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Middletown wants state attorney general to probe 'missing' $1.1 million, shredded documents

By Dan Miller

danmiller@pressandjournal.com

717-944-4628
Posted 1/7/19

A forensic audit announced in June rocked Middletown with revelations of $1.1 million in “missing” money and allegations of 11th hour document shredding by borough officials before they …

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Middletown wants state attorney general to probe 'missing' $1.1 million, shredded documents

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A forensic audit presented in June rocked Middletown with revelations of $1.1 million in “missing” money and allegations of 11th hour document shredding by borough officials before they left their positions at the end of 2015.

Now, six months later, borough council is requesting an investigation by the state Attorney General’s office.

Also, an examination of checks through the borough’s bank from 2015 and 2016 didn’t turn up anything “of significance” borough manager Ken Klinepeter told the Press & Journal last week. Looking at the checks related to the former borough authority from that time period was recommended in the audit as a way to get to the bottom of where the money ended up.

‘Suspected improper use’

Council at the end of its Jan. 2 meeting voted 7-0 to send a letter signed by President Angela Lloyd to the attorney general’s office. It requests an investigation into “the suspected improper use or misallocation of public funds” that the former council and/or former borough authority received following approval of the 50-year lease of Middletown’s water and sewer systems in September 2014 to Middletown Water Joint Venture.

The item was not on the agenda of the Jan. 2 meeting, but followed an executive session during which council discussed the matter behind closed doors.

Before going into executive session, Lloyd announced the session was being held to discuss matters involving “personnel and litigation.”

The request for an investigation is based on findings of a forensic audit presented to council during its June 19 meeting by RKL LLP of Lancaster.

Council hired the firm in October 2016 — 10 months after newly elected Councilor Diana McGlone proposed having a “special” audit done to examine borough finances from Dec. 30, 2014 through Dec. 31, 2015.

Former longtime Mayor Robert Reid also publicly called for a forensic audit in December 2015, just weeks after being elected to council in November 2015.

‘Last-minute’ meeting

The borough’s four-page letter requesting the investigation — addressed to Chief Deputy Attorney General Brian Zarallo with the office’s Public Corruption Unit — cites much of the detail first made known through the RKL report regarding a $1.3 million check made out to the former authority on Dec. 30, 2015.

Council approved payment of the check to the authority during what the letter to the AG characterizes as a “last-minute special meeting” council held, also Dec. 30, 2015, to ratify in one vote all expenditures the borough incurred for 2015.

The letter to the AG also notes that the Dec. 30 meeting was called by a council of which a majority of members, including President Chris McNamara, would be leaving office as of Dec. 31, 2015, due to either not being re-elected or not seeking re-election.

Former officials respond

John Patten, who chaired the former authority from February 2013 until when the authority was dissolved in 2016, said that council, not the authority, would have been responsible for financial issues concerning proceeds from the lease.

“The authority was the entity being leased to generate funds that council would decide what to do with,” Patten told the Press & Journal. “Once the lease decision was made, the authority really ceased to exist. We weren’t further involved.”

McNamara in a text message responding to a request for comment from the Press & Journal suggested it is unclear exactly what the present council is asking the AG’s office to investigate.

“What does suspected improper use or misallocation of funds mean?” McNamara asked in the text message.

Money breakdown

The lease with the joint venture — which includes Suez, the private company that operates Middletown’s water and sewer systems under terms of the lease — resulted in a $43.2 million lump sum payment to the borough.

As also detailed in the RKL report, most of that $43.2 million went to pay off borough debt.

After paying off debt and covering the fees of those who provided advice to council and the authority regarding the lease, enough money was left over from lease proceeds to cover paying $4.2 million to the borough, $6.7 million to the authority, and another $761,331 to the authority for a “rainy day” fund, according to the RKL report.

The RKL report does not pinpoint the source of the $1.3 million check to the authority that council approved Dec. 30, 2015. But the present council’s letter to the AG identifies the $1.3 million as proceeds from the $43.2 million lease deal.

The letter also notes the $1.3 million check being made out to the authority, despite the authority having committed to dissolving itself when the authority approved the lease in 2014.

Instead of dissolving when the 50-year lease went into effect on Jan. 1, 2015, the authority still was around and on Jan. 4, 2016, cut a $241,062.67 check to Stevens & Lee, a law firm the authority hired to resist efforts by council to dissolve the body.

RKL determined the $241,062.67 came from the $1.3 million council approved as payment to the authority at the Dec. 30 meeting.

Bank not a help

The rest of the $1.3 million remains unaccounted for, according to the council, resulting in the “missing” label being applied to the $1.1 million following release of the RKL report in June.

At that time, then-Council President Damon Suglia and Councilor Michael Woodworth both called for the borough to request from its bank information regarding all checks that were processed out of the $1.3 million payment to the authority.

The borough of Middletown spoke to its bank to try and find out what happened to the $1.1 million in “missing” money paid to the former borough authority, according to Klinepeter’s email to the Press & Journal.

Shortly after the June 19 council meeting, borough staff visited the M&T Bank office in Middletown and requested copies of all checks written by the former authority from June 2015 through June 2016, covering the time period until the authority was dissolved, Klinepeter said.

The borough received the information in October.

According to Klinepeter’s email, the information from the bank added nothing “of significance” regarding the $1.3 million paid to the former authority, beyond what the borough knew from the forensic audit.

Conflict of interest?

The RKL report alleges the $1.3 million payment council approved to the authority “may be a conflict of interest,” as despite the approved lease calling for dissolving the authority, several members of council were also members of the authority — including McNamara.

“In authorizing this payment to the authority, which funded a legal retainer for the authority, the borough was essentially funding the legal defense against its own motion” to dissolve the authority, RKL says. “It is difficult to ascertain if these council members were acting in the best interest of the borough when authorizing this payment.”

$940,000 to law firm

The Jan. 2 letter from council to the AG further notes that the authority paid Stevens & Lee more than $940,000 in 2016.

Stevens & Lee filed a lawsuit on behalf of the authority against council in March 2016 as a further attempt to block the dissolution the authority had agreed to in September 2014.

The suit was dropped just six months later.

“The borough council is without any documentation that could substantiate such enormous fees (almost $1 million) for a suit that ended on a motion to dismiss before discovery or a trial,” council says in the Jan. 2 letter.

Council also requests the AG look into how the $1.3 million check to the authority was processed. As noted in the letter to the AG and as detailed in the RKL report, the check was not generated by borough employees whose job it would have been to do so.

“To date, it is unknown who accessed the check generating system or whether the check was, in fact, generated by an authorized issuer,” council says in its letter to the attorney general.

Shredding questions

Finally, the letter requests the AG’s office investigate allegations that documents related to the $1.3 million payment to the authority were shredded, according to the RKL report.

The report does not identify who did the shredding or what was shredded.

However, several key members of borough staff — all hired by the McNamara-led council — resigned abruptly in December 2015, after the elections made it clear that the McNamara majority would no longer be in power come Jan. 1, 2016.

“Current borough staff, most of whom began employment after the former borough council was not re-elected in 2015, have attempted to locate documents pertaining to the actions of the authority and the former borough council,” the Jan. 2 letter to the AG states. “Specifically, staff has attempted to find any documents associated with the former borough council’s Dec. 30, 2015 action to approve the $1.3 million allocation of funds from the general fund to the authority or the overall list of expenditures that the outgoing borough council ratified on that date. No such documentation has ever been located.”

“The current borough council notes that many governmental records associated with the former borough council and the authority are missing, including all minutes of authority meetings,” council adds in the Jan. 2 letter.