Ill-Fated Job Project Raises Questions on City Spending : Government: Officials gave $694,800 to a manufacturing expert to buy industrial equipment, but the enterprise failed and thousands of dollars have not been accounted for.
The manufacturing expert ushered two Lynwood city councilmen through the humming machine shop of a nearby aerospace company. Waving a small machine part in front of them, he made his pitch.
Using his 30-plus years of experience, he told them, he could set up a similar shop in their community. He talked about winning government contracts and using the profits to help pay for an entrepreneurial academy that would teach residents how to run their own businesses. He talked about creating jobs in a city where jobs were desperately needed.
In the summer of 1991, enthusiastic city officials, using public funds, issued a $694,800 check to Richard Calhoun’s Lynwood Manufacturing Co. for industrial machinery.
But Lynwood Manufacturing Co. never opened.
In the first two weeks after he deposited the city’s check, Calhoun spent at least $300,000 on personal bills, charitable donations and other items apparently unrelated to purchasing machinery, according to a variety of documents and other sources.
Although Calhoun claimed in documents that the machinery would cost nearly $700,000, only about $300,000 eventually
was spent on machinery. And even the dozen pieces of equipment that were purchased were suspect; one official described them as “secondhand junk.”
Calhoun has not been charged with a crime and has denied any wrongdoing. He refused, however, to explain how he spent the money.
“I feel I did what I was told,” Calhoun said in a telephone interview. “If they think that I have done something that they feel they need to bring charges against me for, then that’s what they have to do. I operated the best I could out of good faith.”
Some observers say the manufacturing outfit simply was felled by the recession that had sent the aerospace industry into a tailspin. But documents also reveal another reason for Lynwood Manufacturing’s demise: Calhoun had a criminal record that would prevent him from receiving government contracts that he had counted on.
Shortly after receiving the city money, Calhoun was notified that he would be disqualified from receiving government business because he had pleaded guilty in 1990 to mail fraud and income tax evasion. He and two others had been caught in a scheme to sell insulated wire at inflated prices to a Santa Ana company.
In March, 1992, the federal Defense Logistics Agency formally banned, or debarred, Calhoun from receiving government work. Calhoun later departed and eventually signed a contract turning the equipment over to the training program, the Entrepreneurial Development Academy of California, in exchange for being released from all obligations to repay the loan.
The academy was one of the programs run by a Compton-based nonprofit organization, Cultural Economic Youth Sports Arts Foundation, and was fully funded by the city of Lynwood. Lynwood Manufacturing was to have been one of the anchor businesses at the academy, and its profits eventually would have been used to make the academy self-supporting.
The collapse of Lynwood Manufacturing underscores concerns raised several times by the city attorney and some residents that city leaders had been lax in giving funds to the Entrepreneurial Development Academy.
The city gave the academy $2 million, including a $1.5-million loan, without insisting on detailed contracts or loan agreements that would ensure the money was being spent properly. The $694,800 check to Lynwood Manufacturing, although issued directly by the city, was part of the academy’s loan. But City Atty. Henry S. Barbosa had warned city leaders at least three times in writing that their agreements with the academy were inadequate and did not protect the city’s investment.
In addition, The Times has learned that several academy officials and at least one City Council member knew that Calhoun had a criminal record when he was given the loan. Court records show that Lynwood Mayor Paul Richards and academy board members Herbert Reed and Carroll White wrote letters to the judge who sentenced Calhoun, extolling him as a man dedicated to his family and the community.
Richards said he thought that Calhoun simply had some “tax problems” when he wrote the letter. Regardless of what Calhoun did, he was an “excellent candidate” to run the manufacturing company, Richards said, adding that Calhoun has a sterling reputation as a community leader and experienced machinist.
The mayor also said he thought Calhoun already had lined up contracts with Rockwell International to supply aerospace parts. Several academy board members and its executive director had worked at Rockwell, and Calhoun had been a Rockwell subcontractor. A Rockwell spokesman said the company discussed the manufacturing operation with Lynwood officials but never signed a contract with Lynwood Manufacturing because it was never fully operational.
Today, most of the equipment sits idle in an academy building on the west side of town. And city officials are scrambling to keep afloat a training program that virtually everyone says is a good idea because it offers residents of the poor, largely minority community something no one else will give them--an opportunity to start their own business at almost no cost.
At the academy, entrepreneurs receive several months of free classes, then are “incubated” in free office space with free clerical help until their businesses are up and running. In return, the entrepreneurs agree to open their businesses in the city and hire Lynwood residents. Currently, about 40 entrepreneurs are enrolled at the academy.
In a move to establish tighter control over the academy, City Council members have ordered new incorporation papers, a new business plan and new contracts.
The council last week voted to use strictly regulated federal grants rather than city money to fund the academy and appointed new leadership.
“We are really, totally cleaning things up,” City Manager Laurence H. Adams Sr. said. “Whatever the history is, it’s not relevant to what is happening now.”
Bank statements, invoices and a Lynwood Manufacturing Co. ledger obtained by The Times show several questionable expenditures, including:
* A mystery payment of $220,000. Bank statements show that five days after Calhoun received the city check and opened a Lynwood Manufacturing Co. bank account, a $220,000 check was drawn from the account. A company ledger shows that money was paid to “Davis and Hill” for shop equipment.
Documents show that a Los Angeles-based law firm, Davis and Hill, was hired by Calhoun. But its attorneys said they have never sold shop equipment and never received a check of that size from Lynwood Manufacturing. Attorney Cynthia McClain-Hill said Calhoun paid her firm about $10,000 to file legal papers establishing Lynwood Manufacturing Co. as a corporation, and to help him fight the government debarment.
