Report of possible fraud stirs council, administration

lblackford@herald-leader.comMay 27, 2010 

A city employee who said he reported two instances of possible fraud to city officials is about to lose his job, and a city council member wants to know why the administration won't tell her more about the matter.

Patrick Johnston, the director of the Division of Risk Assessment, which is to be reorganized under Mayor Jim Newberry's proposed budget, would not say what he reported. He added that city officials told him he could be personally liable if he made public the allegations or the documents reporting the possible fraud.

Johnston's job is scheduled to be eliminated in the reorganization, he said.

When council member KC Crosbie recently asked to see the documents, city officials told her they were confidential.

But Crosbie wonders whether Johnson's position is being eliminated under the mayor's proposed budget because of the concerns he raised.

"I don't know because I can't get a copy of the fraud questionnaire to be able to evaluate whether his report is legitimate," Crosbie said. "I'm getting the feeling that there's something in there that the administration doesn't want the city council to see."

Susan Straub, a spokeswoman for Mayor Jim Newberry, said: "The reorganization decisions we have made have nothing to do with any complaints any employee has alleged against the government."

The Herald-Leader obtained a May 19 letter written by Crosbie to Law Commissioner Logan Askew asking why city council members could not get the questionnaire — a document external auditors use to ask employees whether they know of any fraud. At Tuesday's city council meeting, Crosbie repeated her concerns.

The city also denied a Herald-Leader open records request for the fraud risk assessments, saying they were not the property of the city, and belonged instead to the external auditing firm, Kentucky's Mountjoy Chilton Medley.

Crosbie said the law department hired outside counsel to evaluate whether she could see the questionnaires. Those lawyers told her she could not see them because the council is considered a third party and not directly involved in the confidential nature of the documents.

Johnston has overseen various aspects of risk management for the city, including its insurance policies, for 13 years.

Given the division's performance and efficiencies during that time: "I don't understand why our division is being eliminated," Johnston said.

In 2007, the city accepted a bid for liability insurance presented by the Kentucky League of Cities on behalf of ACE, a major insurer. Johnston said he did not endorse that selection. By the next year, all insurance decisions were being made by senior administration officials, including Askew.

"I left that selection up to senior management," he said. "I was not as favorable to certain vendors that were being selected by this administration."

Johnston would not comment on whether his reports of fraud related directly to the League's insurance arm.

After reports last year by the Herald-Leader regarding the League, its expenses and conflicts, State Auditor Crit Luallen's office investigated the League. She found more spending and numerous conflicts of interest in the insurance division. Johnston is scheduled to appear before a council committee at 2 p.m. on Thursday as its members discuss the reorganization of the division of risk assessment.

Straub provided the Herald-Leader with a letter to Bruce Sahli, director of Internal Audit, from attorney Terry Sellars, a former city law commissioner. Sellars said that because Mountjoy told employees the questionnaires would be confidential, they were bound to respect that. In addition, Sellars said, the document is clearly a work paper — a preliminary document that is not subject to open records requests.

Sellars also said that the external auditor did investigate the reported fraud in 2008 and "found no evidence that LFUCG's financial statements were materially misstated due to fraud."

Council members had differing reactions to the matter.

"I'm very concerned that council members are not allowed to see certain information, particularly if it is alleging fraud," said council member Diane Lawless.

Another member, Kevin Stinnett, said he asked Askew about the matter.

"I don't know a lot about it, but I was told the fraud was investigated and found to be unsubstantiated," Stinnett said.

Jay McChord said he didn't know much about it either.

"I don't have a concern at this point in time," he said. "It may be something that warrants a deeper look or it may be an employee who wants to make some noise."

Crosbie said she would pursue the matter.

"This is not some random person raising these concerns," she said. "This is our director of risk management, and if the director of risk management who is supposed to be assessing these issues has brought up problems, it would appear the totality of circumstances would warrant more than a preliminary review."

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