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Originally published February 23, 2011 at 9:28 PM | Page modified April 24, 2012 at 2:24 PM

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Seattle schools officials were warned two years ago of financial problems

Seattle Public Schools officials were warned in 2009 of serious management and oversight problems with the small-business program now at the center of a criminal investigation and internal district review.

Seattle Times staff reporter

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Seattle Public Schools officials were warned in 2009 of serious management and oversight problems with the small-business program now at the center of a criminal investigation and internal district review.

The program's former manager, Silas Potter Jr., was stripped of his ability to award small construction contracts in response to the warnings in January of that year. But the district allowed him to continue to award personal-service contracts and approve payments to small businesses that included minority- and women-owned companies, according to a recently completed state audit.

Despite a reprimand and directives to improve his performance, Potter continued to flout rules with little oversight, the audit found.

Potter, 59, who resigned in June and can't be found by investigators, has emerged as a key figure in overlapping inquiries into his handling of $1.8 million in contracts awarded to a variety of recipients, including the Urban League of Metropolitan Seattle, a former Democratic state chairman and prominent leaders in Seattle's minority communities.

Auditors found the district spent $280,000 for work that wasn't done or didn't benefit the district and paid $1.5 million for questionable services.

King County prosecutors are conducting an investigation at the district's request.

The Seattle School Board is separately looking into what responsibility Superintendent Maria Goodloe-Johnson and other top district officials may have in the scandal. Board members have launched an internal review, asking Seattle attorney Patricia Eakes for a report on who in the district knew about the suspicious payments or should have known about them.

Evidence has emerged that some district employees informed superiors about irregularities with the program but were brushed aside, said a source familiar with the matter.

Other employees had concerns but did not raise them because of "fears of reprisal," according to the state audit.

"We found that many District employees were unaware of the District's whistle-blower and anti-retaliation policies, or did not trust the policies," the audit said.

District officials sought the audit of the small-business program in June after discovering the possible theft of a $35,000 payment to the program. Potter returned the money after the district filed a report with the Seattle Police Department, the audit said.

But problems in the program had been flagged two years ago, when an outside consultant hired by the district "performed an unfavorable review" of the program's selection of contractors for small construction projects, the audit noted. The consultant, The Sutor Group in Bellevue, did not examine other contracts administered by the program.

In a Jan. 15, 2009, letter, The Sutor Group said it found, among other things, that in handling construction awards, the program lacked detailed staff procedures, gave preferential treatment to some contractors and kept "incomplete and unorganized" files.

Potter was reprimanded in April 2009 by his then-supervisor, Fred Stephens, who removed Potter's ability to award construction contracts while allowing Potter to retain his authority to award other contracts, according to the audit. Construction contracting was shifted to the district's procurement office.

Stephens left the district in July to work for Gary Locke, the U.S. commerce secretary and former Washington governor. Stephens could not be reached for comment Wednesday.

According to the audit, Stephens, as the district's executive facilities director, ordered Potter to document that he was following district policies and procedures.

Potter also was told to make sure his staff was fully trained and applications for contracts were properly evaluated and documented. He also was told to follow good business practices.

"The reprimand also included an admonishment for testifying and lobbying in Olympia on behalf of the District on two occasions without approval of the District's Government Relations Department," the audit stated.

Potter didn't comply with the directives outlined in the reprimand, the audit found, citing information provided by the district.

Despite the reprimand, Potter contracted with consultants to meet with state legislators and testify in favor of legislation although he didn't have the authority to do so, according to the audit.

Auditors faulted Stephens for failing to maintain proper oversight of Potter.

In a 2009 story on the consultant's report, the Daily Journal of Commerce in Seattle quoted Lee Newgent, executive secretary of the Seattle-King County Building & Construction Trades Council, as saying some construction firms the district used weren't licensed and didn't do background checks on workers, including some who worked near children.

Newgent also told the newspaper some firms were doing work for which they weren't qualified and predicted criminal indictments "somewhere down the line."

In December, school district officials reported possible criminal violations in the small-business program to the Prosecutor's Office. Prosecutors have opened a secret investigation before an inquiry judge, a proceeding similar to a grand-jury investigation, according to a source familiar the matter.

Witnesses and records can be subpoenaed as part of the proceeding, which is conducted behind closed doors.

A Seattle detective has been assigned to work with the Prosecutor's Office, said Sgt. Sean Whitcomb, the Police Department's chief spokesman.

Meanwhile, the district has shut down the small-business program and taken steps to bolster its whistle-blower and internal-oversight programs.

Staff reporter Linda Shaw and news researcher David Turim contributed to this story, which includes information from Times archives.

Steve Miletich: 206-464-3302 or smiletich@seattletimes.com

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