Modesto officials and government auditors continue to gather the facts about potential conflicts of interest involving City Councilman Joe Muratore and a business partner who received millions in federal housing funds.
City Councilman Joe Muratore and business partner Ryan Swehla ran afoul of federal rules that prohibit elected and appointed officials from getting a financial benefit from the Neighborhood Stabilization Program.
Those rules are different from California's political reform laws, which can result in fines or even criminal penalties for officials who participate in government decisions that give them financial gain.
Under NSP rules, decision-makers, employees, consultants and representatives of the agency receiving the grant are disallowed from gaining a financial benefit from the funded program.
Muratore and Swehla were notified of the violations in a letter Tuesday from City Manager Greg Nyhoff.
Last week, officials from the Department of Housing and Urban Development's Office of the Inspector General found that Delta Bank had paid a $62,500 commission to Benchmark Commercial Real Estate for brokering the sale of a Tully Road apartment complex to Trinity Ventures.
Muratore and Swehla are co-owners of Benchmark. Swehla and Scott Monday are principals in Trinity Ventures, one of the designated NSP developers for Modesto. Muratore has stressed that he abstained from votes on NSP activities, but it may not matter.
According to Nyhoff's letter, city and HUD officials agreed a conflict-of-interest violation occurred "because Mr. Muratore is a covered person (under the rules) and received financial interest or benefit from NSP assisted activity."
The city took immediate enforcement action, freezing an undisclosed amount of unspent funding allocated to Trinity and requiring the business partners to refund the $62,500. The sales commission was repaid Tuesday.
Trinity also is barred from taking part in the housing program in the future.
The city could take further action as investigators learn more about Trinity and Benchmark's role in NSP, in which developers used program funds to buy and renovate foreclosed properties to erase blight and provide affordable housing.
In the letter, Nyhoff warned the city could seize ownership of properties that Trinity developed with allocated funds. Beside the 28-unit apartment complex, Trinity has developed 23 houses or duplexes through the program.
The letter warns the enforcement action could be more severe for Muratore and Swehla if auditors find they've concealed other conflicts.
The Bee sought more of the legal details from Nyhoff and the city attorney's office Thursday, but calls were not returned.
"We have complied with everything they have asked us to do," Swehla said.
Muratore, in a written statement, said: "I have always been careful about conflicts of interest with Ryan. I've made every effort to recuse myself from votes related to the NSP program. The City Council was not the group that made the decision to loan money to Trinity Ventures. We have fully complied with all the requests of the city and will continue to in this matter."
Muratore was elected in 2009 to represent District 4, which covers southeast Modesto. He and Swehla have been business partners since before Muratore's election.
Mayor Jim Ridenour's disclosure of the violation at Wednesday's council meeting was another blow for the city's involvement with the Neighborhood Stabilization Program, which has been rocked by revelations of excessive spending and shoddy oversight. Modesto has received $36 million in federal stimulus money since 2009.
Councilman Dave Geer has compared the NSP controversy to a bleeding sore.
"I like Joe and I hope he didn't do anything knowingly unethical," Geer said. "We didn't know the questions surrounding this program would become this complicated. To say it's a disappointment is an understatement."
Said Councilman Dave Lopez "I am feeling disappointed, but I want the investigation to get to the bottom of this. I hope my colleague continues to provide the information they need."
Brian Sullivan, a spokesman for the Department of Housing and Urban Development, wasn't allowed to comment on the Modesto investigation, but said Thursday: "I don't think we are talking about a criminal proceeding. These are regulations as opposed to statutory issues."
Federal audits have uncovered conflict-of-interest violations in other jurisdictions that receive NSP grants.
For example, an Office of Inspector General audit recommended in April that Florida's Palm Beach County pay back $1.7 million in federal housing loans given to nine county employees. One of the three homes resold in the Modesto program was purchased by a city employee, but officials doubt it was a violation.
Bee staff writer Ken Carlson can be reached at kcarlson@modbee.com or (209) 578-2321.
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