Civic Accountability -- Honesty in Local Government I

[Mark Kindt]

At this point, you now understand the kinds of facts that would be relevant to future legal cases against the City as you considered Disclosure Problems No. 1 through No. 7 (particularly a potential securities lawsuit consistent with the federal standards shown by the SEC Harrisburg Release).

From here on out, we will be working without a net. Again, I flag that I am engaged in some speculation about what a future litigant might find, if a serious litigation campaign was launched against the City on either the securities or the antitrust issues.

There is a difficult transparency problem that arrives with any public-private partnership, like that between LHA and the City. The public records access laws won’t apply to the private partner in most of the situations. In our situation, we have public officials siting on the board of LHA; a board that is making decisions that greatly affected municipal assets and right. However, the LHA records are generally not legally available for public access or review.

With Subsidium, the problem gets even worse. It wasn’t retained by the city. It improperly represented that it was doing work for the city, but the public has no access to its records. All transparency for the public is now lost, effectively obstructed by the design of the public-private partnership and further lost in the vendor relationship between LHA and Subsidium. So here we have a kind of effective concealment that is legal, yet, works to the detriment of any public knowledge of what our official(s) asked Subsidium to do for them and what Subsidium actually did. Citizens cannot get to either the LHA or the Subsidium documents.

To summarize, our city administration led a closed process that reached a decision to liquidate the hospital, despite a superior proposal to keep it open. The process chosen was one that would legally minimize any public access to the decision-making of the city officials serving on the LHA board.

[Mark Kindt]

Ms. Allen,

Thank you for your comments.

I will be discussing records retention problems in a forthcoming discussion on "spoliation damages".

I am satisfied that the City has no additional records on its relationship with Subsidium. The City has not withheld information on this particular issue to my knowledge.

However, I do love how quickly Subsidium vanished. It folded its tents and took off into the night, perhaps, at the first sign of trouble. We will never know. It remains a problematic black-hole for me.

[Stan Austin]

Mark-- I am going to take a big leap and say that I along with presumably many others are following your analysis with great interest. While I am very disappointed with the actions of our public officials to date, I must say that I feel like a student in a classroom of securities law 101. Thanks so far for the free classes! Stan

[Jim O'Bryan]

Remember when Summers had the records retention ordinances changed? Don't most records get purged at two years? Could this be one of the reasons that Cuyahoga County Courts appear to be dragging their heels on any cases pertaining to Lakewood Hospital?

Lori

They took it from 3 years to 2 years at his start. At the time I pointed out this was a troubling sign. Especially as the cost of mass storage gas fallen from $5,000 for 1 MB to $89.00 for 1,000,000+ MBs. It was noted that this was covering up something. Noted at the Observer, another reason they want it gone.

Also there are many other records that were asked for outside of the Hospital, that are not answered.

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[Bridget Conant]

The time limit stops when records are requested in a lawsuit. As I'm sure Mr Kindt will discuss, they were put on notice that certain records were requested and if they destroy them they are in more legal hot water.

[Mark Kindt]

Please take a moment and read the first paragraph of this preliminary memorandum from Subsidium. Subsidium is making all kinds of representations about what the "municipality" has instructed it to do. The City denies any contractual relationship with Subsidium and reports that it has no documents with respect to any relationship with Subsidium.

I will have more to say about this later.

[Lori Allen _]

Thanks for the info.

At the risk of slightly thread-drifting, I will say that it appears that they sometimes do not even follow their own records retention schedule. According to Building & Housing records retention schedule 14-07, permits, correction notices, correspondence, etc. pertaining to building & housing stuff is supposed to be permanent. From what I have heard from some sources, they are only keeping many of these permits for 18 years. Blueprints, permits, alterations, etc. all shredded, allegedly. Why?

It may seem like small potatoes, but those blueprints, permits, etc. could really come in handy if someone wanted or needed to do something significant to the house.

Again, why?

[Mark Kindt]

I hope you have all by now read the first paragraph of the Subsidium memorandum.

