Real Deal: DOJ Refuses Catherine Fitts $2.5Mn Pay

It's been almost six years, and Catherine Austin Fitts [Scoop's Real Deal Columnist] still hasn't been paid. The government owes her $2.5 million plus interest for work done by Hamilton Securities, her former investment bank and financial software developer. The "cleaning lady of $100 billion financial frauds," as she humorously describes herself, is in the seventh year of audits and litigation, all resulting from what she deems a frivolous lawsuit filed by a government-sponsored "bounty hunter." The end game of Fitts' fierce federal adversaries: slow down her ability to impact the market with her transparent, taxpayer-friendly, local control-based economic model -- Solari.

"The Department of Justice and the HUD Inspector General's (IG) office have used investigations to drive out honest HUD officials and their most effective financial advisor," said Fitts. "As DOJ and the HUD IG intentionally destroy internal financial controls, billions of taxpayer's monies are reported missing, and losses on defaulted mortgage inventories grow."

On March 18 United States District Court Judge Louis F. Oberdorfer issued a scheduling order effectively ending mediation between the Department of Justice (DOJ), Ervin and Associates, and Hamilton Securities without settlement, thus initiating the discovery phase with a consolidated trial set for September 2003.

And so despite a six-year investigation by the DOJ and the Department of Housing and Urban Development (HUD) that found no merit to the charges of bid rigging and insider trading alleged by Ervin in his suit, Fitts' legal ordeal continues. In a qui tam case, which is what Ervin filed in summer of 1996, the governing statute provides for a 60-day investigation period.

A qui tam suit is one filed by a private party on behalf of a federal government agency against an outside third party. In Fitts' case, her firm was the lead financial advisor for HUD, and Ervin made the claim that Hamilton's HUD loan sales program was rigged in favor of large Wall Street bidders. No evidence of this has surfaced before or since Ervin's suit was filed.

Loan Sales And The 'Bounty Hunter'

Ostensibly, John Ervin's firm is a HUD Ginnie Mae contractor, performing servicing tasks for the department's mortgage portfolios. It was these very same single family and multi-family portfolios that Fitts, first as Federal Housing Administration (FHA) cCommissioner in the first Bush Administration, then as the head of Hamilton Securities, was intent on reducing -- and so reduced -- costs to the government, to borrowers, and to nearby homeowners whose property values are harmed by HUD foreclosures, boarded up homes, and troubled properties.

Traditionally, HUD would manage these defaulted mortgages so as to recover about 35 cents on the dollar, said Fitts. So she devised a loan sale program that was basically the opposite of HUD's old pork barrel style. And political brass couldn't deny the "fiduciary soundness," as Fitts described it, of her $10 billion of successful loan sales. Fitts and Hamilton were lauded for more than doubling recoveries, making upwards of 70- to 90 cents on the dollar return from loan sales -- a $2.2 billion profit affirmed by a General Accounting Office audit.

Picture Hamilton Securities leading auctions of all kinds of government-owned, defaulted mortgage portfolios to a host of large and small investors -- from Wall Street and state housing finance agencies to local mortgage bankers and property owners. Fitts even utilized the budding Internet at the time (1994) to maximize the loan sales' productivity and level playing field.

"Hamilton used software tools, the Internet and AT&T Bell Labs' optimization methodology to dramatically improve transparency and competition. All the steps on the loan sales were documented with hyper linked "design books" that were accessible on the Web, as were detailed databases on the mortgages for sale and upcoming schedules of loan sales. This shifted the balance of power between Wall Street and HUD insiders on one hand and the FHA Funds and homeowners on the other. From Goldman Sachs to Harvard Endowment, the big guys had to pay a lot more to play," said Fitts.

Fitts' loan sales success was a red flag to those who profited both financially and politically from the department's large defaulted portfolios and fiscally unsound, pork barrel style. HUD insiders would be increasingly impacted if high standards of transparency and competition were maintained -- stock prices and executive bonuses would be lower, and tax liabilities would be higher.

Enter John Ervin, or as Fitts describes him, the DOJ's "bounty hunter." Fitts learned Ervin received a HUD contract generating $30,000 per month when the legal action against her began.

Prior to the loan sales program, Ervin was the lead servicer on defaulted multifamily mortgage portfolios at HUD. As the loan sales reduced the defaulted HUD mortgages, Ervin's servicing work diminished. Unsuccessful in his attempts to interest Wall Street loan sales bidders in his services and unsuccessful is his bidding efforts on the loan sales, Ervin started filing lawsuits and contractor bid protests claiming wrongdoing. He filed over 30 contract bid protests, a lawsuit against HUD and HUD officials, and a qui tam lawsuit under seal in the name of the government charging Fitts and her firm with insider trading connected to the loan sales program.

The Hawkes And Hud: 'Criminal Enterprise'

Ervin's legal team included Dan Hawke, the son of Jerry Hawke, who was the undersecretary of domestic finance at the Department of the Treasury. Jerry Hawke, also a former general counsel of the Federal Reserve, was the Treasury official responsible to oversee the integrity of the federal credit programs (HUD is the largest), as well as the integrity of government accounting and financial systems and reporting. Jerry Hawke is now the comptroller of the currency, the lead U.S. banking regulator. When efforts to frame Fitts and Hamilton failed, Dan Hawke left private practice to join the Securities & Exchange Commission's enforcement division.

Reduced portfolios owned by the government also reduced the opportunities for DOJ and the HUD IG office, working with Ervin as a servicer, to profit from enforcement actions related to HUD's defaulted mortgage portfolio. As the War on Drugs expanded throughout the 1990s, DOJ and the HUD IG's Operation Safe Home focused on generating revenues from civil money penalties, recapture of contractor payments, debt collections and asset seizures. Fitts and Hamilton's efforts were good for the taxpayers and homeowners but bad for the enforcement business.

An audit of the loan sales program performed by HUD IG auditors in 1996 found the allegations against Fitts and Hamilton to be unfounded. But the HUD IG hushed it up, and the lead auditor was ultimately forced to leave government service. Similar findings by FBI investigators in 1999 were also ignored. One effort to falsify evidence by the HUD IG general counsel failed when Fitts produced an affidavit documenting them.

Upper Echelons Apparently Marked Fitts And Hamilton For Destruction

In fact, Fitts' loan sales generated $2.2 billion in profit as a result of selling blocks of HUD's defaulted mortgage portfolio on the open market. Whoever wanted to bid, the opportunity was there, says Fitts. But this success threatened top players in Washington and on Wall Street.

"In the summer of 2000, I went to visit with a senior member of the staff of the chairman of the HUD appropriations subcommittee. The staff member asked me what I thought was going on at HUD. I deferred. They said, 'HUD is being run as a criminal enterprise.' Until that moment, I had resisted facing this, as HUD is run by the Department of Treasury, the Department of Justice and a group of private companies and banks. It was hard to face the fact that this many parties would conspire to run HUD as a criminal enterprise. Subsequently, the appropriations committees voted a $1.7 billion increase in HUD appropriations."

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