L.A. sues over unaccounted-for funds

A Los Angeles city agency was so badly run that it could not account for $70 million in federal funds meant to help poor people get housing and jobs, including money that was steered to a friend of a top executive for bogus work, according to a lawsuit filed by the city.

The civil lawsuit, filed earlier this week in Los Angeles Superior Court against the former director of the Los Angeles Housing Authority and his chief deputy, paints a picture of a department run amok -- without apparent oversight from city leaders.

Among the allegations:

* Lucille Loyce, the former assistant executive director of the Housing Authority, wrongly steered millions of dollars to a longtime friend, Dwayne Williams, for “consulting” on job training and other services at housing projects in South Los Angeles.

* Williams insisted that employees undergo expensive dental work at agency expense, then he and Loyce blackmailed them into keeping quiet about other misconduct.

* Donald Smith, the former executive director of the agency, may have misappropriated $60 million to $70 million in federal funds meant for poor families in the Section 8 rent subsidy program. The lawsuit does not accuse Smith of stealing the money but says that it was “moved into other accounts,” and then some of it “disappeared.” It was later recovered.

“What went on was incredible ... quintessential public corruption is what it is,” said Rudolf Montiel, who became executive director of the agency in 2004 after Smith was forced to resign and Loyce was fired. Their departures occurred before a federal audit last year found millions of dollars steered into no-bid contracts with Loyce’s friend Williams, who is also named in the suit.

Federal officials, however, did not file criminal charges against Smith or Loyce. The U.S. attorney’s office declined to comment.

Montiel said city officials filed the suit to compel Loyce and Smith to “pay back some of the people’s money.” He also said he hoped that through the litigation enough evidence of criminal wrongdoing would be uncovered to prosecute Loyce and Smith. The suit is being handled by private attorneys and paid for with Housing Authority funds.

Smith could not be reached for comment. City officials said they had no way to reach him, as did several housing advocates.

Loyce, who now runs Helping Hands Consulting with Williams, declined to comment. She referred calls to her attorney; they were not returned. Loyce had filed a federal wrongful termination lawsuit against the city, contending that she was fired after she complained about using housing funds to pay for police patrols of the city’s gang-plagued housing projects.

The city’s Housing Authority was formed in 1938 to provide low-cost housing to the poor. It is one of the largest public housing agencies in the nation, with 20,000 people living in 8,000 units. The authority also provides financial assistance to about 100,000 residents through the Section 8 program. The authority has an annual budget of about $810 million, 90% of which comes from the federal Department of Housing and Urban Development.

Loyce was hired in 1992, and Smith came on as executive director in 1994. The lawsuit alleges that the misconduct began soon after. It said that officials spent vast sums inappropriately and violated federal rules with impunity. At least one person told officials he feared for his life, according to the lawsuit.

In 1995, federal officials instituted a policy that allowed residents of the city’s housing projects to form resident management corporations to hire residents to provide cleaning, trash removal, extermination and moving services.

But instead of helping the corporations to spend the money to hire residents, train them and help them better their lives, the lawsuit contends, Loyce channeled it to Williams, either by forcing resident groups to hire him as a consultant or by making the groups pay him off before they could receive funds. The suit accuses Smith of colluding in this.

If a resident group tried to resist paying Williams, the suit alleges, Loyce retaliated. The most astonishing allegation, according to officials, was the charge that Williams and Loyce pushed resident managers to undergo dental work, and then threatened to expose them for embezzlement.

In all, officials estimated that Loyce channeled $2 million to $4 million to Williams from 1995 to 2003.

City officials had a chance nearly a decade ago to catch the fraud but blew it, according to the suit. In 1997, Housing Authority employee Margaret Gardenhire filed a whistle-blower lawsuit against the city, accusing Loyce of retaliating against her for complaining of wrongdoing. A jury awarded Gardenhire $1.3 million in 1999.

Smith’s response, according to the suit: He promoted Loyce.

The lawsuit also accuses Smith of interfering with a federal investigation into Loyce and Williams. And in a separate allegation, it charges him with misappropriating money from the Section 8 program. The suit does not accuse him of stealing it. It says he moved it into other accounts.

In an interview, Montiel, the new executive director, said a 2005 audit showed that much of the money was in dormant subsidiary accounts. The money will now be used to acquire affordable housing, Montiel said.

At least one housing advocate had an explanation for why Smith might have done that.

Jan Breidenbach, an adjunct professor at USC who until last year directed the Southern California Assn. of Nonprofit Housing, speculated that Smith may have moved money around to maximize the amount that went to low-income tenants during a period when the federal government was trying to limit Section 8 payments.

That, she said, “was the right thing to do.” But she added that if he had “done something he shouldn’t have done, which involved moving money and then having it disappear, I don’t want to defend him.”

As for the allegations regarding Loyce and Williams, Elena Popp, who was a lawyer for tenant organizations in public housing projects at the time, said she was “not surprised.”

Popp said tenant organizations complained about being pushed into contracts with Loyce’s friend Williams but were threatened with punishment and loss of funds. Popp said she tried to express her concerns to Smith, but “he did nothing.”

jessica.garrison@latimes.com