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HOME: GIDEON:  Affidavit of Catherine Austin Fitts

 

 

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

 

 

THE HAMILTON SECURITIES GROUP,              )

INC. and HAMILTON SECURITIES                       )

ADVISORY SERVICES, INC.,                                  )

                                                                         )

                                     Plaintiffs,                     )

                                                                         )

v.                                                                     )           No. 1:99-CV-1698 (LFO)

                                                                         )

ERVIN AND ASSOCIATES,                         )

INCORPORATED and JOHN H. ERVIN,              )

                                                                         )

                                     Defendants.                 )

 

 

DECLARATION OF CATHERINE AUSTIN FITTS

 

 

I, Catherine Austin Fitts, hereby declare under penalty of perjury, pursuant to 28 U.S.C. 1746, that the following is true and correct:

1.       This declaration is made in support of Plaintiff’s Opposition to Defendant’s Motion to Dismiss, or in the Alternative, for Summary Judgment.

2.       I am the founder and President of Hamilton Securities Group, Inc. and Hamilton Securities Advisory Services, Inc.

3.       I am an investment banker.  I received my MBA from the Wharton School.  I served as an investment banker on Wall Street, becoming a managing director, equity partner and member of the Board of Directors of Dillon Read & Company Inc.  In 1989, I became the Assistant Secretary of Housing-Federal Housing Commissioner in the Bush Administration.  In that capacity, I was responsible for the oversight of the $320 billion Federal Housing Adminis­tration portfolio of mortgages and mortgage guarantees, including the clean-up of the HUD scandal and regulatory responsibilities with respect to the Resolution Trust Corporation regard­ing clean up of the S&L scandal.  My résumé is attached as Tab 1.

4.       During my service in the Administration, I was successful in helping HUD and the Office of Management and Budget -- with the help and advice of GAO -- design and imple­ment legislative and administrative reforms to substantially improve internal financial controls and performance at both HUD and throughout the federal credit programs of the U.S. govern­ment.

5.       Reforms achieved during my tenure included:  the introduction of accrual ac­counting statements to supplement cash accounting and reporting; the introduction of indepen­dent audited financial statements and actuarial reports; the creation of offices of the Chief Financial Officer and Comptroller at HUD and FHA (a practice later adopted government-wide) and the transfer of all FHA accounting operations to the control and management of the FHA; the creation of a budgetary requirement mandating appropriations for expected losses on new mortgage insurance originations (“Credit Reform”) that was designed to improve the chances that backdoor losses could not occur by instituting a concept in government like the loan loss reserves used by the private insurance industry; networking all FHA/HUD employees on a LAN network with PCs, making possible the rapid circulation and sharing internally of place-based financial statements and other information that provided continuous and timely feedback on financial performance throughout the field and headquarters management; sub­stantial increases in investment in and contracting resources to support the development and maintenance of the information and accounting systems necessary to ensure proper manage­ment of resources; the first independent actuarial study of FHA and resulting changes in pre­miums and terms and conditions of FHA mortgage insurance to ensure that FHA/HUD was run on an actuarially sound basis; increased public disclosure regarding FHA and FHA/HUD’s financial performance; implementation of place-based financial accounting internally so finan­cial performance could be assessed on a geographic basis.

6.       I left the Administration in August of 1990.  In 1991 was approached to serve as a Governor of the Federal Reserve Bank by Secretary Treasury Nicholas F. Brady and White House Chief of Staff John Sununu.  I declined as I had started Hamilton, financing the com­pany with my 401K plan and the proceeds from selling my house in Washington.

7.       Based on the financial fraud and patronage that I had observed at HUD, I was convinced that re-engineering government would require greater local accountability for both revenues raised and expenditures made.  Re-engineering government would require that com­munities re-engineer government investment on a per person basis within their community, and could not be done from Washington.  New computer and telecommunications technology would make it possible for private entrepreneurs to finance community small-business net­works and organizations privately, as well as provide the software and database tools that would facilitate re-engineering both government and private investment.  One of our first goals in starting Hamilton was to build the database and software tool operation that we needed to understand “how the money worked” in 63,000 communities in America.

