City council moves to halt lawsuit related to debunked fraud allegations

The Urban County Council voted overwhelmingly Tuesday to halt spending on a lawsuit that blossomed from an investigation of fraud allegations made by a city employee.

One day after State Auditor Crit Luallen's office released a report stating it found no evidence of fraud, the council voted to stop paying lawyers representing the city's Internal Audit Board and an investigative committee of the council. The board and the committee were fighting over the council's authority to subpoena the fraud allegations.

Meanwhile, several council members seemed shocked by the revelation in Luallen's audit that a council member had a copy of the fraud allegations at least a month before the investigative committee was appointed.

The fraud allegations were at the center of the controversy, and the committee was formed in part to force the Internal Audit Board or the city's external auditors to turn over the allegations to the council.

After Councilman Jay McChord challenged his anonymous colleague to come forward, Councilwoman Diane Lawless said she had met with the state auditor and turned over a large stack of documents. However, she denied knowing the fraud allegations were among those documents.

"I didn't know what I had," she said. "That may sound strange, but as you know, a lot of my life is stranger than fiction."

Asked Councilman Tom Blues, "Why take documents to the state auditor if you did not know what they were?"

Councilman Ed Lane told Lawless she could have provided the allegations to fellow council members. "It ended up we had an investigative committee, incurred legal fees and a lot of bad publicity," he said.

Lawless said she did not go to the state auditor "to initiate an investigation but to get advice on what to do."

McChord said the city's ethic's board should investigate Lawless's actions.

Mayor Jim Newberry's re-election campaign issued a statement later Tuesday that called Lawless' disclosure "outrageous and troubling." It noted that Lawless was Vice Mayor Jim Gray's campaign manager in 2006 and is an active supporter of Gray's campaign to unseat Newberry as mayor this year.

"The public deserves to know what Vice Mayor Gray knew and when he knew it," said Lance Blanford, Newberry's campaign manager.

Gray said he did not know Lawless had the fraud allegations. He said the Newberry administration's lack of cooperation made the investigation lengthy and expensive.

The council also voted Tuesday to withdraw the subpoenas it had issued to the Internal Audit Board and to ask lawyers on both sides to drop the issue.

Newberry said that unless a council member objected, he would meet with both lawyers and their clients in the role of mediator to get them to drop the lawsuit. No one objected.

The 6-month-old controversy has cost the Lexington-Fayette Urban County Government about $50,000 in legal bills. The city also faces a $50,000 bill to cover the cost of the state audit.

"No offense to you, but this is getting way out of hand," Councilman Kevin Stinnett told retired Judge Roger Crittenden, who represents the council's investigative committee. "The cost to taxpayers is beyond approachable to even understand."

Councilman Doug Martin, a lawyer, said it was a risky move for the government to ask the court to decide if the Urban County Council had subpoena power, even though it is mentioned in the urban county charter.

The council agreed in a 10-2 vote. Lawless and K.C. Crosbie were in the minority, and George Meyers and Lane recused themselves. Andrea James was absent.

Luallen investigated the controversy at the invitation of Newberry after council members began asking questions about fraud allegations made by Patrick Johnston, the director of risk management. Johnston questioned the way some of the city's insurance had been switched to the Kentucky League of Cities in 2007.

Among questions council members asked was whether Johnston's allegations had anything to do with his job being marked for elimination earlier this year. The council later voted to keep his job because of the controversy.

This story was originally published October 6, 2010 at 12:00 AM with the headline "City council moves to halt lawsuit related to debunked fraud allegations."