Sonia Pressman Fuentes

HUD Goes to the Moscow Trade Show

In January 1986, I moved to Washington, DC, to begin work as an attorney in the Legislation and Regulations section of the General Counsel’s Office at the US Department of Housing and Urban Development (HUD). I thought I’d have an affinity for housing since both my father and brother had been in the real estate business. But my work at HUD turned out to be a far cry from the real estate business. My job involved drafting legislation to correct or revise HUD’s many programs or create new ones. In the main, it was boring and tedious work. Thus, I was delighted when HUD approved my application for the Legis Fellows program in 1988. Under this program, selected government employees, while remaining on the payroll of their agencies, work on Capitol Hill to acquire first-hand knowledge of the legislative process.

In mid-1988 I went to work for Congresswoman Nancy Pelosi of San Francisco. That August, on behalf of the Congresswoman, I attended a hearing conducted by Congressman Tom Lantos, a Democrat from California and Chairman of the Employment and Housing Subcommittee of the House Committee on Government Operations. The purpose of the hearing was to examine HUD’s participation in Stroyindustriya ’87, an international trade and construction exhibit held in Moscow from May 25 to June 5, 1987.

HUD’s programs are normally associated with efforts to improve housing conditions in the United States. The agency’s goal, as set forth in the Housing Act of 1949, is to enable all Americans to have “a decent home and a suitable living environment.” The testimony at the hearing revealed how far HUD had strayed from that mission during the stewardship of HUD’s Secretary Samuel R. Pierce, Jr. The title of the report issued by the Committee after the hearing was: “HUD Goes to the Moscow Trade Show: Misguided, Mismanaged, and Misspent.” HUD’s actions constituted an egregious and hilarious example of Federal government bungling and the unfortunate wasting of taxpayers’ dollars. The story does not deserve to be buried in the transcript of the hearing or the report issued by the Committee thereafter 1. I shall, therefore, take this opportunity to share it with you.

It started in 1974 when President Nixon signed an agreement with the USSR designed to foster cooperation between the two countries in the area of housing and other construction. HUD was the executive agency responsible for implementing the agreement. After several years of inactivity, President Reagan directed HUD to revitalize its cooperative programs under this agreement. The upshot was that in 1985 HUD Secretary Pierce appointed Dr. June Q. Koch, HUD’s Assistant Secretary for Policy Development and Research, as coordinator of US activity. The primary focus was to be United States participation in Stroyindustriya ’87. Both HUD and June Koch came to this endeavor as neophytes: it was HUD’s first effort at participating in an international trade exhibit relating to the housing and construction field (Transcript 63); June Koch had no experience in organizing a trade show or with respect to the Soviet Union.

Ordinarily, the spending of funds for commercial trade promotion activities is a job performed by the Department of Commerce. That department, left to its own devices, would not have taken part in Stroyindustriya ’87. The General Accounting Office (GAO), the investigative arm of the Congress, told the subcommittee, “Commerce wouldn’t have touched the construction exhibit with a 10-foot pole” (Report 5, Transcript 10).

Commerce, which had since 1986 completed three trade shows in Russia, alerted HUD to the potential difficulties with HUD’s participation in this exhibit. Trade with the Soviet Union, even at its peak in 1979, constituted only one percent of total US trade. Furthermore, doing business with the Soviet Union posed many problems for US companies. The main one was the Soviet shortage of hard currency. As testified by Ernst-Theodore Arndt, who represented manufacturers who contracted with the Federal government:

“It was quite clear to me that wholesale selling furniture to the Russians would be a utopian undertaking as the Soviets have no hard currency in payment therefor” (Transcript 36).

Historically, the Soviets preferred to pay in products rather than money. The Commerce Department told HUD it was concerned that American companies not be misled about the availability of hard currency for Soviet purchases.

Commerce also expressed concern about HUD’s ability to recruit enough firms to support the exhibit space the Soviets required US firms to rent. This would drive the costs to exhibitors up to a level most companies would find prohibitive.

Finally, Commerce questioned the market potential for building materials and construction technology in the Soviet Union. Building construction by its very nature is a domestic activity, and it is not a high-technology activity. Commerce assumed that if and when the Soviet Union decided to focus on housing, it would do so on its own. Housing was thus not an arena where the US had great trade promotion prospects (Transcript 9).

Commerce was not the only agency that had doubts about the endeavor. A 1986 memorandum from the Office of Management and Budget (OMB) to HUD stated (Report 10, Transcript 9):

“[We] have concerns whether it is the most effective utilization of HUD’s Assistant Secretary for Policy and Research, who is charged with analyzing the issue of housing for the poor in the United States, to mount an extensive effort for promotion of United States sales of building materials and construction technology in the Soviet market.”

