer their own questions and draw their own conclusions about "how the money works" at HUD and how this may relate to various political campaigns and budget/appropriations cycles in 1996, 1998 and 2000 and the political aspirations and fundraising of the parties involved. Our goal is to help ensure that the information is available and useful to you in a way that will also help us solve the mystery. Please see all the other fronts with other federal agencies such as the Internal Revenue Service and local agencies such as the D.C. Department of Tax and Revenue and D.C. Department of Public Works on which we are fighting our harassment battles in the Audits, Investigations, and Suspicious Occurrences section of the Legal Web page.
 

There are some who have said from the beginning of this odyssey that Hamilton, a 50-employee-owned company, was not important enough in the scheme of things to merit the concentrated efforts of so many government agencies in destroying it and its principals. There are those who say that this entire brouhaha came about because of an optimization discrepancy made in two loan sales that resulted in the government's saving $2.1 billion instead of $2.1038 billion, a potential decrease of 0.04%. This is hard to believe, considering that HUD regularly made disclosure and scheduling decisions that resulted in decreased proceeds in the tens of millions of dollars based on the opinion that $10-25 million of additional proceeds were "not material." Indeed, Hamilton was often criticized as being too aggressive in maximizing proceeds on the HUD loan sales. HUD's cancellation of the Hamilton contract was followed by the cancellation of the scheduled loan sales at a cost to the government of many multiples of $3.8 million. In the following month, the HUD OIG received a special appropriation that was the approximate amount of Hamilton's remaining $10 million contract authority. 

At times we have asked ourselves "could HUD or the Department of Justice really believe there could have been fraud in the loan sales program?" Design books and bid procedures were specifically designed to ensure that these things were not possible. This was common knowledge for the HUD program staff and HUD OIG staff who participated in and oversaw the auctions. We ask, "would anyone have launched a criminal investigation based on the word of a chronic complainer who was clearly attempting to make up for what he lacked in expertise and performance by making a percentage of some qui tam "pot" when Hamilton's reputation was one of uninterrupted successes that saved the taxpayers billions?" We wondered what Hamilton had that was worth destroying in 1998, since what cash money Hamilton had was all gone, and HUD ensured that Hamilton equity, which had been substantial, was as a result of the events above now worthless. We can only surmise that powerful forces did not want transparency and competition in HUD programs.

We have estimated that the total expense to continue on with the current HUD discovery request will cost $1 million, at a minimum, and could go much higher. The cost to our ability to begin to build a new business is much higher, adding on to the $250 million in cash and equity we estimate that Hamilton and its shareholders lost from the government's violations of the law and the $2 million that Catherine Austin Fitts has lost, not to mention losses to other employees, suppliers and creditors of time, reputation, foregone income and the stress to their health and that of their families.

Something was and is up! We need your help in understanding exactly what. This affair, after all three and a half years, and losses in cash, equity and personal assets of over $250 million to Hamilton, its employees and creditors and Catherine Austin Fitts, remains a mystery.

If we can help you in any way, please do not hesitate to contact us. If you have any information or insights that can help unravel this case, we would love to hear from you. Thank you! 

The Solari Team

Subsequent Developments

In January, 2000 the GAO issued a report in response to the Subcommittee on Housing and Transportation and Committee on Banking, Housing, and Urban Affairs in the U.S. Senate. The GAO issued a favorable report with regards to the impact of HUD's multifamily, partially assisted, and Missouri loan sales. The GAO found that the private loan sales resulted in substantial exterior property renovations by the owners and, in general, the transition from project-based to tenant-based assistance at partially assisted properties was successful. However, the GAO also found that HUD had not adequately informed interested parties of tenant protections provided after the conversion. Link to GAO January, 2000 report on the Impact of Loan Sales on Tenants and Properties Varies by Property.

On February 8, 2000, as the Solari team was waiting for word about the appointment of a new judge to replace Stanley Sporkin in the U.S. District Court, an investigator from HUD OIG contacted the Special Master to inform him that HUD OIG had entered into a contract with a company to capture and copy data from back-up tapes pursuant to Judge Sporkin’s December 18, 1998 order. Link to letter from Saddler to the Special Master. 

