Condo Scam Casts Doubt on City Officials

Even as a flurry of guilty pleas, convictions and prison sentences reverberate from a condo-conversion scandal in Huntington Beach, unanswered questions remain about what went wrong.

Residents and others still want to know why city officials -- including administrators, the city attorney, the planning director and elected officials -- knew there was a problem for months but seemingly did little to stop it until the FBI stepped in.

City officials say that they responded promptly, that the federal probe identified fraud, and that wrongdoers such as former Mayor Pam Julien Houchen face prison sentences. But critics are unconvinced, and they worry another scandal could emerge under the city’s nose.

“There’s culpability at the city level,” said condo owner Renee Tarnow, who complained to building officials in 2002 after discovering she had bought an illegal unit. Her concern turned to frustration as the city’s investigation stretched from months to more than a year.

“I can’t point my finger at any one person specifically,” she said, “but someone called off the dogs.”

Tarnow is a typical victim in the scam, which eventually roped in 122 units.

Thinking they were buying legal condominiums, people instead were buying apartments that hadn’t been properly converted. As a result, many owners still cannot sell or refinance their units, and face thousands of dollars in remodeling expenses to meet the city’s condo standards, including having separate utility systems.

Condo owner Vince Periolat said he was waiting for the city to clear his unit three months after submitting his paperwork. He was among dozens of owners who agreed not to sue the city in exchange for their title companies paying the necessary conversion fees. The title companies maintain that they were also unaware that the conversions were illegal.

“It seems like once the city got their money, they really slowed down,” he said. “It’s not front-page anymore, so it’s not being treated as such a big deal. Most of us just want this settled. We’re sick of it.”

The scandal has netted several big fish in Huntington Beach, including the former mayor and a prominent real estate agent who advertised himself as the go-to guy for the popular conversions. As housing prices surged in Orange County, many of those selling the condos in mostly triplexes and fourplexes in Huntington Beach scored huge profits.

Eight defendants were indicted in federal court over the scheme, including Houchen, a real estate agent who resigned in the wake of the scandal. She is to be sentenced later this year.

The mastermind, real estate agent Phil Benson, was sentenced Friday to 70 months in federal prison on 24 fraud counts -- which his attorney called a death sentence. Benson, who lives in Idaho, has lung cancer and has been given six months to live.

Residents who bought some of the tainted units sold through Benson accused city officials of failing to take steps to protect them. Of 47 condo sales detailed in the federal indictment, 35 were illegally converted after a city building inspector sounded the alarm about improper work in May 2001.

City officials have been quick to say that no one within the city, other than Houchen, was responsible for the condo mess. They said city officials couldn’t have policed the conversions because they were done by private parties who falsified real estate documents and didn’t follow city rules.

The only rule change came at the state level. Assemblyman Tom Harman (R-Huntington Beach) pushed through a bill requiring city approval before anyone could record new documents for converted condos with the county assessor.

City Administrator Penny Culbreth-Graft, the city’s top employee, is distancing herself from the scandal, which occurred before she arrived in June 2004. She said she had “no feeling either way” about whether City Hall should have been more vigilant. But she has made personnel moves that some see as scandal-related. She declined to discuss them, but critics say she appears to have targeted the city’s longtime planning czar.

Culbreth-Graft placed Howard Zelefsky on administrative leave and recently encouraged council members to take more control over several high-profile developments.

Both officials declined to publicly discuss his job status, citing the confidentiality of personnel issues. His attorney, Cecil Ricks, didn’t return calls seeking comment.

Zelefsky’s supporters said he did all he could as it became clear that the scandal involved dozens of units and the city’s popular mayor.

“He did exactly what was appropriate by notifying people that they needed to stop what they were doing and turning it over for an investigation,” said Susie Newman, a former planning commissioner and city activist. “This got turned over to the Police Department and the city attorney. Nothing happened until the FBI showed up.”

Huntington Beach Police Chief Kenneth W. Small, who joined the city in October 2002, has defended his department’s investigation but declined to discuss it in detail.

Councilman Dave Sullivan said he was convinced Culbreth-Graft had singled out the planning director, one of only two department heads with civil-service job protection. He has worked for the city for 22 years and has been its planning director since 1998.

“I personally have never had any problem with Howard,” Sullivan said. “There’s pretty much unanimous support for him in his department.”

In August, Culbreth-Graft placed Zelefsky on paid leave while she reviewed his contract. He was allowed to return to his job after 30 days under civil-service rules.

In meetings in January and this month, the City Council wrestled with Zelefsky’s authority. In the end, council members gave themselves final say on major development decisions affecting Bella Terra, a remodeled outdoor mall just off the San Diego Freeway at Beach Boulevard.

The power struggle wasn’t lost on council members and developers. Councilman Gil Coerper said he was frustrated that a lack of confidence in Zelefsky was dictating changes in city policy.

“That should be worked out between you folks,” he told Culbreth-Graft and Zelefsky, “and not the public and the people who are trying to build here.”

Some critics, including Tarnow, think there is enough blame to go around over the city’s failure to swiftly contain the condo-conversion problem. An investigation by City Atty. Jennifer McGrath continued for months without stopping the condo sales, she said.

McGrath opened her formal investigation in late 2002 -- more than a year after the first complaint -- after reports of two more problem conversions. In July 2004, the FBI took over; indictments were handed down in December.

The case was sensitive because the transactions involved Pier Realty, the firm that employed Houchen, who was first elected to the council in 1996. Jan Shomaker, owner of Pier Realty, was appointed by Houchen to a seat on the Huntington Beach Planning Commission.

McGrath has insisted that officials couldn’t have done more because the conversions were done illegally, without getting the proper city approvals. Letters exchanged between city officials and building owners during that time laid out the requirements for converting apartments to condominiums, but didn’t judge whether the units qualified.

Several condo owners said they’re still frustrated by the city’s response.

So far, none of the condos has been certified as legal, though 77 will be soon, Culbreth-Graft said. Owners of the rest are awaiting city inspections and could face thousands of dollars in remodeling costs.

“The city just dropped the ball,” said condo owner Dan Torla.