A lawsuit alleging mismanagement of city funds, fraudulent financial practices and violations of city ordinances and the City Charter has been filed by the city of Crestwood against two former city officials.
The lawsuit, filed Nov. 19 in St. Louis County Circuit Court, alleges that former City Administrator Kent Leichliter and former Finance Officer Robert Wuebbels breached their fiduciary duties by manipulating financial records to misrepresent the city’s true financial condition to Mayor Jim Robertson and the Board of Aldermen.
The lawsuit also alleges professional negligence and breach of contract by Hochschild, Bloom & Co., which served as the city’s independent auditing firm from 1998 to 2002.
The lawsuit was filed on behalf of the city by J. Christopher Hesse and Andrew J. Martone of Bobroff, Hesse, Lindmark & Martone of Clayton.
After current city officials began an internal investigation into the accounting practices used by Leichliter and Wuebbels, the Board of Aldermen engaged Brown Smith Wallace to perform a forensic audit of the city’s finances for fiscal 2001 and fiscal 2002.
Based on the forensic audit, the lawsuit alleges that Wuebbels, with Leichliter’s knowledge, “engaged in a complex scheme to manipulate the financial accounts of the city of Crestwood so that the city budget would appear to be in balance and that the city was operating in a positive cash-flow situation, when, in fact, the city was operating in a serious negative cash-flow situation.”
The scheme, “devised and perpetrated” by Wuebbels and Leichliter, included fabrication of revenues, improper inter-fund transfers and fraudulent submissions of warrants, the lawsuit alleges.
As a direct result of the misrepresentations by Leichliter and Wuebbels, “the city actually had a year-end fiscal 2002 deficit of $990,322 instead of a $132,334 surplus” as the two reported to elected officials, the lawsuit alleges.
The lawsuit further alleges that because of Leichliter’s “failure to disclose said facts of the improper revenue entries and the improper fund transfers, the Board of Aldermen operated a 2002 fiscal year budget that depleted the financial reserves of the city, without the opportunity to adjust the budget during the fiscal year to balance the budget and resulted in a deficit operating balance.”
Leichliter and Wuebbels were unavailable for comment before the Call’s press time.
Contacted by the Call, Robert Offerman of Hochschild, Bloom & Co. said he was unaware of the lawsuit, but was aware of the forensic audit. In fact, Offerman said, his company had provided copies of its working documents for the fiscal 2001 and fiscal 2002 audits it performed for the city.
“Nobody contacted us during the investigation,” he said, noting that he was not the “engagement partner” for the Crestwood audits.
Because he had not seen the lawsuit, Offerman declined to comment, other than to say he was surprised to learn the suit had been filed.
“They could have at least inquired with us,” he said.
The lawsuit alleges that as a result of the breach of fiduciary duties by Leichliter and Wuebbels, coupled with their violations of municipal code and the City Charter, the city was required to:
“Borrow approximately $1.2 million to meet payroll and operating expenditures for fiscal year 2004, incurring total interest, costs and fees in excess of $10,000 on the borrowed money to date, which will continue to increase over time.”
“Terminate the employment of six city employees.”
“Expend significant amounts for the services of a forensic accountant to rectify the prior false and misleading accounting” by Leichliter and Wuebbels “and to prepare amended financial statements for fiscal year 2001 and 2002.”
“Expend in excess of 500 hours by the city administrator (Greer) and the director of finance (Diana Madrid) to investigate the financial improprieties committed” by Leichliter and Wuebbels.
Regarding Leichliter, the lawsuit seeks a judgment rescinding his employment contract with the city for 2001 through 2003 and ordering him to repay the city salary and benefits he received for those years; a judgment for the amount of interest, costs and fees on the roughly $1.2 million loan taken by the city; a judgment for the cost of the forensic accounting and preparation of amended financial reports for the city; a judgment for “the reasonable value of the services of the city administrator and director of finance during 2003 to investigate and correct the city’s financial statements for the fiscal years 2001 through 2003”; a judgment for the city’s costs and attorneys’ fees; and a judgment for compensatory and punitive damages in an amount to be proved at trial.
During a Dec. 10 closed session, the Board of Aldermen voted unanimously to approve a “reassignment agreement” in which Leichliter, who had served as city manager since 1978, would retire from his post Dec. 31 and become an adviser to the Board of Aldermen in the newly created position of administrative adviser until March 2004. Under the terms of the agreement, Leichliter would continue to receive his $91,056 salary until March 1, 2004.
However, during a closed session Oct. 28, the Board of Aldermen voted to terminate the reassignment agreement and to terminate all payments to Leichliter.
The lawsuit also seeks a judgment rescinding the reassignment agreement and ordering Leichliter to repay the city the salary and benefits he has received under the terms of the agreement.
The suit alleges that as a result of Leichliter’s “willful, fraudulent misrepresentations and concealment, the city continued Leichliter’s employment and paid him salary in 2001 and 2002 in excess of $189,000 plus benefits, and further entered into the reassignment agreement with Leichliter, which it would not have done but for the fraudulent concealment, and has paid to or on behalf of Leichliter in excess of $300,000 pursuant to the agreement to date.”
Regarding Wuebbels, the lawsuit seeks a judgment ordering him to repay the city all salary and benefits he received during the years through 2003; a judgment for compensatory and punitive damages in an amount to be proved at trial; and a judgment for the city’s costs and attorneys’ fees.
At the time his employment was terminated in January, Wuebbels earned a salary of $72,510.
The lawsuit also alleges that as a direct result of Hochschild, Bloom & Co.’s professional negligence and breach of contract, “the city of Crestwood sustained damages in excess of $100,000 as well as the fees paid to Hochschild, Bloom for the negligently performed work.”
The suit seeks a judgment in excess of $100,000 against the auditing firm, “plus the amount of fees paid to defendant Hochschild, Bloom for performance of the city’s independent audit and preparation of the city’s Comprehensive Annual Financial Reports for fiscal years 1998 through 2002.”
The lawsuit alleges that during its audit of the city’s fiscal 2002 records, Hochschild, Bloom & Co. “identified questionable entries made by defendant Wuebbels,” yet the company’s “only attempt to verify the questionable entries was by questioning defendant Wuebbels.”
Hochschild, Bloom & Co. “did not expand its audit testing to review additional journal entries in order to discover whether or not there were other questionable transactions. In fact, a properly conducted audit would have revealed over 100 improper, unauthorized and illegal journal entries made by defendant Wuebbels in the city’s general ledger,” the lawsuit alleges.