On February 14, 2000 the Special Master informed Hamilton's counsel that, after a full year, an agreement had been reached in December 1998 for HUD to employ a third party to copy some seventeen of Hamilton's computer back up tapes, HUD announced that it intended to go forward to copy these tapes. Under the agreement, which Hamilton had entered into under protest, the tapes would be copied and hard copies of the documents would be printed for review (at Hamilton's expense) by Hamilton for privileged or unresponsive matters. After review, all responsive and unprivileged documents would then be turned over to HUD. Former employees of Hamilton estimate that these tapes, if full, could comprise some 700 gigabytes of stored information. When printed out in hard copy form, 700 gigabytes is equal to hundreds of thousands if not millions of pages. None of this information, to our knowledge, would provide HUD with any new information that HUD has not had access to for three or more years. The cost of this copying will be underwritten by the American taxpayer, as will be the cost of the Special Master's review in excess of $100 per hour plus the cost of making a set of hard copies of all of the information on the tapes, plus the cost of the HUD investigators' time in reviewing documents. Hamilton's insurance carrier will have to pay counsel to review all of the hard copy documents on Hamilton's behalf to identify privilege and relevancy issues.

On February 18, 2000, Hamilton’s counsel hand-delivered correspondence to Assistant U.S. Attorney Rudolph Contreras⁴⁵  inquiring whether the government had reached its decision to pursue or not pursue the qui tam action as had been anticipated in mid-January.  The correspondence addressed the urgency of the decision and the financial harm it has caused to Hamilton and Ms. Fitts over the last four years.  Shortly after receiving the correspondence, Mr. Contreras met with his superiors to discuss the matter. Link to letter from Hamilton’s counsel to AUSA Rudolf Contreras 

On February 23, 2000 Hamilton’s counsel received a letter from Bryan Saddler, Acting Counsel to the Inspector General, regarding release of non-responsive documents. Link to letter from Saddler to Hamilton’s counsel.

In a letter dated February 24, 2000, Hamilton's counsel responded to Bryan Saddler's February 23 letter regarding non-responsive documents. The correspondence reiterated that OIG did not need any additional assurances that the records that Hamilton designated are, in fact, non-responsive. It further stated that the OIG's suggestion to put the matter on a fast track after more than a year was inappropriate. Finally, the letter stated that Hamilton will not pay the Special Masters' fees for overseeing Hamilton's use of its own documents. Link to response letter from Hamilton’s counsel to Bryan Saddler. 

On February 28, 2000, an article entitled "Justice unable to find bids worth $5.2 billion" by George Archibald was reported in The Washington Times. Notwithstanding the misleading title, the event reported in this article is the denial to Ervin and Company of a Freedom of Information Act request for copies of the bid cards submitted in two HUD loan sales. In an effort to defend Andrew Cuomo against efforts to force his testimony in a "bid rigging case", the article reports, DOJ had filed an affidavit before Federal District Court Judge Sullivan stating that the cards were "missing." A HUD spokesman ten days later made the statement that the "bids" weren't missing, rather, the HUD OIG had seized the bid documents as part of an "ongoing criminal probe of multibillion-dollar contract fraud and bid-rigging in HUD's auctions of defaulted federally subsidized housing properties." Archibald repeated the old and false charges against Hamilton (without contacting Hamilton or its counsel to check any facts alleged), stating "[t]he tug of war over bid records involves Mr. Ervin's claim that Hamilton Securities Group, HUD's fired contractor … improperly awarded most of the properties to Wall Street investment firm Goldman Sachs & Co. and its partners, among the biggest contributors in the current and past presidential campaigns." John Ervin is quoted as stating "Susan Gaffney is asleep at the switch or they're being told to kill this thing….. They aren't stupid. There's a cover-up going on." At the end, the article quotes Ervin's counsel, Wayne Travell of the law firm of Venable Baetjer, Howard and Civiletti, in response to Justice attorneys' representation in court that HUD never saw auction bids but entrusted Hamilton to maintain and certify them, "[t]hat's extraordinary because what it means is the government conducted $8.9 billion worth of auctions of government notes and never did even the most cursory review of how their contractor conducted those sales." Hamilton does not know what inspired this extraordinary battle in the press. 

