State auditors knew by 2005 that former Chelsea Housing Authority chief Michael E. McLaughlin was concealing his true salary from state officials and urged him to seek official approval for more than $40,000 in hidden income, according to interviews and records.

McLaughlin resisted, joking to auditors that “all my neighbors are rich and I have to keep up with them,’’ according to a person who heard the remark. But after McLaughlin said he would think about reporting his full income, records show the team from former auditor A. Joseph DeNucci’s office dropped the issue.

During the next five years, however, auditors discovered in the course of two additional examinations that McLaughlin was still concealing his true salary – and by ever-increasing amounts. Both times they did nothing.

By the time the Globe revealed on Oct. 30 that McLaughlin had become perhaps the highest paid public housing official in the United States, his $360,000 salary was a stunning $200,000 more than the amount he declared on state reports. McLaughlin resigned four days later, but not before one of the 2010 auditors invited him to lunch to cheer him up, according to a housing authority employee.

Now, Attorney General Martha Coakley has convened a grand jury looking into whether McLaughlin and others defrauded the state, calling at least two former state auditors to testify, according to two people with direct knowledge. Meanwhile, state Auditor Suzanne Bump, DeNucci’s successor, last week forced the supervisor of the Chelsea audits to resign because of what her office called his mishandling of the agency reviews.

“Mike’s salary was right there in the payroll records for anyone to see,’’ said one housing authority employee who asked not to be identified for fear of retaliation. “The auditors and accountants came and went, year after year . . . but nothing ever came out. Mike had a way of managing things so his salary just didn’t come out.’’

On Friday, Bump’s office declined to comment, but a spokesman confirmed that “after reviewing all audits of the Chelsea Housing Authority since 2005, she provided all audit materials to the attorney general.’’

The state auditors’ repeated failure to blow the whistle on McLaughlin’s admitted efforts to hide his extraordinary pay is part of a comprehensive failure of the financial overseers who were supposed to safeguard the $15 million in subsidies to Chelsea public housing from the state and federal governments.

Martin Scafidi, a certified public accountant who has audited the Chelsea Housing Authority for HUD since 2003, said he did not know McLaughlin’s true salary until it came out in the Globe. Scafidi said he did all the analyses he was supposed to, though he did not say whether he saw the payroll records.

McLaughlin “betrayed everyone,’’ said Scafidi, who was paid $10,500 for his 35-page audit and report on Chelsea last year. “He’s just a bad guy.’’

Former state auditor DeNucci said he, too, was unaware of the controversy about McLaughlin’s salary until the Globe story.

“We had good people doing’’ the audits, said DeNucci, who retired in 2011 after 24 years as auditor. DeNucci said the salary issue “never got back to me,’’ and he trusted his subordinates to handle the Chelsea audits.

Housing authority employees say the gregarious, politically savvy McLaughlin actively cultivated relationships with the auditors, so much so that one auditor, part of the 2010 team, asked McLaughlin to lunch after the scandal over McLaughlin’s salary became public.

In addition, McLaughlin was a friend of one of DeNucci’s most trusted aides, Robert Powilatis. The two had served on the board of a housing advocacy group together and Powilatis had donated to a political fund-raiser for Lieutenant Governor Timothy P. Murray organized by McLaughlin in 2009.

When state auditors were at the Chelsea Housing Authority’s office in October 2010, phone records show that McLaughlin and Powilatis called each other four times, though Powilatis said they never discussed the audit.

Powilatis, now retired, said he learned of McLaughlin’s pay from media coverage and played no role in the Chelsea audits. But he said any auditor or accountant reviewing the authority’s books should have recognized the paycheck discrepancy almost immediately and reported it.

“It was an outlier or a red-flag and it would be brought to light,’’ he said of McLaughlin’s outsized salary. “You go in and pick that up in five minutes.’’

But one former auditor’s office employee said some auditors may have felt they had no right to question McLaughlin’s salary, which had been approved by the authority’s board, unless it was so high that it represented a misuse of state funds.

McLaughlin, now facing multiple investigations, declined comment. In the past McLaughlin has defended his decision to dramatically understate his true salary to the state Department of Community and Housing Development, lightheartedly calling it “the rebel in me.’’

McLaughlin, now 66, also set himself up to collect the biggest state pension in Massachusetts history, based on his income, although the Chelsea retirement board has frozen his retirement application pending an investigation into whether he deserves an annual pension of $278,000.

State audits are supposed to be in-depth, independent reviews of government agency finances, seeking out both mistakes and evidence of misuse of public funds. The Chelsea auditors spent weeks reviewing the books at the housing authority’s Locke Street headquarters where they could easily find McLaughlin’s $183,624 annual pay for 2005 by looking at the agency’s payroll and McLaughlin’s income tax filings.

