Possible fraud at Port focus of criminal probe

The U.S. Justice Department has launched a criminal investigation of the Port of Seattle, following a recent state audit that accused the Port of wasting public money and raised the specter of possible fraud in construction contracts.

State Auditor Brian Sonntag disclosed the investigation Monday, releasing a letter his office had received Friday from U.S. Attorney Jeff Sullivan.

Sonntag said his office has received information indicating that multiple federal agencies could be involved in the probe, including the U.S. attorney's office, FBI and Office of the Inspector General for the U.S. Department of Transportation.

The investigation comes as the Port is scrambling to deal with fallout from the 334-page audit, which said the agency's lax management of construction contracts left it ripe for fraud or abuse. Much of the audit focused on contracts related to construction of the third runway at Seattle-Tacoma International Airport.

The federal probe will test whether the audit discovered evidence of corruption, or merely bureaucrats who cut corners on competitive-bidding rules to get projects done.

The Port Commission plans a public hearing at 1 p.m. today on the audit findings, and commissioners are expected to take up proposals aimed at increasing their authority over Port staff.

Sullivan's letter did not specify which audit findings federal authorities were interested in, but it did suggest agents will be looking for whistle-blowers.

To "ensure that our criminal investigation is not compromised," Sullivan's letter asked Sonntag to refrain from disclosing any information not already contained in the Dec. 20 audit report. In particular, Sullivan asked Sonntag to delay -- for at least three months -- releasing names of people interviewed for the audit, which included potentially damaging assertions from several unnamed Port managers and consultants.

Sonntag, in an interview, said he suspects the criminal investigation will look more closely at the audit's description of cozy relationships between Port employees and contractors.

Emily Langlie, a spokeswoman for the U.S. attorney's office in Seattle, said the office does not comment on criminal investigations before charges are filed. Asked about Sonntag's disclosure of the investigation, she said, "The auditor is going to do what he's going to do."

In a written statement, Port CEO Tay Yoshitani repeated earlier assurances that the Port has "zero tolerance" for fraud and that if any is found, "we will deal with it swiftly and appropriately, notifying law enforcement whenever necessary."

Two private consulting firms hired by Sonntag spent months examining Port construction contracts active from January 2004 through March 2007. Although they did not find proof of fraud, auditors discovered problems they said could be "indicators" of fraud and urged further investigation.

"The fact that the feds are taking it this seriously validates the work we did," Sonntag said. If no fraud is discovered, he added, "That would be great news. That would be a good story."

Port officials said they only learned of the probe Monday after seeing a report on The Seattle Times Web site.

Former Port CEO Mic Dinsmore, who was in charge for most of the period examined by the audit, was traveling Monday afternoon and could not be reached for comment, according to an assistant at the investment firm where he now works.

In an interview Monday morning before learning of the criminal investigation, Yoshitani said the problems identified by auditors were not due to corruption, but to a hard-charging, get-things-built culture that sometimes flouted the Port's own policies.

"The pendulum swung too far toward loose controls, and we need to bring that back," Yoshitani said.

Yoshitani said he already has been working on two key changes: hiring a chief procurement officer to manage all Port contracts, and hiring an independent investigator to determine whether fraud was involved in any of the contracts criticized by auditors.

The Justice Department's hunt for whistle-blowers could start with the unnamed Port managers and consultants who gave information to auditors.

One consultant, a construction manager, was "uncomfortable" with the award of a $115 million contract for work on Sea-Tac's third runway, according to the audit. The manager, a former federal contracting officer, told auditors "he knew that such an award would have been improper under federal rules," and didn't know enough about Washington state law to feel comfortable agreeing with the contract.

A Port manager also told auditors that the Port's top lawyer, Craig Watson, had OK'd negotiations with a construction company about the price of its bid before awarding the company a contract. That is illegal under state law. But Watson told auditors, "as far as I know I did not authorize negotiating prior to award and do not believe that would be appropriate."

The audit said the Port could be forced to refund federal money if an investigation discovers violations of federal grant rules. The Port has received at least $288 million in U.S. Department of Transportation grants since 1999 for construction of the third runway.

Yoshitani and other Port officials downplayed that possibility in interviews Monday, noting that independent auditors have monitored the spending of grant money, as required by the federal grants. They found no major problems.

At today's public hearing, the Port Commission plans to start considering ways that its five part-time commissioners, with minimal staff, can better oversee the multibillion-dollar agency.

The audit found that Port managers sometimes hid important information about major construction contracts from the commission.

Commission President John Creighton called the audit's findings "appalling" and said the commission today will take up several proposals in response. One would create a subcommittee to study how to increase the commission's oversight authority.

While that may strike some as underwhelming, Creighton said the commission needs to be thoughtful and deliberate. "This is only the first step. We need to look at what's in the best public interest, not what gets the biggest headline," he said. "I'm convinced the path we're on will provide positive change and a more transparent Port."

Yoshitani released a letter Monday to business and community leaders disputing some of the audit's more explosive findings -- in particular, the claim that the Port had wasted $97 million. Yoshitani said most of that money was spent hiring consultants for important work on the third runway at Sea-Tac and was not wasted.

The performance audit was authorized by Initiative 900, the Tim Eyman-sponsored measure approved by voters in 2005. That measure broadened the authority of Sonntag's office to investigate and criticize public agencies and their spending of taxpayer money.

Eyman, who plans to attend today's Port hearing, said he is proud the initiative has started to show results.

"We lit a fuse in 2005 and only now are the bombs starting to explode," Eyman said.

Staff reporter Mike Carter contributed to this report. Jim Brunner: 206-515-5628 or jbrunner@seattletimes.com

Bob Young: 206-464-2174 or byoung@seattletimes.com