Undaunted, HUD, in the words of the Committee (Report 5), “plunged headlong” into preparations for the exhibit. June Koch “launched a crusade to send the largest ever United States delegation to a Soviet trade show (Report 5).”

HUD approached businesses nationwide to participate in the trade exhibit. Despite Commerce’s statement that building construction was not a high priority purchase item for the Soviet Union, HUD identified a list of priorities that included wooden window frames, skylight bubbles, and equipment to rehabilitate bathrooms and kitchens. Although Dr. Koch asserted that only those items in which the Soviets had a serious interest would be exhibited, no firm was turned down.

The GAO investigation revealed that many of the businessmen who were asked by HUD to participate were not advised until they reached Moscow of the hard currency problem and of the fact that their most likely options for doing business were bartering or joint venture agreements. Had they been so advised, it is likely that many of them would not have chosen to participate. Many of these firms were small and didn’t have the resources necessary to sustain the negotiations required in a joint venture agreement.

Even though they did not receive information on the hard currency problem, many businessmen, including the leading furniture manufacturers, initially declined to participate in the trade show. They believed that the risks and costs were too high. Gediz Soyer of Sterling Manufactured Homes cited the high cost of shipping a mobile home to Moscow; another furniture manufacturer believed the rental space was overpriced. Arndt testified that some of the furniture manufacturers also refused to participate because “the Russians are engaged in Afghanistan, killing 1 million out of 6 million people, that they are putting doctors and scientists in nut houses. ‘We don’t want to have anything to do with the Russians. We don’t want to make our furniture available to them,’ was their reaction.” (Transcript 37).” Arndt testified that Dr. Koch was “quite elated that at least one company [Bassett Furniture Industries] took an interest after she had struck out with all major companies who had been approached by HUD at the 11th hour . . . “ (Transcript 36).

As time ran out, HUD and its contractors began to subsidize and put pressure on companies to take part. For the businessman who believed the rental space was overpriced, HUD reduced the price. After armtwisting by Arndt, seven manufacturers, including Bassett, hastily assembled a sixty-piece furniture exhibit, which was airlifted to Moscow by HUD at HUD expense (Transcript 45). To get the participation of Gediz Soyer, HUD offered to ship the mobile home itself. When Soyer still demurred, Koch approached his brother, who was also with Sterling, and insisted it was their patriotic duty to take part. The brothers, both born in Turkey, felt that their loyalty to the United States was being impugned and agreed to participate. HUD shipped the mobile home to Moscow at a cost of over $38,000. In addition, HUD paid about $90,000 for the rental of exhibit space; about $72,000 for the transportation of some companies’ materials and products; and about $30,000 for travel and per diem expenses for technical experts representing certain companies. In contrast, the Commerce Department does not pay any expenses of participating companies when it conducts trade promotion activities (Transcript 20).

A common theme of HUD’s sales pitch was the assurance that the products exhibited would be sold. Many participants received the impression that if they could just scrape together the funds to attend the show, they would have huge sales. As Arndt testified, “All exhibitors proceeded on the assurance that the furniture would be sold prior to the completion of Stroyindustriya ’87” (Transcript 37). There was no discussion of what would happen to unsold goods.

By the time Stroyindustriya ’87 opened, the Commerce Department was so concerned that it transmitted to its staff in Moscow the unusual instruction not to sign any bills on behalf of HUD.

About 110 US companies sent representatives to the exhibit. Of the twentyfour countries that took part, only the United States had its own pavilion.

Stroyindustriya ’87 was well attended: 175,000 visitors came. HUD did not provide a security briefing for the Americans involved with the exhibit; nor did it give exhibitors advance warning of important visitors or set different times for trade visitors and the general public. Instead, HUD told the exhibitors: “Don’t ask for names, don’t ask for business cards, don’t ask what kind of business they are in and don’t ask where people are from,” as such questions would embarrass the Soviets (Report 8).

Many participants complained that HUD and its contractors were more interested in helping them get tickets to the Bolshoi Ballet than in finding buyers. Many of the participants found that their products were totally unsuited to the Soviet market. One company representative stated:

“They’re [the Russians] not in the 20th century. They’re looking for grassroots technology . . . I should have brought over a load of upright brooms. Women were bent over cleaning the exhibition hall with hearth brooms. I could have sold out an entire load of push brooms” (Report 6).

The overwhelming majority of the 175,000 visitors were not potential buyers but just Russians looking for entertainment. HUD’s promotional efforts for the fair were a failure. Secretary Pierce returned home with all thirty-seven English-language press kits he had prepared for news conferences.

