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Top state investigators issued a scathing report Monday that scores the State Canal Corp. for breakdowns in management, accountability and ethics in its dealings with a Buffalo businessman seeking exclusive development rights along the Erie Canal.

Attorney General Eliot L. Spitzer and Inspector General Jill Konviser-Levine issued their long-awaited report in Spitzer's Buffalo office. It outlines dealings with developer Richard Hutchens that failed to produce any criminal charges against high-ranking canal officials only because prosecutors lack authority under current state law.

Because all the implicated canal officials have resigned, they cannot be prosecuted. The whole episode, they said, points to the need for not only new criminal statutes, but also widespread reform of how state authorities conduct business.

"This is a morality tale," Spitzer said. "It's a morality tale of government gone wrong. It's a morality tale that has woven into it the need for reform of our authorities, the reform of lobbying, the reform of whom we appoint on public authorities.

"It's also about the need for reform of laws that . . . prohibit us from gaining access to the appropriate sanctions against those who act improperly when they are put in the position of authority," he added.

The 75-page report focuses on three officials of the Canal Corp., a subsidiary of the State Thruway Authority that oversees operation of the state canal system. It cites a pattern of "bureaucratic incompetence, cronyism, ethical lapses and lack of oversight."

Key findings include:

Senior canal officials had no expertise in economic development.

Canal officials conducted only minimal background checks on Hutchens before naming him as the canal's major developer.

They became so "invested" in the project that, for a fee of only $30,000, they repeatedly provided Hutchens with confidential information and helped him win agency approval.

They withheld important information from the Canal Corp.'s board of directors about Hutchens' lack of experience in waterfront development.

The report also outlines the actions of Donald B. Hutton, a Buffalo native, former Lovejoy GOP chairman and State Senate candidate who has figured in several political controversies. In late 1995, he resigned as first deputy inspector general following allegations that he had attempted to suppress a probe into a possible misappropriation of funds at Roswell Park Cancer Institute.

The latest report says Hutton "repeatedly exercised extraordinarily poor judgment and acted in an inappropriate and unlawful fashion." It accused him of advising Hutchens to hire a lobbyist to shepherd his cause through the Canal Corp., even introducing him to a top Albany lobbyist. He also introduced Hutchens into his own social and political circles of "key players."

Hutton, now an official of the New York Cross Harbor Railroad in Jersey City, N.J., did not return a call seeking comment.

When asked if Hutton and two others had resigned to avoid prosecution or were correctly terminated, Spitzer replied: "Maybe both."

"It is recognized by all too many people in state government that the failure in state ethics laws of reaching former employees is a reality that allows people to leave and essentially close the door on certain things that have occurred," he said. "That is why . . . the governor has been pushing for change since 1996. We need to remedy that problem."

Gov. George E. Pataki sought the investigation after the situation came to light and Assemblyman Richard L. Brodsky, D-Westchester, held hearings. Konviser-Levine noted that that two separate investigations had reached the same conclusions.

She also pointed to the need for new statutes to establish criminal culpability.

"It is an important message to everyone employed in state government to know we are watching, and that simply leaving state government will not allow you to escape responsibility," she said.

Hutchens had proposed developing clusters of new homes around newly constructed marinas joined to the Erie Canal. While the Buffalo businessman had presented himself as an experienced developer, Spitzer and Konviser-Levine said his resume really consisted of stints in ditch digging and melon selling.

"His undisclosed goal was to obtain an exclusive option on development, and to sell -- or flip -- this exclusive right to other developers," the report said.

Spitzer and Konviser-Levine emphasized that no bribes or money exchanges were involved in the system breakdown, but that canal officials became so involved that they broke reams of rules to promote Hutchens' plan.

Hutchens did not return a call seeking comment. But Thomas Bystryk, his Buffalo business associate, issued a statement noting that the investigation determined no wrongdoing on Hutchens' part.

Michael Fleischer, who became Thruway Authority executive director after the investigation was launched, said new policies promoting open competition, widespread advertising of development proposals, and evaluation of credentials are now integral parts of proposed new developments.

He also said Hutton and two other canal officials -- Robert Brooks and Howard Taylor -- left the authority to pursue other opportunities and not "to allow anyone to avoid the consequences of their actions."

The project eventually was terminated because Hutchens violated his contract with the state by selling the development rights, Spitzer said.

Fleischer added that he considers the Hutchens project dead, and that while the authority will review any new ideas, it has no plans to revive it.


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