Chau Phan: Joe Millionaire

How an SPU employee allegedly pulled off the largest government embezzlement in modern Seattle history.

Late on Friday, October 22, 2010, Seattle Public Utilities auditing supervisor Bruce Madsen sat in front of his computer on the 46th floor of the Seattle Municipal Tower, matching that day's customer payments with actual receipts. He was accustomed to dealing with large numbers: SPU generates about $800 million in city revenue each year, and that day Seattle residents had paid more than $1.8 million on their garbage, water, and sewage bills.

But it was a comparatively small number that kept bugging Madsen: As he reviewed his computer totals, the balance repeatedly came up short $527.69. He searched the electronic columns and quickly found an in-house manual cash entry for that exact amount—a payment applied to a home owned by Chau Q. Phan on Beacon Hill.

Phan, a likable, youthful-looking man of 44 who wore glasses, a ready smile, and went by the name Joe, worked in SPU's Project Delivery Branch on the floor below. He had bought the big four-bedroom house for $350,000 back in 2004. A Vietnamese immigrant, he'd started in the city's water department as an intern in his 20s, worked his way up to customer service, and by 2005 had become an associate civil engineer. "A good guy," one of his managers, Mike Mar, called him. He did his job without fanfare—he was "just Joe."

Married with two daughters, the stocky, 5-foot-9-inch Phan (pronounced "fon") became the sole employee in charge of arranging new construction hookups to the city's water-supply system. He consulted on the work, submitted the bill, and accepted payment. Allowing a city worker to pick up checks and carry them back to the office was frowned upon by modern accounting procedures—better to separate the functions, and have the customer just bring in, mail, or wire the payment to the department's financial side. But Phan was a trusted employee, and when SPU was audited repeatedly by city, state, and outside auditors, no one had questioned his one-man show.

But that Friday, Madsen saw a problem with Phan's utility payment, which the engineer had entered into the SPU system after logging on with his user ID, leaving a trail for Madsen to follow. He sent a memo the following Monday to customer-billings manager Mar, who considered Phan his "go-to guy" for water-availability issues. "It appears," Madsen said in his memo, " this payment did not go through the normal City payment receipting processes and no money was received by the City."

Not that Phan didn't have the dough to pay his bill. He and his wife of 10 years, Tra My Thi Le, owned three four-bedroom homes as well as three undeveloped city lots. The six properties are worth an appraised $1.1 million total. He also had a personal bank account through which another $1.1 million had flowed since 2006. Not bad for an $81,000-a-year city worker.

Madsen, Mar, and other SPU officials were unaware, however, that "just Joe" was a millionaire. While friendly, Phan was something of a loner who revealed little about himself. Co-workers did notice his liking for the radical politics of Lyndon LaRouche, the controversial economic theorist and fringe presidential candidate whom Phan supported with a $250 donation in 2009. Phan's own economic beliefs seemed more traditional, however: He not only owned three homes but rented out two of them through the Seattle Housing Authority, adding another $3,000 to his monthly income.

Officials would eventually stumble onto the fact of his surprising wealth, and learn something even more shocking: The million dollars that gushed through his bank account belonged to taxpayers.

Keith Savas, a veteran Seattle Police fraud detective who would later obtain Phan's records from Bank of America, puts the grand total at $1,091,000 and counting. Altogether almost six dozen checks, from a few hundred to a few hundred thousand dollars, all made out to the City of Seattle, would find their way into Phan's personal account, dating back to 2006. At one point, 2008 through 2010, city checks were being deposited at a rate of $360,000 a year—an amount equal to twice the annual salary of Phan's boss, SPU Director Ray Hoffman.

That discovery would lead to Phan's arrest last month for 67 counts of first-degree theft and three counts of second-degree theft. He was jailed, unable to raise $750,000 bail after his extensive assets were frozen by the city, and faces 10 years in prison if convicted on all counts. The city also confiscated $220,800 still sitting in his bank account—the other $800,000-plus having been withdrawn over the years to buy properties and at least one car and to make large credit-card payments, Savas would tell a judge.

