A former department chief at Detroit Public Schools and his assistant used secret offices and their own computer system to improperly divert more than $57 million in school funds to vendors who provided little, if anything, in return, according to sworn records reviewed by the Free Press.
Documents in a Wayne County Circuit Court lawsuit brought by DPS allege that Stephen Hill of Detroit — director of DPS risk management from 2001-05 — received luxury vehicles and other kickbacks. Some of the vendors who benefitted were friends or associates of Hill’s or relatives of Hill’s assistant, Christina Polk-Osumah of Detroit, court records allege.
When Hill left the district in September 2005, he received a champagne-and-tenderloin farewell bash that cost the impoverished school system $40,000, according to the suit.
The FBI now is investigating the alleged fraud scheme.
Robert Bobb, the district’s emergency financial manager, said in a statement that the case is another example of how “DPS has been a place where people use the district as their personal banker and where there has been a cesspool of corruption, and in cases such as this one, both national corporations and local individuals took advantage of Detroit Public Schools.”
Hill could not be reached for comment. His former attorney denied that Hill acted improperly and said he will be vindicated.
DPS filed the lawsuit against Hill, Polk-Osumah and others in June 2008, claiming the vendors, who were paid through wire transfers, knew the payments violated district policies when they accepted them. The suit seeks to get the district’s money back.
Polk-Osumah declined to comment.
Costly payments trigger DPS lawsuit, FBI probe
As chief of risk management for Detroit Public Schools, Stephen Hill’s job was to save the district money.
But as Hill left his post in September 2005, saving money was not on the menu.
The 200 guests at his going-away bash, a golf-themed affair atop a parking deck, feasted on Chilean sea bass, grilled petite tenderloin of beef and bananas foster, washing it all down with champagne, Jack Daniels, martinis and imported beer.
The tab: $40,000.
Who paid: Detroit’s impoverished public schools.
The allegations about the party are contained in thousands of pages of documents in a DPS lawsuit that portrays Hill and Polk-Osumah, as running a shadowy side operation outside the scrutiny of district leaders.
As the lawsuit proceeds to trial in July, the $40,000 reportedly spent on Hill’s party is hardly the worst of it.
DPS says it can prove Hill and his aide, using secret offices and computer systems, diverted more than $57 million in illicit wire transfers to vendors who did little or no work. The vendors — friends or business associates of the pair — knew the payments were improper, but accepted them anyway, the district contends, while Hill received luxury automobiles and kickbacks from at least two of them. Two other vendors later hired Hill.
Filed in Wayne County Circuit Court in June 2008, the suit names Hill; Polk-Osumah; two international insurance companies; Detroit insurance executive Lawrence Long and his firm, Long Insurance Services, and Detroit businesswoman Sherry Washington and three partners, among others.
Bobb said the suit, which seeks to get the district’s money back, is “moving too slowly, and we look forward to it being resolved and those responsible being held accountable for their actions as quickly as possible.”
Long’s firm received the most money — roughly $25 million in wire transfers. Although most of that, $15 million to $17 million, was for insurance premiums, the district claims the rest was for work that was “woefully inadequate” given the tab. DPS contends that Long also paid Hill a $115,000 kickback.
The FBI has been investigating the alleged fraud scheme since at least 2007, according to federal court records.
Hill could not be reached for comment. Attorney Benjamin Whitfield Jr., who represented Hill until earlier this month, said that Hill did nothing improper. Whitfield said that he has told by federal authorities that Hill is under investigation.
Polk-Osumah declined to be interviewed Friday.
Other records indicate that Washington and her partners also have come under scrutiny. Washington’s Detroit office was raided by the FBI in 2007, as was an office run by her and her partners. She referred questions to her attorney, who did not return calls.
Two of the insurance companies say they are cooperating with federal investigators.
Randall Phillips, a Bingham Farms lawyer who represents Long Insurance and Lawrence Long, said Hill was paid for consulting work, not as a kickback. He said the allegations against Long and his company are false and they will be “vindicated when the case is brought to trial.”
An expanding empire circumvents rules
Hill, who had performed risk management work for DPS in the mid-1990s, returned in 2001, when DPS created a separate department of risk management and named him director.
His office, at district headquarters in the Fisher Building, had fewer than five staffers, who primarily handled worker’s compensation claims and district insurance policies.
Once on the job, Hill created two other offices: One was next door to Long’s insurance office; another inside the offices of a second vendor, according to the school district’s lawsuit.
Hill then began building his staff, eventually hiring 25 contract workers from Long’s insurance office, the suit alleges.
Rather than using the district’s information technology department, Hill created his own computer system that he used to hide improper financial transactions, the suit alleges.
Hill was able to circumvent the district’s purchasing rules to approve more than $57 million in spending for unauthorized contracts through wire transfers, the suit alleges; often, the vendors were paid in full before they had performed any work.
Wire transfers were supposed to be used only for insurance payments, but Hill “falsely” convinced the district’s cash management office that he had the authority to pay millions of dollars in wire transfers to vendors, the suit contends.
Delores Brown, who was in charge of the cash management office, has told district lawyers that she assumed that the payments were proper because they had been authorized by a department head. When she had questions, her boss, then-DPS chief financial officer Dori Freelain, approved the deals.
Freelain, who was also Hill’s boss, had a sexual relationship with Hill at one point, Hill said in his deposition.
Freelain left the district in 2007. She has not given testimony in the lawsuit and her attorney did not return phone calls this past week.
Big vendors get millions in deals
Among the vendors who received millions of dollars in wire transfers were two large insurance and risk management companies: Arthur J. Gallagher & Co. of Itasca, Ill., and Marsh & McLennan Cos. of New York, court records show.