* A $14,786 payment that apparently was for personal legal fees. A company ledger shows that amount was paid to Gene Zech for shop equipment. Zech, a Newport Beach attorney, said he received the check from Calhoun, but it was for overdue legal fees that had nothing to do with either Lynwood Manufacturing or the academy.
* A $14,885 payment to the Internal Revenue Service. Court records show Calhoun was ordered to pay the IRS $20,000 in 1990 after pleading guilty to mail fraud and income tax evasion. An IRS spokesman, citing confidentiality laws, said he could not confirm or deny whether Calhoun had satisfied the debt.
* Contributions of $6,400 to religious organizations, including $5,000 to an Orange County church where Calhoun serves as deacon.
Records also show that there was a sizable gap between what Calhoun reported the equipment would cost and what he actually paid. In an undated invoice submitted to academy and city officials in which Calhoun requested the $694,800, he quoted the price of three Escomatic precision machines at $163,500. According to Chicago-based Standex Machine Tools Inc., which supplied the machines to Lynwood Manufacturing, Calhoun paid a total of $73,000 for them.
Calhoun acknowledged that he bought used equipment but did not further explain the discrepancy between the two figures. He said he planned to upgrade the equipment by connecting it to a computer system to create a “highly sophisticated” shop.
Calhoun defended his decision to give $5,000 to the Anaheim-based Set Free Christian Fellowship church, saying several of its members volunteered to help set up the machine shop.
However, he refused to discuss the $220,000 mystery check and the payments to the IRS.
“I really don’t need to get into this thing,” Calhoun said. “It could get way out of hand and I am not going to be a part of it. I have an obligation to be accountable and I guess I can do that, but at this point in time I don’t want to take this any farther.”
Allegations of questionable spending and other business irregularities at Lynwood Manufacturing were raised in August by attorney Sandy English, who was asked to examine the company’s records. English said the academy’s executive director, Jesse Arnold, was concerned because most of the equipment was not working, and he wanted to know how the money for Lynwood Manufacturing had been spent.
English said that after a limited examination of invoices, cashier’s checks and other documents, “it was clear that Calhoun had not spent $700,000 on equipment and that a substantial amount had been used for purposes, such as lawyers and the IRS, that were apparently not related to the academy.”
Arnold resigned in September, citing poor health. In a brief telephone interview recently, Arnold said only that he once admired Calhoun and now has “no respect” for him. “I was disillusioned,” Arnold said before hanging up.
Shortly after Arnold resigned, English outlined his concerns in a letter to then-councilman Richards, who helped create the academy and has been one of its staunchest supporters.
The confidential letter, which was obtained by The Times, said English and academy board member Reed met with Calhoun at his Santa Ana home to discuss the transactions.
“He (Calhoun) simply indicated to me that the situation involving the disbursement of the $700,000 was very messy, everyone was involved, and that he would not name names or point fingers unless he is asked to do so by governmental investigative agencies such as the District Attorney’s office or the Federal Bureau of Investigation,” English wrote Richards.
Reed confirmed English’s account. In an interview, Calhoun denied making such a statement, but refused to discuss the conversation.
Richards said that after receiving the letter, he talked to both Reed and Arnold, both of whom told him there was no proof that money had been misused. Richards did not discuss the letter with his fellow council members.
“I concluded it was just a private affair between some of the players over there,” Richards said. “It seems as though there was a deliberate effort to undermine what was taking place there.”
Reed, who became acting executive director after Arnold resigned, said he told Richards the academy was rife with infighting and that he had no proof of wrongdoing.
“I felt that something went down prior to me getting involved in management,” Reed said. “But my feeling was it didn’t happen on my watch and I didn’t have any proof, so I may as well let things lie. I may have been stupid but I was trying to take the academy to another level.”
Since opening in the spring of 1992, the academy has been praised by small-business groups, organizations representing minorities, and a broad section of community leaders.
Although most of the original class of 20 entrepreneurs fell victim to the recession and other pitfalls of a start-up business, seven business are still “incubating,” including a clothing designer and a machinist who is using some of the equipment Calhoun purchased. A new class of 30 entrepreneurs, with businesses ranging from helmet manufacturing and desktop publishing to courier and plumbing services, are enrolled in business classes and are scheduled to graduate later this month.
“Look at what we have over there,” Richards said, referring to the two warehouses that house the academy. “We have a beautiful facility. There are kids being trained to run businesses right now. To me that is good evidence of how we have been watching things. I think we have made a great investment.”
The mayor pointed out that the city’s $694,800 check to Calhoun was part of a $1.5-million loan to the academy, and the first payment is not due until 1997. He said the city’s main concern is that the academy repays the loan and that its leadership delivers what was promised--business training.
Some City Council members reacted with shock upon hearing that Calhoun was on probation and that thousands of dollars were spent on items unrelated to purchasing equipment.
Councilman Louis Byrd said recently that he did not even know that Calhoun had left. “So what happened to the money?” he asked.
Armando Rea, the only council member who voted against using city money to fund the academy, said he will call for an investigation by the Los Angeles County district attorney.
Finger-pointing has already begun. Councilman Louis J. Heine suggested that city staff should have been watching how the money was spent.
Mayor Richards said academy officials were responsible because they asked that nearly $700,000 of their loan be given to Calhoun to set up Lynwood Manufacturing.
“We simply issued the check at their direction. That’s a mega-leap from saying the city was doing business with Richard Calhoun.”
But, said board member Reed: “You don’t just give away $2 million in taxpayer money and wash your hands of it.”
Council members Rea and Byrd agreed.
“Apparently the City Council should have been more diligent and responsible for the process,” Byrd said. “The buck stops here, I guess.”