Phan, carrying $400 cash and his Bank of America Visa card when arrested, would confess to opening the bank account and "to taking many checks" intended for deposit in the city's own bank, Savas would say. Seattle Police, along with other city agencies and state and federal investigators, would also quietly launch a wider probe for other possible bank accounts and any violations of U.S. income-tax and wire-transfer laws.

As additional details would show, this alleged five-year embezzlement spree was the bureaucratic version of a million-dollar heist—with no gunplay, no armored car takedown, and no dividing the loot and splitting to Mexico. The tools of this alleged crime were handmade receipts, a rubber stamp, and an ATM machine that didn't ask questions.

Based on interviews, police records, court documents, and a review of city investigative records by Seattle Weekly, the City Hall caper appears to have been pulled off with so little effort it's almost laughable. Police and prosecutors have created a trail of almost 1,000 documents to follow the money. Yet, says King County Prosecutor Dan Satterberg, "I was struck by how simple and easy it was, and how few questions were asked. One of the deposited checks was three years old. I didn't think banks accepted a check as old as that." According to Savas, Phan told him that all that had been needed to open the Bank of America account was his driver's license.

Satterberg calls it the largest embezzlement of public funds in modern city history. The scheme was enabled by a conspiracy of failures: a faulty government accounting system and an inattentive, if not irresponsible, big bank. Key to it all was an alleged perpetrator bold enough to dutifully carry on normally around the office while holding back a secret big enough to make most mortals blurt, "OK, I did it!!!"

Phan is blurting nothing, however. He and his attorney will say only that he is not guilty. They're not addressing such lingering questions as whether millionaire Joe Phantom, as some now call him, would even be sitting in jail today if he hadn't tried to stiff the city for his monthly utility payments, too.

 

Bruce Madsen's Monday memo to Mike Mar was moving up the food chain at SPU, landing on the desk of Human Resources director Laura Southard, when yet another questionable manual-payment entry showed up on the daily balance sheet. It was found six days after Phan's $527 payment, and also had been punched in by him, according to his ID trail. The new entry was for $521.80 on the utilities account of a $250,000 home Phan owned and rented out on Beacon Hill. But no verifiable cash or credit payment was found.

That afternoon, October 28, 2010, Southard invited Phan and two supervisors into her office to discuss the entries. Phan could see it was serious. After he sat down, he was read what are called his "Weingarten rights," which allow an employee to have a union rep sit in and to not participate until one arrives.

Phan said he didn't think there was any need for that; he'd done nothing wrong. The supervisors questioned him about the computer payments, but he simply denied making them. He was "puzzled" by the fake payments, he said, and had no idea who might have accessed his ID code and submitted them. Phan had a bad habit, he said, of sometimes writing his password on sticky notes and leaving them affixed to his computer. Maybe someone took advantage. He mentioned a woman he'd once hit on in the department, who'd seemed offended. He didn't think she carried a grudge, "but you never know," he told the supervisors. The meeting ended without resolution.

It didn't make sense for Phan to fudge his utility payment, thought Mar. Phan was "not the kind of person who would do this," Mar told another supervisor, and he'd vouch for Joe's character "any day of the week." Yet he found it difficult to reconcile Phan's denials with the computer data.

A few days later, Phan told a supervisor he'd figured out what happened: Phan's wife had informed him she'd made two online utility payments on the day in question, October 22, with a credit card. The system apparently failed to promptly record the payments, but the bills had been paid in a timely manner.

Sure enough, supervisors determined, there were two such entries in the system. But they had been made on Nov. 1—nine days after the pay date in question. Most payments typically showed up in the city system within a day—four days at the latest.

Supervisors asked Phan for further proof, and he brought in what he said was a bank statement showing the payments had been made October 22. Except the statement appeared to have been doctored, supervisors thought. They became increasingly suspicious, and asked to see original documents.

Phan said he'd try. When pressed, he couldn't come up with any.

On December 10, 2010, SPU issued its findings: Phan had made the computer entries without paying any money. He then attempted "to cover up his actions" with a bank document "most likely altered to show the payments had been made on the same date." He was placed on paid administrative leave as the findings were discussed and checked further. In the first week of February 2011, he was fired. Phan later admitted the billing falsification in a settlement agreement with the city's Ethics and Election Commission and paid a $1,500 fine.

