SEC Investigates Firm Whose Biggest Stockholder Is Feinstein’s Husband : Securities: Blum denies participating in any improprieties. Probe focuses on allegations that the company and its officials inflated the value of stock.

The Securities and Exchange Commission is investigating alleged stock manipulation by an engineering firm whose biggest stockholder is Richard C. Blum--the husband of Dianne Feinstein and the chief financial backer of her campaign for governor, records show.

The investigation focuses on allegations that the company and its officials inflated the value of the firm’s stock by issuing false and misleading financial statements during 1986 and 1987, according to the company’s quarterly financial statement, filed publicly with the SEC in late September.

The company, San Francisco-based URS Corp., said that the SEC “has under consideration . . . violations of certain sections of (federal securities law) and the seeking of an injunction against any violations . . . in the future.” Officials with the SEC declined, as a matter of policy, to confirm or deny the existence of the investigation.

Blum, reached Wednesday, said he was unaware that the SEC is investigating the company. He said he neither participated in nor knew about the alleged improprieties at URS at the time and was a “victim.”

“I can tell you absolutely and categorically I knew nothing,” said Blum, a director and paid financial consultant of URS since 1975.

Blum blamed the company’s former top executives for URS’s problems. He said that his involvement in the running of the company was limited and that he did not compose the financial reports.

“We had a level of confidence that these guys, after being with them for 10 years, knew what they were doing,” said Blum. “Obviously, things got out of control.”

Blum’s description of his involvement was disputed by the company’s former chief financial officer, Richard H. Towle, who told The Times that Blum was “intimately involved” in the firm’s operations.

The SEC’s investigation comes in addition to settlements--for a total of $35 million--of shareholders’ lawsuits that alleged financial misconduct by Blum and three of the companies in which he has been a major shareholder. Blum has said he was asked “some months ago” by the SEC whether he used insider information when he sold stock in one of those companies, National Education Corp.

Blum’s investments and other business relationships became issues in the California governor’s race last spring after he and Feinstein loaned about $3 million to her campaign. Records show that their money--most of it from Blum’s income as an investor, consultant and manager of investing partnerships--represents the largest single source of funds for Feinstein’s campaign.

Feinstein is expected to raise $10 million in her campaign while her Republican opponent, U.S. Sen. Pete Wilson, is expected to raise at least $16 million, according to aides.

Feinstein, who married Blum in 1980, listed Blum’s URS income as more than $100,000 annually on financial disclosure statements she was required to file during her 10 years as mayor of San Francisco.

Financial disclosure statements filed by URS in recent years show that the SEC began investigating the firm in 1988--well before Feinstein, a Democrat, signaled her candidacy for governor.

Blum, the firm’s largest shareholder throughout the 1980s, increased his holdings in URS from about 10% of the company to about 80% this year. Company records also show that Blum and his investment company have received monthly financial consulting fees throughout the last decade, including more than $1 million from 1987 through 1989.

URS has contracts with California state government, including one for $3 million with the state Energy Commission. The company provides consulting services and conducts cleanups of contaminated water supplies for government and private clients in the United States and abroad. Shares of the firm’s stock closed Wednesday at 3 1/8 on the New York Stock Exchange.

U.S. District Court records show that Blum’s company and its officials also have suffered two legal setbacks during the last year--each related to allegations that the firm falsely represented its financial condition to shareholders and other potential investors.

In August, 1989, URS participated in a $19.3-million settlement of a class action lawsuit that named Blum and eight other directors or executives of the company as defendants. The class action alleged that URS directors and executives issued false and misleading financial statements “to artificially inflate the market value of (URS Corp.) common stock” in 1987 and 1988.

“There’s a lot of people who took very substantial losses,” said Jeffrey A. Klafter, an attorney with the Manhattan law firm of Bernstein, Litowitz, Berger & Grossman, who represented the shareholders who filed the lawsuit.

The suit alleged that Blum and the other defendants, including an outside auditing firm, “caused or permitted (URS Corp.) to issue a series of false and/or misleading positive public statements, annual and quarterly reports, and other communications regarding (URS), its businesses, growth, profitability, assets and future business prospects.”

The defendants did this, the suit alleged, “in part . . . to continue and prolong the illusion of (URS Corp.’s) continued growth, to . . . protect their executive and/or directorship positions and the substantial compensation and/or prestige they obtained, (and to) enhance the value of their personal (URS stock) holdings and options.”