They could also see that McLaughlin was reporting to the state an income of only $139,050. One DeNucci employee recalled that McLaughlin’s high salary was “the talk of the [auditor’s] office.’’

During the 2005 audit, the team told McLaughlin that the discrepancy was one of their main findings, according to people with direct knowledge of the discussion. McLaughlin tried to make light of the issue, these people say, but also asserted that he was not legally obliged to report his full salary to the state since the state provided only a portion of the authority’s funds.

Nonetheless, the auditors urged McLaughlin to report his full salary as state rules require and McLaughlin said he would consider it, these people say. The auditors made no reference to McLaughlin’s excessive income in their final report.

When the auditors returned in 2008, they found that McLaughlin was hiding even more income – $135,818 by the Globe’s calculation – and they again let the issue slide. By 2010, the gap had grown to $199,966. Again, they did nothing.

Accountants say that it is a major breach of professional standards to allow a financial misstatement to get worse without taking action after the problem has been identified.

Investigators for the attorney general quickly focused on potential lapses by the state auditors as they looked into how McLaughlin got away with his salary deception for so many years. Last week, state Auditor Bump’s office told an audit supervisor that he had to resign or be fired for his oversight of the Chelsea audits, according a person with direct knowledge of the situation. The supervisor resigned.

But the state auditors were not the only analysts who had access to the authority’s records. John D. Marotto, a Woburn certified public accountant who began preparing annual financial reports for the housing authority before McLaughlin arrived in 2000, declined to say whether he knew McLaughlin’s real salary.

During the two days after the Globe revealed that McLaughlin was making $360,000, McLaughlin called Marotto five times, including one conversation that lasted 35 minutes, McLaughlin’s phone records show.

Marotto declined to answer questions, issuing a terse statement that said: “I compile the information that is provided to me by the Housing Authority in the proper format for reporting purposes.’’

Likewise, accountant Scafidi, who was hired on a no-bid contract to provide an independent review of housing authority books for HUD, failed to identify the salary discrepancy for eight years.

Scafidi’s firm, who was paid by the authority, said his team typically spent two to three weeks a year inside the authority’s offices reviewing the books.

The report Scafidi filed last year certified that authority financial records were accurate even though McLaughlin had understated his salary by nearly $200,000.

“We did the work we were supposed do,’’ said Scafidi without going into details. “We report what we see. It will all come out after the investigation.’’

Officials at HUD repeatedly used Scafidi’s favorable reviews as one factor in awarding the Chelsea Housing Authority its highest performance rating year after year, which McLaughlin was quick to tout.

Looking back, federal officials acknowledge that they did not provide adequate oversight of the Chelsea Housing Authority, which gets $10 million in federal funds annually.

“We are very concerned that no one detected his salary on the local or the HUD level,’’ said HUD spokesman Jereon Brown

State housing head Aaron Gornstein said if his agency had discovered McLaughlin’s true salary, it would have ordered him to reduce it drastically or it would have withheld state funding.

“McLaughlin’s salary was absolutely unacceptable,’’ Gornstein said.

Probation Commissioner John O’Brien suspended as Mass. Treasurer Timothy Cahill explains decision to hire O’Brien’s wife, daughter

Published: Monday, May 24, 2010, 3:45 PM     Updated: Monday, May 24, 2010, 4:03 PM

The Associated Press

This is a 4:02 p.m. update of a story posted at 10:53 this morning.

BOSTON – Massachusetts Probation Commissioner John O’Brien was suspended Monday over concerns about the hiring and promotion of probation officers.

In a joint statement issued Monday, Chief Justice Margaret Marshall and Chief Justice for Administration and Management Robert Mulligan said they were deeply concerned with media reports on management practices within the Probation Department.

They said O’Brien has been placed on administrative leave, effective immediately.

O’Brien’s hiring practices have been the subject of front-page stories in The Boston Globe.

The justices said they were concerned not only with the administration of the department, but with how the media reports may affect the public’s perception of the integrity of the judicial branch.

This action came on the heels of independent gubernatorial candidate Timothy P. Cahill’s statements Monday that patronage is a part of politics, but politics played no role in his decision to hire the wife and daughter of a state official who has been suspended amid allegations of rampant patronage at his own agency.

The state treasurer said he knows Probation Commissioner John O’Brien, and O’Brien has supported his political career in their hometown of Quincy. Yet he said that didn’t influence his decision to hire O’Brien’s wife, Laurie, and one of the couple’s daughters.