8.       Hamilton and I took on several assignments that helped us understand even more about the magnitude of financial fraud that America was experiencing.  I helped several of my former partners try to turn around an S&L that had suffered substantial fraud in the 1980s.  I served as a trustee on the board of First American in support of the court-appointed trustee in charge of liquidating the American assets of BCCI.  The fraud that had devastated those assets was substantial.  These experiences affirmed my commitment to find ways to use new technol­ogy to increase local access to place based financial disclosure required to support improved local responsibility for stewardship of both public and private resources.

9.       In 1993, I caused Hamilton to bid on a competitive contract issued by HUD.  The contract was awarded to us through an open competitive process in the fall of 1993.  Competi­tion was light because much of the financial advisory industry had little or no interest in work­ing with HUD.

10.   Our first assignment for HUD was to prepare an analysis regarding the manage­ment of HUD’s large and growing inventory of defaulted mortgages.  Both the S&L industry -- through the RTC -- and the banks and insurance companies had sold off or resolved their large inventories of defaulted mortgages and foreclosed properties.  HUD had not, and for this rea­son had an inventory of approximately $12 billion of single-family and multi-family mortgages.

11.   HUD’s unresolved inventory of defaulted loans caused several problems, in­cluding, but not limited to, the following:

·                      HUD was losing 65¢ on the dollar for every defaulted mortgage.  The losses were far greater than private industry standard.

 

·                      Tenants were experiencing problems where buildings were not properly maintained by the defaulted borrowers.  These defaults often led to poor management and maintenance that would go unresolved because HUD would not service the situation aggressively.

 

·                      HUD’s loss rate meant their “recovery rate” of 35% was very low.  The recov­ery rate is one of the chief actuarial assumptions used to value the current mortgage insurance portfolio as well as determine the cost of issuing new mortgage insurance.  Under then-new rules for issuing new insurance, this also meant that the cost of issuing new insurance would require substantial up front appropriations to fund the loan loss reserves, or require a cutback in origination volume unless substantial improvement could be made in the recovery rate.  In other words, Congressional appropriators would have to come up with higher appropriations to authorize the issuance of a given amount of new HUD mortgage insurance.

 

·                      HUD servicing personnel were overwhelmed by the volume of loans in many field offices.  Their time was increasingly spent on crisis management and workouts on the defaulted portfolios, and they had insufficient time to attend to their primary responsibility, servicing of the outstanding mortgage insurance-in-force portfolio.

 

·                      The mortgage portfolio had been listed as a significant material weakness by GAO, had been highlighted as a problem by the FHA’s independent auditor and had been the subject of criticism by the HUD Inspector General, who had been critical of the fact that HUD had not followed the RTC’s example by developing a loan sales program.

 

12.   The growing defaulted inventory did advantage some parties.  Servicing con­tracts to outside contract servicers like Ervin & Associates increased.  Numerous private inves­tors and real estate companies were able to default on their mortgages without losing their property and were often able to negotiate workouts at much more attractive -- even lucrative -- terms than would have been possible with proper loan servicing.

13.   Hamilton’s first assignment for HUD was to determine the reasonable servicing options for HUD to manage or dispose of its mortgage portfolio.  Based on a review of all avail­able options, Hamilton recommended and HUD decided to move forward with a loan sales pro­gram, and HUD asked us to design and assist them in implementing it.

14.   The HUD loan sales program resulted in the disposition of approximately $10 billion of HUD mortgages prior to in the program’s termination in November 1997.  The loan sales raised the recovery rate on defaulted mortgages from 35% to 70-90%, and in so doing gen­erated an improvement in recoveries by $2.2 billion for HUD, funds that were used to fund ongoing programs and reduce the federal deficit.  This performance has been affirmed by GAO audit.

15.   This improved recovery rate was also used by HUD to lower the cost and in­crease the volumes of new originations of mortgage insurance and to recalculate an increased value for the surplus capital in the single-family FHA Mutual Mortgage Insurance Fund.

16.   In addition, the GAO and auditor-designated material weakness was removed in a manner that brought substantial accolades to HUD for its performance.  HUD had been listed as a high-risk agency by GAO, and the loan sales program was one step the agency was taking to ensure that it was removed.  This effort ended when the loan sales and re-engineering efforts were terminated in late 1997.  GAO has since reaffirmed HUD’s high-risk status.

