Dubious Contracts Mar Minority Transit Work : Business: At least $50 million went to firms with questionable eligibility, records and interviews show.

Tens of millions of dollars in Los Angeles mass transit construction contracts intended for small, struggling businesses owned by minorities or women are going to firms that do not appear to be disadvantaged or allegedly have acted as “fronts” for non-minority firms, The Times has learned.

The “disadvantaged business enterprise” program has not worked as intended largely because of loopholes in federal rules and poor enforcement by local transit officials, records and interviews show.

The Southern California Rapid Transit District and the Los Angeles County Transportation Commission overlook warning signs of fronting, fail to share important information, are slow to enforce regulations and are ignorant of crucial federal rules, The Times found.

While minority contracting programs across the nation have been plagued by abuses, the stakes are especially high on Los Angeles transit projects. Officials say that of the $1.8 billion spent since 1985 on building the subway and light rail system, more than $471 million--or 26%--has gone to minority contractors.

But interviews and transit agency documents cast doubt on how much has gone to companies that are truly disadvantaged, legally qualified to do the work and independent of large prime contractors, as required by law. Records for half a dozen minority contractors alone show that at least $50 million worth of work was awarded under questionable circumstances.

The Times found:

* A firm owned by a Panama-born businessman named John Benjamin Franklin received $7 million worth of minority contracts, but Franklin said that he has never suffered any disadvantage as a result of being Latino and that his company was highly successful before being certified as a “disadvantaged business.”

* An Atlanta company that was certified as “disadvantaged” boasted of obtaining more than $110 million in federal contracts last year and is partly owned by the treasurer of the United States.

* A small, black-owned Los Angeles company that received more than $7 million in transit work was a front controlled by a tunneling consortium that was awarded $34 million worth of contracts, transit officials now say.

* A woman is listed as the owner of a Van Nuys company that was awarded more than $7 million in contracts for disadvantaged businesses, but rival firms and transit officials complain that the company was set up as a front and is controlled by the owner’s husband and brother-in-law.

* An Asian-American company was awarded $3.4 million in contracts and was allowed to work for nearly a year although the firm did not have a valid contractor’s license. Transit officials had evidence in their files indicating that the company was a front for a non-minority contractor but took no action to bar the firm from transit work until state officials charged the owner in a salary kickback scheme.

Transit officials argue that the minority contracting program generally is working as intended.

“The problems are the exceptions,” said RTD General Manager Alan Pegg, who noted that the agency was lauded this year by the Los Angeles County Grand Jury for its method of certifying disadvantaged businesses.

Leslie Porter, deputy executive director of the county Transportation Commission, declined to comment on The Times’ findings but said that the commission and other public works agencies are attempting to improve communication among themselves and to streamline the certification process.

Contracting programs for minorities and women have been beset by troubles from coast to coast.

“The problem . . . is one of national significance,” said David E. Wilson, chief of the criminal division of the U.S. attorney’s office in Seattle, where federal authorities are investigating a fronting scheme in a $1-billion federal highway program.

In Baltimore, state authorities filed criminal fraud charges in connection with alleged fronting on an airport construction contract. In Houston, city officials discovered two fronting operations, one involving a $2.6-million sewer contract. The National Assn. of Minority Contractors is investigating similar accusations in half a dozen states across the country.

Minority contracts worth $1.5 billion are at stake in Los Angeles, where transit agencies have embarked on one of the country’s largest public works projects. By completion in the year 2010, Los Angeles’ planned 300-mile commuter rail system will carry a price tag of $7.5 billion--and officials say at least 20% of that money is earmarked for contracts with disadvantaged firms.

The rules for awarding such contracts are set by the U.S. Department of Transportation, which requires that transit agencies receiving federal funds attempt to award at least 10% of construction work to “disadvantaged business enterprises.”

Construction companies owned by non-minorities are required, when seeking transit jobs, to make “good faith” efforts to subcontract varying percentages of the work to disadvantaged firms.

To be eligible to receive such subcontracts, a company must meet income restrictions and be at least 51% owned by a minority or a woman who controls the business. If a company’s status as a disadvantaged firm is challenged, the owner may be required to show proof of suffering from chronic racial, ethnic or sexual discrimination.

The RTD is responsible for applying such federal regulations while certifying and monitoring disadvantaged businesses that work on the Metro Rail subway. The county Transportation Commission bears a similar responsibility on the Blue Line and other light-rail projects.

