City Attorney Mike McMahan might have to return hundreds of thousands of dollars of city money, risk losing his job for 10 years and face prosecution for fraud after a state comptroller's report said he violated state law, records show.
"I am of the opinion that a reasonable jury would find it implausible that the city's own attorney, who was siphoning off hundreds of thousands of dollars a year to his own private firm, did so ignorantly and without knowledge of and intent to benefit his own finances and the business interests of his private law firm," Chadwick W. Jackson, staff attorney for the state Comptroller's Office, wrote in a letter to City Auditor Stan Sewell.
Mr. McMahan said he has done nothing wrong.
"I am angry," Mr. McMahan said Friday about the report. "I really am angry. This calls my integrity into question. My integrity has never been questioned."
A longtime arrangement between the city and the city attorney's office was illegal and Mr. McMahan knowingly violated Tennessee law by billing more than $15,000 a month for secretarial services at his private law firm, according to the comptroller's report released on June 29.
Mr. Jackson said he forwarded his findings to Hamilton County District Attorney Bill Cox for review. Mr. Jackson said Mr. McMahan should face criminal prosecution for fraud.
Mr. Cox said his office is looking over the comptroller's recommendations for prosecution.
"I'm reviewing it at this point of time," he said.
City Attorney's Office
* Department head: Mike McMahan
* Pay: Annual salary of $105,765, the ninth-highest among 10 comparable cities *
* Staff: Six attorneys, plus nine support employees
* Budget: $1.17 million requested for fiscal 2011 **
* Location: Second floor of City Hall Annex
* Function: Legal advice for all city agencies and legal representation for lawsuits involving the city
* Survey of salaries by University of Tennessee Municipal Technical Advisory Service for 2009-10.
** The city is considering boosting pay for Mr. McMahan and his top assistant, Phil Noblett.
* 1963: Eugene Collins is appointed city attorney and develops an arrangement for his law office to do work for the city and outside legal work in the Pioneer Bank building. The building lease and some employee benefits are paid by the city, along with service payments to the Collins law firm for most of its legal work for the city.
* 1990: Chattanooga City Commission form of government is replaced by new government with mayor and City Council. The city attorney is a department head but maintains an outside office and clients under a contract arrangement.
* 1990: Randall Nelson, a longtime member of Mr. Collins' law firm, is appointed city attorney and maintains the private law practice in the Pioneer Bank building.
* 2008: Mike McMahan, a 35-year attorney in the Collins and later Nelson law firm, is appointed interim city attorney.
* January 2009: Mr. McMahan is named city attorney.
* November 2009: Mayor Ron Littlefield brings employees and staff into city government following an internal audit questioning the city attorney's contract arrangement.
* May 2010: Over the objection of Legal Committee Chairman Peter Murphy, the City Council votes to ask the state comptroller to review a critical audit of the previous payment system for the city attorney.
* June 2010: Tennessee comptroller agrees with the city internal audit that the previous arrangement for city attorney services and payments violated city and state conflict-of-interest rules.
Mr. McMahan, who as city attorney is paid $105,765 a year by the city, also billed the city nearly $200,000 a year for clerical and legal assistance from the staff of his law firm, McMahan & Associates. Mr. McMahan insists he never profited from the arrangement, which he said is allowed under professional services contracts. But auditors claim the payments to Mr. McMahan as a city department head violate the city's conflict-of-interest and purchasing rules.
Mayor Ron Littlefield lashed out at the state Comptroller's Office on Friday, saying no one from the office ever contacted him or anyone else within the city. He said the arrangements described as being illegal have been going on for 45 years and his office corrected them by making the city attorney's office an in-house department in November.
"We're essentially beating a dead horse," Mr. Littlefield said. "It's not like this was anything new or interesting."
The state comptroller reviewed the case after Mr. Sewell conducted an informal audit in September. That audit criticized the arrangement that allowed the city attorney to use his own law firm for city-paid services and to do outside legal work while on the city payroll. Mr. McMahan said last year he personally earned less than $10,000 from outside legal work.
The City Council voted May 25 to forward the city audit to the state Comptroller's Office for an independent opinion. The comptroller's opinion since has been forwarded to several council members, along with the mayor and Mr. McMahan.
Mr. McMahan said he was so frustrated after seeing the report that he tendered his resignation but the mayor would not accept it. He said Friday that the city is correcting the situation and he had only been following the practices of his predecessors, Randall Nelson and the late Gene Collins.
"If I thought it was illegal, I wouldn't be here," he said. "I wouldn't have taken the job."
The report points out that before bringing the city attorney's office and staff within city government last year, McMahan & Associates billed the city about $15,300 a month for secretarial services based upon fees set by Mr. McMahan. The city also paid 80 percent of the payments for the law firm's lease in the Pioneer Bank building and also paid for health insurance for the employees of McMahan and Associates even though most were not city employees.
Mr. McMahan said his predecessor used a private firm to bill the city for secretarial services. After being appointed city attorney in 2009, Mr. McMahan said he found that, if he did the billing himself, he could save the city money.
"It was well intentioned to save city money," Mr. McMahan said.
But in his audit review last year, Mr. Sewell said the arrangement allowed the city attorney to oversee money going into a company he owned and controlled.
It will be up to Mr. Cox's office to seek any kind of criminal charges.
The City Council also could try to push Mr. McMahan from office and sue him to get back any of the compensation received from the arrangements.
"Why has he not been removed from office and repaid all compensation his firm received?" Mr. Jackson asked in the report.
Councilwoman Deborah Scott, who also received a copy of the report, said last week the findings are "concerning."
"The council and the district attorney have to make some decisions about that," she said. "We have to follow the law."
Councilman Peter Murphy, chairman of the Legal and Legislative Committee and an attorney himself, said he did not think the state attorney's finding is accurate. He said law offices have various ways of billing and the traditional way the city attorney's office billed the city fell within those parameters.
He also dismissed the idea of criminal wrongdoing, saying there is no evidence to suggest Mr. McMahan profited from conducting his billing while also operating as a private practice.
"There has to be intent for something to be criminal," Mr. Murphy said.
He also said that if the council went after Mr. McMahan's law firm to recoup money, the effects could be devastating. The staff attorneys in the office likely would quit if that were the case, he said, and the city could spend millions of dollars in a legal fight with its own attorneys.
"I think that would be very negative," Mr. Murphy said.
Mr. Littlefield reiterated Friday that the arrangement has been corrected. The city attorney and his staff have moved into the City Annex building and are now being paid fully as city employees, he said.
The report comes at the end of a practice that went on for nearly a half century and he stopped it, he said.
"No good deed goes unpunished," he said.