• Windcrest had poor oversight of Rackspace deal; financial controls were a ‘gooey mess’

    Search warrant affidavit alleges Rackspace was defrauded by John Tedesco

    Last month, Express-News reporters Patrick Danner and Jason Buch obtained a search warrant affidavit that showed Texas Rangers are investigating a land deal involving Rackspace and the city of Windcrest, a suburb of San Antonio. The affidavit shows the criminal probe is focusing on Ronnie Cain, who until recently was the city manager of Windcrest; Cain’s brother, Gary, a developer who was in charge of buying property for Rackspace’s new headquarters at Windsor Park Mall; and $2.8 million that was supposed to be spent on the land deal.

    Texas Rangers investigate Rackspace deal in WindcrestLast month’s article detailed the allegations against the Cain brothers, who have not been arrested. Patrick and Jason wrote a story published Sunday that revealed how Windcrest officials put too much faith in the Cains and failed to closely watch the deal with Rackspace:

    “They didn’t have a great control system,” said Robert Hirth of the consulting firm Protiviti’s global internal audit practice in San Francisco. “It’s a gooey mess.” The city now is trying to make amends by tightening up the stewardship of its finances, and there’s a movement to rein in the city manager’s power.

    Lori Harris, Windcrest’s acting city manager, didn’t respond to a request for comment about the city’s controls. Garlene Bach, who has been on the Windcrest City Council since 2005, said it’s easy to see the city’s errors in hindsight. “I had a 20-year relationship, not close, but I had worked with Ronnie Cain for that long and knew and trusted him,” Bach said. “He seemed to have done a good job, so therefore, if any of the allegations are true, I feel betrayed personally and for the community.”

    In complicated stories like this, the challenge is making sense of it all and writing a clear story for readers who might be unfamiliar with the twists and turns. Patrick and Jason told me they spent a lot of time interviewing outside experts to offer context. And they also did what Windcrest officials failed to do — check the background of developer Gary Cain:

    Two years before the Rackspace deal, two banks each sued Gary Cain and his partners for bank fraud over loans used to buy some small Louisiana hospitals. The banks accused Gary Cain of misrepresenting the value of collateral for the loans. Randall Pulman, Gary Cain’s lawyer, said the companies already were financially strapped before his client got involved. Two hospital-related companies tied to Gary Cain filed for bankruptcy in 2005 in Louisiana. The hospital properties were deeded back to the lenders by agreement of the parties, Pulman said.

    In Bexar County, the IRS in early 2007 filed federal tax liens totaling $1.4 million against another of Cain’s companies connected with the hospitals. No release of those liens had been filed as of Friday afternoon. A background check of Gary Cain by Windcrest should have been “a routine thing considering the relationships,” said Dennis Dycus, a certified public accountant who has conducted fraud examinations involving public entities in Tennessee. The suits “would raise serious questions (whether) to go further.”

    Other coverage: Jeff Flinn wrote a story that focuses on the affadavit, which lays out the criminal case like a road map. Man O’ Law and Strange in San Antonio are two local bloggers who have been following the investigation.

    Patrick and Jason also compiled a chronology of key events, which helps untangle complex stories for readers — and reporters.

  • Texas Rangers: Cain brothers conspired to defraud Rackspace, city of Windcrest


    Business writers Patrick Danner and Jason Buch wrote a story today that revealed new details about an investigation of brothers Ronnie and Gary Cain, who had played a key role in helping Rackspace Hosting Inc. set up its headquarters at the old Windsor Park Mall in Windcrest, outside San Antonio:

    The former city manager of Windcrest and his brother, a San Antonio developer, are facing allegations they conspired to defraud millions from the city and the tech company Rackspace Hosting Inc.

    On Tuesday, Texas Rangers and the Bexar County district attorney’s office executed a search warrant at the offices of developer Gary Cain, looking for evidence that he and his brother, Ronnie Cain, who recently retired as Windcrest’s city manager, engaged in various financial crimes.

    A search warrant affidavit — a publicly available court document investigators must present to a judge to obtain a search warrant — lays out details of the criminal case Texas Rangers are trying to build. The Cains have not been charged with a crime:

    Windcrest had wooed Rackspace to move into the former Windsor Park Mall through an incentive agreement. Gary Cain reached a deal with the city to acquire the vacant mall and develop the nearby property.

    Gary Cain was tasked with financing the purchase of four tracts that comprised the mall, which would be transferred to the Windcrest Economic Development Corp. for tax abatement purposes. Gary Cain was to recoup the costs when Rackspace paid $27 million up front on its lease.

    Cain was required to provide a sworn cost certification to the economic development corporation to prove that Rackspace’s lease did not exceed the cost of acquiring the properties, according to the company’s lawsuit.

    The search affidavit alleges that Gary Cain fraudulently inflated the costs by more than $7 million, and that Ronnie Cain knew the true value of the land.

    “But Ronnie Cain stood silent at the meeting … as his brother misrepresented the sales prices of the properties to Windcrest city officials,” the affidavit reads.

    The affidavit accuses the brothers of lavish spending — Gary Cain’s daughter was even featured on MTV’s “My Super Sweet 16.”

    Update: Here’s the entire affidavit in a pdf file:

    Search warrant affidavit alleges Rackspace was defrauded by John Tedesco