17.   The loan sales success was attributed to a small but very committed group of HUD staff with support around HUD headquarters and the field offices, combined with a series of innovations designed by Hamilton.

18.   Innovations brought to the loan sales process included the following:

·                      The loan sales were designed and implemented pursuant to a “Design Book” that reflects the techniques used to design and quality control complex soft­ware developments.  Before HUD did its major loan sales, Hamilton facili­tated a process whereby all HUD staff who were members of the loan sale team -- both in headquarters in the field -- simulated what steps they would take and how they would do it in writing and circulated that document to all impacted parties for comment.  This meant a much longer planning process initially, but worked out the “kinks” of doing these large and visible transac­tions in a large public agency that managed a fair amount of stress from spe­cial interests.  It also enabled HUD to communicate with numerous parties such as OMB, GAO and Congressional staff about the various trade-offs in the design process before sales were done and maintained a record of why HUD had decided to go the route it went.  Finally, the design books facili­tated the design being reviewed by numerous industry experts before the sale was undertaken.  The design books brought about tremendous coopera­tion within HUD, the HUD field system and various impacted parties.  The design book was owned by HUD, and was designed to enable HUD to use it to hire and train additional financial advisors and contractors, thus insuring that the agency was not dependent on Hamilton or any other outside party, and that the technology could be available to the public and used by other agencies throughout the government, ensuring the best return on investment for the taxpayers.  The design books were updated with “lessons learned” after each loan sale and were posted on the HUD Website for HUD by Hamilton as part of Hamilton’s contract.

 

·                      The loan sales were marketed with very high quality data disclosed about HUD, about HUD’s programs, and easily accessible predigested data about the HUD loan sales and the loans themselves -- much of which was available in digital form on line through the Worldwide Web and financial markets systems like Bloomberg.  This made if very affordable for a wide range of real estate, mortgage and securities investors to participate in a HUD program for the first time.  Like the design books, this increased public access for non-traditional and smaller buyers.  To achieve this standard of disclosure, firms with substantial private industry and RTC disclosure and servicing experi­ence were used.

 

·                      AT&T Bell Labs/Lucent Optimization Technology:  Many of the sales were conducted as auctions in which large, medium and small bidders were allowed to bid for their preferred combination of mortgages as opposed to the financial advisor stratifying the portfolio into pools that favored one segment of the market over the other.  The latter method was the only one in use in the mortgage sale markets, including at RTC, at that time.  This new method was made possible by a software model which allowed a calculation of the total combination of bids that would produce the largest total proceeds for HUD.  The result was a much broader market for the loans than is typic­ally the case for auctions of this type.  This led to much more competition and contributed to much higher prices for HUD than had been achieved by the RTC.  Like the design books and the disclosure innovations, this increased public access for the non-traditional and smaller bidders without the govern­ment being forced to conduct non-competitive sales, which would have lowered proceeds substantially.

 

·                      Program Marketing:  The loan sales were marketed well in advance of when the sealed bid auctions were conducted so that bidders had plenty of time to anticipate the opportunity and prepare for it, whether by learning about the HUD portfolio, forming bidding groups or raising the necessary capital.  The sales were spaced and timed to make it attractive for all areas in the market to pay attention and participate over a multi-year period.  Like the other innovations, this increased public access for the non-traditional and smaller bidders in a competitive forum.

 

19.   When the financial performance of the early sales far surpassed HUD and indus­try expectations, HUD’s loan sale program achieved substantial accolades.  A Barron’s article on the first large HUD loan sale headlined “At last, HUD Does Something Right”.  A copy of the Barron’s article is attached at Tab 2.  The HUD loan sale program was considered a resounding success in both re-engineering circles and in the financial markets.  A copy of the FHA Perfor­mance Report is attached as Tab 3.  Tab 4 is a sampling of articles in major business publications about the success of the loan sales program.

20.   Because of HUD’s willingness to use design books and to work on-line, 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, according to an anal­ysis done by the Office of Management and Budget.