As a misrepresentation, this document would be another link in building a securities law case. For the antitrust case, it sets the stage for an inquiry into whether or not the LHA proposal process was actually a proposal steering process possibly in violation of the Sherman Antitrust Act.

It also leads us into a unique thought experiment about how our local government actually operated.

Experiment A

If the statements in the document are literally true, then we are in the midst of a serious open meetings problem. If the municipality indeed authorized Subsidium to proceed as described in the document, then the City should have some very detailed records of the deliberations and/or resolutions that let the solicitation search take place for it. That is, how was this activity authorized? Was the full council consulted? If not, why not? Keep in mind that the document is also offering to lease or sell various rights that the City might have or make other arrangements. Clearly, it is offering a new lessee the opportunity to enter into a 20 year lease for the delivery of comparable hospital services. So, if city council actually did this, how was it done?

Experiment B

The city administration has told us that it did not have a contract with Subsidium and has no documents to support a relationship with Subsidium. So now, let's assume that the first paragraph of the document is false, i.e., that the City did not authorize Subsidium to do what it did. Now, this is where it really gets interesting! Who's really governing Lakewood?

This is the classic public-private partnership dilemma. Before you know it, a private board is making governmental decisions for the citizens without any legal authority to do so. The open process that the electorate expects disappears in the blink of an eye. As each of you has read about the hospital closure over the past two years, does anyone doubt that the citizens are facing the risk of an income tax increase as a result of the hospital closure? Now with a hospital shuttered and on its way to future demolition, we can see a fundamental governance problem in the City.

Who was setting revenue and tax policy for the City of Lakewood in 2014, LHA or the city administration?

It appears as if LHA was representing itself as acting for the municipality(!) This was done through the activities of its third-party vendor Subsidium. Unbelievable! Here we have LHA using a third-party to structure a process designed to generate an insider opportunity for the incumbent lessee and then rejecting the proposal that would most likely have retained the most revenue for the City. Thereby, clearly maximizing the risk of future revenue losses or tax increases to the citizens and/or taxpayers. What role did our city council have in the rejection of the Metro Health System proposal? None! They were excluded from exercising their electoral responsibilities.

This all leads to the next disclosure problem that addresses various failures to meet fiduciary duties, but here we've witnessed a fundamental failure in civic governance.

Thank you for your patience in following this somewhat complex line of thought.

[dl meckes]

I also want to thank you, Mark, for a fascinating series of posts.

[Bridget Conant]

There was a short piece on WCPN the other day about the Lakewood Hospital closure featuring Dr Kilroy and Mike Summers. A short version is here: (Thanks to Mjkuhns for his response to the story at the bottom)

http://wcpn.ideastream.org/news/in-lakewood-moving-on-after-a-long-contentious-debate

Mayor Summers further opined (I'm trying to obtain the full transcript) that a big part of the reason for the opposition was that they just didn't "understand" the whole situation and the deal they negotiated.

From what I'm reading here, that may well be true, but only because the city and its officials may well have deliberately misled us and preferred that we understood as little as possible about the machinations. Clearly, if they are contradicting themselves in court testimony and filings, something is not right.

If there was a concerted attempt to mislead, that is a violation of some law, at some level.

[Mark Kindt]

Thank you Ms. Conant. That was the perfect lead into my next post.

Disclosure Problem No. 8: Failure to Manage Conflicting Fiduciary Duties

Prior to January 2015, public officials were negotiating a Letter of Intent related to Lakewood Hospital. Given that these public officials knew or had a reasonable basis to know that Lakewood Hospital would likely close, did they fail in their fiduciary responsibilities to the City by failing to disclose such facts to all members of city council and to the public? Did public officials make affirmative statements to the contrary about the hospital not closing or misrepresent the viability of the hospital in violation of their fiduciary duties to the City during this period?

Given that the hospital closure would affect 1.) the collection of future hospital employee income tax revenues, 2.) the payment of future hospital lease revenues to the City, and 3.) any reversionary contractual rights that the City possessed under existing contracts, these financial conditions were clearly material.

