Lobbying Client of Judge Kennedy Fined in Kickbacks

At the time Anthony M. Kennedy was a lobbyist for Schenley Industries Inc., in Sacramento, the giant liquor producer allegedly was paying hundreds of thousands of dollars in illegal kickbacks to liquor distributors and restaurants in New York and California, records in those states show.

The records give no indication that Kennedy, picked for the Supreme Court, played any role in the illicit schemes, for which Schenley later agreed to pay $79,000 in fines. But Kennedy’s lobbying activities for Schenley and other businesses in Sacramento are expected to emerge as a primary focus for questions when the Senate begins its confirmation proceedings if he is nominated.

Moreover, Schenley’s legal problems could raise embarrassing questions about the thoroughness and adequacy of Supreme Court nomination screening procedures by the White House, which only days ago saw one of its nominees withdraw because of drug use that had not been discovered in background checks conducted by the FBI.

White House officials have stressed that they have performed an extensive investigation of Kennedy. Presidential spokesman Marlin Fitzwater immediately sought to play down the Schenley disclosures, saying that “Kennedy represented (the liquor firm) for a period, and that representation was fully looked into at the time of his 1975 confirmation hearing. It was looked into this time, and we found that his actions were totally appropriate.”

However, government officials apparently were not aware of Schenley’s legal problems at the time because the California investigation of the firm did not conclude until several years after the FBI reviewed Kennedy’s background during his nomination to the federal appellate court.

Agents discussed Kennedy’s lobbying activities while meeting with him for several hours Tuesday but did not have the information about Schenley’s legal problems in the two states, said Milton Ahlerich, acting assistant director for congressional and public affairs for the bureau. “We will look into that fully,” he said, adding that a “full field” background check is still to be conducted.

Kennedy, 51, served as a registered “legislative advocate” for Schenley from May, 1967, until April 15, 1975, California state records show, before he terminated his association to accept an appointment by President Gerald R. Ford to the U.S. 9th Circuit Court of Appeals.

In February of 1978, Schenley, under investigation by the state Alcoholic Beverage Control agency, paid a maximum $4,000 fine to settle allegations that it had provided $22,000 in “free goods” to two California restaurant chains from 1974 to 1976 to entice them to stock its brands of liquor, state records show.

In a larger case in New York later in the 1970s, Schenley pleaded no contest to charges that it had paid approximately $500,000 in illegal kickbacks and rebates to distributors in 1973 and 1975. The company paid a $75,000 fine to the state Liquor Authority.

Efforts to reach Kennedy for comment about the Schenley investigations were unsuccessful Wednesday.

Kennedy’s lobbying activities are certain to come under close scrutiny when the Senate Judiciary Committee prepares its hearings on the expected nomination, which probably will begin sometime in January. On Wednesday, when apprised of Schenley’s past legal problems, committee Chairman Joseph R. Biden Jr. authorized a spokesman to say that the panel would investigate the question.

“We will look into all appropriate matters,” Biden’s statement said.

Even before the nomination was announced, some of Reagan’s own conservative supporters had predicted that Kennedy’s lobbying would become an issue. Lobbying is the “No. 1” concern about Kennedy, Judiciary Committee member Orrin G. Hatch (R-Utah), said Monday. “I’ll have to look into it,” he said.

At the Justice Department, spokesman Terry Eastland said that “these matters will be dealt with at the confirmation hearings, if the senators choose.”

A spokesman for Dallas-based Schenley said Wednesday that Charles L. Jarvie, the president, and other executive officers were not available for comment.

A former Kennedy law partner said that Schenley’s ABC violations “would have nothing to do with the legal work we did for them in California.” As part of that work, Kennedy and his partners reviewed Schenley’s contracts in California, said Hugh A. Evans, now a state appeals court judge.

A ‘Straight Individual’

“Whatever they did of a commercial nature would go across our desk,” Evans said. But, he added, “they could investigate him ‘til summer, and they wouldn’t come up with anything. He’s absolutely a straight individual.”

A former Justice Department official who was one of Kennedy’s first clerks after he became an appellate judge, also praised his integrity. Caroline Kuhl, a clerk for Kennedy in 1977, recalled how struck she was when Kennedy, after becoming a judge, had severed nearly all the ties he had had with a wide segment of the Sacramento legal community.