21.   The loan sales were not advantageous for all parties impacted.  As HUD’s loan portfolios decreased in size, Ervin & Associates’ servicing business diminished.  In addition, large HUD property owners and managers were forced to either buy their loan or to work with market based servicing.  Simply going for years not paying their debt service or getting below market workouts was no longer possible.  One of the largest HUD owners and managers  was particularly aggressive in its complaints.  Its net income was dependent on above-market management fees from HUD properties it owned and controlled through affiliate financed tax shelters.  As other companies won their defaulted loans in the HUD loan sales, that company faced renegotiated management fees or losing the business altogether to companies that were more competitive in the marketplace.  Consequently, the loan sales and all the steps that HUD was taking to re-engineer its programs to more open competitive standards were of concern to its large investors who had made it clear that they wanted to achieve short-term capital gains.  As a result, the loan sales program was affecting the value of large institutional investors’ stock and the stock options of senior management.

22.   The first large HUD loan sale was the Southeast Loan Sale.  This sale was of al­most a billion dollars in outstanding principal balance of multi-family mortgages collateralized by properties in the Southeast area.  The sale occurred in the Spring of 1995.

23.   Coopers & Lybrand was hired to do the most complex aspects of designing and preparing the due diligence packages, but we had anticipated that HUD would hire experi­enced due diligence contractors with RTC experience to complete about half of the due dili­gence tasks.

24.   Judy May, the HUD GTR on our contract at that time, asked me to attend a meet­ing with John Ervin that he had requested for the purpose of discussing the Southeast sale.  Ervin & Associates was the servicer on approximately a third to a half of the loans in the sale -- the ones that were part of the “coinsurance portfolio”, a portfolio which he serviced for the department.  At the meeting, which I attended with Rick Samson from Coopers & Lybrand, John Ervin proposed that Ervin should be hired to prepare the due diligence packages.  To my surprise, Judy May accepted and told Ervin that he would be doing the due diligence work.  I reported the development to Helen Dunlap, the HUD official in charge of the day-to-day oper­ations of the loan sales program. My understanding from Helen was that this was reported to Nic Retsinas, the Assistant Secretary of Housing in charge of the loan sale program, and was one of the considerations in determining that Ervin should not be used in connection with the loan sale program.

25.   Before the Southeast sale was finished, I started to hear complaints from HUD staff and others about Ervin and his activities.  We heard reports that he was trying to market “insider information” to get hired by large loan sale bidders.  (Ervin acknowledged that fact recently in a document filed in opposition to Hamilton’s motion to dismiss the qui tam com­plaint.)  This was a particular concern at HUD as Ervin had contracts on servicing as well as col­lecting private financial statements.  A number of HUD officials were concerned that he might be sharing too much information with potential bidders.

26.   My impression at the time was that Ervin’s reputation with the HUD staff was deteriorating steadily as the group at HUD accessed more and more very high quality people and contractors, and Ervin’s business diminished.  In 1994-1995, I believe, The Kerry Company was hired to lead the multi-family SWAT effort for HUD, indicating to me that Ervin was no longer a preferred servicing contractor.

27.   While I have been told that Ervin was a subcontractor on some of the financial advisory bids, Ervin & Associates was not then or ever a financial advisor to HUD as far as I know.  Ervin & Associates was an asset management and servicing firm – with contracts to ser­vice portfolios, collect on debt, do workouts and collect financial statements -- with no expertise that I know of or ever saw in the capital markets, no meaningful securities or broker dealer experience or licenses and no experience in portfolio strategy and the financial re-engineering of portfolios or securities.  Consequently, they were not qualified to perform for financial advisory or large financial re-engineering assignments at government agencies or in the private market.

28.   William “Bill” Richbourg replaced Judy May as GTR on Hamilton’s contract, but was replaced later by other personnel.

29.   Ms. Dunlap subsequently told me that as a result of his failure to disclose a prior relationship with John Ervin, Mr. Richbourg was removed from the Contract Selection Board.

30.   During this period in 1995, John Ervin was filing contracting bid protests, in­cluding protests of the award of contracts to Hamilton,  and papering the agency with FOIA re­quests, some of which concerned Hamilton.  These actions caused significant operational prob­lems at HUD because of the time and effort involved in refuting accusations yet according him fair treatment.  For Hamilton, it meant that HUD employees, in their relationships with the loan sales activities and with Hamilton, were fearful and exceedingly cautious, slowing down the pace of the loan sales and making the work harder and more expensive for us.

