Special Reports

Luallen describes 'possible criminal activity' in release of airport audit

Blue Grass Airport officials fostered a culture of "shameful" spending that led to more than $500,000 worth of questionable expenses over three years, State Auditor Crit Luallen said Wednesday with the release of a searing audit. She has referred the findings to criminal investigators.

"I don't think we have ever seen an audit where so many different individuals in the management of a public agency abused the trust with such arrogance and a lack of ethical standards," Luallen said.

The 256-page report details rampant spending by airport executives at bars, restaurants, golf courses, liquor and retail stores, and Web sites. The spending encompasses extravagant items, such as two $700 bottles of champagne, hundreds of dollars worth of cigars, and $1,606 for tickets to six plays, including Dirty Rotten Scoundrels. It also covers more mundane bills: dozens of DVDs that are not at the airport, and $40 in cornhole beanbags. For holiday gifts, managers bought more than $14,000 in hams and $400 in train sets for airport employees and board members.

In all, seven airport officials spent $813,039 using their credit cards or cash, for which they were reimbursed.

During that period, the audit says, some of the managers, led by former executive director Michael A. Gobb, padded their pockets by double-billing the airport for reimbursements. They also cashed out unused vacation days — a perk not available to other airport workers — and bought tens of thousands of dollars worth of gifts for themselves and others.

None of the current or former executives of the airport responded to phone calls requesting comment.

Luallen said she was "appalled" at the spending and highlighted $7,400 spent for five employees to go "on a NASCAR drive that they called a team-building exercise."

She said that instead, it appeared that the trip was "just as a lark — as a fun outing."

The audit points to a lack of checks and balances by the airport's board, saying that in some cases, oversight was non-existent.

"This has been a very embarrassing ordeal for all of us," said J. Robert Owens, the new chairman of the airport board.

There was no hint that board members were complicit in the managers' improper spending, but it was clear that they didn't put procedures in place and trusted Gobb unquestioningly, she said.

During the period that Luallen covered, from January 2006 through December 2008, the board was led by Bernard Lovely, a Lexington lawyer. Lovely was responsible for approving Gobb's expenses. However, just three of Gobb's monthly reports included Lovely's initials, according to the audit.

The airport board, in a 57-page response to the audit, pins much of the blame on Gobb, who "disregarded many of the board's policies." And it points out that Gobb and three of his lieutenants have resigned and that the board has revoked airport credit cards since a series of Herald-Leader articles raised questions about the managers' travel and spending starting in November.

On Wednesday morning, the board approved four specific recommendations from its consultant, Jacobs Consultancy. Those four policies, which are aimed at tightening employee ethics and internal auditing, reflect some of the key recommendations that Luallen made.

"We have moved quickly to rebuild the public trust," Owens said.

The audit, which was requested by the Lexington-Fayette Urban County Council in December, has been referred to the FBI, the U.S. Attorney's Office and Kentucky Attorney General Jack Conway, Luallen said. At one point, 12 members of Luallen's staff were working on the audit.

"Certainly when we make a referral to law enforcement, it is because our auditors have reached conclusions that lead us to believe there is possible criminal activity," Luallen said. "We expect that law enforcement agencies will follow up on this aggressively."

Gobb set the tone

Gobb, who resigned in January, remains at the center of the spending controversy. The audit shows that 92 percent of his total expenses had no documentation whatsoever and 96.5 percent of his $158,384 in airport credit card purchases were questionable or unsupported; that he signed off on $23,000 in bonuses and nearly $83,000 in payouts for vacation days — none of which was approved by the board. In addition, he had the airport pay $36,500 for his association and club memberships in 2008 alone.

"The former executive director established a culture of wasteful and excessive spending that provided personal benefits for himself and others through inappropriate expenditures and arbitrary personnel actions," the audit says. "Blue Grass Airport management staff lost sight of their responsibility as stewards of a public agency to be accountable to the community they served."