On February 29, 2000, Hamilton's counsel wrote a letter to the editor of The Washington Times charging the publication with inaccuracies, failure to verify alleged facts with Hamilton, and libelous charges that any criminal investigation is ongoing and that Hamilton has "admitted" to "bid tampering." Hamilton's attorneys requested that a meeting immediately be scheduled to address the publication. It was further requested that the publication retract the libelous and wrongful statements immediately. Link to letter from Hamilton’s attorneys to the Editor of The Washington Times 

On March 3, 2000, Hamilton’s counsel received a letter from Bryan Saddler stating that he has no objection to the Special Masters’ release of Hamilton’s paper records that have previously been identified as being non-responsive to the OIG’s subpoena.Link to letter from Bryan Saddler to Hamilton’s counsel.  So, after almost two years, Hamilton finally has access to a small fraction of its documents delivered to the Special Masters for what the Special Masters were led to believe would be a mere "one or two month" assignment.

² Initially, Hamilton was hired by HUD to help it address the material weaknesses recognized and reported by the General Accounting Office and HUD Inspector General with respect to FHA. After reviewing the FHA portfolio, Hamilton recommended that HUD, among other things, institute a mortgage loan sales program. Hamilton was then hired to assist HUD in the design and implementation of the program. Soon after the initial and highly successful HUD mortgage loan sales, Hamilton recommended that HUD hire other contractors to assist it with the program. Due to the cumbersome contracting process at HUD, however, it took some [18 months] to put additional loan sale advisors in place. In the interim, Hamilton agreed to assist HUD until additional advisors could take over the loan sale financial advisory work in 1996.

³June of 1996 is the same month during which Federal Housing Administration (FHA) closed the landmark structured sale of mortgage loans on partially assisted (i.e., Section 8) apartment mortgages. Subsequently, after the conclusion of the loan sales, the Senate Subcommittee on Housing and Transportation of the Committee on Banking, Housing, and Urban Affairs, requested an audit report from the United States General Accounting Office (GAO) on the impact of multifamily partially assisted loan sales on tenants. In January, 2000, the GAO issued a report in response to the Congressional request. [Click here to see GAO report on Impact of Loan Sales on Tenants and Properties Varies by Property.] 

⁴ A "Bivens" action is a lawsuit against government officials in their individual capacities (as opposed to their roles as employees of the government) for money damages, so-called because this type of action was permitted in the case Bivens  v. Six Unknown Named Agents of Federal Bureau of Narcotics 1971 S. Ct.  2217, 403 U.S. 388, 91 S. Ct. 1999, 29 L. Ed. 2d 619.

⁵ The Small Business Administration is involved because the case, in addition to other complaints, deals with the Small Business Administration's Section 8(A) program for preferences to minority and women-owned small businesses in awarding government contracts. While Hamilton qualified as a "woman-owned business," it never competed for HUD contracts based upon this status.

⁶ Then the Deputy Assistant Secretary at HUD who headed the mortgage loan sales program.

⁷ We believe the date of filing was June 6, 1996, the day after the filing of the Bivens suit.

⁸ A qui tam is filed by a private party, called a "relator," on behalf of the government." 31 U.S.C Sec. 3729-373 (1988) "Qui tam" is Latin for "he who brings an action for the King as well as for himself." If the case is successful, the relator is entitled to a percentage of the government's recovery, which includes "treble" damages. Qui tam lawsuits are sealed by statute in part to protect the government's investigation until the Department of Justice makes the decision whether to "adopt", or pursue, the case. During an investigation, when the government serves a subpoena, called a "Civil Investigative Demand", on a target of the investigation, the statute requires that the subpoena disclose the nature of the alleged violations of the false claims law and the applicable provisions of law alleged to be violated. 31 U.S.C. Sec. 3733(a)(2)(A) (1994).

⁹ The HUD OIG has separate and independent counsel from HUD's Office of General Counsel. In court, the OIG's counsel is represented by the Department of Justice, which has exclusive jurisdiction over qui tam actions. Even though the Federal False Claims Act, Section 3733, provides that the Attorney General may not delegate the civil investigative function of a qui tam suit, Judge Stanley Sporkin ruled, and was affirmed in his ruling, that, because the IG has independent subpoena authority, the subpoena issued to Hamilton by the OIG without required FCA disclosure were valid.

