Katz ‘violated public trust,’ Sheegl lacked ‘moral compass,’ police HQ inquiry commissioner concludes

The final report from the public inquiry into the scandal-plagued Winnipeg Police Service headquarters construction project concludes that former mayor Sam Katz and former city CAO Phil Sheegl broke public trust and engaged in unethical conduct.

And the report, released Monday by inquiry commissioner Garth Smorang, says the cost of the project — transforming a downtown Canada Post office tower and warehouse into the police HQ — soared, in part, because main contractor Caspian Projects overcharged the city by more than $40 million in expenses.

The project’s initial $135-million initial price tag rose to about $209 million in the end. The city purchased the complex in 2009; construction was completed in 2016.

Smorang’s report concludes Katz “violated the public trust” and council code of conduct, and Sheegl suffered from a “complete lack of a moral compass.”

Problems related to the building at 245 Smith St. have plagued the city for more than a decade.

An external audit found the project had been severely mismanaged. RCMP completed a lengthy investigation into fraud and forgery allegations but no criminal charges were laid.

During the $2.1-million inquiry, which began last February and came to an end after 27 1/2 days of hearings in May, a forensic accountant estimated $45 million to $50 million in excess claims were filed. Caspian owner Armik Babakhanians strongly denied allegations that his company overcharged the city.

However, Babakhanians acknowledged his company did turn in hundreds of false invoices to ensure it was fully paid for its work and earned a profit.

Smorang’s report, titled “A Sad Tale of Mismanagement, Misconduct and Misrepresentations,” finds “fictional” invoices show Babakhanians’ actions amount to “misconduct.”

“Nothing that happened on the HQ project happened by accident. Armik set out right from the start of the HQ project to inflate Caspian’s costs, to the detriment of the city,” Smorang writes.

Later in the report, he said he agrees with the forensic accountants’ estimate.

“I fully accept… that the total excess claims made by Caspian and paid by the city ranged from (roughly) $45 million to $50 million, all paid for by the taxpayers of Winnipeg directly into the pocket of Armik Babakhanians,” writes Smorang.

Overall, he estimates the city overpaid about $43.3 million for the project, with $42 million of that going to Caspian.

Smorang also takes issue with a payment Babakhanians made to Sheegl and Katz, questioning their testimony that it was made to buy land in Arizona.

“I am satisfied on the balance of probabilities that they entered into a financial transaction whereby Armik paid $327,200 to Sheegl and Katz, which was then split equally between them… I do not believe the testimony of the three participants as it pertains to the payments made in 2011 and 2012,” the commissioner writes.

Even if there was a land transaction, the financial transaction with the key contractor would still amount to “a gross and obvious conflict of interest,” he writes.

“I feel comfortable saying money exchanged hands, there was an explanation given to me about what that was for — it was for a land deal in Arizona — and, at the end of the day, I don’t accept that evidence,” he said Smorang during a Monday afternoon news conference.

The inquiry was created to answer questions about the construction project but has some important limits on how testimony can be assessed.

“My terms of reference prohibited me from coming to any conclusions about criminal or civil liability,” said Smorang.

Caspian Projects paid a $28-million settlement for fraud and construction deficiency lawsuits to the city earlier this year. That is in addition to a $1.15-million payment the city received from Sheegl, following a court ruling that he accepted a $327,000 bribe from Caspian. Sheegl has repeatedly denied accepting a bribe.

Smorang noted he has faced many questions about the nature of actions surrounding the project.

“No other question has been asked of me more often, since being appointed as commissioner of this inquiry, than, ‘Why weren’t criminal charges laid in this case?’ I explain in the report (that) I will not speculate in that regard,” he said.

In an interview Monday, Katz stood by his testimony at the inquiry, stating the money was solely for land. In retrospect, he said he should have divulged the sale from the start or simply not sold the property.

“We’ve already confirmed that’s the reality and that’s what should have been done,” said Katz.

When asked specifically if he accepted a bribe, the former mayor said he did not and received “zero” personal benefit from the project.

“I think I already made it very clear that I sold an interest in my property, and that’s that. Anything other than that is not accurate,” he said.

There was no response to requests to speak with Babakhanians, Sheegl or their lawyers Monday.

The report provides 25 recommendations to improve large-scale construction projects in the future.

They include having the city engage an independent quantity surveyor to certify payments and keep all subtrade invoices, as well as having all councillors who participate on selection panels complete a conflict-of-interest declaration.

Bylaw changes are proposed to let city council hold private sessions when disclosing information that could be harmful to the city’s economic interests, is considered “privileged” or for “any other reason that city council deems appropriate.”

“These are politicians, but they’re also members of the board of directors of a very large corporation that makes huge decisions, financially and otherwise, on a regular basis and I don’t know of a corporation out there, or an entity out there, that doesn’t allow itself to consider sensitive, confidential information within the confines of its own four walls,” said Smorang.

Without that option, city staff could refrain from disclosing some sensitive project details, he said.

Smorang also suggests the province require a five-year term for the city’s integrity commissioner, provide that person immunity from being sued from action taken in their duties and extend the role’s mandate to cover senior members of the city’s public service.

He also calls on the province to change legislation so Winnipeg residents could request that the integrity commissioner investigate alleged violations of the Municipal Council Conflict of Interest Act and authorize that commissioner to bring matters forward to a judge.

Joseph Dunford, Winnipeg’s current chief administrative officer, said the report highlights “unacceptable failures in oversight and governance.” He said the city has taken many steps to prevent those problems from being repeated and will continue to do so.

“The recommendations identified for the city are reasonable and we look forward to implementing them,” said Dunford.

Mayor Scott Gillingham said improvements have already been made to better protect taxpayers, including involving legal teams in drafting requests for proposals for mega-projects, expanding requirements to disclose conflicts of interest and hiring an independent fairness commissioner.

Gillingham said he wants the new recommendations reviewed as soon as possible.

“I completely concur with our CAO. Every one of the… (additional) recommendations, I want to see implemented,” he said.

The mayor also highlighted the city’s successful legal challenges related to the project.

“I think the decision to pursue the lawsuit was incredibly important. It sent a clear message: if you try to rip off the City of Winnipeg and its taxpayers, we’re going to come after you,” he said.

Last week, mayoral candidate Kevin Klein urged the province to release the report publicly before Winnipeg’s Oct. 28 election.

Klein noted Gillingham, who is seeking re-election as mayor, was not leading city council when the headquarters project began. However, he accused Gillingham of not doing enough in recent years to ensure the problems are not repeated.

“The city’s controls for large projects remain inadequate today…. We now know that a full forensic accounting (for the headquarters project) should have been done years ago,” said Klein.

He said he agrees with the inquiry recommendations and, if elected, would also ensure a clear path for whistleblowers to report concerns.

Gillingham said the city did not delay on improving oversight and will continue to do so.

joyanne.pursaga@winnipegfreepress.com

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Police HQ inquiry report