But loopholes in federal regulations allow businessmen who are not disadvantaged to be certified for minority contracts.

When John Benjamin Franklin Jr. sought minority contracts on the rapid transit project, officials for the RTD and the Transportation Commission apparently were not obligated under federal regulations to find out if he had suffered social and economic disadvantage because no one challenged his certification.

Franklin was born in Panama but raised partly by an aunt and uncle in Southern California. Born Juan Antonio Fernandez, Franklin subsequently took the name of his uncle, who was a descendant of Benjamin Franklin. As a teen-ager, he attended a private military academy in New Mexico, where he says his aunt sent him to keep him out of trouble. Franklin speaks Spanish fluently and English without a trace of a Spanish accent.

By all accounts, Franklin built up his business through hard work and long hours. He told The Times that he has never suffered discrimination as a businessman and acknowledges that his company was highly successful before receiving minority certification.

Orange County divorce records show that in June, 1982--less than a year before his company was first certified as a disadvantaged minority firm by Caltrans to do freeway work--Franklin’s community property included a 1979 Mercedes, a two-story home on a hill in Mission Viejo, condominiums in Hawaii and Huntington Beach, and real estate in Whittier, Santa Fe Springs and in the area of the Colorado River. At the time, he also engaged in costly hobbies such as big game hunting and power boating.

“Why should I get that advantage (as a minority subcontractor)?” Franklin said in response to a question. “My answer is I shouldn’t.

“Basically the program that’s out there helped Franklin Steel immensely,” he added. “It has not helped the common individual who needs a job.”

Nevertheless, Franklin maintained that he had a legal right to certification as a minority contractor.

Transit officials agreed. He was awarded $7 million in transit contracts meant for disadvantaged firms from 1987 to 1989.

Even after Franklin Reinforcing Steel exceeded the federal limit on earnings for small, minority companies, the company was certified as disadvantaged by the county Transportation Commission.

As of the fiscal year ending June 30, 1988, Franklin Steel had averaged gross sales of $15.5 million annually over the previous three years--nearly $1 million over the $14.7-million federal limit. Still, it was certified by the county Transportation Commission as a disadvantaged company in August, 1988, and awarded $800,000 in Blue Line contracts during the next six months.

The commission finally decertified Franklin Steel last February. By that time the company was averaging more than $22 million a year in gross sales. Commission officials said their tardiness was caused by an oversight.

Applying the Rules

The Transportation Commission and the RTD sometimes reach opposite conclusions while applying the same rules, The Times found.

Communications International Inc. of Atlanta is certified as a minority contractor by the RTD although the commission disqualified the company as too large. A $1-million minority contract is at stake.

The telecommunications company was founded in 1979 by Joseph Profit, a black former football player for the Atlanta Falcons who is president of the firm and the major stockholder. The company boasts of obtaining $110 million in government contracts last year and of its ties to Catalina Vasquez Villalpando, the treasurer of the United States. Villalpando owns more than $260,000 worth of stock in the company, and documents in 1987 listed her as owning 10% of the firm.

Communications International was certified by the RTD in 1985 and, according to agency records, began work on a $140,000 phone cable subcontract on transit district facilities, even though the firm did not have a state contractor’s license to perform the job as required by law.

Walter R. Norwood, head of the RTD’s office of economic opportunity, told The Times that the agency certified Communications International because the company had shown the ability to perform cable work on federal jobs. RTD officials said the responsibility for making sure that the company was licensed rested solely with PacTel InfoSystems--the prime contractor on the job.

Prime contractors do have such a responsibility under state law, but a PacTel official said the company assumed Communications International was licensed because the RTD had certified the minority firm.

“RTD gave us the name of (Communications International),” said Stephen Slocum, PacTel account manager. “So the assumption was that they had a contractor’s license. . . . What government agency would certify you if you didn’t have one?”

In June, 1987, still without a state contractor’s license, Communications International was certified as a minority firm by the county Transportation Commission, which at that time simply accepted RTD certifications without investigation.

The next year--as Communications International was about to be awarded a $564,000 contract for cable work on the Blue Line--commission officials found that the company did not have the necessary license.

Performing contracting work without a license is a misdemeanor punishable by a fine of up to $4,500 for a first offense, but state licensing authorities could find no record of a complaint.

In the summer of 1988, Communications International obtained a contractor’s license for “specialty” work such as low-voltage communications jobs, and the company was awarded the $564,000 Blue Line subcontract.