The incident prompted SPU Director Ray Hoffman, appointed to his $185,000-a-year position by Mayor Mike McGinn in 2010, to form a new risk-management unit and probe further into the billing system's vulnerability. Investigators then began to find other workers who had violated SPU rules and tampered with their accounts, submitting false payments and readjusting due dates. Six more employees were eventually fingered in what became a small scandal within the agency. Along with Phan, four others were fired last year. Another was suspended, and still another resigned.

Phan landed on his feet, however, finding a senior engineering technician's job with the City of Bothell. Officials there checked with the three SPU contacts Phan had named as references, and each said "they would rehire him without reservations," recalls Joy Johnston, Bothell public information officer. Apparently, however, no one Googled Phan's name, since there had been news stories about his firing.

Phan started his new Bothell job in August 2011, making $4,766 a month. All may have seemed well again, but his bill tampering and the other dismissals had SPU supervisors double-checking to see if this was a case of a few dishonest employees among the department's 1,450 workers, or whether something bigger and darker was at play.

 

Shortly after Phan was fired, one of his former supervisors, Mike Brennan, sat down one day in Phan's former Muni Tower workspace and began going through the data his ex-employee had left behind. Brennan, SPU's Plan Review Manager, studied paper and electronic documents, read messages, and reviewed project files in preparation for handing over to someone else a position that only Phan had held since 2005.

As manager of water-main extension projects, Phan would meet with developers or individual customers needing new water hookups. They'd go over plans and Phan would provide an estimate of the city's charges, which included mostly set fees for engineering services and, if necessary, construction services.

He did his job well, in the eyes of supervisors and fellow workers. "He was nice, though it was hard to be friends with him, to be close," said one longtime employee who asked not to be named. "But we felt he was a good soldier, a very efficient employee. Customers liked him. He never goofed off."

A typical water-main expansion for a new structure on an existing site could cost around $10,000. About half the cost would involve construction inspection by Phan, with another $1,200 for plan review and administration. The actual water-main connection, done by city workers, would come close to $4,000.

Once the cost was confirmed, the developer or homeowner would give a check to Phan, who would issue a signed paper from a book of receipts he had drawn up by hand, according to investigators—another factor, they say, that could allow someone to operate in the shadow of the SPU accounting system. He would then make a copy of the check for his project file and supposedly send the original off to accounting, routing the water-system work order to an engineering unit.

However, the check and the contract were never reconciled as corresponding entries. There was neither a computer program nor a pair of eyes to match the two and confirm that payment actually had been received for the work to be done. Customer utility payments could be more diligently followed and mated with invoices, but water-main extension payments—part of SPU's "secondary payments" system— weren't monitored as closely. A rogue employee aware that such revenue wasn't being tallied and recorded at the other end could divert money without fear of detection.

SPU spokesperson Andy Ryan admits that was the way things were done on water-main jobs. "It was going on for as long as anyone can remember," he says. "An employee was simply trusted to do the right thing." Even under director Hoffman's new orders to review accounting operations early last year after the billing scandal, "No one thought this was a problem because it hadn't bubbled up to the top of our list yet."

Then one day it did. Brennan was still going through Phan's projects list in February 2011 when a developer called about revising an earlier water-main job. He'd taken over for another developer who'd gone bankrupt, and wanted to know if the $37,000 deposit paid earlier could be reapplied to the project. Brennan said it likely could be if the developer provided a copy of the check—which he did.

But Brennan couldn't find the original check in SPU's systems. Nor could the city's bank, Wells Fargo, when asked to search deposit records. Brennan even called Phan to ask him about it. The ex-employee seemed cooperative, and suggested a couple of ways the check may have been lost in the system. But none of those proved fruitful.

Brennan notified Charlene MacMillan-Davis, SPU's Labor Relations chief , who in turn contacted Guillemette Regan, director of the newly created Risk and Quality Assurance unit that was overseeing an accounting-systems review. They too were puzzled by the missing check. SPU's review of department-wide financial security was therein expanded to also focus on this new question: Where does a city check go when it doesn't go into the city's bank account?

