FRAUD LAWSUIT OVER LP&L COOLING TOWER WORK TRIGGERS AUDIT REQUEST BY CITY

On February 6, 2013 Talon, an Amarillo company which has a contract to provide LP&L with utility construction services, sued its Lubbock based project manager alleging fraud. The lawsuit alleges that Talon’s project manager, who was responsible for supervising the construction and repair work to LP&L’s Massengale Station cooling towers, created fictitious companies and invoices and submitted them to Talon for payment. Talon alleges that it was bilked out of more than $340,000 as a result of the scheme. The lawsuit can be found here.

When notified of the suit, the City finance department began to look into LP&L payments to Talon and other contractors currently being paid by LP&L for utility work. The results of the preliminary investigation are disturbing. Pamela Moon, Executive Director of Finance for the City reported that there were payments made without Electric Utility Board (EUB) approval and insufficient documentation of work done. Moon prepared a spreadsheet detailing payments made to Talon for 2012 and found that more than two million dollars had been paid to Talon for work on the Brandon, Massengale and Cooke stations. Of the amount paid to Talon in 2012, only $1,034,000 was approved by the EUB. More than 1.6 million was paid to Talon without EUB approval. According to LP&L guidelines, no purchases of more than $100,000 may be made by LP&L without EUB approval. Moon also found that several invoices appeared to be “split” to avoid the requirement of EUB approval. A split invoice is one for a project that is billed in stages instead of all at once in order to avoid the $100,000 EUB requirement. The spreadsheet is here.

Because of the large amount of money paid to Talon by LP&L in 2012, the City investigated the nature and amount of work performed on the cooling towers, especially at the Massengale station. James Gilmore, who is the Electric Production Superintendent for LP&L, told City investigators that some of the work on the cooling towers did not take place because it was determined that the “upgrades” to the towers were not needed. An e-mail from Steven O’Neal to Lee Ann Dumbauld discussing the cooling tower work can be found here.

Another contract which raised questions with City auditors is with a company called CII Cardinal (Cardinal). Cardinal is a small Illinois based company that specializes in industrial valve repair. On February 20th, City Manager Lee Ann Dumbauld sent an E-mail to Gary Zheng, CEO of Electrical Utilities. The e-mail questioned the amount of money paid to Cardinal since 2011, the failure of the contract between LP&L to be ratified before work performed, the fact that the contract had no terms, pricing, schedule of charges or deliverables. She also questioned why the contract was not sent out for competitive bid. Dumbauld expressed concern that she would not be able to certify the City financial statements to the City Council because of the lack of LP&L internal accounting controls. The e-mail can be found here.

EUB Chairman Gail Kring responded to Dumbauld’s e-mail the next day. His response can be found here. Kring takes the position that the amount paid to Cardinal was not excessive because the payments were for work performed over the course of three fiscal years. He also states that the projects were performed within LP&L purchasing authority and bidding guidelines and that any allegation of misappropriation of funds is “misleading and wrong.”

Pamela Moon responded to Kring the next day with the results of her investigation. She states that the contract approved by the EUB between Cardinal and LP&L did not include any terms, pricing or schedule of charges. She also states that the contract does not contain a reference to an appendix. She found that payments were made to Cardinal before EUB ratified the contract and that payments approved by the EUB were much lower than the amount of payments made. EUB approved payments of approximately $400,000 but actual payments made to Cardinal total almost 1.7 million. Moon also interviewed James Gilmore regarding the Cardinal contract. Gilmore told Moon that he was the one who entered into the contract with Cardinal and that the job was never released for competitive bid. He also told Moon that he did not get any competitive bids or solicit quotes. Gilmore’s statements to Moon seem to contradict Kring’s assertion that the Cardinal contract met LP&L bidding and purchasing guidelines. Moon’s e-mail can be found here.

In reviewing the documents provided to me in the light most favorable to LP&L it appears that there is a serious lack of internal accounting controls involving a large amount of money. The lack of accounting controls spans several years. If nothing else, there is an appearance of impropriety which casts a cloud of uncertainty over the entire LP&L organization. Without an outside audit of the Talon and Cardinal contracts, it is impossible to determine if funds have been misappropriated or if more serious financial wrongdoing or even criminal acts have occurred. The City Manager is charged with the duty to the taxpayers of the City of Lubbock to make sure that city funds are not being misappropriated or wasted. Serious questions have been raised regarding LP&L’s contracting and procurement procedures and the City Council should respond by immediately authorizing an outside audit of the Talon and Cardinal contracts. If the City Council refuses to authorize an audit, the City Manager should conduct one under the authority granted to her by the Texas Government code.

2 comments

  1. Jo Conatser says:

    How embarrassing as well as distressing that the City of Lubbock is notified of fraud by Talon! The lapses in following established policy and procedures will probably reveal additional cases of fraud. At this point, Talon and Cardinal audits are absolutely needed even though the horse is already out of the proverbial barn door. The magnitude of this problem will probably grow and grow….i would expect that the appropriate persons would no longer be employed at the conclusion of the investigation. As a taxpayer, I expect the City to make sure that funds are not misappropriated or wasted.

    • Lawson says:

      Good point Jo. This is not what we pay all our taxes and 6 figure incomes for missing. LP&L was separated from city council because of misuse of funds, but they seem very capable to misuse the trust of the owners of the company on their own. Time for a shareholders meeting, IMHO.

      Lawson
      Texas