“There’s no personal relationship,” Cahill said of John O’Brien. “He’s not hanging out at my house or anything like that. He’s a political supporter, or has been for a while, but that didn’t influence the decisions I made about his members of his family.

“We had openings for positions. They applied for those positions. I’ve known Laurie O’Brien for a long time, because she’s a Quincy resident,” Cahill said.

Gov. Deval L. Patrick heightened attention on the issue by branding the Probation Department a “rogue agency” and urging the Legislature to pass a department-realignment bill he filed in January.

Cahill offered a defense of political patronage when asked about descriptions of seemingly highly qualified applicants being passed over for probation jobs in favor of those related to politicians.

“Does that not happen in government all the time?” he asked. “Obviously, it is part of the political process. It’s an unfortunate part when it’s been brought to this level.”

Cahill noted none of his family members work for O’Brien.

Patrick, a Democrat seeking re-election, and Republican gubernatorial candidate Charles D. Baker said Attorney General Martha M. Coakley should investigate. Marshall and Mulligan appointed former Big Dig investigator Paul Ware to conduct an investigation on their behalf.

Cahill said an investigation is not needed. Rather, he supports returning oversight for the department from the legislative branch to the judiciary.

“The Legislature really deserves the blame for this,” Cahill said. “They shouldn’t have made the move when they made it. They made it simply because they wanted to control the jobs.”

He said if oversight is returned to the judicial branch, then it “could determine whether Commissioner O’Brien should stay or should leave, and they can reorganize the place around making it work for probation, making it work for public safety.”

Patrick told reporters the Probation Department is a “rogue agency.”

“What I thought was a problem may be even a bigger problem, and I want to encourage the Legislature to take up this bill,” the governor said.

His bill proposes combining the Probation and Parole departments under the executive branch, which Patrick says will create a modern agency allowing people to transition from prison life back into society. It would also give oversight to the governor instead of the Legislature.

Cahill said that would likely just shift the source of patronage, which Patrick dismissed with a quip.

“You mean, will people still ask for jobs?” the governor asked with a chuckle as he entered a student forum at Suffolk University’s Rappaport Center. “Yeah, I’m sure people would still ask for jobs.”

Nonetheless, Patrick said patronage should not just be accepted.

“I don’t think that’s enough of an explanation, and it’s certainly not one that’s going to satisfy me or anybody else in the general public,” he said.

Also Monday, all seven justices of the Massachusetts Supreme Judicial Court signed an order calling for “a prompt and thorough administrative inquiry into alleged improprieties with respect to the hiring and promotion of employees within the Probation Department as well as other practices and management decisions within the Probation Department.”

The court appointed Paul Ware, an attorney with the Boston law firm of Goodwin Procter, to conduct the inquiry and report back to the court within 90 days.

Ware had previously been tapped by Attorney General Martha Coakley to oversee the criminal investigation into the fatal July 2006 Big Dig ceiling tunnel collapse.

The justices appointed Ronald Corbett, Executive Director of the Supreme Judicial Court and the former Deputy Commissioner of Probation, as acting administrator of the Probation Department to replace O’Brien.

Meanwhile, the treasurer picked up the endorsements of the patrolman’s and superior officer police unions in Quincy. He said after a month of negative ads against him by the Republican Governors Association, “It’s nice to know that people are going to stand with you.”

Lt. Timothy Sorgi, president of the Quincy Police Superior Officer’s Association, said in a statement: “Tim Cahill is a longtime friend of law enforcement and is committed to making sure that our men and women wearing the uniform have the resources and support that they need.”

Another brother, John P. Bulger, lost his state pension in 2003 after pleading guilty to perjury and obstruction of justice for lying about contacts with his fugitive brother. John Bulger was a retired clerk magistrate at Boston Juvenile Court and sued unsuccessfully to reclaim his pension. His lawyer argued before the Supreme Judicial Court that he had not violated his oath as a clerk magistrate but lied to grand juries out of “family loyalty.’’

Christopher Bulger, 41, has publicly demonstrated his own fierce family allegiance. In 2002, when his father was subpoenaed to testify before a congressional committee investigating the FBI’s relationship with Whitey Bulger, Christopher Bulger lashed out against US Representative Stephen F. Lynch of South Boston, a member of the committee, for not defending his father.

In South Boston Online, Christopher Bulger called Lynch “simply, unabashedly opportunistic.’’ The public spat was viewed in part as an eruption between two family clans: Lynch had beaten Christopher’s brother, William M. Bulger Jr., to win their father’s seat in the state Senate after the elder Bulger stepped down in 1996.

