CALIFORNIA ELECTIONS / U.S. SENATE : Investments Put Feinstein at Risk of Conflict

Democrat Dianne Feinstein would be among the wealthiest senators in the millionaires club that is the U.S. Senate. But more than sheer wealth, she would bring an investment portfolio like no other--one that has many possibilities for conflict between her public duties and personal finances.

Feinstein, the front-runner in the race against appointed Republican Sen. John Seymour, is a millionaire on her own. But her financial disclosures and tax returns show that nearly all her income--it topped $4 million last year--comes from her entrepreneur husband, Richard C. Blum, whom she married in 1980 when she was 48.

Blum sits on the boards of directors of six corporations, most of which are subject to federal regulation in varying degrees. Among them are Sumitomo Bank, an engineering firm with $500 million in federal contracts and Northwest Airlines.

A high-stakes money manager, Blum and his Richard C. Blum & Associates invests his and his clients’ funds in ventures and corporations, many of which have issues that cross the desks of bureaucrats, members of Congress, and, in one case, criminal investigators.

The firms in which he invests include a defense contractor and a pharmaceutical company, a firm he set up to carry out trade with the People’s Republic of China, famed chef Wolfgang Puck’s venture into the frozen pizza business, Bank of America. Blum is regulated by such federal agencies as the Securities and Exchange Commission.

From what experts on politics and conflict of interest laws say, many holdings could be fodder for conflicts between Feinstein’s public duties and her and her husband’s personal finances.

“She’s going to have to spend a fair amount of time paying attention to the web of relationships that her husband has developed in business,” said Washington lawyer Marc E. Miller, who counsels members of Congress and their working spouses about avoiding conflicts.

Given the cloud over retiring Sen. Alan Cranston (D-Calif.), the always flammable mixture of money and political power is even more an issue this year. Cranston was reprimanded for pressuring regulators on behalf of Lincoln Savings & Loan boss Charles H. Keating Jr. after Keating poured $850,000 into Cranston’s nonprofit corporations.

Feinstein emerged from a decade as mayor of San Francisco without becoming enmeshed in scandal. But her husband’s ventures had few direct dealings with the city of San Francisco, while many are affected by congressional legislation and decisions by federal agencies.

The potential pitfalls are of enough concern that Feinstein said she will appoint a staffer to ensure that there is no unintended merger of the public and private sectors in her household if she is elected. The aide would steer her away from potential conflicts and keep in contact with the Senate Ethics Committee.

“We don’t discuss this stuff,” Feinstein said of Blum’s business. “He runs his business. I have been busy running a city. I hope I’ll be busy as a U.S. senator. I have always kept an arm’s length from his business, and I always will.”

Feinstein and Blum sought counsel on the question from the Democratic law firm of Manatt, Phelps, Phillips & Kantor--the latter being Mickey Kantor, Bill Clinton’s campaign chairman. Manatt, Phelps--and independent conflict of interest experts--say Senate rules would bar Feinstein from voting on legislation designed to directly benefit Blum’s companies.

But the rules are broad. Even though Blum has a significant stake in Northwest Airlines, Feinstein could vote on bills affecting the entire airline industry without violating any ethical canon.

“It seems very unlikely that any actual conflicts of interest would arise for Dianne as a United States senator,” Manatt, Phelps said in an Oct. 2 letter.

But what is legal and what is proper or politic are not necessarily the same. “Somewhat more problematic,” the letter said, “is the possibility of an appearance of a conflict of interest.”

Feinstein and Blum insisted in interviews with The Times that their pocketbooks do not influence her views. Although the income, dividends and fees he generates are community property, the couple considers Blum’s businesses to be his separate property. In fact, he said, the stands she takes more often than not run counter to their financial interests.

“People don’t run over me,” Feinstein said. “They don’t tell me what to do. I’m going to do what I think is right, come hell or high water.”

As if Blum’s personal dealings do not provide enough potential problems, Feinstein might also have to worry about the even more far-flung interests of her husband’s clients. As mayor of San Francisco, she took positions favoring a major commercial development at Fisherman’s Wharf sought by one of Blum’s clients, and advocated awarding a downtown redevelopment contract to another close associate.

Blum’s 70 or so individual and corporate clients range from a Getty to the Southern California carpenters pension fund, to several smaller investors. One is Frederic V. Malek, the manager of President Bush’s reelection effort, who invested with Blum in Northwest Airlines and gave a $1,000 to Feinstein’s Senate campaign. Another is Robert Muse Bass, whose fortune is worth an estimated $1.6 billion.

In public disclosure documents filed with the U.S. Senate, Feinstein reported that Blum and Bass are partners in Bass-controlled cable television systems, at a time when Congress has just finished debating cable regulation. Feinstein favors the recent legislation that established regulation of cable television, which runs counter to the industry position.