Commission officials now say that Communications International made too much money to qualify for the contract and decertified the firm this year. The company reported average gross sales of $9.6 million for fiscal years 1986-88--or $2.6 million a year more than the federal government allows for the type work performed on the Blue Line, according to Transportation Commission officials. The company reported $14.8 million in sales for the fiscal year 1988-89.

Despite the decertification of Communications International by the commission, RTD officials recertified the company this year and assured the firm that it is eligible to receive more than $1 million in Metro Rail contracts involving the installation of fire alarm and security systems and cable splicing.

Norwood contended that the company is eligible to perform the work because it is certified as disadvantaged by the federal government. But federal officials said that such certification does not exempt companies from income limitations connected to particular jobs, such as the pending Metro Rail contracts.

Profit, company president, insisted that Communications International has not exceeded federal size standards for minority subcontractors and is appealing the commission’s decertification.

Asked about the $110 million in government contracts described in the company’s promotional literature, Profit said those projects may take years to complete and may not bring in that much revenue. He would not reveal how much money the company made last fiscal year.

Slow Enforcement

Enforcement of minority contractor rules can be so slow that companies suspected of fronting are allowed to complete jobs and collect millions of dollars.

In early 1988, RTD officials suspected that Doubleday Construction Co., a small black firm located in Los Angeles, was a front for Shank-Obayashi, a giant consortium formed by an American company and a Japanese business. Shank-Obayashi had two Metro Rail contracts worth $34 million. Doubleday’s subcontracts for concrete work totaled $7.6 million.

In a Feb. 15, 1988, memo, RTD officials asked the federal Department of Transportation to investigate, saying, “We have reason to believe (Doubleday Construction Co.) is a front.”

RTD officials termed the case “egregious” and accused Shank-Obayashi of secretly running the jobs that Doubleday supposedly performed.

Both Shank-Obayashi and Doubleday deny that a front relationship existed.

“That’s crazy; I wasn’t fronting for anyone,” said Garland Smith, owner of Doubleday.

Smith said that Shank-Obayashi leased him equipment and provided an experienced supervisor because Doubleday had never done such extensive concrete work.

The help that Doubleday received, Smith pointed out, was not secretive and is spelled out in subcontracts that were available to the RTD. Officials of the agency said they do not routinely examine minority subcontracts.

Despite prodding from the RTD, the federal investigation stalled and sputtered for more than two years. Finally last March, federal investigators told the RTD that Doubleday was indeed fronting for Shank-Obayashi.

By that time, however, Shank-Obayashi and Doubleday had completed their work on the Metro Rail and had been paid.

After receiving the results of the federal investigation, the RTD decertified Doubleday.

Last June--three months after receiving the results of the federal investigation--RTD officials asked the U.S. Department of Transportation to bar both Doubleday and Shank-Obayashi from bidding on any federal contracts--the harshest penalty available short of a criminal prosecution. The request is pending.

But the RTD did not warn its sister agency, the county Transportation Commission, of its concerns about Doubleday until the commission inquired about the company last August--2 1/2 years after the RTD first recorded its suspicions that the firm was acting as a front and five months after federal investigators completed their probe.

In the meantime--in late February of 1988--a $900,000 minority subcontract was awarded to Doubleday by another contractor for work on the Blue Line light-rail project being built by the Transportation Commission.

Norwood, head of the RTD’s office of economic opportunity, said he had not notified the commission about the federal investigation sooner because it was not his responsibility.

“I’m not required to tell (the commission) about it,” he said.

RTD spokeswoman Andrea Greene contended that it was the duty of the federal Department of Transportation to notify the commission of the allegations against Doubleday. Federal officials denied it was their responsibility.

Identifying the ‘Fronts’

Transit officials do not always use consistent standards to differentiate between fronts and legitimate minority firms.

For example, transit officials have taken no action against Golden Bear Concrete Co. although the black-owned Cypress firm appears to depend even more heavily on a large non-minority contractor than Doubleday depended on Shank-Obayashi.

Golden Bear Construction, owned by Henry Thompson Jr., has subcontracted for $9 million worth of Metro Rail tunnel work from three contracting companies headed by Tutor-Saliba Construction Co. of Sylmar. The prime contractors are receiving a total of $131 million.

Golden Bear crews on the jobs are hired, managed and laid off by Tutor-Saliba, according to Golden Bear supervisors and union dispatchers.

