Troubled Montebello comes under federal scrutiny

Federal prosecutors and the FBI have launched an investigation into potential misuse of funds and fraud involving federal housing money in the troubled city of Montebello, adding to the growing list of agencies looking into the city’s stewardship of public dollars.

Sources told The Times that the FBI is leading an investigation into how the city used federal funds over the last few years. The probe comes after the federal Housing and Urban Development agency in April took the highly unusual step of suspending all funding to the city.

HUD officials suggested that Montebello misspent some of the money and demanded that $4 million be repaid.

Acting City Administrator Larry Kosmont confirmed that the city received a subpoena from the U.S. attorney’s office for records pertaining to HUD money. City Councilwoman Christina Cortez said she talked with FBI investigators, who showed up unannounced to a meeting she called with HUD officials. The FBI agents asked her questions about the city’s financial decisions, she said.


The federal inquiry comes as the Los Angeles County district attorney’s office looks into mysterious “off the books” city bank accounts discovered earlier this year. State Controller John Chiang has also launched a wide-ranging audit of the city and its redevelopment agency.

Montebello, a bedroom community about 10 miles east of downtown L.A., faces a major financial crisis, with officials saying they face possible insolvency later this year. Kosmont is part of a new team of city administrators and council members who are grappling with how to clean up the city’s finances.

A central issue in the federal probe is what happened with $1.3 million in HUD funds that the city paid to a developer in 2008 to build affordable apartments on Whittier Boulevard.

The project was never built, but city officials recorded it as completed in a HUD database.


On Thursday, the city filed a lawsuit against the developer of that project, Danny Ku, alleging that he defrauded the city by artificially inflating the cost he allegedly paid for the land and getting a kickback through a real estate company he controlled.

Ku could not be reached for comment Thursday.

Federal officials have been troubled by the housing deal for some time. In an audit released last July, HUD’s office of inspector general declared that the city had disbursed the $1.3 million to Ku in June 2008 without having any valid written agreement.

In 2009, the city gave HUD a copy of an agreement with Ku that had signatures and dates that appeared to have been “inappropriately cut and pasted” from another document, according to the inspector general’s report.

“Upon further inquiry,” the report noted, “the City confirmed there actually was no approved” agreement.

It is not legal for the city to disburse those funds without council approval and a valid agreement. Kosmont said he did not know who in the city authorized issuing the check.

Eight months after disbursing the money to Ku, according to the audit, the city finally signed a loan agreement with him, but still without council approval. The City Council never formally authorized then-city Administrator Richard Torres to sign off on the loan, according to the city’s lawsuit.

Torres said he was unaware of the lawsuit and had not been contacted by federal authorities. “I am not sure I’d recognize Mr. Ku if I saw him,” Torres said. Asked whether he signed the contract with Ku’s company without council approval, Torres said, “I don’t know anything about [that]. As a city administrator I signed a lot of documents…the deal was negotiated by the redevelopment staff and the City Council had contact with Ku.”


Kosmont said he hoped the city would soon be able to clean up its issues with HUD and resume receiving federal housing funds.

“There is no doubt that Montebello’s administrative processes, when it comes to property, have to be managed more precisely,” he said. “Montebello needs to maintain and manage programs cleanly and efficiently, and from this point on, that’s what we are going to do.”

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