In 2008, Satish Gabhawala ran a motel off the interstate in Harvey, Illinois. The motel had a 24-hour diner and was used primarily by truckers. But Gabhawala had a vision: he was going to transform the motel into a Holiday Inn and conference center.
There was just one problem: Gabhawala didn’t have the money. So he contacted an advisor, who convinced the city of Harvey to raise $14 million from bond issuances to back the project. Harvey had been in decline for years, so this was an opportunity to turn things around and generate some tax revenue.
But 5 years later, the hotel still wasn’t finished. All the city had to show for its money was a gutted building, full of exposed wires. People began asking questions. Where had the $14 million gone?
The SEC then launched a bombshell, charging the city of Harvey with fraud. They found out what happened to that money, and it wasn’t good. Millions of dollars had been misappropriated, and the city’s comptroller got rich in the process. It was a complete mess. And before it was all over, someone would end up dead.
I’m Michael McLaughlin, and this is Scheme
Harvey is about 20 miles south of Chicago and has a population of about 25,000 people. It once was a thriving blue-collar town. But several large businesses shut down in the 1970’s and 1980’s. Crime and poverty increased, and the city became littered with vacant homes.
Harvey’s mayor, Eric Kellogg, tried to entice businesses to come back. He offered developers incentives to rehab the Dixie Square Mall. This mall was the scene of the car chase in the Blues Brothers movie. The mall had closed in the late 1970’s after a series of murders, and it would sit vacant for decades. No one ever renovated the mall, and it was demolished in 2012
But one developer did step forward with an idea to attract more people to Harvey.
Chicago Park Hotel
Satish Gabhawala owned the Chicago Park Hotel at 17040 Halsted in Harvey. It was a 4-story, 75,000 square foot motel with a good location near I-80/I-294. But this wasn’t the type of place you’d go on vacation with your family. It was a little bit sketchy. There was a strip club right next to the motel, and at one point, there was a strip club located inside the motel. Yes, you heard me correctly; there was a strip club literally inside the motel.
That sounds crazy, but when I hiked the Appalachian Trail I walked past a strip club in Pennsylvania that used to be on a bus. So apparently strip clubs are pretty flexible when it comes to location.
Gabhawala said the motel was initially profitable. However, in 2007 he lost a contract in which trucking companies prebooked rooms. The motel fell behind on its bills, and it got hit with some lawsuits. Gabhawala didn’t want to give up, so he reached out to an accountant who was a frequent customer of the motel’s diner: Joseph Letke.
Letke was a CPA and he ran an accounting firm called Letke & Associates. He and his firm handled the bookkeeping for a number of south suburbs: Robbins, Riverdale, Dolton, & Markham. In 2008, Letke also happened to be the comptroller for Harvey.
Letke listened to Gabhawala’s plan for turning the rundown motel into a Holiday Inn with 239 rooms, a conference center, a restaurant, and an indoor pool. Apparently Letke liked what he heard, because he advised the city of Harvey to lend Gabhawala the money.
The bond issuances
To fund the project, the city raised $6 million in 2008 by selling limited obligation bonds. The fact that these were limited obligation bonds is really important. It means Harvey can’t do whatever it wants with the money; it should strictly be used to fund the redevelopment project. Investors would be paid back through the hotel tax and sales tax revenues that the project would generate.
But $6 million wasn’t enough, and Harvey ended up raising another $3 million in 2009 and $5 million in 2010. These were again limited obligation bonds. But this time Harvey promised to repay the money through something called Tax Increment Financing, or TIF. In short, Harvey expected the redevelopment to increase property tax values in that district. The investors who bought Harvey’s bonds would then be paid by the increased property tax revenues.
Harvey ended up raising a total of $14 million from issuing bonds between 2008 and 2010.
Lack of oversight
But you know what’s really interesting? Harvey didn’t need voter approval to issue the bonds per Illinois law. This is because Illinois provided very little oversight of municipal governments. It simply required cities to submit annual audits and self-reported data. After 2008, Harvey would go 5 years without issuing audited financial statements.
If you’re wondering, “Why didn’t the state of Illinois keep a closer eye on Harvey?” it’s because the state of Illinois has its own problems. The SEC accused Illinois of securities fraud for misleading investors about its unfunded pension obligations when it sold bonds to investors. And Illinois is famous for having governors and other political officials sent to prison for corruption on a regular basis.
The key takeaway for Harvey’s taxpayers was this: if the hotel redevelopment project didn’t work out, taxpayers would be on the hook for the $14 million, plus interest.
Now the $14 million was supposed to be used to build the new hotel. But in reality, the money was spread all over the place.
Millions of dollars went to the developer, Gabhawala. He was supposed to receive money so he could build the hotel. Makes sense, right? But here’s the catch. Gabhawala owed money to a lot of people, and instead of using the bond money to build the hotel, he spent more than $5 million paying off his old debts.
But the bond proceeds didn’t just go to the developer. Letke, Harvey’s comptroller, got a big piece of the action. Letke received $547,000 for serving as an “advisor” on the development project. Letke also received $269,000 of payments on the side, which had not been communicated to investors when the bonds were issued. Also, Letke’s firm was doing Harvey’s bookkeeping, and his firm received over $1 million for this.