¹⁰ Hamilton provided documents and ongoing information throughout its contractual relationship with HUD. A weekly meeting was held at HUD for each loan sale at which Hamilton and HUD team members, as well as due diligence providers, counsel and others, were in attendance. Representatives of the HUD OIG, Office of General Counsel and other HUD sections had standing invitations to these regular meetings. Moreover, most other communications among team members took place on HUD's closed e-mail network system (Ccmail) instead of by telephone and, therefore, multiple HUD team members received copies of each such communication. Under the contract, much of Hamilton's work was documented in the form of written (in hard copy or digital form and, in many cases, both forms) "deliverables" like the Design Books and Lessons Learned for each loan sale, copies of which were provided to HUD program personnel and team members. A copy of each deliverable also was provided to the HUD Contracting Office with each monthly bill for services. Many HUD deliverables also were made available to the public on the FHA section of HUD's web site. In addition, Hamilton provided duplicate or additional copies of anything Hamilton had produced to HUD whenever requested to do so, and duplicate copies were provided on many occasions, because HUD appeared to have no coherent record keeping system. Then, when the loan sales audit was undertaken, Hamilton provided copies of many of the more substantive and important documents to members of the audit team. Upon receipt of the first subpoena, Hamilton hired a contractor to comb through hard copy files and e-mails exhaustively to pull out everything that even conservatively might be deemed responsive to the subpoena. Hamilton also provided back-up tapes, which were made in the ordinary course of business more or less on a weekly basis. The result is that delivery of all of Hamilton's back-up tapes constituted delivery of a huge amount of information many, many times over. In addition, since e-mail correspondence routinely was addressed to 10 or 15 recipients at both HUD and Hamilton, and was delivered over HUD's own private network system, HUD had multiple sources of in-house retrieval that didn't even require Hamilton's participation. When Hamilton's contract was cancelled, HUD contracting insisted on re-production of many deliverables that had already been given to HUD once as part of the contract performance, a second time to facilitate the Denver audit, and a third time in response to the subpoena.

¹¹ EVillages sponsored a data servicing company, Edgewood Technology Services ("ETS") located within a HUD housing project in the inner-city Edgewood neighborhood of Washington, DC. [Click here for a July, 1996 article on ETS in the Washington Post] Residents of Edgewood Terrace who had completed classes offered by eVillages were offered jobs at this pilot project, which offered employee stock options. ETS was created to offer data management services to government and the health care industry clients. The establishment of the neighborhood learning center prototype project had followed HUD's expression of disinterest in response to Hamilton's recommendation that HUD apply place-based principles (including establishment of computer learning centers) in the management of the FHA portfolio. The success of the first ETS classes altered HUD's notion of how fast and at what financial cost tenants in HUD housing could learn to be economically self sufficient. This realization led to the acceptance of the concept of data servicing centers by HUD and the institution of the Neighborhood Networks Program, which allows HUD Section 8 landlords to count expenditures on these centers as permitted expenses of their projects. [Click here for several articles by Catherine Fitts on the ETS projects.] The Edgewood Terrace center successor is now advertised in the Microsoft television commercial highlighting a data servicing center to which Microsoft donated equipment.
   Hamilton used the services of ETS employees both in assisting with production of HUD database deliverables under the HUD contract and in building proprietary databases for Hamilton involving the entire HUD multifamily portfolio. As a result of the subpoena, ETS's business suffered and Adelson Entertainment's relationship with Hamilton soured. Adelson Entertainment is known for using entertainment to make otherwise dry information interesting and fun, allowing it to makes successful movies and documentaries that expose corruption by the government. 
   E2 Netanalytics was a Hamilton subsidiary established in 1995 to develop an investment model for "two-test" investments, i.e., investment strategy that uses information about the total impact on an environment and stakeholders to show the return to investors, as well as other affected parties, to increase investment returns and reduce risks. 

¹² It may be for the purpose of avoiding such conflicts implied by Section 3730 of the False Claims Act, which bars any action “based upon allegations or transactions which are the subject of a civil suit or an administrative civil money penalty proceeding in which the Government is already a party.”

¹³ The story ultimately did not run until after the election.  Click here to see a copy of the story.

¹⁴ The audit was assigned to the Denver office for two reasons.  First, members of the Headquarters audit team of the OIG had participated actively in the design of the loan sales program, and it was felt that their participation in the program might affect their objectivity.  Second, staff members in the Denver office of OIG had previous experience auditing non-performing mortgage loan sales for RTC.

