When a new Beverly Hills company sought a loan guarantee from the state, its goal seemed laudable: to expand residential care services in poor neighborhoods of Los Angeles County.
The company, though, did not meet the state's financial requirements, and one of its facilities had a history of serious health and safety violations.
Still, the state's Cal-Mortgage program granted $17 million in loan guarantees to Community Adult Care Centers of America Inc. four years ago.
None of that money has benefited the poor, and nothing has been built.
The company defaulted on nearly $5 million in loans and, the state alleges in a lawsuit, misappropriated more than $1 million of that sum in a kickback scheme.
A separate state investigation into activities at CACCOA's two facilities led to the indictments of two of the company's business associates on Medi-Cal fraud, forgery and tax evasion charges.
Key players in the loan deal have denied wrongdoing and blamed each other for the project's collapse.
How did Cal-Mortgage, a respected financial aid program for nonprofit health care providers, get drawn into this tangle--the first losing transaction in its 25-year history?
A three-month Times examination found that the program was loosely run, leaving it vulnerable to manipulation by private business interests, despite obvious financial risks for the state.
Also coloring the deal were procedural irregularities, some of which have spawned allegations of political influence-peddling and attempted bribery, as well as a lawsuit and an investigation by the state attorney general's office.
"It was such a bad deal," said former Cal-Mortgage official Richard A. McManus.
The CACCOA troubles emerge as Cal-Mortgage is struggling to recover from a $167-million loan default by Triad Healthcare Inc. of Encino.
Cal-Mortgage has played a pivotal role in health facility construction in California, enabling health care companies to qualify for low-interest loans that they could not obtain without the backing of the state treasury. But the program has been temporarily shut down by the Triad default last summer.
A legislative inquiry into Triad is focusing on possible conflicts of interest as well as departures from customary procedures that helped the company obtain a Cal-Mortgage guarantee.
Similar procedural irregularities show up in the CACCOA transaction, records show.
Both deals were accelerated by Larry G. Meeks in his final months as director of Cal-Mortgage's parent agency, the Office of Statewide Health Planning and Development.
Meeks also approved them over the objections of staff analysts who considered them unsound investments, according to records and interviews.
Meeks--an appointee of former Gov. George Deukmejian who was replaced in the $97,428-a-year job in 1991--said in an interview that he gave special treatment to CACCOA because its chairman, Howard L. Winkler of Los Angeles, was a Deukmejian appointee in another arm of Meeks' agency.
"Knowing this person was close to the governor's office because he was an appointee and so forth, I was always very attentive . . . to make sure his complaints were responded to," Meeks said.
Winkler tried to bribe Meeks with about $2,000 and a prostitute while the loan guarantee application was under review, state investigators alleged in an affidavit filed in Los Angeles Superior Court last year. No criminal charges have resulted because the attorney general's office was unable to find corroborating evidence.
Winkler declined to comment, but through his attorney, he denied the bribery allegations.
The affidavit alleged that CACCOA obtained the loan guarantee because of those bribe offers and "the influence of CACCOA's board chairman, Howard Winkler, who was on the board of a governmental unit within that same (state) agency."
Meeks also told The Times about the alleged bribery attempts, one of which occurred during a visit to Winkler's Los Angeles office.
Meeks said the CACCOA chairman put an undetermined amount of folded bills in the breast pocket of his suit. "I was freaked out," Meeks said. "I took it out and flung it on his desk and said: 'Don't you ever do that again.' " He said Winkler apologized.
On another trip to Los Angeles, Meeks said, he was staying in a hotel when Winkler telephoned to say he was sending over a "high-class call girl" to keep him company. Meeks said he angrily told Winkler to "call her off."
The former state official said he reported the alleged bribery attempts to the agency's counsel and was not influenced by them.
The agency's counsel, John Rosskopf, said in an interview that Meeks never told him about the prostitute but did say that Winkler had offered him $2,000 cash.
Meeks said he approved the CACCOA application solely because he believed that the project would benefit the needy.
"I thought it was a good project," said Meeks, 50, who is now retired on a medical disability. "I was intrigued by the concept of it: adult day care. The people behind it, I personally did not care for them."
Winkler's attorney, Harold Greenberg of Los Angeles, said his client did not try to bribe Meeks. Greenberg said Winkler did offer Meeks a gift of collector's coins--valued at about $100--but that it occurred after CACCOA's application was approved.
Greenberg said Meeks refused the coins, which Meeks confirmed.