“I leave the hiring and firing to them,” said Tony Rivera, a Golden Bear supervisor.

“Tutor-Saliba is definitely running this job,” said Jeff Moseley, who was a Golden Bear foreman when he talked to The Times. “The only sign of Golden Bear (on the job) is the logo on (Rivera’s) truck and the printing on your paycheck.”

Golden Bear also uses Tutor-Saliba’s office space and leases equipment from the prime contractor.

Federal officials say that such ties can be signs of a classic front.

“The management and daily business of these minority firms must be controlled . . . (by the) socially disadvantaged owners,” said Robert G. Owen, civil rights director of the Department of Transportation’s Urban Mass Transit Administration. He said disadvantaged subcontractors must do their own hiring and firing, supervise their own work force and maintain an independent office and payroll system.

But Norwood of the RTD said he is “comfortable” with the arrangement between Golden Bear and the larger company. “Tutor-Saliba is providing some assistance,” he said. “And that seems like a good idea under the circumstances.”

Thompson and Eric Carlin, vice president of Tutor-Saliba, acknowledged that Golden Bear was receiving special help from the prime contractor because the minority firm was inexperienced in tunnel work, but denied that the relationship constitutes a front.

The Gender Factor

Firms claiming to be owned and run by women are frequently found to be fronts for white males in other parts of the country. But in a Los Angeles case, transit officials did not heed signs in their own files that a woman-owned company might not be what it claimed.

Zeev Oved and Associates of Van Nuys, a firm that installs handrails and wall panels, was founded in 1986, according to RTD records. Zeev Oved, a white male, owns 35% of the company and his wife, Esther, owns 65%.

After operating for four years as Zeev Oved and Associates, the company dropped the name of Esther’s husband from the title last spring when the firm sought certification from the RTD as a disadvantaged woman-owned business. The RTD certified the company as disadvantaged May 1 and four months later the firm legally changed its name to Oved and Associates.

RTD records show that Esther Oved had previously worked as a saleswoman for her husband’s brother, Pinhas Oved, who operated a business similar to Oved and Associates.

Pinhas Oved subsequently joined the new firm and handles estimates, bidding and supervision of jobs. Esther runs the office and says she manages the company along with her husband.

“I worked for Pinhas,” said Esther Oved, “and it’s funny, now Pinhas works for me.”

In addition, another male relative, Jacov Oved--a cousin of Zeev--holds the contractor’s license for the company. “I chose him because he had a license,” Esther Oved said. “I was not qualified for a license.”

Between May and September, the company was awarded $7.8 million in disadvantaged business contracts on Metro Rail.

In September, two competitors of Oved and Associates formally complained to the RTD that Esther was acting as a front for her husband and male relatives.

“They want me out of the way,” Esther said of the complainants. “I run this company.”

She went on to say that her brother-in-law, Pinhas Oved, does “man’s work,” while she controls the company from an office.

“I can run my company from here,” she said. “I do not need to negotiate with men.”

After The Times inquired about complaints against Oved and Associates, the RTD notified the company on Nov. 9 that it was being decertified as a disadvantaged firm on the grounds that Esther is not really in control. Officials based their action on information such as the history of the firm, which has been in the RTD file since the business was certified six months ago. The company is appealing.

The Lack of Licenses

In another case, transit officials not only overlooked evidence of a front in their files, but also failed to take prompt action when warned that a minority company was working without a valid state contractor’s license and was involved in a kickback scheme.

PIE Construction Inc., an Asian-American firm owned by Gregory C. Park of San Dimas, was awarded $3.4 million worth of minority subcontracts for electrical work on the Metro Rail in 1987. In July, 1988, the firm’s contracting license was suspended by state officials for undisclosed reasons. The license expired two months later, but the company kept working.

In December, 1988, investigators for the International Brotherhood of Electrical Workers complained to the RTD that PIE was operating without a valid contractor’s license and that the company was forcing workers to kick back part of their salaries in order to keep their jobs.

When the RTD took no action, the union turned over its complaints regarding alleged payroll kickbacks to state labor officials who filed criminal charges against Park in August, 1989. He pleaded guilty to accepting payroll kickbacks, was ordered to pay $178,000 restitution and was placed on five years’ probation.

RTD officials could not explain why the agency did nothing about the kickback complaint.

While the union’s complaint was pending, the RTD allowed PIE to continue working on Metro Rail subcontracts for several months without a valid contractor’s license.