¹⁵ "Credit subsidy" is the term used in federal budgeting to describe the "subsidy" that must be allocated to cover the cost of a federal loan, guarantee or other credit program. If a credit program has a history of losing money, the Congressional appropriators must appropriate enough to cover the estimated future losses at the time an additional extension of the credit (i.e., making of a new loan or guarantee obligation) is made. A "negative credit subsidy" is a direct credit to the federal budget that occurs when the credit program loses less than was originally expected. In effect, when a loan sale generates a negative credit subsidy, the taxpayers make a profit.

¹⁶ Ultimately, members of the Senate Subcommittee on Housing and Transportation of the Committee on Banking, Housing and Urban Affairs requested that the General Accounting Office conduct an audit to determine the accuracy of the credit subsidy computations performed by Hamilton.  The GAO report, released in August, 1999, concluded, generally, that the credit subsidy computation methodology was valid.  The director of the housing group at GAO, in a meeting with Catherine Fitts and Hamilton's attorneys during the summer of 1999 prior to the release of the report, stated that HUD's expression of savings to the government generated by the loan sales was greatly understated.  [Click here to view a copy of the GAO report.]

¹⁷ Jim Martin, an assistant to counsel for the HUD OIG, requested and obtained a transfer into the HUD Office of General Counsel during the course of the investigation. 

¹⁸ Hamilton consistently received favorable feedback from HUD on the quality of its work. From the outset, HUD involved many of its own divisions as well as outside agencies in the design and implementation of the loan sales program. This included HUD's own Office of Inspector General and Office of General Counsel, both of which had significant input and ongoing involvement in the program. Congress was also involved from the beginning and remained a participant in the mortgage sale effort, including the passage of 1994 legislation authorizing the program. Proposed rules for the sales were published regularly in the Federal Register. In addition, after each sale, HUD and its financial advisors conducted a "post-auction review" to determine what went well and what could be improved upon in future sales. At no time during the sales design or implementation process did Hamilton receive any negative feedback, complaints, questions or contract inquiries from any of these participants. 

¹⁹ During the audit closing interviews with the Denver OIG team, Hamilton had been informed that the draft audit would be submitted to Headquarters for comment soon and that Hamilton could expect it to be released some time in October.

²⁰ Referred to in the False Claims Act as a "Civil Investigative Demand."

²¹ The Justice attorney who took this position, Barbara Van Gelder, was transferred from her position soon thereafter.

²²  It appears that the positions of the Secretary's Office of HUD and the Office of Inspector General of HUD with respect to the Hamilton investigation are not always consistent.  This is not surprising, given the ongoing battle between the HUD Secretary and HUD OIG as reported by the media and in Congressional testimony.  Link to 2/28/00 The Washington Times article.

²³ This action was inconsistent with the favorable feedback that Hamilton received in weekly meetings and performance reports with the HUD GTR (Government Technical Representative) regarding the work performed and billed, and approved for payment by the HUD GTR, for which HUD was withholding payment.  The claim of a breach also is inconsistent with the cancellation of the contract under its cancellation for convenience clause.

²⁴  I.e., real estate tax shelter promoters that served as general partners of the partnerships that owned the properties and received management fees through affiliated management companies.

²⁵ If a company is not public, or sold to another company, the senior executives' stock and stock options have little value, because of the limited or non-existent market for company shares.   It is for this reason it is the typical founder's dream to "go public" or sell out to an acquirer.

²⁶  Readers may recall that the seizure of the Bank of Credit and Commerce International seizure by the federal government was the largest such seizure in history at $ 550 billion.  See, False Profits, Peter Truell and Larry Gerwin, (Houghton Milken 1992).  BCCI was the Middle Eastern sheik - owned bank that illegally held stock in First American Bankshares, the bank holding company for First American Bank, a major Washington, DC bank.  Clark Clifford and Robert Altman testified in 1991 before a Congressional committee with respect to their role as directors and were indicted by a District of Columbia grand jury in July, 1992 under RICO (Racketeer Influenced Corrupt Organizations) statutes.  Harry Albright was appointed trustee of First American by District Attorney Robert Morgenthau and the courts, and he, in turn, appointed Catherine Fitts to serve on the board of directors of the bank.  The BCCI liquidator announced that $9.5 billion had been lost or stolen in the debacle.