In his testimony before the special counsel, Christopher Bulger seemed to infuriate the independent counsel. The report says Bulger was “consistently evasive and untruthful in responding to questions under oath.’’

“He made repeated attempts to deflect the questioning,’’ the report says. “Many of his answers were blatantly false in the view of independent counsel.’’ The report suggests the probability that Bulger knew of the extent of fraud for years but tried to maintain “plausible deniability.’’

The report shows that as legal counsel, Bulger played a key role in preserving the job of one patronage hire, Ashley Losapio, who had been giving information to criminals. She received a two-week suspension and a transfer to a different court division, but was not fired. While acknowledging that the department’s hands may have been tied because of union issues, Ware wrote, “It is inconceivable that a responsible private sector company would continue the employment of an employee who knowingly used company computers to assist her criminal friends.’’

Bulger also acknowledged regularly updating O’Brien about the status of the investigation. In testimony under oath in October, Bulger told investigators that he briefed him two or three times a week and that he would call O’Brien that very afternoon to brief him “unless I’m told not to,’’ according to a transcript obtained by the Globe.

In one exchange, detailed in testimony obtained by the Globe, the investigators apparently grew frustrated with Bulger as he denied ever seeing a list of names of potential hires, though he had encouraged an employee to provide it to the investigators.

“Mr. Bulger, please. You’re legal counsel to the Probation Department,’’ the questioner said, according to the report. “There is an investigation going on which you have said you treat as a criminal investigation. Your employee comes to you and says: ‘Here’s a list of recommenders for particular candidates. Do I take this to independent counsel? And you said yes without looking at the list?’ ’’

“Yes,’’ Bulger answered. “Yes.’’

Stephanie Ebbert can be reached at ebbert@globe.com.

Thomas M. Finneran pushed through a 2001 change in law that gave John J. O’Brien personal control over Probation Department hiring and promotion.

Related

Patronage in the Probation Dept.

• At probation, stories
  of favoritism mount
• Top House leader downplays finding of corruption in probation agency
• Special counsel’s report puts another Bulger under microscope
• Finneran was silent when queried on agency patronage
• Graphic Rigged probation
  officer job interviews
• Excerpts from the Probation
  Department investigation
• Supreme Judicial
  Court’s statement
• PDF The independent
  counsel’s report
• Highlights from the report
• Graphic Probation employees
  connected to politicians, court
• Video Report blasts ‘pervasive fraud’ in Probation Department

The longtime probation commissioner — John J. O’Brien, who now faces firing and criminal investigation — is a Finneran protégé and former jogging buddy.

It was Finneran, more than anyone else, who pushed through the 2001 change in law that gave O’Brien personal control over hiring and promotion in the 2,000-employee agency.

Yet when he got the chance to explain how probation could have become an employment agency for politicians’ friends, families, and supporters, the normally loquacious Finneran became a stone.

Under questioning from independent counsel Paul F. Ware Jr. at Ware’s law office in Boston’s Financial District, Finneran took his constitutional right to remain silent to an extreme.

“What’s your current home address?’’ asked Ware, a former federal prosecutor used to smoking out reluctant witnesses.

“Based upon advice from counsel, I’m not going to answer that,’’ replied Finneran, who has had trouble in the past with sworn testimony. He resigned as speaker in 2004 amid a perjury investigation based on his testimony in a lawsuit. The charges were later dismissed, but he pleaded guilty to obstruction of justice.

Ware asked if Richard Hayes, the lawyer who accompanied Finneran to the Sept. 21 meeting, was, in fact, Finneran’s lawyer.

“I’m going to invoke my right to remain silent,’’ came the reply.

Ware said Hayes would have to leave if he was not, in fact, Finneran’s attorney. Even that did not shake Finneran and Hayes from their script.

Finneran was invoking his constitutional right to remain silent, while the lawyer said he was not allowed to speak to Ware because the Supreme Judicial Court had said lawyers could sit in on their client’s testimony but not participate. Ware had to step out of the room to learn from Hayes that he was working for the former speaker.

Eventually, Ware gave up on getting meaningful answers, but he kept asking questions anyway:

“Did you pressure Mr. O’Brien in any way to make jobs available in exchange for increases in the budget?’’

“Was any gratuity or payment to your knowledge ever given to Mr. O’Brien in exchange for his hiring individuals recommended by the Legislature?’’

Is there “any other information that you may feel exonerates you?’’

No comment. No comment. No comment.

Ware said yesterday that questioning Finneran was frustrating because the former speaker knows so much.