31.   During this period, I met with John Ervin at my office to offer him an opportun­ity to communicate any problems he had with Hamilton to me.  The meeting appeared to be very cordial.  He expressed no concerns, but later provided descriptions of that meeting which are simply fiction.  During this period, I received comments from a number of members of industry associations about Ervin’s lobbying against the loan sales in Congress and with other industry members.

32.   Hamilton was awarded one of four new advisory contracts in January 1996.  We had strongly encouraged HUD to hire multiple financial advisors in a manner that could reduce the time we spent working with HUD and they could build a stable of advisors without being dependant on any one.  My understanding immediately subsequent to the award of the con­tracts from Assistant Secretary of Housing Nic Retsinas, the official in charge of the FHA, including the loan sales and all of our work, was that he had been ordered by White House staff to not award a contract to Hamilton.  He explained that he had chosen to ignore that order.

33.   Subsequent to the award of the contracts, Ervin filed additional bid protests and it appeared that his lobbying efforts increased as he failed to win more HUD contracts, even in joint venture with larger groups.

34.   We at Hamilton heard about Ervin’s “Bivens” lawsuit soon after it was filed in June 1996, shortly after the sale of loans on apartment buildings with partial Section 8 subsidies which had received a lot of attention by industry special interests that wanted to stop the sale.  The favorable return on this sale underscored in a very visible way for the industry how much better a performance HUD could get for its subsidized portfolio than it was getting currently by those lobbying against the program.

35.   The largest defaulted borrower represented in the partially-assisted “Section 8” portfolio sold was a major HUD real estate company.  According to their chairman, they were under very strong pressure to produce capital gains on their stock price for their lead institu­tional investors.  The partially-assisted sale represented a potential lose in fees significant for their stock price, and indicated that they could be at risk of losing substantially more of their portfolio if HUD were to proceed to use open disclosure and competitive processes in the future for reallocating HUD subsidies when the real estate company’s current contracts were up.

36.   We had prepared HUD for the possibility that industry opposition to the “partially-assisted” loan sale might result in a last minute TRO filing, particularly from that large real estate company or a related party.  I remember being surprised that the sale pro­ceeded without incident.  It didn’t go without incident, of course -- we just didn’t know that Ervin had filed a False Claims Act suit against Hamilton, making similar charges to those made in the public Bivens action against HUD and Helen Dunlap, but specifically targeting Goldman Sachs---the bidder who had won the partially-assisted sale (and in so doing, dramatically proved its ability to outperform the real estate company on any subsequent loan sales or re-engineering that applied to loan sales).

37.   Hamilton employees were instructed not to discuss the Bivens suit with HUD staff, further burdening the working relationship and increasing the cost and stress of the get­ting the work done.  Hamilton then started receiving contacts from reporters who had been given information about Hamilton that was patently untrue.  We spent a substantial amount of effort and money attempting to refute the untrue accusations, protect our client, HUD, from the untruths, and continue our excellent performance on our HUD contracts.  The worst accusations had to do with Ervin’s allegation about a “new girls’ network” that we soon discovered was a euphemism suggesting that I was a lesbian and was having a lesbian relationship with Helen Dunlap, the day-to-day head of the loan sales.  I am not a lesbian and had no such relationship with Helen Dunlap.  This is the type of pure fiction invented and spread by Mr. Ervin for profit and business advantage.

38.   HUD, too, was dealing with the additional work and frustration generated by the untrue allegations.  Reporters and politicians peppered the agency with questions.  In the at­tached letter from the HUD Assistant Secretary to Senator Larch Faircloth, HUD responded to the “baseless allegations of a disgruntled contractor”.  See Tab 5.

39.   In June or July of 1996, I knew things were serious when a housing industry insider informed me that “the big boys have gotten together and you are going to jail”.  The implication was that members of the traditional housing industry had put together an effort to frame Hamilton and me.  Because of the care with which we had approached the internal man­agement at Hamilton and the management of the loan sales, I told the person that it was not possible; that Hamilton, the loan sales, and I were too ethical and vetted; that nothing could be found that was wrong and that I believed that it was impossible to falsify anything that would stick.