²⁷ DOJ and HUD "proprietaries" are independent private sector companies that are controlled largely in secret by the agency.  Air America frequently has been referred to as a CIA "proprietary."

²⁸ To clarify this key point: HUD knew in November, 1996 (less than four months after the filing of the case that HUD says gave rise to the three-and-a-half-year investigation of Hamilton) that the very bidder Hamilton was alleged to have engaged in bid-rigging with was disadvantaged by the optimization error. 

²⁹  Motorola's then-progressive quality control management system accepted a six in 1,000 error rate as the highest that could reasonably be achieved.  The Hamilton team's goal was to achieve the equivalent of this high achievement standard, recognizing, as Motorola management did, that striving for a higher standard would be unrealistic and counter-productive. 

³⁰  HUD’s demands for close-out documentation after the cancellation of Hamilton's contract went way beyond the routine for such situations and way beyond what was reasonable under the circumstances, particularly in light of the facts that (a) HUD's behavior had forced Hamilton out of business, (b) HUD had withheld the funds that could have been used to pay employees to perform the close-out and (c) Hamilton already had provided all or virtually all of the requested documentation both in the ordinary course of contract compliance and on numerous other occasions thereafter.

³¹ Nicolas Retsinas, Assistant Secretary /FHA Commissioner had, however, refuted many of the same accusations leveled in the press in 1997 at the time of the contract cancellation.  [Click here to view his letter to US News and World Report dated October 17, 1996, exactly one year before the contract cancellation.]

³² This is routine in sales of this type.  Most legal and investment advisory firms will not agree to undertake assignments to represent HUD if such assignments preclude them from bidding on HUD assets or representing HUD borrowers and, therefore, obtain the necessary conflict waivers before beginning to work on HUD contracts or subcontracts.

³³ Hamilton's inability to conduct other aspects of its business operations during the pendency of the HUD contract meant that employee/shareholders who were foregoing the types of salaries they could have earned using their talents at most alternative employers were dependent upon future equity values of the company for market-comparable remuneration.  As part of the HUD contract, Hamilton agreed to cap salaries of all of its employees at $125,000, forcing Hamilton's salary scale to a level far below what was available in the private sector to employees with the type of expertise held by "Hamiltonians," whose areas of expertise ranged the gamut from law, investment banking, government finance and budgeting and community development to digital technology and database design and development.  Hamilton routinely recruited PhD graduates from MIT and hired licensed attorneys for business related positions.  HUD's actions caused all of these shareholders to lose 100% of this "sweat equity."  More important, though, is the postponement and then loss of the extraordinary market innovations Hamilton was creating for implementation at an expected huge profit to Hamiltonians and communities after it had gained the knowledge for which it had engaged in the HUD contract.  The lost potential may be summed up by repeating the "short form" Hamilton mission statement: "End poverty.  Get jet."  [For a long form description of Hamilton's mission, click here.]

³⁴ Judge Sporkin also was hearing the case then pending against former HUD Secretary Henry Cisneros.

³⁵ Hamilton had argued that even if Hamilton were liable to the government in damages, there was no justification for withholding contract payments because any error of this type would be covered by Hamilton's errors and omissions insurance policy.  The government's attorney responded that the insurance coverage would be nullified in the case of fraud.  Judge Sporkin turned to the government's attorney and stated that he knew that Hamilton would have to close its doors if he ruled in favor of the government and, therefore, he was loath to take this action in the absence of credible evidence of fraud on Hamilton's part.  The government's attorney stated in the affirmative that the government had reason to believe there was fraud.

³⁶ Tradewind is a minority-owned due diligence contractor of HUD that had performed services in connection with some of the HUD mortgage loan sales.  Goldman Sachs and BlackRock's real estate affiliate, apparently, were the successful bidders for the HUD loan on the property owned by the plaintiff, which was in bankruptcy proceedings.  This loan was not sold in either of the two sales in dispute with respect to the computer optimization error, but the plaintiff had, apparently, been notified of the contents of the confidential memorandum by Hamilton reporting the error and attempted to use this information to forestall foreclosure of the plaintiff's property.