State investigators searched the homes of Meeks and Winkler a year ago and seized bank records and other documents. Deputy Atty. Gen. Mark Geiger said they failed to find corroborating evidence.
Meeks' successor, Dr. David Werdegar, said the transaction should have been killed immediately if a bribe was offered. "It defies imagination," he said. "If I were offered a bribe . . . everything would come to a screeching halt."
CACCOA sought a Cal-Mortgage-insured loan in 1990 to finance improvements and additions to the former Walnut Convalescent Hospital, a skilled nursing home in Long Beach, and to Hope House, a board and care home for recovering substance abusers, mentally ill homeless people and ex-felons in Los Angeles' Koreatown.
The facilities were owned by Los Angeles businessmen Michael Rosenberg and James Salamon, who under CACCOA's proposal would run the facilities.
At the time, Salamon was banned from managing Hope House or any other board and care home in California. He agreed to the ban--until 1996--after the state Department of Social Services moved to revoke his license.
State inspectors found the facility filthy, vermin-infested and unsafe with "numerous exposed electrical wires." They also found that residents were poorly supervised. Records show that two residents hung themselves in their bedrooms in the late 1980s and one of the deaths was not discovered for two days.
"This had been a problem facility for a long time," said Lisa K. Hightower, senior staff attorney for the Department of Social Services.
Meeks said he was unaware of Hope House's citations. He said Cal-Mortgage did not routinely check with other state agencies for disciplinary actions against applicants. "We never had this problem before," he said.
There were other reasons to deny CACCOA's application, according to Cal-Mortgage staff and members of the program's advisory loan committee.
The application was incomplete, and financial documentation was so inadequate that the loan committee twice refused to vote on the CACCOA proposal. After what officials said was an unprecedented third review, it was approved with stringent conditions.
"There were just too many unanswered questions," said Dale Flournoy, the staff analyst assigned to CACCOA. "I'd say: 'Show me the plans.' . . . I never saw final approved architectural plans with specifications."
The seven-member committee voted to recommend approval, but attached 10 conditions to remedy the application's deficiencies. Four committee members interviewed by The Times said they expected that CACCOA would be unable to meet the conditions and that the project would die.
"The conditions should have killed it," said McManus, the former loan committee chairman.
But Meeks did not enforce the conditions, although he had endorsed them in writing. Records show that he signed final closing documents for the loan guarantee in December, even though six conditions were unmet and the company had not met a separate requirement to put up 10% of the project cost.
Meeks said in an interview that he was unaware that the conditions had not been met because his staff had not informed him.
Cal-Mortgage records, however, show that Flournoy, the project officer, wrote several memos to Meeks alerting him to CACCOA's noncompliance; the last one was three days before the closing.
"I told (Meeks) what was wrong with it over and over," Flournoy said. "It made no difference."
Meeks said his approval was based solely on the merit of the project, although he acknowledged that CACCOA's application got special handling.
Before the application was filed, Meeks met privately with Winkler to tell him what was required to obtain a state loan guarantee.
He said he extended the help largely because of Winkler's claims of political pull and his ties to the agency as a member of its minority educational foundation.
Meeks later scheduled a special meeting of the loan committee solely to hear CACCOA's application, records show.
Meeks said he also made an unusual number of inquiries about the progress of CACCOA's application. The reason, he said, was that Winkler had complained that the application was being held up because of anti-Semitism.
"The nature of the charges was intimidating," said Meeks, who is African American. "Here I am black, and I am having these charges made. . . . and I am supposed to be very sensitive to this sort of discrimination."
Winkler, through his attorney, denied making allegations of anti-Semitism. His attorney, Greenberg, said his client sometimes does drop names of political officeholders. Winkler's resume lists memberships in several Republican organizations, and records show he contributed more than $5,000 to Republican candidates in 1990.
While CACCOA's application was wending its way through Cal-Mortgage's review process, Department of Social Services investigators were assembling evidence of financial irregularities at Hope House that they turned over to the attorney general's office.
Last August, Salamon and Rosenberg were indicted on 15 criminal charges, including Medi-Cal fraud, grand theft, lying to state licensing authorities, workers' compensation insurance fraud, and failure to pay unemployment insurance taxes. They have pleaded not guilty, according to the attorney general's office.
Rosenberg and Salamon declined through their attorneys to comment on the charges.
None of the criminal charges deals directly with CACCOA or with the participation of Salamon and Rosenberg in CACCOA's Cal-Mortgage transaction.