40.   In August of 1996, we received our first of a number of subpoenae from the Office of Inspector General at HUD.  We were shocked, since the Denver field office of HUD was then just concluding a favorable audit of the loan sales program -- they shared their con­clusions with us -- and since the OIG’s office had played an active role in designing the loan sale program.

41.   At around the same time, a team of reporters from US News & World Report started researching a story that, we gathered, was intended to disparage HUD Secretary Henry Cisneros before the upcoming 1996 election.  The Report is attached hereto at Tab 6.  Reporters assured us that they had information “from the highest levels” of the OIG that Hamilton was guilty of criminal wrongdoing.  I was told I would go to jail.  We spent approximately $350,000 in time on lawyers and for public relations consultants to assist us with the untrue impressions US News & World Report had been given about the loan sales.  All told, we estimate that Hamilton or I have spent over $2 million dealing with the investigations, press and various other incidents triggered and/or promoted by Ervin.

42.   Over a period of months at around this time we decided that effecting change and reform from within the government in the face of this level of opposition from well-financed special interest groups was not enjoyable or profitable anymore.  The problem was how to bow out gracefully of working with HUD and to transition into the private marketplace, where Hamilton’s expertise would be a prized commodity.

43.   During the time of our HUD contracts, we had been forced to cut back on, and eventually abandon, our work for other clients and from seeking work from private clients or beginning our investment and trading operation.  Every time we discussed new business with a potential partner, rumors would start, suggesting that there was a conflict of interest due to our relationship with HUD.  At the time, we had no way of knowing how much Ervin was doing to propagate those rumors.

44.   On October 17, 1997, we received two letters from our contracting officer at HUD.  The first letter cancelled our main HUD contract.  The second demanded a payment of $3.8 million in payment for purported “losses” to HUD resulting from a 0.4% optimization dis­crepancy in two loan sales (that Hamilton had reported to the FHA Commissioner and FHA Comptroller, who reported it to HUD’s General Counsel, soon after it was discovered almost a year before).  The letter claimed that the contracting office had just learned of the error.

45.   There followed a number of articles in The Washington Times, reporting inaccu­rate details about the cancellation of the Hamilton contract.  Some of the articles contained quotes from Ervin.  The Washington Post and the Wall Street Journal, among other publications, also carried stories.

46.   Then, as we laid-off almost all of the employees who had worked on the HUD contract, without any severance, we read that Secretary Cuomo was “postponing” the loan sales program, using as an excuse the cancellation of Hamilton’s contract.  Given our design of the loan sale program, with design books and multiple contractors, there was no operational reason for sales not to continue.  Within a month of the cancellation of our contract, the two other primary supporters of and contractors for the HUD program to sell defaulted Section 8 assisted loans in a novel trust structure, Ernst & Young and Holland & Knight, had both become embroiled in what I regarded to be cooked-up scandals provided to the press by the Secretary’s Office.

47.   We also heard from several HUD employees in December 1996 that Ervin sent a “Christmas message” to many of the senior HUD officials involved in the loan sales program explaining why he felt compelled to file his lawsuit against Helen Dunlap and others.  I do not recall if the message mentioned Hamilton by name, but it would be clear to anyone familiar with the program that Ervin’s accusations of corruption and favoritism smeared Hamilton, as the lead financial advisor.

48.   Not long after the HUD contract was cancelled, Lorraine Adams, of The Washington Post, began researching a story about our situation for her paper.  During many interviews by Lorraine Adams, I learned a great deal of information that helped me put to­gether the pieces of the story about what on earth was happening.

49.   Lorraine Adams said that the Office of Inspector General had led her to believe that Hamilton was guilty of serious wrongdoing.  I asked her why she was interviewing me.  She said because the OIG leaks like a sieve and if there was any evidence to back-up the charges, she would have heard about it.  She also told me that John Ervin had sent The Washington Post many packages of documents for quite some time attempting to get The Post to cover the story of the insider-trading and corruption allegations involving the loan sales.  She said that she went to Ervin’s offices to interview him and noted that he had many full-time employees who appeared to be devoting 100% of their efforts to pursuing his attacks on HUD and promoting the story of a massive HUD scandal surrounding the loan sales.