In total, Letke and his businesses received $1.9 million from Harvey between 2008 and 2010. Oh, and Letke also had the developer pay $100,000 to a woman who had “no apparent connection to the Hotel Redevelopment Project.” But I’m sure there’s nothing sketchy about that.
Now, Gabhawala and Letke weren’t the only ones to misuse the bond money. In February of 2009, Harvey was in dire straits financially. It couldn’t afford to pay its employees or even its water bill. Harvey was out of option, but then one of Letke’s employees had an idea. He suggested that Harvey use the bond money. That money was supposed to be used for the redevelopment project; using it for Harvey’s general expenses would be securities fraud. But that’s exactly what Harvey did, using $290,000 of the bond money to make payroll. This soon became a pattern, and Harvey ending up diverting $1.7 million of the bond money for everyday expenses
The project fails
It should come as no surprise that the hotel project failed. Gabhawala ran out of money, and contractors began filing liens against the hotel. Gabhawala then took out a $2.3 million mortgage at 22% interest to try and save the project.
It didn’t work, but Gabhawala still didn’t give up. He talked about reviving the project by selling 100-year old Chinese gold bonds. These are bonds that China had issued in the early twentieth century. China defaulted on these bonds when it turned communist in 1949, but some investors have held onto the bonds as a collector’s item.
The fact that he even brought this up shows how desperate the situation was. If a child had come to him with an idea about a lemonade stand I think he would have said yes.
Lenders foreclosed on the property in August 2011, and Gabhawala went to India.
The fraud is discovered
But if Letke and Harvey city’s officials thought the story was over, they were wrong. In 2013, the Chicago Tribune published an exposé. It said the hotel was an empty shell and asked what happened to the $14 million.
So people were getting the idea that something had gone very wrong here. But Harvey was still in financial trouble, so despite the negative publicity it planned to push ahead with yet another bond offering in 2014. This time it would issue limited obligation bonds to finance a grocery store.
But the SEC stepped in to stop the madness. In June 2014 the SEC asked a federal judge to issue a restraining order prohibiting Harvey from issuing more bonds. The judge agreed, saying that Harvey couldn’t be trusted with the money.
Also, The SEC filed a complaint against Harvey and its comptroller, Letke. The main two issues were (1) Harvey’s use of the bond money for unauthorized purposes, and (2) the undisclosed side payments to Letke. These acts constituted securities fraud.
Six months later, Harvey reached a settlement with the SEC. Harvey agreed not to issue bonds for three years.
Letke was out as Harvey’s advisor and comptroller, so you’d hope the city would get a fresh start. But that same year it hired a disgraced former mayor as its new advisor. Donald Luster had been mayor of the nearby town of Dixmoor until he was ousted in 2004 after being convicted of tax violations and other crimes. Harvey’s problems continued. In 2018 the state of Illinois had to garnish $1.5 million of Harvey’s revenues to fund Harvey’s pension liabilities.
The mayor of Harvey, Eric Kellogg, also settled with the SEC. He was fined $10,000 and banned from ever participating in a bond offering. It wasn’t his first brush with the law, though, as he’d also used federal grant money to buy himself a Chevy Tahoe.
As for the hotel, the Cook County Land Bank Authority seized the property in late 2017, as the property taxes hadn’t been paid in five years. The gutted building was demolished a year later.
But I was most interested to know what happened to Letke. After all, he was Harvey’s comptroller and advisor, and it was his job to look out for Harvey’s finances.
In 2015 a federal court banned Letke from serving as an advisor for any bond offerings. It also ordered him to pay $217,000, but Letke was never arrested or charged with a crime. So I’d say Letke got off pretty easy, but this is where the story takes a dark turn.
In 2016, Letke’s CPA license was suspended for failing to pay his state income taxes. That same year, he lost his home to foreclosure. He filed bankruptcy, and said the feds told him they’d make it so he couldn’t get a job working at McDonald’s. Letke was 57 years old, and his life had fallen apart.
So in August 2017, he took a road trip. Letke went to southern Indiana to visit his ex-wife and two children. He wanted to see his kids one last time, and then he shot himself.
This is a tragic story on so many different levels, and it left me with a lot of unanswered questions.
Was Letke a good guy, who made mistakes that financially ruined not just himself but an entire city? Or was he a crook who took advantage of a town that was down on its luck?
And what about the developer, Gabhawala? He really wanted to make the hotel deal work. Was the project just too ambitious for him? He seemed like the type of guy who always owes people money.
Probably the only innocent victims here are the people of Harvey. They’ll get hit with higher taxes to pay for a project they didn’t even approve. Their schools will miss out on millions of dollars in tax revenues, and Harvey will continue to lose residents and businesses as people move away.
Corruption, financial mismanagement, and a lack of oversight are the core problems here. I don’t pretend to have the answers for the city of Harvey, or the state of Illinois, but I do know this: You shouldn’t bet the future of your city on a rundown truckers’ motel with a strip club inside it. And if you do, taxpayers should at least get to vote on it, since they might end up paying the bill.