After an inventory of financial records, the auditor found that six years of Gobb's expense reimbursement forms and about three years of his airport credit card statements were missing.

Luallen told reporters that the review found "no specific evidence" that those records were destroyed or purposely removed. "But it certainly was suspicious ... that we found numbers of files that were just completely missing with no duplicates," she said.

Luallen's audit urges the airport board, made up of Lexington community leaders appointed by the mayor, to revamp many of its oversight policies, which the report said were regularly "circumvented" or inadequate to begin with. The audit makes more than 100 recommendations for tightening financial controls.

The audit said internal and external auditing of the airport must be ramped up. "Frankly, the outside auditor should have seen red flags long before this," it said.

Managers approved their own credit card purchases, and Gobb often charged expenses to the cards of his lieutenants, as previously reported by the Herald-Leader.

Luallen, through interviews with Gobb's former directors and through other airport documents, found that the practice was widespread.

Former director of operations John Coon, for instance, told auditors that Gobb would ask for his airport credit card number and expiration date each time Coon was issued a new card. John Rhodes, the former director of administration and finance, told auditors that, while traveling, Gobb often would ask the other managers for their room numbers to charge meals and entertainment to their rooms instead of his.

Gobb directed the airport's manager of administration, Debbie Kelly, to charge $110 for a conference fee for his young daughter and more than $720 for U.S. Equestrian Federation holiday cards.

Other charges directed by Gobb include a $700 tuxedo, a $127 formal dress from Dillard's, $3,315 worth of Nintendo Wii consoles and $700 in DVDs, as previously reported by the Herald-Leader.

"With the release of this report today, we are confirming and quantifying earlier reports of excessive spending by the airport's former executive director and his management team that did not properly serve the mission of this airport," Luallen said.

Pattern of behavior

The audit reveals a series of incidents involving Gobb that went unreported.

Members of the auditor's staff were told about an accident that Gobb had on July 17, 2008, two days before he left town for medical treatment. Gobb was driving an airport vehicle that was towing a trailer loaded with old fence posts to be used on a farm, according to the report. The next day, the airport learned that two mailboxes had been damaged in an accident. The cost of materials and labor to repair the damage was about $132.

Airport officials violated policies, according to the audit, by not reporting the accident and not requiring the driver to give blood and urine samples and pay for any damage.

Airport public safety chief Scott Lanter told airport operations director John Coon that an accident report needed to be completed. But Coon told Lanter not to fill it out, the audit says. .

Just three months earlier, Gobb had bought three Breathalyzer kits for $320, which the auditor's office learned were for Gobb's personal use.

The auditor also questions the airport board's habit of not publicly discussing or including in its minutes many decisions, including its approval of $10,000 paid on Gobb's behalf to Cottonwood de Tucson, a treatment facility in Arizona where Gobb stayed in July 2008.

Many of Luallen's recommendations are aimed at better record-keeping and auditing, which could prevent future abuses.

Auditors found that some financial records, including credit card statements and expense reimbursements, had been removed from the airport accounting office in fall 2005.

The airport recently installed a card reader on the door leading to the accounting office that restricts access to that office during non-business hours. The auditor's office recommended that the airport retain scanned electronic images of financial records.

Rush to reimburse

Several former managers have scrambled to pay the airport back for personal purchases since the Herald-Leader began detailing questionable spending last fall.

For example, Rhodes wrote 15 personal checks totaling more than $5,000 in December 2008 for charges he made on the airport's tab dating back to 2002, according to the audit.

Earlier this month, Gobb paid $1,000 that he owed for the March 2007 purchase of exercise equipment.

Even the board's former chairman, Lovely, recently paid back $1,324 that was charged to the airport for a ticket to Hawaii for his wife, Sylvia Lovely, who is executive director and CEO of the Kentucky League of Cities. She attended a 2007 conference for airport executives with her husband. Bernard Lovely didn't reimburse the airport for her ticket until this month.

However, Lovely said he wrote a check for the ticket in 2007, but apparently it was never cashed.

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