Lawyers for Providence developer Antonio L. Giordano say the government has relied on "misleading and incorrect statements" from a draft report of HUD's inspector general.

01:00 AM EDT on Thursday, May 26, 2005

BY JENNIFER LEVITZ
Journal Staff Writer

The U.S. Department of Justice alleges in court records that the defunct Hillside Health Center was a "fraud from the start," with calamitous consequences for its elderly residents.

The government alleges that Providence developer Antonio L. Giordano, half-owner of Suburban Mortgage Associates Inc., opened Hillside in 1999 with a $12.9-million government-backed loan, and then let the nursing home deteriorate while keeping the "cash flowing" -- as much as $900,000 a year -- to a network of 13 companies owned by Giordano and his family.

The allegations about Suburban Mortgage, of Bethesda, Md., and the confirmation that the company is a target of a federal grand jury, were filed by the Department of Justice in U.S. District Court in Washington, D.C., this month in response to a lawsuit filed by Suburban Mortgage on April 29.

Suburban, which finances housing for the poor and elderly nationwide, is suing the U.S. Department of Housing & Urban Development, saying the government has backed out of its agreement to cover the Hillside loan in case of default.

Giordano placed Hillside into state bankruptcy in March 2004, leaving millions in debts. The nursing home closed in June, forcing 100 people to find new homes. State court records showed Hillside had been bouncing checks for staff, food and basic supplies and that some residents suffered from poor nursing care.

Last month, HUD refused Suburban's claim -- filed last May -- seeking $12.3 million from the government. Suburban had obtained loan insurance under the agency's Section 232 nursing home loan program. These loans, which have drawn criticism from HUD's inspector general, are "non-recourse," meaning that the agency pays back the lender if a nursing home fails.

But HUD, in a highly unusual move, last month rejected Suburban's claim "on the grounds of fraud or material misrepresentation" by the company.

Suburban immediately sued, leading to a flurry of filings by the U.S. Department of Justice, representing HUD and claiming impropriety by Suburban.

The two sides are awaiting a decision by U.S. District Court Judge Henry H. Kennedy on Suburban's attempt to force HUD to pay the Hillside default.

SUBURBAN MORTGAGE is a 26-year-old company that says it has arranged $4.5 billion in government-backed loans nationwide.

According to court documents, the company is equally owned by J. Walsh Richards Jr., and Giordano, a 61-year-old developer who lives in North Kingstown. One of the three directors is Washington lawyer and lobbyist Thomas H. Boggs Jr., chairman of Patton Boggs LLP, one of the biggest lobbying firms in Washington.

Patton Boggs is representing Suburban in its lawsuit against HUD. In court filings on April 29, it accused HUD of "blatant disregard of its insurance obligations under the FHA insurance contract."

Yesterday, Giordano's spokesman, Guy Dufault, referred questions to Patton Boggs. Brian Hale, a spokesman for the firm, declined comment. "We don't comment on cases in that status, but we believe that our papers speak for themselves," Hale said.

In court documents, Suburban's lawyers say that the Department of Justice is wrongly suggesting that the company permitted improper payments from Hillside to other companies owned by Giordano. HUD's rules do not prohibit nursing homes from using vendors owned by relatives.

"It suggests that $900,000-plus in such payments were not only improper but were used to enrich Giordano and his family," Suburban's lawyers wrote.

Giordano's lawyers also say the government has relied on "misleading and incorrect statements" from a draft report of HUD's inspector general.

The inspector general began an audit of Suburban in 2003, after two other nursing homes financed by Suburban -- the Coventry Health Center and Edmund Place in East Providence -- went into default. The government reimbursed Suburban about $14 million for those two failed homes.

The inspector general's audit of Suburban includes two other nursing homes, Riverview in Coventry, and the financially troubled Mount Saint Francis in Woonsocket. A draft report of the audit was used in preparing the government's response, according to court records.

"A common feature of these projects is the interest held by Antonio Giordano in each of them," according to U.S. Attorney Kenneth L. Wainstein. "In addition, Giordano and his immediate family own a series of companies that received substantial payments from all of these nursing homes."

Suburban responded in its court papers that Giordano never held an interest in Edmund Place.

Suburban's lawyers argue in court documents that the government's refusal to pay the Hillside claim has forced the company to the "brink of financial ruin, as well as caused injury to its reputation in the mortgage banking community."

The company said in court records that since 1978, just 10 percent of Suburban's loans have resulted in default.

COURT DOCUMENTS do not detail how well HUD scrutinized Giordano to begin with. Since 1995, the inspector general has raised concerns over HUD's level of oversight of operators of for-profit, government-backed nursing homes.

In March, The Journal filed a Freedom of Information request, seeking information on HUD's credit check of Giordano, who was a major delinquent borrower in Rhode Island's credit union crisis of 1991.

HUD still has not provided details on its credit check of Giordano.

HUD knew, when it backed the $12.9-million loan for Hillside in 1998, that Giordano also held an interest in the lender, Suburban Mortgage. But in the documents filed this month in U.S. District Court, the government argues that Giordano did not properly disclose "the extent of the relationship."

According to the government, "Mr. Giordano profited immensely from this transaction."

Giordano and his company, Consultants, Inc., received commissions of $292,034 for bringing in the Hillside loan, according to court documents.

"But far beyond this commission, Giordano and his immediate family regularly received identity-of-interest payments from Hillside Health Center, over $900,000 in 2001 alone," wrote Wainstein, the U.S. Attorney.

While Hillside was struggling to pay bills in 2001, Hillside was paying, in one instance, $3,000 a month to My Place, for an employee morale program run by Giordano's daughter, according to court documents.

The federal government alleges Hillside was in default to Suburban for more than three years before the company notified HUD. In laying out its case, the government talks of the "calamitous consequences that Suburban's failure to abide by its promise to act as a prudent lender may have caused the residents of the Hillside Health Center."

Wainstein argues that HUD could have intervened, protecting the business and ultimately residents.

"This kind of HUD intervention would have surely meant that Mr. Giordano could no longer pay himself hundreds of thousands of dollars a year for 'services' performed on behalf of the nursing home," wrote Wainstein.

Suburban, he wrote, "sat idly by while the project was placed into receivership" and then asked to be reimbursed for the default.

"These otherwise inexplicable events, which benefited Hillside's owners to the detriment of HUD, can best be understood in light of the fact that the project's owner, Antonio L. Giordano, is also the 50-percent owner, executive vice president, and a board member of Suburban," Wainstein wrote.

"The facts in this case lead to the inevitable conclusion that Suburban never intended to abide by any regulation, directive, requirement or promise that would interfere with its owners' ability to make money."

In response, Richards, co-owner and president of Suburban, said that problems filling the beds at Hillside caused the financial troubles. In in affidavit filed in U.S. District Court on April 29, Richards wrote that Suburban was not ignoring the problems, but took multiple steps to help Hillside.

The lender followed government guidelines for avoiding a default, Richards said, but "through an administrative oversight," Suburban did not seek HUD approval to delay loan payments when Hillside got into financial trouble shortly after opening in 1999. Richards said that Suburban reported the default to HUD in March 2003 and that HUD was aware of the company's strategy to protect the loan.

Suburban's lawyers cast doubt on the assertion that the government would have intervened to save Hillside.

Digital Extra: Look back at a special 2004 Journal report, "Resident #1," looking at the nursing-home system in Rhode Island and focusing on treatment of Germaine Morsilli at Hillside Health Center:

http://projo.com/extra/2004/nursinghomes/