Finneran is one of the few people who knows that the roots of probation’s current patronage scandal go back to 1997, when the late chief justice for administration, John J. Irwin Jr., lowered the education requirements for probation commissioner so that O’Brien, who has only a bachelor’s degree, would qualify.

“Speaker Finneran was there at the creation,’’ Ware said. “I had hoped to elicit the truth from Speaker Finneran, and instead I was stonewalled.’’

But Finneran regained his voice the day after the release of Ware’s report. He defended himself on his morning radio show on WRKO-AM.

Scott Allen can reached at allen@globe.com

With the help of two influential businessmen, one the developer of a major project in her district, former state senator Dianne Wilkerson received a no-show job at a local college that paid $15,000, federal prosecutors say.

The new allegation, which was immediately denied by Wilkerson’s lawyer, was presented yesterday in a sentencing memorandum filed by prosecutors. The government recommended that Wilkerson be sentenced next month to four years in prison for taking $23,500 in bribes in the FBI sting that led to her arrest in 2008. She pleaded guilty in June to eight counts of attempted extortion.

The proposed sentence is two months longer than federal probation officials recommended but is warranted because of Wilkerson’s history of ethical lapses and illegal conduct, including a 1997 conviction for tax evasion, according to the office of US Attorney Carmen M. Ortiz.

“As outlined below, between Wilkerson’s conviction in 1997 and her plea in this case, Wilkerson repeatedly demonstrated that she believed that she was above the law,’’ said the 17-page memorandum.

Dianne Wilkerson (AP Photo/Kevin Martin, File)

But Wilkerson’s lawyer, Max D. Stern of Boston, recommended that his client be sentenced to substantially less than the three years and two months suggested as a minimum period of incarceration in federal sentencing guidelines.

Stern, who said he will be more specific at Wilkerson’s sentencing, said she exercised “extraordinarily poor judgment’’ by taking the bribes, but never sought to enrich herself. He cited her years of public service and commitment to the poor and oppressed. He also denied that Wilkerson received a no-show job at Curry College.

“It was real,’’ he wrote. Wilkerson planned to moderate a lecture series on politics and the law, he wrote, but the college eliminated the position after she became a “public relations liability.’’ Wilkerson became a liability following a suit against her by the state attorney general’s office for alleged campaign finance violations, according to Stern.

The government’s sentencing memorandum details a long history of misconduct and financial problems for Wilkerson, many of them previously reported. But in a new allegation, prosecutors say entrepreneurs with business in Wilkerson’s district and with state government helped her in 2005 to engage in “another set of unethical and ultimately unlawful financial transactions.’’

Through the efforts of the men, identified only as A.W. and J.K., “Wilkerson obtained a no-show job at a local college,’’ said the memorandum.

The men urged the college to give Wilkerson a $15,000 contract because she outspent what she earned each year by $60,000, according to prosecutors.

Although the memorandum did not identify the men or the college, a spokesman for Arthur Winn, founder of WinnCompanies, who retired as chief executive in 2009, yesterday said the developer “facilitated an interview for a job’’ at Curry College.

“Beyond that,’’ said the spokesman, Alan Eisner, “Mr. Winn had no involvement and received nothing in return.’’

At the time Winn helped Wilkerson, she had become the legislative champion of one of his major Boston development projects, the failed $800 million Columbus Center venture.

The man identified by prosecutors as J.K. is John W. Keith, chief executive officer of Keith Companies and a trustee of Curry College. He confirmed in a brief interview that he testified before a grand jury that he helped Wilkerson obtain a position at Curry.

Keith’s lawyer, George C. McMahon of Quincy, said yesterday that the teaching position dealt with government affairs and paid $25,000, but he vigorously denied that it was intended to be a no-show job. “She showed up for a couple of lectures, but after that she didn’t show up and she was fired,’’ he said.

The allegation is not the first time Winn’s name has come up in the Wilkerson scandal. Winn acknowledged last year that he gave $10,000 to Wilkerson in 2004 to help her pay tax debts but said it had nothing to do with wanting assistance in securing public funds for Columbus Center. In September, Martin Raffol, a former top executive of the residential arm of WinnCompanies, pleaded guilty to illegally funneling $12,000 in campaign contributions to four Massachusetts congressmen in a federal case that was an offshoot of the Wilkerson corruption investigation.

Wilkerson is to be sentenced the week of Dec. 6. Her codefendant, Boston city councilor Chuck Turner, is to be sentenced Jan. 25 on one count of attempted extortion and three counts of lying to FBI agents in connection with his conviction in October for taking a $1,000 bribe.

Saltzman can be reached at jsaltzman@globe.com.