D.A. Investigates Alleged Fraud by 2 Former Water Control Officials

The Los Angeles County district attorney’s office is investigating allegations that two former state water quality officials may have committed fraud by falsifying time cards so one of them could work on outside business interests.

The two former officials were partners in a private overseas venture that included Raymond V. Stone, who later was appointed by Gov. George Deukmejian to chair the state Water Resources Control Board.

The subjects of the criminal investigation are Raymond M. Hertel, 67, retired director of the Los Angeles Regional Water Quality Control Board, and Khairy E. Aref, 44, a former supervising engineer at the regional board. Hertel was Aref’s boss.

Stone is not a target of the district attorney’s probe. But Assemblyman Tom Hayden (D-Santa Monica) contends that Stone’s business dealings with Hertel and Aref raise questions about his fitness to chair the state board. And the matter is likely to become an issue next year during Senate confirmation hearings for Stone, who was appointed chairman last March.

Enterprise in Egypt

Hertel and Aref, from 1979 to early 1983 while employees of the state regional water board, worked together on a private project providing engineering services for a U.S.-backed $37-million fish farming enterprise in Egypt.

A memorandum prepared earlier this year by an attorney for the state Water Resources Control Board charged that Aref “submitted falsified employee time reports which show massive amounts of overtime work and work on Saturday, Sundays and holidays.”

The time sheets, which were personally approved by Hertel, allowed Aref to claim compensatory time off and collect his full state salary while absent for “as much as two weeks at a time” to pursue their outside business interests, according to the memo, prepared by Bill White, until recently a staff attorney for the state water board.

To assess the total dollar impact on taxpayers, White recommended adding up all of Aref’s “alleged overtime” and “illegal days off.” The attorney challenged the legitimacy of hundreds of hours of work reported by Aref, whose annual salary was about $43,000.

These matters are under investigation by the district attorney’s office.

“We are conducting an investigation into allegations of grand theft, and perhaps conspiracy to violate criminal statutes involving theft,” said Steven Sowders, who heads a unit that investigates allegations of corruption by public officials.

In recent interviews, both Hertel and Aref denied that they falsified time cards or that there was any impropriety in their work on the Egyptian project.

“I don’t know of any time cards that were incorrectly filled out,” Hertel said.

Aref said, “Whatever I put (down on time cards) was whatever I did. My work (on the Egyptian project) did not affect my work for the state.”

Aref was fired from his state job for being “absent without leave” after he was arrested in Cairo in January, 1983, on charges of bribing Egyptian government officials. The arrest followed a lengthy investigation by the U.S. Agency for International Development, which provided more than $27 million for the fish farming project.

Although Aref was convicted and sentenced to three years in prison, the verdict was later overturned by the highest Egyptian court.

Aref, now living in Los Angeles, charged that he was fired improperly from his state job and has been seeking reinstatement since he returned to the United States in 1984.

Hertel, who lives in Alhambra, retired in 1983.

Contract From U.S.

When the Egyptian project began, Stone was in private business, an officer in the engineering firm of Neste, Brudin and Stone, which participated in the Egyptian enterprise along with Hertel and Aref. Together with James M. Montgomery Consulting Engineers Inc., the partners won a $4.6-million contract from the U.S. Agency for International Development to help train the Egyptians to run a vast fish farming operation. Like Stone, the Montgomery company has not been included in the district attorney’s investigation.

Hayden turned over voluminous files on the matter to Dist. Atty. Ira Reiner and also provided the same information to the Senate Rules Committee, which will hold confirmation hearings on Stone’s appointment.

Unless confirmed by the full Senate by March, Stone will have to step down from his chairmanship.

Stone acknowledged in an interview with The Times that as executive vice president of his engineering firm he played an active role in negotiating the partnership contracts with Aref and Hertel. Stone, who was executive director of a regional water board before going into private business in 1963, said he has known Hertel for many years.

Sees No Conflict

Stone said that “the contracts were entered into on the basis of a legal business venture, not in conflict with the laws of California.”

“I would welcome an investigation,” he said.

Stone said he was assured by Hertel and Aref that “they could be employed as long as it didn’t interfere with their state jobs.”

However, Norman A. Neste, president of Stone’s firm, was puzzled by the notion that Aref could fulfill his state duties while working on the overseas project. He told federal investigators, “It does not appear that Aref’s employment by the State of California hindered his movement or trips to Egypt in any way and this is very difficult to understand.”

Stone questions whether the contracts with his California-based engineering firm represented a conflict of interest for Hertel and Aref as top officials in the regional water board. He said since the engineering firm was doing business only in Riverside, San Bernardino and San Diego counties--outside the Los Angeles regional water board’s jurisdiction--the participants believe there was no conflict, according to Stone.

Investigators for the Egyptian government and the U.S. Agency for International Development began raising questions about the disposition of $393,000 that Aref obtained from Egypt’s Ministry of Agriculture for the fish farming project, according to a report by the U.S. agency. The report contended that “adequate accounting (for the money) was not available.”

‘Came Out Not Guilty’

Aref told The Times that these same allegations were brought up in his 1983 trial and in his appeal before the Egyptian supreme court in 1984. “There was a complete investigation and nothing came of it,” Aref said. “I came out not guilty.”

However, William Attwater, chief counsel for the state Water Resources Control Board, said that a translation of Egyptian court records shows that the Egyptian high court “sent it back for retrial.” Aref declined to comment on whether he would be retried if he returned to Egypt.

Referring to the Stone-Aref-Hertel partnership, Hayden said, “I am not prepared to make a judgment about whether a crime was committed, but I am convinced that very legitimate questions can be raised . . . as to Mr. Stone’s capability of protecting the public interest.”

Hayden added, “if he doesn’t have a clear distinction between a public and a private interest, it’s a fair question whether he will be a tough defender of the quality of the ocean or a tough advocate of the need to fine polluters.”

Local Concerns

Hayden’s interest is rooted in concerns that are far closer to home than a distant fish farming operation. He has been complaining that under Hertel the regional water board did an inadequate job of stopping the flow of pollution into Santa Monica Bay, which is in his Assembly district.

While preparing for hearings on the pollution problems this past summer, Hayden and his staff learned about Hertel’s and Aref’s outside business interests. Hayden obtained the files that the state Water Resources Control Board had compiled in building their case against Aref’s reinstatement.

“The records show a neglect of enforcement, a deep demoralization of the staff, and a total lack of serious leadership in protecting ocean waters that went on for years and peaked in this scandal, without the regional board’s being aware,” Hayden said.

Although it was Aref’s job to supervise a staff of six state engineers, he was frequently absent when his subordinates were working, according to a Dec. 20, 1984, state water board memorandum. On his time cards, Aref reported putting in long hours when his subordinates were not present at all.

Viewpoint of Staff

He also recorded spending hundreds of hours on oil spills and other special investigations between January, 1981, and June 30, 1982. But his staff told state investigators that he was never directly involved in those activities and his review of the cases would have taken only a few hours, according to an undated state water board memo.

Documents provided the state by the U.S. Agency for International Development show that Aref was scheduled to spend two to three months a year on the Egyptian project during the period when he was employed by the state.

But Aref contended that he has made no money from his outside work and that his defense against the bribery charges cost him and his family $300,000.

Stone said that the joint venture’s contract was eventually canceled by the U.S. government, and final payments have yet to be made. “It’s possible that we made no money,” Stone said. “And I would say the the same is true for all involved.”