A summary of the settlement said that Blum, URS and the other defendants, while agreeing to the $19.3-million settlement, denied “all liability and allegations of wrongdoing.” Blum said that he did nothing wrong and that the settlement was paid entirely by an insurance company and by URS’s former outside auditor, Touche-Ross. A representative of Touche-Ross said she was unable to comment.

The second setback for Blum’s company came in May, 1990, when the SEC accused four former executives in a civil filing of issuing six “false and misleading” statements during 1986 and 1987 regarding the company’s financial posture. Among other things, the SEC alleged that the executives overstated the company’s revenue and earnings by $13.4 million.

Blum was not cited. Without admitting or denying the SEC allegations, the four executives consented to a permanent injunction barring them from future violations of securities laws.

One of the four executives was Arthur H. Stromberg, a longtime Blum business colleague. Stromberg resigned as chairman and chief executive officer of URS Corp. in June, 1989, and remained a director until last fall.

Blum and Stromberg were directors and leading shareholders of an Illinois-based company, Advanced Systems Inc., that was sued by shareholders in 1984. The lawsuit, federal court records show, accused Blum, Stromberg and two other company executives of inflating Advanced Systems’ stock price by falsely portraying its finances.

Without conceding wrongdoing, Advanced Systems, Blum and the other defendants settled the lawsuit in August, 1988, for $3.9 million, according to John G. Jacobs, a partner in the Chicago law firm of Plotkin & Jacobs, who represented the plaintiffs. Stromberg, who also was chairman of the Advanced Systems, could not be reached for comment.

Blum on Wednesday said he did nothing wrong and relied on the executives and accountants employed by Advanced Systems.

In 1987, Advanced Systems, which originally had been a subsidiary of URS, was merged with an Orange County company, National Education Corp., and Blum became a director and the leading shareholder of the new, combined concern.

The Times reported last month that Blum sold $2.7 million of National Education Corp. stock in March, 1989, during the two days before that company announced a management shake-up that caused its stock value to plunge.

Blum, who continues to control more stock than any other director of Irvine-based National Education Corp., has denied any impropriety, saying he had no inkling of the impending shake-up because he was skiing near Lake Tahoe.

On Sept. 15, Blum said that he had been questioned by the Securities and Exchange Commission “some months ago” about his sale of the stock, but said he presumed the investigation had since ended.

In March, 1990, National Education Corp. settled for $11.85 million a shareholders’ class action suit against the company, Blum and three other directors. The suit accused the defendants of lying about the company’s falling revenue and earnings to keep the stock price “artificially inflated” during the time when Blum sold the $2.7 million in shares.

In settling the lawsuit, National Education Corp. termed the accusations groundless and said the suit was settled to avoid what could have been protracted litigation.

The current SEC investigation of URS centers on the same genre of alleged misrepresentations that were at issue in the consent decrees reached last May with the four executives, according to the company’s September financial statement, called a 10-Q report.

Financial disclosure statements by URS and an interview with the company’s former chief financial officer show that Blum was and remains involved in the company’s operations.

During 1987--the year that the company says was the subject of the SEC’s initial investigation--Blum received monthly payments for consulting, plus other income from URS. In all, the firm’s annual 10-K report shows that Blum received $213,762 in payments that year from the company, personally and through his control of Richard C. Blum & Associates Inc.

Blum, 56, is the majority shareholder of Richard C. Blum & Associates, a partnership that invests his own money and the money of clients. Blum receives commissions on stock transactions conducted by Blum & Associates.

For the years 1987-89, Blum received from URS a total of $1,096,032 in payments, personally and through Blum & Associates, records show. Blum said that his consulting for URS has been “sporadic” and that he assisted the company in finding new sources of capital and with potential mergers and acquisitions.

As of June 8, 1990, Blum, now the vice chairman of the company, controlled 79.63% of URS’s stock.

“He (Blum) was the largest shareholder and was intimately involved in what was going on” at the company, said Towle, URS’s former chief financial officer and one of the four former executives named in the SEC consent decree last May.

Towle said that Blum, in addition to attending board meetings, frequently contacted company executives by telephone and was involved in selecting an investment banking firm employed by the company to raise new capital. “At that level, he was not a passive observer,” said Towle.

Times staff writers Douglas Frantz in Washington and Dan Morain in San Francisco contributed to this report.