One exhibitor described the visitors as “swarming like locusts” over his exhibit and removing anything not firmly held down. He labeled the fair “a toy operation” and added that “everyone knew this was going to be a flop. (Report 8, Transcript 1).” He said, “If you did that in the private sector, I’d sue the guy.” In a masterpiece of understatement, Geoffrey Knauth, Arndt’s assistant and interpreter, wrote of the exhibit, “The business end had a bit of a `no-win’ feel to it . . . . (Transcript 50).” Carl Hahn, the most senior exhibit manager at the Commerce Department, who had had twenty-two years’ experience in trade promotion, described HUD officials and contractors as having “no idea what they were doing” and called the exhibit “the worst show I ever worked on (Report 9, Transcript 62).” He stated that when alerted to potential problems, Koch allegedly responded, “I don’t want to hear anything negative” (Report 9). When told that the mobile home would not fit inside the American pavilion, Dr. Koch allegedly instructed him to bring in the Soviet Air Force to take the roof off the pavilion so the home could be lowered inside. The beams of the pavilion made this operation impossible.

In Hahn’s view, Koch’s inexperience and ineptitude led to a great waste of taxpayers’ money. He cited the example of the model American house on display at the show. It was initially located upstairs when Koch arbitrarily ordered it to be moved downstairs at an additional cost of $2,000. Hahn also criticized Koch for failing to seek competitive bids for the work involved in setting up the exhibition. According to him, the resulting work was overpriced and of poor quality. He described the show as a “waste of money” (Report 9).

After the fair, some companies had to give their display goods away out of necessity. They had not found buyers and in many cases the shipping costs would have exceeded the original cost of the product. Arndt arranged for the unsold furniture to be taken to the US Embassy. It was his understanding that the Embassy would make the pieces available for an appropriate consideration to the Soviet Ministry of Wood-Working Technology. A month after the exhibit closed, Arndt wrote to the American Ambassador in Russia about this. Almost eight months later, the Ambassador responded, stating that the Embassy accepted the furniture because it was the staff ’s understanding that it was a gift to the Embassy. He offered to return the furniture to the United States upon receipt of a letter of credit guaranteeing payment of packing and shipping costs; he also requested reimbursement for the cost of shipping the furniture from the exhibit site to the Embassy’s warehouse and for the cost of storing the furniture for eight months (Transcript 39).

When Arndt sought Secretary Pierce’s assistance in retrieving the furniture, he was sent a $6,000 bill for rental space at the pavilion (Report 8). At the time of the Committee’s report (September 1988), the furniture was still in Moscow.

Two Soviet ministries expressed interest in buying the mobile home, but these offers never materialized. The hapless Mr. Soyer stayed on in Moscow, desperately seeking a buyer for the mobile home that had been reduced in price to $15,000. When the Soviet authorities directed him to remove it from the trade show site, since his visa was expiring, Soyer had no alternative but to donate it to the Ministry of Tourism. Other firms in similar dilemmas gave their products to a local monastery. Arndt testified that with regard to the disposition of the furniture exhibited:

“Mr. Pierce seems to have pursued the policy of an ostrich and we feel that we [the participants] were left in the lurch” (Report 5, Transcript 38).

Peter Hale, the Director of the Office of Western Europe of the Commerce Department, when asked for his opinion on whether this was a “well-prepared, well thought-out, carefully executed exhibit” responded, “No. I would have to answer no” (Report 5).

According to GAO, between 1984 and 1987, HUD spent approximately $3 million implementing the US-USSR agreement. Of this amount, $1.6 million was spent on commercial trade promotion activities, including Stroyindustriya ’87. Some of these expenditures were for entertainment. This included $25,000 for a reception in the Soviet Union.

Of the $1.6 million spent on commercial trade promotion, about $1.3 million, including entertainment expenses, was charged by HUD to its research and technology account. Research and technology funds are intended for HUD to conduct in-house and contract policy studies, economic analyses, research and demonstration projects, and program evaluations. The report stated:

“Instead of using research and technology funds to develop desperately needed responses to the life-threatening problems of lead-based paint, asbestos, and radon, HUD used these very funds to hawk furniture, computers, and paintbrushes to the Soviets” ( 11).

GAO estimated that HUD spent about twenty-one staff-years implementing the US-USSR agreement. Five-and-a-half of those staff-years were devoted to commercial trade promotion work.

