Federal prosecutors have launched an investigation into a prominent Los Angeles developer accused of bilking taxpayers out of millions of dollars, building potentially unsafe apartments and possibly making improper gifts to public officials.
Advanced Development and Investment Inc. has submitted fraudulent bills to cities for affordable housing projects, failed to keep proper records on more than $650 million that flowed through its checking accounts and transferred as much as $80 million to personal accounts — at least one in India — according to a court-appointed receiver's report on the company's activities.
The report was filed in Los Angeles County Superior Court as part of a divorce proceeding involving the company's former president, Salim Karimi, and Jannki Mithaiwala, the daughter of company founder Ajit Mithaiwala.
It was also turned over to the U.S. attorney's office and, at a hearing on Tuesday, receiver David Pasternak asked the court's permission to comply with subpoenas for records from a federal grand jury.
In his report, Pasternak indicated that ADI had "virtually no financial records," no general ledger, no balance sheet and no bank reconciliations. Working with forensic accountants, he said he had discovered "potential fraud and criminal activity."
On Tuesday, he told the court he was still trying to gain control of company assets and had identified 400 bank accounts, as well as $600,000 in gold bullion and three cars, including a Bentley.
Over the last 20 years, ADI has built more than 50 affordable housing projects in California in cities, including Los Angeles, Glendale, Anaheim, Fresno, Long Beach, Sacramento and San Diego. Jim Starbird, the city manager of Glendale, said the city was dispatching structural engineers to evaluate its ADI projects after the receiver raised concerns about potential health and safety violations.
"Glendale, as well as the taxpayers — we all begin to look like victims," Starbird said. The city's biggest concern, he said, was making sure the buildings were safe.
ADI has built five projects in Glendale at a cost of more than $30 million, he said.
In Los Angeles, city officials said ADI has built 16 projects at a total cost of $190 million, including $32 million from the city. The officials said they had no plans to dispatch inspectors because they have received no complaints.
One project, southwest of downtown, has been put on hold because of concerns about the company. "We're still looking into it," said Douglas Guthrie, general manager of the Los Angeles Housing Department.
Laura Chick, the former Los Angeles city controller and now state inspector general of federal stimulus funding, said she was appalled at the allegations." "It's not just potential misuse and abuse of significant amounts of public money," she said. "It's also messing with low-income housing that's so desperately needed."
Chick said she learned last week of the investigation, which involves an array of agencies, including the FBI. ADI had six projects that were slated to receive $10.7 million in stimulus funds, but none of that money has been released to the company, she said.
In court on Tuesday, Pasternak said his office had retained a company to physically examine several projects and had discovered construction defects and "substantial deferred maintenance." He said he will seek a structural analysis of at least one property to decide whether such analyses are warranted in other cases.
Assistant U.S. Atty. Paul Stern, who handles major fraud cases, attended the divorce hearing but refused to comment, as did Pasternak.
Lawyers for Karimi and Mithaiwala also refused to comment. Karimi's lawyer said he is in India.
Some officials marveled that the potential fraud had come to light in the most mundane of civil proceedings.
"The divorce is the fuse that lit the bomb," Starbird said.
Pasternak was appointed in February to review the books of ADI and Pacific Housing Diversified, a general contractor with the same ownership. In March, according to his report, Pasternak learned that the IRS was auditing some company members for "substantial unreported income." His report later identified $13 million in one year that went unreported.
Then came the discovery of potential fraud, according to the report.
The document included allegations that the firm inflated its budget estimates for development projects to qualify for more tax credits, then submitted fraudulent invoices and doctored documents to cities. For instance, it cited a bill to the city of Glendale for $2.47 million for "framing" even though a subcontractor agreed to provide the service for $1.2 million.
It also found that the $80 million transferred to personal accounts was apparently not reported as income.
And it said the company may have made "improper gifts to public officials," who were not identified; extorted employees and subcontractors; and illegally reimbursed employees for political contributions.
ADI has made thousands of dollars in campaign contributions in Los Angeles. Employees of ADI have contributed at least $14,000 to candidates for office since 1999, including $3,500 to Mayor Antonio Villaraigosa, according to Ethics Commission records.