50.   Hamilton filed suit in Federal District Court in 1997 in an attempt to obtain a re­straining order against HUD to prevent the withholding of approximately $1.5 million it owed Hamilton.

51.   After the contract cancellation, Hamilton’s remaining employees finalized a pri­vate placement we had been preparing to raise capital for an investment model for raising funds in the capital markets to invest in equity in local communities.  A copy is attached hereto at Tab 7.  We built a sophisticated marketing database and hit the street with a product that should have received favorable attention from those who we had educated about what we were hoping to do.  As a result of the adverse publicity about Hamilton’s troubles with HUD and the criminal investigation for insider trading and bid-rigging, substantial interests had evaporated, and we were unable to raise the funds and abandoned the effort.  A number of our potential investors reported that they believed that the charges against Hamilton were false, but they understandably were not willing to assume the risk that HUD or others promoting the scandal theory and criminal investigation would destroy the new venture.  One stated that they knew that our reputation was quite strong, but “where there is smoke, there is fire … or there might be”.

52.   In the almost five years since the HUD OIG began investigating the allegations, no one has brought out credible evidence suggesting any fraud.  In fact, the FBI investigated the charges of bid rigging and insider trading and concluded, in the summer of 1999, that on the basis of interviews with both winning and losing bidders there was no evidence of loan sale improprieties nor anything to support Ervin’s allegations.  Attached at Tab 8 is a copy of the FBI report.

53.   By the time the Hamilton/HUD Crosscutting Contract was cancelled, Hamilton had borne massive losses as the result of legal and employee expenses related to Hamilton’s compliance with the subpoenae, loss of productive capacity due to adverse effects on employee morale, time and consulting contract expenses in dealing with the news media and others, and significantly increased costs of performing under the HUD contract.  I estimate these expenses to be $2 million for direct, out-of-pocket expenses and $250 million in lost equity value of the company.  Our promising eVillages joint venture with Adelson Entertainment (attached at Tab 9 is a Washington Post story about the project), into which Hamilton had invested over $1 mil­lion, had fallen apart after a mysterious and inexplicable falling out with our partner.  I believe this was a direct result of the adverse publicity about Hamilton.

54.   Our losses following the cancellation of the HUD contract are even more stagger­ing.  I liquidated my 401k savings to fund Hamilton payroll expenses in November, 1997 and lost $250,000 in penalties and interest paid to the IRS.  I had to sell my home, for which I was paid approximately $1.25 million.  I sold most of the contents of my house, valuable paintings, antiques, etc.  I am now in the process of selling the family antiques and paintings.  My two remaining employees in Solari, Inc., the company I started to handle Hamilton legal and admin­istrative matters and carry on a new business along the lines of the new business we were pursuing at Hamilton, have staked all of their assets and thousands of dollars of debt.  They have worked without pay since March 2000.  The house of Solari’s in-house attorney is sched­uled for foreclosure sale on January 3, and she has liquidated her IRA to bring the mortgage current.  I had a beautiful home and a comfortable lifestyle.  Now, there is nothing left and, based on no evidence whatsoever indicating I have committed any wrongdoing, I am threa­tened with going to jail.

55.   Hamilton still operates under a subpoena enforcement court order.  We have to pay for copies of any of our documents held in a special master’s office and cannot access most of our files, stored in some 200 boxes, except on advance notice and with a paid law clerk as a witness.

56.   The losses to taxpayers are even greater.  Since this odyssey started in 1995, GAO has dropped HUD from a “D” to an “F” rating as the result of its failure to produce audited financial statements.  HUD also has lost most of its senior staff and appointees involved with internal financial controls and having loan sales experience.  I believe there is a direct correla­tion between Ervin’s efforts to target those government officials and contractors who were man­aging HUD’s resources in accordance with the law and the subsequent deterioration of HUD’s internal controls and ability to manage its financial affairs combined with the return to low recovery rate operations more in keeping with the interests of numerous private special inter­ests.

 

_____________________________________________

CATHERINE AUSTIN FITTS

DISTRICT OF COLUMBIA     )           ss

 

SWORN TO BEFORE ME this ______ day of _________________________, 2000.

_____________________________________________

Notary Public

My commission expires:___________________________________.

 

 

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