³⁷  Subsequently, the Michigan suit was settled by other parties and the suit was dropped.

³⁸ In addition to the fact that Hamilton was not destroying any hard copy documents, all of Hamilton's accounting and financial records, with the exception of invoices and other paperwork originated by third parties, were kept in digital form on its accounting software.  Therefore, any printouts that might have been tossed in the trash when Hamilton's offices were being closed down were duplicates of what was on the digital system that already had been copied. 

³⁹  As recounted by Fitts’ uncle, a "carload" of HUD and FBI agents from Boston arrived at 4:30 PM to serve the subpoena, causing him (and other members of Fitts's family who heard about the incident) great anxiety and fear.

⁴⁰ All communications between Hamilton and its counsel were privileged as attorney-client communications.  Nevertheless, the OIG attempted to force Jenner & Block to compose a detailed index of each and every communication as to which it claimed such privilege.  Hamilton’s subsequent counsel, Drinker Biddle & Reath, was required to provide this indexing.

⁴¹  On May 20, 1999 the Justice Department attorney (Criminal Division) who would prosecute any criminal charges advised Hamilton that he had "declined prosecution" of any criminal charges based on the evidence presented to him.  Counsel for the IG, however, has maintained on numerous occasions that it does not consider the criminal investigation closed.  The OIG has taken different positions at different times as to whether its investigation is criminal or civil and whether its subpoenas are issued pursuant to an investigation of the Bivens action or in connection with the qui tam case.  As far back as October, 1996, counsel for Hamilton wrote to USNWR that "based on what I have been told by the individual responsible for the IG investigation… there is above all no credible basis for contending that a criminal investigation has been initiated or that the IG's Office has concluded that there would be a basis for instituting a criminal investigation."  It may be noteworthy that various search and seizure laws enacted by Congress during the 1990s permit enforcement authorities broad powers in connection with criminal investigations.

⁴² When Judge Sporkin retired, Hamilton had several motions pending in his court awaiting the promised decision by the Department of Justice whether it would adopt the qui tam suit.  Until the US District Court assigns his cases to another judge, no filing can be made by Hamilton and no unsealing of the record can take place. 

⁴³ Hamilton believes that federal enforcement bureaucrats may have intended to seize some $4.7 billion in assets from Goldman Sachs and BlackRock Capital based upon a "probable cause" to believe financial fraud had been perpetrated.  Such a seizure could have taken place even if no charges were ever filed against Goldman and BlackRock.  The attempt may have failed when Hamilton failed to seek protection in bankruptcy and control of Hamilton records was vested in the Special Masters, with Hamilton retaining master duplicate by retaining its main server, thereby making it impossible to plant evidence of bid-rigging and insider trading.  Interestingly, Goldman Sachs's initial public offering of stock planned for the spring of 1997 was abruptly postponed some two weeks after the appointment of the Special Masters.  Subsequently, on the day Eric Holder, Deputy Attorney General, announced that no special prosecutor would be appointed to investigate campaign fund-raising charges against the President and Vice-President, Goldman Sachs's web site announced that the IPO was back on.

⁴⁴  This estimate is based upon two calculations.  First, with respect to the existing inventory of HUD held and guaranteed loans, there will be a massive cost associated with the return to the loan by loan workout system of resolving defaults and insurance claims.  This is the difference in historic recovery rates between loan by loan workouts (i.e., approximately 35% recovery rate) and the loan sales (approximately 70% - 90% recovery rate).   The second cost has to do with the use of inaccurate historic loss rates for purposes of future appropriations for the origination of new FHA guarantees.  As the result of the Federal Credit Reform Act of 1990 (2 U.S.C. 661 et seq.), Congress is required to appropriate what amounts to a loan loss reserve in connection with the authorization of federal credit (like loan guarantees).  These reserves are based upon historic loss rates for similar credit risks.  With the apparent blessing of OMB and CBO, HUD has convinced Congress to "pretend" that HUD loan sales will continue in the future and apply the 70% - 90% recovery rates for new originations, even though, in fact, HUD has cancelled the loan sales program and returned to loan by loan workout recovery methods, which historically have resulted in 35% recovery rates.  The result is an underestimate of future losses and the origination of more new loan guarantees than are justified by the risks assumed in appropriations.  The US taxpayers will make up the difference.