What did this money and time produce? According to a GAO survey of participating companies, only eight of the seventy-nine firms that responded transacted any business at the exhibit. Of these eight, only two transacted business of more than $1 million; two did business between $25,000 and $100,000; and four did $25,000 or less. At the time of the August 1988 hearing, forty-five companies were still trying to get some business. Most of the firms did not anticipate signing any kind of contract with the Soviets as a result of their participation in the trade show. In contrast, the sixty companies that participated in Inprodtorgmash ’86, an international food processing equipment show organized by the Department of Commerce in Moscow, did over $22 million worth of business; and Neftegaz ’87, an oil and gas trade exhibit organized by Commerce in Moscow, resulted in signed contracts totalling $20 million, with another $20 million in negotiation. Stroydormash, a third show organized by Commerce in the Soviet Union, involved heavy construction and roadbuilding equipment. Since it was held in the spring of 1988, total results were not yet available by the August 1988 hearing; nonetheless, participants had already had about $2 million in sales and another $8 million was in negotiation (Transcript 61).

While it was not established at the hearing or thereafter that HUD engaged in criminal activity in connection with its participation in Stroyindustriya ’87, GAO concluded that HUD did not have the authority to spend the $1.6 million it spent on the show and, therefore, violated the Anti-deficiency Act (31 U.S.C. 1301). As stated to the subcommittee by John Luke, Associate Director of the Resources, Community, and Economic Development Division of GAO, HUD’s trade promotion activities did not further its statutory mission but were designed to enhance business opportunities of U.S. companies (Report 11).

The Senior Attorney in GAO’s Office of the General Counsel testified at the hearing that GAO did not find any evidence that HUD’s violation of the Antideficiency Act was knowing and willful. Had there been such evidence, criminal penalties for the officials involved, including a $5,000 fine or imprisonment for up to two years or both, would have been appropriate. Absent such evidence, the responsibility for imposing the administrative penalties provided by the Act, which included suspension from duty without pay or removal from office, lay with the violator’s superiors and the head of the agency. In the case of a violation, the agency head is also required to report all pertinent facts and a statement of the action taken to the President and the Congress (Transcript 10 and 11).

Secretary Pierce, while disagreeing with GAO’s opinion that HUD’s activities violated the Anti-deficiency Act, reported the violation of that Act to the President and the Congress. No disciplinary action was taken against Koch, who had already left HUD. Instead, on January 25, 1988, after the hearing and the issuance of the Committee’s Report on HUD’s mismanagement of the US participation in the Moscow Trade Fair, for which Koch was responsible, HUD appointed her as a consultant to advise it on commercial activities under the US-USSR agreement.

It appears that neither the President nor Congress took any action with regard to HUD’s report that its activities violated the Anti-Deficiency Act.

Postscript.

On September 23, 1987, June Koch notified Secretary Pierce that she was resigning from HUD effective October 30, 1987. Two days after her resignation, she became president and treasurer and one of the two stockholders of a consulting firm called Construction, Marketing & Trading, Inc. Its purpose was to represent companies seeking to do business in the Soviet Union. Three months later, HUD appointed her a consultant to advise it on commercial activities under the US-USSR agreement. She was initially appointed for a six-month period, which was subsequently extended twice until January 20, 1989.

In 1989, the Employment and Housing Subcommittee held another hearing and issued a report involving June Koch and HUD 2. The hearing was prompted by complaints of participants in Stroyindustriya ’87 that Koch tried to solicit them as clients for her consulting firm immediately after she left HUD.

GAO and the Committee found that Koch used her access to HUD officials to secure unfair benefits for herself and her clients; that Koch’s post-employment activities appeared to have violated the Ethics in Government Act and, therefore, should be referred to the Department of Justice for further investigation; and that HUD did not adequately control and monitor Koch’s activities to ensure that her work as a consultant did not result in a conflict of interest. It appears that the Justice Department took no action on this referral. Thus ended HUD’s involvement in Stroyindustriya ‘87.

Notes

1.United States, “Department of Housing and Urban Development’s Participation in the Moscow Trade Show,” Hearing Before a Subcommittee of the House Committee on Government Operations, 100th Cong., 2nd sess. (Aug. 3, 1998); United States, Report of the House Committee on Government Operations, “HUD Goes to the Moscow Trade Show: Misguided, Mismanaged, and Misspent,” H.R. 100-1052, 100th Cong., 2nd sess. (Oct. 4, 1988). Where the report and the transcript differ, the author has used her judgment in relying on one or the other.

2.United States, “Trading on Position and Conflict of Interest by Former HUD Official,” Hearing Before a Subcommittee of the House Committee on Government Operations, 101st Cong., 1st sess. (Apr. 26, 1989); United States, Report of the House Committee on Government Operations, “Trading on Position and Conflict of Interest by Former HUD Assistant Secrertary June Koch,” H.R.101-372, 101st Cong., 1st sess. (Nov. 17, 1988).

Copyright 2010 by Sonia Pressman Fuentes. Originally published in Sparks 28, March - April, 1999.