On December 19, 2011, an answer began to emerge. That day, Wai Leung, SPU's accounts receivable manager, became aware of a $2,000 check made out to the city that had been deposited in a non-city account. The King County Housing Authority was attempting to reconcile the check on its books, issued in 2008 for an upcoming water-main job. (Rhonda Rosenberg, KCHA spokesperson, says the check was partial payment for hookup fees and water-main extensions at Seola Gardens, a $70 million housing project currently underway in White Center.) SPU was unable to locate any record of the payment when the housing authority asked about it, so the housing authority sent a copy of the cancelled check.

It was made payable to the City of Seattle, Department of Finance. And on the back, an endorsement stamp read: "Pay to the Order of Bank of America, Seattle, WA 98199, For Deposit Only, Account #*7000."

The county's check, made out to the city, had been deposited in what turned out to be someone's personal account. And as Leung noted in his message to supervisors, the check had originally gone to Joe Phan.

On January 5 of this year, Regan, the risk-management supervisor, contacted the city attorney's office before informing police the next day. A small SPU investigative team was formed that included Eileen Lawrence, a city attorney's investigator.

So far it was a one-check case, and police were uncertain whether the three-year-old check could lead to any prosecution, due to the statute of limitations. But going through Phan's files, the city investigators began to do something the accounting system hadn't: attempt to match checks with contracts. They dug out dozens of check copies that appeared to have been properly sent for water-extension work before presumably winding up in the city's account at Wells Fargo.

Lawrence entered the data into a spreadsheet, a list of 47 checks totaling more than a half-million dollars. All had gone to Phan for payment on city projects. City investigators then asked Wells Fargo for a match with the bank's deposit records.

They were astonished at what the bank reported: Of the 47 checks, only 12 had been deposited at Wells Fargo. Thirty-five, worth a total of $455,576, had gone somewhere else.

 

But where? The copies Phan had kept had no stamp on the back to show where they'd been deposited. Investigators already had their suspicions, however, thanks to that $2,000 housing authority check. On January 24, police fraud investigator Savas was assigned to the case. He subsequently obtained a subpoena for the records of that Bank of America account.

The documents arrived on his desk February 28. Bank of America claimed it couldn't find the original signature card filled out to open the account in 2006. But it had been established in two names: Joseph Phan and "the City of Sea."

It seemed Just Joe had opened an account with his employer. With that enigmatic—and imaginary—co-signer, Savas concluded, Phan allegedly was able to deposit check after check made out to the city without raising any apparent suspicions by the bank.

"I found that 71 checks made payable to the City of Seattle or to SPU had been deposited to this account between January 2006 and January 2011," Savas says in his report. The check amounts "ranged from $675 to $217,655 and totaled $1,090,762.16." There were a few smaller checks, too. And there were also a couple, for a few hundred dollars each, actually made out to the "City of Sea."

Most of the checks on the list were deposited from January 2008 through November 2010. The majority were in the $10,000 to $20,000 range, made out to the city by developers and builders. A few were in the $30,000 and $40,000 range, including one for $49,000 to the city from major builder Sellen Construction. One for $51,000 was written by Bonus Properties LTD. Several of these companies contacted by Seattle Weekly chose not to comment. "All we know is the check went to the city and that was that," said a spokesperson for one, who asked not to be named.

Like the county housing authority check that had led to discovery of Phan's account, the one for $217,655 diverted to the account was also from the housing authority for the White Center project. It was deposited on August 27, 2010, the last of five checks to go into the account, and left investigators mind-boggled over how a nearly quarter-million-dollar check from one government agency to another could have been deposited in a private account.

It's a question the bank has yet to answer, as BofA did not respond to repeated inquiries for this story. But these deposits raise serious questions about the bank's oversight. "I'm surprised the bank would accept checks made out to the City of Seattle," says county prosecutor Satterberg, "when it doesn't have a relationship with the city."

Satterberg doesn't know if the city can sue to recover its losses. "That would be up to the city attorney to decide," he says. (Kimberly Mills, spokesperson for city attorney Pete Holmes, says their office is still mulling such a legal action). Last year BofA settled out of court with a Maine lawyers' organization which sued after one of its members embezzled $166,000 using a BofA account to conceal her thefts.

