Inspector General: Questionable Practices Invalidate Property Auctions

Property auctions conducted by the Lieutenant Governor’s Office in 2012 and 2013 were so marred by schemes and sloppiness that most of the sales should be voided, according to the finding of a V.I. Inspector General’s audit made public today.

The report cites “highly irregular and questionable practices,” particularly in the St. Thomas-St. John district auctions.

Most egregious was an alleged scheme to manipulate the bidding process, shut out legitimate bidders and transfer properties at undervalued prices.

The scam required collusion by at least two bidders, the report states.

“There is also a strong indication that one or more officials from the Lieutenant Governor’s Office either participated in the bid manipulation scheme or were aware of it happening and failed to prevent it from continuing.”

Auditors also found that the office failed to fully document notice to owners of pending sales in about 50 percent of the cases, that it sold some properties it had no right to sell, that it sold some properties that were misidentified and turned out to be roads, and that it routinely failed to recapture advertising costs for auctions from the delinquent taxpayers involved. This last practice resulted in a loss of “at least” $276,046, the report says.

In response to a request for comment, Shawna Richards, director of communications for the Lieutenant Governor’s Office, said Wednesday that Lt. Gov. Gregory Francis would not be issuing a statement.

Gov. John deJongh, in his formal response released as part of the final audit, says he agrees with most of the findings and indicates the lieutenant governor shares the response.

The final report also contains an advisory opinion from Attorney General Vincent Frazer, dated Aug. 28, 2014, in response to a request from Francis as to whether and how to proceed with reversing the sales as recommended by Inspector General Steven van Beverhoudt. Frazer’s opinion is almost more damning than the audit.

Frazer wrote to Francis that the Lieutenant Governor’s Office’s “failure to conform its behavior in accordance with law jeopardized the property owner’s rights, other bidders’ expectations, and the financial opportunities that may have been afforded the Government of the Virgin Islands pursuant to law.”

Frazer said the Lieutenant Governor’s letter did not advise that the inspector general’s “factual description of what is alleged to have transpired in 2012 and 2013 is incorrect. If it is true what the (inspector general) described, there is no rule or regulation which authorizes (the Lieutenant Governor’s Office) to engage in the bidding process used at the time.”

The administration transferred responsibility for collection of property taxes from the Department of Finance to the Lieutenant Governor’s Office in deJongh’s first year in office, December 2007.

The audit states that as part of the Lieutenant Governor’s Office’s “attempt to reduce the territory’s large delinquency in real property taxes and sewer system user fees,” the government decided to sell properties involved in delinquencies of 10 or more years, as is authorized by the V.I. Code.

Between Jan. 25, 2012, and June 26, 2013, the Lieutenant Governor’s Office held 12 auctions and sold a total of 153 properties.

It actually advertised 411 properties, but 258 of those were removed from the list of delinquent properties before sale “at the discretion of the lieutenant governor” or because the owner paid the back taxes or fees, or made a payment plan.

Auditors found no problems with the first auction. But after that the rules changed and problems began, the report states. Auditors identified 15 properties in the St. Thomas district that were not awarded to the highest bidder but rather to the second or third recorded highest bidder. There was just one instance on St. Croix.

What had changed was the policy of what to do if the highest bidder failed to post 10 percent of his bid on the day of the sale, as required by law. Rather than invalidating the auction in such a circumstance, the purchase was awarded to the next highest bidder, the report says, adding that the lieutenant governor changed the amount of time a buyer had to pay the full amount from 10 days from the auction to 30 business days.

“The scheme required cooperation of at least two individuals who would bid on a given property, with an extremely inflated bid being placed right after the planned winning bidder, thereby closing off the bidding process,” the report explains.

“Some bidders were used as plant bidders, while others took turns serving in this capacity,” according to the report. “The highest bidder, and at times the second highest bidder, would not pay the 10 percent deposit by the required due date, thereby canceling their bid, resulting in the property being awarded to the next highest bidder. There were instances where the nonresponsive highest bidder for one property would be the second or third highest bidder for another property at the same auction…”

In one example, the highest bid on a property was $110,000, but it went for the third highest, which was $15,423.

In another case, the highest bid was $100,000 but the second highest – and the amount it actually sold at – was just $10,100.

Francis changed the policy again in April 2013, during the preliminary stage of the inspector general’s investigation, notifying staff that awards would no longer go the next highest bidder when the highest bidder failed to post the required 10 percent.

The audit was conducted in response to allegations of questionable bids and failure to comply with proper procedures, van Beverhoudt said in his cover letter on the report.

To read the full audit report, go to www.viig.org.

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