City alleges former Winnipeg CAO made up real estate deal to avoid RCMP scrutiny over payment from contractor

The City of Winnipeg argued in court Thursday the former head of its public service made up an Arizona land transaction in order to “try to cover up a bribe” from the contractor who built Winnipeg’s police headquarters.

City of Winnipeg lawyer Michael Finlayson alleged former Winnipeg chief administrative officer Phil Sheegl invented a land transaction with Caspian Construction’s Armik Babakhanians in 2017 in order to explain a $200,000 payment made six years earlier from a Caspian-controlled company to a firm controlled by Sheegl.

Speaking before Manitoba Court of Queen’s Bench in a virtual hearing, Finlayson alleged Sheegl fabricated the transaction to avoid charges while the RCMP were in the midst of a criminal investigation into the Winnipeg police headquarters construction project.

“In 2017, when he’s panicking because the police are going to potentially charge him with bribery, he has to sit down and manufacture a document to try to cover it up, and it worked,” Finlayson said, referring to a handwritten agreement for a $327,000 Arizona land transaction.

“There were no criminal charges laid. The RCMP backed off because of this document.”

Finlayson was in court in an effort to obtain a summary judgment against Sheegl as part of a civil action that alleges Caspian — the contractor on the construction project — and more than three dozen other people and companies involved in the police HQ construction defrauded taxpayers of more than $24 million.

The city allegations against former chief administrative officer Phil Sheegl are being heard separately from allegations against dozens of other defendants in a civil suit. (CBC)

The city alleges the defendants worked together to profit from the construction of the downtown headquarters under false pretences. The lawsuit accuses the defendants of coming up with a “scheme” to inflate and overcharge the city for the cost of construction through fraudulent quotes and invoices, altered quotes from subcontractors and kickbacks.

None of the allegations have been proven in court.

The city launched the lawsuit weeks after the RCMP ended a five-year investigation into alleged fraud and forgery connected with $214-million police headquarters project.

In 2016 court documents, the RCMP alleged Caspian owner Babakhanians had paid Sheegl a $200,000 secret commission for showing favour to him in the award of a contract — which police said Sheegl split with former mayor Sam Katz.

In 2017, the RCMP changed the allegation, alleging Sheegl committed a breach in trust by engaging in business with Babakhanians and receiving a benefit from him while the former CAO was working on the police headquarters file.

At the time, lawyer Robert Tapper told CBC News the money was part of a 2012 real estate deal Sheegl and Katz made with Babakhanians involving a parcel of land in Tartesso, Ariz.

Land deal didn’t make sense: city lawyer

Finlayson argued Thursday the deal was made up, pointing to a 2011 payment made by Caspian-controlled Mountain Construction to the Sheegl-controlled F.S.S. Financial Support Services.

It was made days after Sheegl, acting as Winnipeg’s CAO, awarded Caspian a police-headquarters construction contract later set at $137 million, Finlayson noted.

He also noted the Arizona land transaction was handwritten, something he told the court was unusual given Sheegl’s decades of work in real estate.

Finlayson also noted Sheegl could not recall under cross-examination that the compensation for the deal was split up into two payments, a year apart.

The city lawyer also cited email evidence Babakhanians was not aware who his new co-investors were in the property and that those investors only learned about the deal through the media.

Finlayson said the Arizona transaction ultimately did not make sense since it took place following a collapse in Arizona real estate prices.

The city lawyer said even if the deal was real, Sheegl still violated his fiduciary duty as a senior City of Winnipeg official by engaging in a real estate deal with a bidder on a construction project — and failing to disclose that transaction.

Finlayson cited emails showing Sheegl was in frequent communication with Babakhanians about the contract prior to its award but was not speaking to rival bidders PCL, Stuart Olson or Graham Construction.

‘Stupid’ but not a breach of duty: lawyer

Tapper told the court the Arizona transaction was real, saying that handshake deals take place all the time in real estate and Sheegl broke no rules governing his role with the city.

“It was stupid, but it was not a breach of his fiduciary duty,” Tapper said, adding the deal between Sheegl and Babakhanians posed no risk to the city.

“There is no risk to Mr. Babakhanians, only risk to Mr. Sheegl in that deal.”

Tapper said even if Sheegl broke the city’s code of conduct, it would not justify the city seeking $150,000 in punitive damages from his client and the repayment of his city severance.

Tapper argued the city case against his client is based on hearsay, including “little emails” he said should not have been admitted to court as evidence.

Tapper also said Sheegl, in his role as CAO, only signed off on police HQ decisions made by other public servants.

Tapper is seeking a summary judgment in favour of Sheegl.

Court of Queen’s Bench Chief Justice Glenn Joyal gave Finlayson until the end of next week to make another submission and asked Tapper to respond within one week after that.

The city allegations against Sheegl are being dealt with separately from a lawsuit against Babakhanians and more than three dozen other defendants.

Joyal severed the suit against Sheegl from the allegations against the other defendants in 2020.

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