What's clear to him, the prosecutor says, is that Phan found an easy path to the depository. "He had an official-looking little rubber stamp made up that he used to stamp the backs of the checks, and then put them through an ATM," says Satterberg. "There was little face-to-face contact with the bank."

According to investigators, Phan allegedly didn't divert all the checks he handled, but could have taken as many as two-thirds of them. Court records show that of the checks in question (70 of the 71 are listed in charging papers), he's accused of depositing more than $370,000 (26 checks) in 2008, more than $325,000 (28 checks) in 2009, and more than $390,000 (16 checks) in 2010—the year of the $217,000 housing authority debacle.

The last deposit was November 19, 2010, for $12,101. By then, Phan had come under department scrutiny for his fake billing payments. He would be sent home on leave three weeks later.

"He was beloved in the department," says SPU spokesperson Ryan. "This comes as a real blow to the department. These are honest and dedicated public servants, and they feel betrayed."

Though he allegedly stole contractors' checks to the city, none of the contractors were swindled, SPU officials note, since all their paid-for work was completed. It's SPU's treasury that took the hit—a million-dollar loss that went unnoticed while the utility was raising rates and cutting staff. Over the past two years, SPU has eliminated 85 positions and lowered its capital expenses for a $56 million savings. Meanwhile, water rates are expected to rise by more than 20 percent over the next three years, and SPU is exploring plans to limit now-weekly garbage pickups to every other week.

City Council member Jean Godden, chair of the utilities committee, has asked for an independent financial review of SPU by the City Auditor's Office, and last week met with director Hoffman and city auditor David Jones to hear about new controls to improve SPU's accounting procedures. An audit has already begun to, as one audit staffer put it, "follow the money" and look for systemic failures. The city is also hiring several additional auditors to improve oversight of both SPU and Seattle City Light.

Godden says that while she was outraged that the thefts could have gone on so long without detection, she "didn't get as many calls and e-mails from the public as I expected." Much of the loss might be recouped through the city's insurance policy, she says, if the city's legal actions against Phan—and perhaps BofA—come up short. But she has no doubt "that the public is very unhappy about this. They deserve financial accountability, they deserve answers, and they're going to get them."

 

Phan, meanwhile, awaits his fate in King County Jail, facing both a criminal trial and a civil action. City attorney Holmes has obtained a court agreement freezing Phan's assets, while Phan and his wife have agreed through their attorney to be put on an allowance for "reasonable living expenses" of $4,400 a month. They'll be unable to transfer any property, and are restricted in withdrawing bank funds. The city's retirement system is also currently enjoined from issuing any funds to Phan, and SPU has asked that he be denied a pension.

The city has already claimed the $200,000 that was sitting in Phan's BofA account. That and the asset freeze has thus far left the accused unable to raise bail money. His attorney, Anna Gigliotti, from the law firm of local NAACP chapter president James Bible, says they aren't commenting on any aspect of Phan's legal cases "at this time." Bible's firm will be paid a $25,000 legal retainer that the city is allowing Phan and his wife to withdraw from their other personal bank account, with Chase Bank. The city agreement also allows the Phans to pay their house mortgages from the Chase account.

Sitting in her 49th-floor Muni Tower office last week, Regan, the risk-management director, says that with the Phan probe now in police hands, she is focusing on improving SPU's accounting systems. The problem the Phan case left the agency with, however, is not resolved. Phan's replacement, the new water-main extension engineer, does not accept checks (payments are sent directly to accounting by the contractor), but the department's computer system is still not programmed to square contracts with payments.

"We have a temporary fix," says Regan. "It will ultimately require an IT change, or redesign, to resolve it." But there are new procedures in place, including extra provisions on access to the system, to limit future threats. The internal billing investigation continues as well. "It didn't end with those last cases," Phan's among them, she says, noting that all 147 of SPU's billing-system employees are being checked for misuse of the payment system.

Regan's crew is plowing through a decade's worth of employee electronic entries. "Ten years of data," she says. "We're looking at the whole process."

She doesn't expect to find another Joe Phantom. But then, nobody ever did.

randerson@seattleweekly.com

 
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