making local government more ethical

Hiding Conflicts vs. Disclosing Them

Hiding a conflict of interest can lead to much worse problems than appearing before an ethics commission and getting your hand slapped, or even getting slapped with a fine. A criminal case in Winston-Salem, NC this week shows how bad things can get.

According to an article in today's Winston-Salem Journal, the chair of the Housing Authority of Winston-Salem allegedly hid his interest in a property that was purchased at foreclosure and quickly sold to the Housing Authority at a sizeable profit. He and his associates were indicted on wire- and mail-fraud charges, as well as money laundering.

The two partners in the company that sold the property to the Housing Authority were local business people with no involvement in property development until they served on a task force in the 1990s that looked for ways to redevelop the city's east side. Usually the problem is developers serving on task forces, not task force members becoming developers.

This is the way the conflict was allegedly hidden. The partners sold the property in 2002, but kept a second mortgage on it. When the purchaser got into trouble, the other partner purchased the property at foreclosure to protect the second mortgage, and then immediately transferred the bid to the partners' company, which sold it to the Housing Authority two days later at a 45% profit.

The Housing Authority had ten days to make an upset bid on the property instead of purchasing it from the bidder, but that would have wiped out the partners' second mortgage. The authority chair pushed for the purchase, not disclosing his interest, and the purchase was made.

The authority chair says that everyone knew he had an interest in the company that sold the property to the authority. One wonders if the chair spoke out in favor of disclosure statements from people on boards such as the housing authority. An invasion of privacy, he probably would have said, if the topic came up. As I keep saying, ethics programs are intended not only for enforcement against, but also for protection of government officials.

Robert Wechsler
Director of Research, City Ethics