But Cal-Mortgage officials now assert in a civil suit against CACCOA, Winkler, Rosenberg, Salamon and others that CACCOA was a "mere shell and sham" created to defraud the state and obtain money for "personal use."
Although some site preparation was done, the state's lawsuit asserts that CACCOA officials did not improve the two facilities, nor did they construct the promised additions. Hope House in Koreatown has since gone into receivership and has been shut down because of fire-safety problems. The Long Beach nursing home is under new management.
The suit alleges that more than $1 million in loan proceeds paid to architects, consultants and contractors hired by CACCOA were kicked back to Rosenberg, Salamon, Winkler and other officers of CACCOA.
For example, Cal-Mortgage officials authorized a $336,400 payment for services rendered by a firm called Comprehensive Consulting Services. The suit alleges that the owner and CACCOA board member Robert Armstrong kept $21,400 and then wrote checks to several other people, including one to Winkler for $238,000, according to court documents.
The remaining money was distributed to four religious organizations, including, the suit alleges, $50,000 to Congregation Mogen Abraham in Los Angeles, whose leader, Rabbi Abraham Low, was convicted last month in U.S. District Court of conspiracy to launder drug money.
Low declined through his attorney to be interviewed.
Armstrong and his attorney could not be reached for comment.
Armstrong formally denied the allegations in court documents filed in 1992. He has since turned over a memo that he wrote in 1990, detailing the distribution of the money, according to the state's attorney, Jeffrey Belote. The memo, which The Times has obtained, also alleged that Winkler had directed him to write the checks.
Salamon, Rosenberg and Winkler, through their attorneys, declined interview requests.
But, in answers filed with the court, they denied the allegations of civil fraud and blamed each other for any misrepresentations or misappropriations of loan proceeds.
Rosenberg said he relied on the opinion of experts in consenting to the deal and denied that he knowingly submitted false invoices to Cal-Mortgage. He alleged that Winkler was "the main power to arrange the loan" because of a "special relationship" with Meeks.
He also said he was unaware that Salamon had been barred by the state from managing residential-care facilities.
Salamon acknowledged the state's claim that CACCOA was a "sham," but alleged that Winkler, Rosenberg and several others created it. He also alleged that these associates took money from CACCOA's bank accounts for their "personal use."
In court papers, Winkler said the project could have succeeded if the state had not halted it and seized the loan proceeds. Therefore, he said, the state is responsible for the losses.
State officials declared CACCOA in default of its Cal-Mortgage-guaranteed loan in March, 1992.
The company had failed to make timely payments on the loan, and Cal-Mortgage officials had uncovered evidence that some work paid with the loan proceeds had not been performed, according to court documents.
By declaring a default, the state was able to hold back $12 million in authorized loan proceeds.
But nearly $5 million was already spent. To pay back the lender, state officials were forced to make up the deficit out of Cal-Mortgage reserve funds.
The program took another hit a year later when Triad Healthcare defaulted on a $167-million loan it used to buy two San Fernando Valley hospitals--Sherman Oaks Hospital and Health Center in Sherman Oaks and West Valley Hospital and Health Center in Canoga Park.
The size of that default exceeds Cal-Mortgage's reserves, leaving California taxpayers potentially liable for the debt.
The loans to Triad and CACCOA were brokered by a member of Cal-Mortgage's advisory loan committee, Vincent F. Forte, a vice president of the investment banking firm of Goldman Sachs & Co. The firm earned $2.4 million in commissions from the Triad deal and $350,000 from CACCOA's.
At the time, Cal-Mortgage policy did not prohibit loan committee members from representing applicants, and Forte abstained from both votes. He and his firm maintain that his actions were legal and ethical.
But state Assemblyman Burt Margolin (D-Los Angeles), who held hearings after a Times report on Triad's Cal-Mortgage transaction, has introduced legislation that would bar state employees and appointees from representing clients before their agencies. The law would also bar them from holding positions in applicant companies.
Cal-Mortgage has taken steps of its own to safeguard the program from deals such as Triad and CACCOA.
Applicants cannot get hearings before the loan committee unless Cal-Mortgage staff analysts recommend their projects and certify that the applications are complete. In the Triad and CACCOA cases, staff analysts recommended against approval.
Also, the director no longer has the power to make unilateral decisions that run counter to recommendations of staff and the loan committee.
And Cal-Mortgage now requires the staff to run background checks on license holders and facilities applying for loan guarantees to ensure that disciplinary actions by other state agencies are not overlooked, according to Werdegar.