Did our public officials sitting as ex officio board members on LHA let their fiduciary obligations to LHA supersede their fiduciary obligations to the City of Lakewood itself? Given the actual conflicts-of-interest described in Disclosure Problem No. 5, this becomes a natural area for inquiry and investigation.

Aside from potential failure of fiduciary duties, did public officials have a broader obligation under federal securities laws to disclose these likely anticipated material changes in the financial position of the City during 2013 and 2014?

Given the suppression of the proposal from Metro Health Systems with the knowledge and the participation of the city administration (previously discussed as Disclosure Problem No. 2), each of this issues seems to be highly productive areas for investigation for future litigants.

These disclosure problems might support a case theory that public funds were being improperly diverted for private third-party use. The Letter of Intent and the Master Agreement both provide ample evidence that such was the actual intent of the parties. The question of whether this diversion was legal, improper or tainted would be up to a court to determine.

At this time, I cannot answer the questions that I pose here. I merely describe this as another obvious legal risk that was taken by the city administration during the process to close the hospital.

[Mark Kindt]

What's so troubling about all of this is that the participants have been so absolutely deaf about these sorts of issues.

Not even the Ohio Ethics Commission seemed to have much effect. The LHA deal was never re-evaluated in light of the established conficts-of-interest that the OEC opined upon. Keep in mind that these conflicts have potential misdemeanor criminal consequences. Nope, not a problem for the City. Full speed ahead.

The deal couldn't be re-evaluated, because all of the faults would begin to show. Like the improper suppression of the offer from Metro, etc. Or the potential antitrust violations.

Because I was free that morning in January 2015, I attended the Mayor's press conference. Because I was curious, I read the Letter of Intent. Because I had a calculator, I went through that Letter on a section-by-section basis to estimate the value of the proposal. Because I was interested, I met with some members of city council who were just as concerned as I was.

By February or March of 2015, I had concluded reasonably that I and the public were being lied to by the city administration. By April 2015, maybe earlier, we sharp minds with pencils all, had concluded that the deal to close the hospital was at least a "wash" and probably worse--negative economically. The entire alleged $120 million value to the City and the community was illusory--a mirage.

Others organized and filed the Taxpayer lawsuit.

The city administration did what it did and has to live with the consequences. What it did, was not just close a hospital and impair the economic future of Lakewood; but was likely done so in a way that would maximize legal liability to the City and the personal liability of its own leadership.

Yes, we got the periodic inserts in our water bills and each of us knew that we were still being lied to. What did the City's bondholders hear or learn. I don't know. Did they get better information that we did, I doubt it. If they did, so much the worse for the rest of us.

The face of "health care" changed in our community. It diminished. The malign face of legal risks to the City have only grown. The two were, if not purposely interwoven, then at least carelessly so.

The citizens lost on both.

[todd vainisi]

Mark, thanks so much for these informative posts. It has been fascinating to read. And I also applaud your bravery in the face of ominous calls.

[Bridget Conant]

I met with some members of city council who were just as concerned as I was.

Yet they voted for it. And then belittled the naysayers, again insinuating no one understood.

I think COUNCIL didn't fully understand. The deal was complex - even if they did read through the lengthy documents with lots of legal and business mumbo jumbo,
they were constantly reassured by the city and the Clinic, with their "experts" and plentiful legal counsel, that they were doing the right thing.

[Jim O'Bryan]

I met with some members of city council who were just as concerned as I was.

Yet they voted for it. And then belittled the naysayers, again insinuating no one understood.

I think COUNCIL didn't fully understand. The deal was complex - even if they did read through the lengthy documents with lots of legal and business mumbo jumbo,
they were constantly reassured by the city and the Clinic, with their "experts" and plentiful legal counsel, that they were doing the right thing.

Bridget

Actually I think we saw one council person after another, realize the deal, no matter how bad, was done and feared "the big hole of nothing" they all started to desperate cling to. Read what they said, "What if there is nothing?" "Well certainly the revised deal is slightly better."

Basically, back it or take the blame for "nothingness" there.

One of the very real sides of politics is needing the most votes and help in getting things done. Burn a bridge, career over.

Civic accountability be damned.

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