Hill awarded Gallagher more than $6 million to provide an emergency management information system to the district. Gallagher then converted the system to an electronic format that the district has never used. The district’s chief of police testified that the system was obsolete.
The lawsuit alleges Gallagher had no written deal to provide these services, and knew Hill lacked the authority to approve such a contract.
The district alleges Hill approved some payments to Gallagher as he was seeking employment with the company and after he got the job.
In a statement to the Free Press, Gallagher said it earned what it was paid, and did not engage in any wrongful conduct.
Marsh received more than $17 million from 2002-08 for insurance and consulting services. The suit contends that Marsh intentionally billed inflated rates or commissions, and was paid for services the district didn’t need. DPS contends Marsh’s own records show that the company was paid for work that was never done.
Company spokesman Al Modugno said Marsh does not comment on pending litigation.
Trading up on jobs — and cashing in
By 2005, Hill had a large staff, a $124,000 salary, and one very large honor. He was named risk manager of the year by the Public Risk Management Association, based in suburban Washington, D.C.
Around this time, Hill decided to leave DPS to take a series of lucrative jobs with vendors who had benefitted from his district contracts.
Court records show that in October 2005, Hill became an executive vice president at Gallagher & Co. in St. Clair Shores.
Before leaving, Hill attended the $40,000 going-away party.
Hill’s new job paid well, a $200,000 salary with a $350-a-month car allowance.
But Hill found a way to boost his earnings even more. While working for Gallagher, he was paid $115,000 by Long Insurance to write a 15-page report on school security for then-Detroit Mayor Kwame Kilpatrick.
DPS calls the $115,000 payment a kickback for the lucrative contracts to Long’s firm, which Long’s lawyer disputes.
Within a year, in May 2006, Hill left Gallagher to become a senior vice president at Marsh & McLennan in Detroit, again making $200,000 a year.
While he was under salary to Marsh, the company loaned Hill back to DPS as an unpaid consultant; for a time, he resumed running the risk management department.
The arrangement created a classic conflict of interest, DPS attorneys now contend, particularly when Hill turned in a procurement form ordering the district to pay Marsh — his employer — a $450,000 “casualty consultant fee.”
The lawsuit contends there was no approved contract for such a fee and that neither Hill nor his company intended to provide such services.
Hill left Marsh in June 2007, as DPS’s investigation of risk management was under way.
A shower of gifts, an admitted affair
Meanwhile, Polk-Osumah — Hill’s alleged cohort in the wire fraud — remained with the district until October 2006, when she was discharged, according to lawsuit records.
But she was not without work.
The suit contends she was given office space by New Bridge Multimedia Inc., which Hill had brought to the department for its IT work. From New Bridge’s office, Polk-Osumah was able to access the school district’s risk management database, and continue to perform risk management duties, the district claims.
At one point, New Bridge subcontracted with companies connected to Polk-Osumah’s relatives, with Polk-Osumah dictating the language of the bills, the suit contends.
At various points in their working relationship, Polk-Osumah showered Hill with gifts, lawsuit records show.
Hill acknowledged in a deposition that in July 2005, when both were still at DPS, Polk-Osumah bought him a fully loaded 2005 Ford Mustang GT convertible, costing $47,000.
Six months later, in January 2006, after Hill left for Gallagher, she bought her former boss a $40,000 Dodge Durango.
At his deposition last September, Hill was asked why she would do that.
“I’ve asked that question myself many times,” Hill answered. “She was very supportive and wished to provide me with that token.” He testified that he also had an affair at one point with Polk-Osumah.
Court records show that in September 2006, Hill traded in the cars for a lease on a $112,000 Cadillac XLR with $5,990 in custom accessories.
Files disappear as suspicions grow
In February 2007, a Grand Rapids law firm was hired by the district to investigate risk management.
That month, an assistant to the executive director of risk management, Brenda Foster, suspected something was not right with the office.
When she arrived at work one morning that February, she said, she discovered a wire dangling from the ceiling in her office and connected to her computer hard drive. Her files had been deleted, and hard copies of correspondence and invoices that she considered questionable had been removed, Foster said in a sworn statement. She said the wire was gone the next morning, but she couldn’t log on.
The next month, the Free Press reported that DPS had put Hill’s former boss, Freelain, and Brown, the cash manager, on administrative leave, as it investigated irregularities in the risk management department. Freelain later was notified that her contract would not be renewed because of unspecified job performance issues. She sued for wrongful termination and settled a year ago, her lawyer, Jason Hegedus, said.
Patterns revealed as trial looms
The district eventually concluded that “Hill engaged in a pattern of abuse and waste of the school district’s funds.”
In addition to alleged kickback from Long Insurance, DPS contends Hill received kickbacks of up to $30,000 from Associates for Learning, a wellness company connected to downtown businesswoman Sherry Washington and her business partners.
According to the suit, Associates for Learning received $3.3 million to educate and motivate school district employees on the benefits of healthy living.
The suit contends Hill chose Washington’s company without competitive bidding or a contract, to conceal the fraudulent scheme. The centerpiece of the wellness program was to have district employees participate in a health assessment survey. Fewer than 150 did so.
Today, Hill doesn’t have a lawyer and is under federal investigation.
His former attorney, Benjamin Whitfield Jr., said Hill may end up representing himself at the trial, set for July.
“He’s very intelligent, and he can handle himself very competently with respect to these allegations,” Whitfield said. “Mr. Hill will be vindicated.”
Source:freep.com/BY JENNIFER DIXON