Kennedy began working as a lobbyist in 1964, when he took over the legal and lobbying practice of his father, who had died the previous year. The elder Kennedy had an extensive lobbying practice that occupied roughly half his time, former associates recall.

The younger Kennedy, by contrast, “was more of a lawyer than a lobbyist. He spent very little time lobbying that I could see,” said former Assemblyman Paul J. Lunardi, now a lobbyist for the Wine Institute.

Lobbying was “10% to 15%” of Kennedy’s work, former partner Evans said. “I handled the billings, so I ought to know,” he said.

Records on file with the state show that Kennedy received a $6,000 annual retainer from Schenley and, in his final year working as a lobbyist, earned $15,000 from the distiller. The records do not clearly show how much of the payments were for legal work and how much for lobbying, in part because disclosure requirements in the state were lax until the 1974 passage of Proposition 9, which required more extensive filings by lobbyists.

Contacts With Authorities

But the records do show that Kennedy, as Schenley’s lawyer and lobbyist in California, had frequent contact with state liquor control authorities. On at least one occasion, for example, he successfully sued the director of the state liquor control agency, at that time Edward J. Kirby, to overturn regulations Schenley opposed that restricted the types of discounts liquor wholesalers could offer to retailers.

Kennedy’s filings as a lobbyist also show that he worked on legislative efforts to change state laws that regulate dealings between liquor companies and their wholesale and retail distributors.

Records at the liquor control agency show frequent correspondence between Kennedy and liquor regulators, but Manuel Espinoza, the assistant director of the agency, declined to release the contents of the letters. It could not be determined whether any of the correspondence related to investigations of any improprieties by Schenley.

In August, 1977, two years after Kennedy had gone on the appeals court, California liquor authorities filed charges alleging that Schenley Affiliated Brands Corp., a subsidiary of Schenley Industries, had paid about $22,000 in “free goods” to two California restaurant chains, Botello Enterprises and Victoria Station Inc., to induce them to buy Schenley brands.

According to the charges, the inducements, which allegedly violated six provisions of the state Business and Professions Code, had been made between Nov. 19, 1974, and June 9, 1976, which included periods while Kennedy was representing the company. In addition, Espinoza said, investigators suspected that the kickback scheme began before 1973 but were unable to prove it when the charges were filed.

Pays $4,000 Fine

In February, 1978, Schenley settled the case by paying a $4,000 fine, the maximum under the law at the time. Later, the ABC used the Schenley case as an example in persuading the state Legislature to raise the fine for such violations to at least the amount of the kickback and sometimes more.

New York authorities in October, 1977, charged that Schenley had paid about $500,000 in illegal kickbacks and rebates to its distributors in the state between 1973 and 1975. The kickbacks were paid to reimburse Schenley’s distributors for reductions they made in prices they had charged retailers for Schenley brands.

Michael Roth, chairman of the Liquor Authority at the time, called the investigation of Schenley “one of the most extensive ever undertaken” by the agency.

Schenley and the Liquor Authority eventually settled the charges by entering a number of conditional “no contest” pleas under which the company admitted no guilt but chose to avoid presenting any defense to the charges. Schenley agreed to pay a $75,000 fine, but no licenses were suspended.

Underworld Links Alleged

Schenley had other problems with law enforcement authorities at the time Kennedy was serving as its Sacramento lobbyist. In 1971, for example, the New York state joint legislative committee on crime investigated alleged links between underworld figures and Schenley’s founder and former chairman, Lewis S. Rosenstiel.

At a March, 1971, hearing by the committee, which was investigating ties between organized crime and legitimate business, Louis B. Nichols, a former Schenley executive vice president, contended at the hearing that Rosenstiel had “shunned organized crime like the plague” but conceded that Rosenstiel had known people linked either directly or indirectly with the underworld.

Among these was Joseph Fusco, a former associate of the late Chicago crime boss Al Capone. Fusco became a Schenley distributor in October, 1955, but was no longer a full-scale distributor at the time of the New York hearing.

Ronald J. Ostrow reported from Washington and Douglas Jehl from Sacramento. Staff writers John J. Goldman in New York, Jerry Gillam in Sacramento and Robert L. Jackson and David Lauter in Washington contributed to this story.