Fraud added to litigation claims against former contractor
Posted May 7, 2010
Sewer District asserts KMM&K acted fraudulently through bribery scheme involving former General Counsel
Cleveland | May 7, 2010 - Yesterday, the Northeast Ohio Regional Sewer District fought once again for its customers by asserting KMM&K, a former contractor in litigation with the Sewer District, acted fraudulently in obtaining legal settlements through a bribery scheme involving the District's former General Counsel.
The Sewer District asked the court for permission to amend its counterclaim and third-party complaint to include new claims against KMM&K specifically related to the bribery scheme involving Mill Creek Tunnel Projects, MCT-2 and MCT-3. The Sewer District is seeking to recover from KMM&K, approximately $25 million in overcharges on change orders, credits, and the cost to complete unfinished work on the project. In addition, the Sewer District hopes to recover about $7.5 million by asking the court to set aside four legal settlements paid to KMM&K that the Sewer District is saying were procured by fraud through the illegal actions of its former General Counsel.
"In light of the recent charges against former General Counsel William Schatz, it is apparent that KMM&K acted, in our opinion, fraudulently in its contractual dealings with the Sewer District and its customers," said Executive Director Julius Ciaccia. "In the end, our customers footed the bill. That's unacceptable and the Sewer District and its staff are doing everything possible to assure a wrong is made right."
Charges against former General Counsel
On April 21, 2010, Federal investigators charged Mr. Schatz with bribery, embezzlement and tax evasion. The bribery charges stemmed from transactions between Mr. Schatz and a contractor identified as "Contractor No. 1" in the charging documents, which can only refer to KMM&K, a joint venture made up of Kassouf Co., Mole Contractors, Murray Hill and Kenny Construction Co. The charges against Mr. Schatz are related to a bribery scheme in which Mr. Schatz was paid $682,130 by KMM&K with the intent to influence Mr. Schatz's advice and counsel to the Board of Trustees involving the payment of disputed claims arising from the Mill Creek Tunnel Projects through legal settlements. A third party acted as the go-between by invoicing KMM&K for services that were not performed and funneling monies back to Mr. Schatz as fictitious legal fees.
Mill Creek Tunnel project suspended, audited
After work began on the Mill Creek Tunnel Project (MCT‑3) in 2004, methane gas began leaking into the tunnel. The Sewer District ordered work on the project suspended for seven and a half months while mitigation of the gas took place. The Sewer District Board granted KMM&K monthly allowance payments while the project was on hold, with a requirement that an audit be conducted to reconcile KMM&K bills with their actual costs. Any over-payments discovered in that audit would be returned to the Sewer District.
When preliminary audits were reviewed, the new Sewer District administration and staff raised significant questions about the propriety of certain costs and the amount of certain expenditures for labor and electricity. The District withheld further payments under the provisions of the contract. KMM&K took exception tohe District's position and filed a law suit in December of 2007. In response, the Sewer District retained attorneys Barry Miller and Theologos Verginis of the Benesch law firm and filed a counterclaim and third-party complaint against KMM&K.
Construction progress on the MCT-3 contract came to a virtual standstill. On September 19, 2008, the Sewer District terminated KMM&K's contract. The Sewer District then repackaged the remaining part of the job and entered into a new contract with the lowest bidder through the competitive bid process. That work is ongoing and is scheduled to be completed next year.
"It's telling that KMM&K refused to work within the bounds of their contract," said Ciaccia. "They were willing to take the monthly allowance, probably assuming their charges wouldn't be challenged, and not abide by the audit¿s findings which has since been bolstered by a detailed forensic audit performed by PriceWaterhouse Coopers. They were wrong and we continue to seek recovery of our customers' money."
Regaining trust, improving efficiency
In an effort to regain public trust, the fraud assertion is one of many sweeping actions the Sewer District has implemented over the past three-and-a-half years. Other actions include:
- Revamped the bidding process to ensure fair business practices
- Instituted a District-wide ethics policy for employees to promote organizational integrity
- Instituted Program Management to better manage construction projects
- Presented monthly construction progress reports to the Board
- Revamped our change-order policy to achieve more efficiency
- Revised the Bylaws for the Board of Trustees to promote transparency and accountability
- Increased the staffing of our internal audit group
"It should be noted, too, that even though there were systematic flaws to managing contracts, the accomplishments of the Sewer District staff can not be overstated," said Ciaccia. "In 38 years, we've been able to stop nearly five billion gallons of raw sewage from entering the environment. We've made major improvements to the sewer and plant infrastructure, and we've become leaders in the wastewater industry winning performance awards year after year. As a result, the Cuyahoga River is healthier and the lake is no longer dead."
"It is no longer 'business as usual.'"
In order to build on the foundational achievements while carefully guarding customers' money, the Sewer District is prepared take further action, including aggressively pursuing three major civil lawsuits involving the recovery of millions of dollars. Additionally, the Sewer District will hire a firm to review and investigate all legal settlements submitted to the Board by Mr. Schatz during his tenure with the District. Plus, the firm will review all construction contracts where change orders approved by our engineering staff exceeded 10% in the aggregate of the contract amount. This will culminate in a report and may result in further legal action. Lastly, the Sewer District will consider bringing in additional outside resources to update a previous performance report issued by the firm of Calfee Halter & Griswold, LLP and/or conduct a performance audit by the State of Ohio Auditor.
"It's no longer 'business as usual' at the Sewer District," said Ciaccia. "Contractors are well aware of this fact and we are receiving more bids than ever which is good news for our customers. With these changes, we are confident that our customers will trust us once again to protect public health and the environment while protecting their monetary investment in Greater Cleveland."
For additional information, please contact Public Information Specialist Jean Chapman at 216-881-6600 ext. 6853.