Bass also owns the nation’s fifth-largest savings and loan, American Savings Bank of Stockton, though Blum has no interest in it. In 1988, when the Bass Group bought it, American was the largest failed savings and loan, requiring a $2.7-billion government bailout.

Now, American has assets of $17 billion. Congress concluded that the deal was so sweet for the Bass Group that in 1990 it directed the Resolution Trust Corp. to renegotiate the deal and about 100 other transactions. Two years later, those talks are continuing. Feinstein said she has no intention of getting involved in Bass’ S & L, especially given the public’s lingering disgust over the savings and loan crisis.

“This is a very a good thing to stay away from,” she said.

Although she does not rule out sitting on committees that would have oversight of Blum’s interests, Feinstein said she would be cautious about taking an assignment on a committee that regulates the airlines industry.

“I’m not going to have anything to do with those companies, nor would I lobby,” Feinstein said. “Nor will Richard C. Blum and Associates lobby. . . . And the world should know that.”

Blum insisted in an interview that he will “jump through whatever hoop I have to, to make sure there is no conflict of interest, or appearance of conflict.”

Feinstein and Blum have opened their joint tax returns for public inspection. By disclosing what he owns, who his clients are, and where he puts their money, Blum maintained that he has revealed more than should be expected of him, certainly more than any other investment banker.

In his business, Blum looks for troubled companies in need of an infusion of cash and management help. In exchange for the capital, he often gets a say in the companies’ operations. One such firm is a longtime holding, the engineering firm URS Corp. of San Francisco. Five years ago it was losing money, fending off a stockholders’ lawsuit and had been stripped of a Pentagon contract.

But since 1989, with Blum on the board of directors and his company taking a more direct role in the firm, URS has turned around, winning contracts from the Navy, Air Force and Environmental Protection Agency potentially worth $500 million.

Not everything he touches turns the color of money, however. He and his partners hold a 20% stake in a New York defense contractor, Frequency Electronics. Frequency produces timing and navigational devices used in military satellites, aircraft, missiles and spacecraft, including the Voyager probes, and the space shuttles.

In 1990, the company disclosed that federal agents searched its offices and that its president is the target of a federal criminal investigation into billing fraud. If indictments are filed, Frequency could lose its federal contracts, which account for more than 80% of its business.

Blum said he plans to sell the stock, but not because of the investigation. Instead, he is disappointed with the company’s stock performance. Whatever the motivation, Feinstein would welcome the sale.

“There is a cloud, let’s say that,” Feinstein said. “It is better to avoid clouds if you can.”

Blum’s biggest deal came in 1989 when he put together an investment group that bought Northwest Airlines for $3.65 billion. While he has done his share of leveraged buyouts, Blum did not use junk bonds to finance the deals. But he did business with at least one money man who did partake in the junk bond gluttony of the 1980s--Fred Carr and his Executive Life.

Using premiums of pensioners and policyholders, Executive Life and Carr, a close friend of Michael Milken, became the largest single purchaser of junk bonds peddled by Milken and Drexel Burnham Lambert. The huge Los Angeles life insurance firm failed last year and was seized by Insurance Commissioner John Garamendi.

Blum said he gained Executive Life as a client through Blum & Associates’ “outreach.” The money he managed for Executive Life returned a handsome profit--20% or more, he said. Blum has not been named in any of the lawsuits filed in the wake of the Executive Life collapse.

So far, Seymour has not directly made an issue of Feinstein’s personal finances or Blum’s business, though he is attacking her for the Fair Political Practices Commission’s suit against her over her 1990 gubernatorial campaign finances.

When Feinstein ran for governor in 1990, Blum was credited for being her most prolific fund-raiser, helping her arrange a $3-million loan and tapping his business contacts, who responded by giving her at least $450,000.

Texan billionaire Bass gave $21,000 in 1988 as Feinstein was deciding whether to run for governor, and another $36,000 during her campaign. Bass’ close associates gave at least another $66,000 two years ago.

In the current Senate campaign, Bass has given $1,000. His associates and lawyers raised about $9,000 through the primary. More recent donations will not be reported until later this month. A Times review of Feinstein’s contributors showed Blum’s clients and business associates combined gave about $85,000 through the primary.

Blum said he is less involved in fund raising this time. His efforts are not needed, he said, largely because Feinstein is better known to Democratic donors than she was in 1990, and has a broader fund-raising base.

Lawyers and political scientists who are experts on conflict of interest rules say issues raised by the Feinstein-Blum financial portfolio are unique and will present a case of first impression for the Senate Ethics Committee.

Ellen Miller of the Center for Responsive Politics in Washington noted that no one is asking politicians and their spouses to sell their stocks or become cloistered. But, she said, “it’s a difficult era.” Trust in politicians is not the currency of the day.

Still, she added, “We have to assume some level of independent judgment on the part of members of Congress. To assume that she takes her husband’s position would be to ignore that she has been elected in her own right.”

Times staff writer Dwight Morris contributed to this report.