PIE was forced to give up the jobs in May, 1989, but RTD officials permitted another firm that was partly owned by Park--Citicon Inc. to immediately take over the two Metro Rail subcontracts.

Park owned Citicon in partnership with George Dickey, a white electrical contractor. The company’s certification as a disadvantaged minority firm was authorized by RTD economic opportunity chief Norwood, despite objections of a staff member who said that the white partner exercised too much control over the business.

Three weeks after Citicon’s takeover of the PIE contracts, Norwood changed his mind about Citicon and decertified the firm, alleging that it was a front for Dickey.

“We find that the non-minority owner, George Dickey, exercises disproportionate control over the management and daily operations of Citicon Inc.,” wrote Norwood on June 7, 1989. He also alleged that Citicon was set up by Park and Dickey to “subvert the certification and take over PIE Construction’s RTD contracts.”

Even so, Citicon continued to work on the Metro Rail subcontracts for another three months.

In addition, RTD records show that the agency overlooked early warnings that Park and Dickey might be operating a front. In November, 1988, and January, 1989, a company called Airways Electric was listed, along with PIE, on certified payroll records as having paid PIE employees for work on Metro Rail subcontracts. Airways Electric is wholly owned by Dickey and had no official connection with the Metro Rail work, but again RTD officials took no action for six months.

Norwood wrote on July 27, 1989: “It was determined that Airways Electric, owned by Mr. Dickey, and PIE, owned by Mr. Park, arranged to have PIE’s employees paid through Airways Electric on both Metro Rail Contracts.”

“PIE appeared to be a front for Airways,” RTD spokeswoman Greene said recently. She acknowledged that the RTD had not acted promptly on available evidence that pointed to a front.

Park has denied acting as a front and Dickey could not be reached for comment.

Norwood said the question of how RTD handled the case is moot because no firms connected with Park are certified to receive minority contracts and no further action is needed.

But Gene Lyon, former electrical union investigator who worked on the PIE case, remains dissatisfied.

“The RTD’s shallow investigation of this whole thing,” he said, “was a major display of ineptness and casts doubt on the RTD’s ability to carry out its responsibilities.”

Times staff writer Greg Krikorian and research librarian Nona Yates contributed to this story.

LOS ANGELES TRANSIT CONTRACTS TO MINORITIES AND WOMEN

The Southern California Rapid Transit District and the Los Angeles County Transportation Commission had spent $1.2 billion on Metro Rail and the Blue Line by June 30, 1990. Of that amount $266 million-just over 25%-had gone to firms that the transit agencies had certified as disadvantaged minority-or women-owned businesses. By fall, the amount paid to such firms had increased to $471 million. However, a Times investigation revealed that tens of millions of dollars have gone to companies with questionable minority status, businesses that do not appear to be truly disadvantaged or firms that served as “fronts” for white, male-dominated prime contractors.

Southern California Rapid Transit District TOTAL: $138.7 million to minorities and women Black: 13.3% Hispanic: 4.8% Native American: 1.5% Asian: 4.4% Women: 3.8% Other Contracts: 72.2%

Los Angeles County Transportation Commission TOTAL: $127.5 million to minorities and women Black: 7.5% Hispanic: 5,5% Native American: 2.7% Asian: 3.3% Women: 6.6% Other Contracts: 74.4% Source: Southern California Rapid-Transit District Source: Los Angeles County Transportation Commission

QUALIFICATION REQUIREMENTS

A firm owned by an ethnic minority or a woman must be certified as a “disadvantaged business enterprise” by the Southern California Rapid Transit District or the Los Angeles County Transportation Commission to participate in the equal opportunity program for construction contractors on local transit projects. To date the RTD has certified 371 firms. The commission has certified 234, including some that are on the RTD lists.

To qualify an applicant MUST:

* Prove the firm is 51% minority-owned or owned by a woman. Minorities include blacks, Hispanics, Asians and Native Americans.

* Have a state contractor’s license to be certified by the commission. The RTD does not require such a license.

* Gross less than $14.7 million a year.

* Demonstrate that he or she actively manages the firm’s affairs and is in control of all work subcontracted to the firm.

* Demonstrate that he or she is a disadvantaged minority, if challenged.

Note: Neither the RTD nor the commission attempts to determine if the owner-manager of a certified company has the skills or the financial capability to perform the contracted work.