2 O.C. Water Officials Targeted in D.A. Probe : Investigation: The Santa Margarita district managers took gifts from firms they recommended for contracts.

The Orange County district attorney’s office launched an investigation Monday into whether two top managers of the Santa Margarita Water District violated state conflict-of-interest laws by recommending that contracts be awarded to companies that had given them thousands of dollars worth of gifts.

“We have received a complaint involving the water district, and we will be looking into the matter,” Deputy Dist. Atty. Guy N. Ormes said Monday.

The Times reported Monday that the two men, general manager Walter W. (Bill) Knitz and his deputy, Michael P. Lord, accepted more than $40,000 worth of gifts from contractors and consultants over the last several years. Some of those contractors and consultants received millions of dollars worth of district work.

The water district’s offices were flooded with calls Monday, mostly from irate customers complaining about lavish spending detailed in a separate Times article on Sunday.

Picketers also stood at a busy intersection near the water district’s headquarters on Marguerite Parkway near Oso Parkway, waving at passing motorists signs that said, “Honk if you are tired of Santa Margarita Water District Perks.”

Meanwhile, at an emergency meeting called Monday night, the water district’s board of directors axed the spending privileges of both Knitz and Lord. Any expenditure now must have the approval of at least two of the board’s five members, and even then, such a payment must be “absolutely essential” or an emergency, board members said.

“We have taken absolute control of the situation,” Don B. Schone, chairman of the Santa Margarita district, said after the 2 1/2-hour, closed-door meeting.

The new limits on the two district managers will encompass all business activities, even the purchase of gasoline for district-owned cars.

“They can go to a meeting and drive down to it, but they’d have to pay for (gasoline) themselves, unless it was pre-approved,” Schone said, adding that $200 lunches at French restaurants would no longer be acceptable. “There will be no business lunches.”

On Sunday, The Times reported that the two men had been reimbursed for tens of thousands of dollars in questionable expenses over the past decade, including cross-country trips for their wives, rooms at expensive hotels like the Ritz-Carlton, sheepskin seat covers and $125 wax jobs for their cars, four-figure room service tabs and regular repasts at pricey local restaurants.

The two men defended many of the questionable expenses, such as $200 theater tickets in New York, as acceptable “perks.”

Ormes, head of the district attorney’s special assignment section, said his office had received a letter from civic activist Shirley L. Grindle, who asked that the activities of Knitz and Lord be investigated.

In her letter, Grindle said it would be unfair to former County Supervisor Don R. Roth for the district attorney’s office not to investigate Knitz and Lord. Roth resigned and pleaded guilty to seven misdemeanors involving his failure to report gifts as required under state law and for voting on matters where he had a conflict of interest.

Ormes, the lead prosecutor in the Roth case, said he would look at the issues involving Knitz and Lord in a similar vein.

It is a violation of the state Political Reform Act of 1974 for officials such as Knitz and Lord to use their position to “influence a governmental decision” that has a financial impact on a company that gave them gifts exceeding $250 in the previous 12 months. Many of the companies that showered gifts on Knitz and Lord had given them as much as $3,000 a year in hunting trips, travel and entertainment.

Knitz, Lord and the water district’s legal counsel, Fritz Stradling, did not return calls for comment Monday.

Both men sit on the finance committee that recommends consultant payments to a five-member board of directors.

The board members are elected, but not according to the U.S. Supreme Court’s “one-man, one-vote” rule. Rather, they are elected under a California law that allows the creation of special “landowner districts” where the votes are apportioned among landowners in the district on the basis of one vote for each dollar of their landholdings on the county’s tax rolls.

In the most recent election, the Santa Margarita Co. and its subsidiaries cast nearly one-third of the votes. In league with only one or two other major landowners in the district, such as Fieldstone-Trabuco, the giant South County development firm could decide the election’s outcome.

Like elected officials, who must abstain from voting on matters that they know would benefit them financially, administrators of public agencies also must refrain from influencing any vote where they have a conflict of interest, Ormes said.

Public officials can be fined $2,000 each time they violate a requirement that they abstain from voting, according to state law.

“We have to determine whether there was an attempt to influence a governmental decision,” Ormes said. “With an elected person, that’s easy to tell. With appointed people, it’s not as clear.”

In an interview last week, Lord acknowledged accepting gifts during 1990-91, although his statement of economic interest says he accepted none. Ormes said he would be checking to see whether Lord should have reported accepting gifts during that time. Failure to file a statement of economic interest is likewise a violation of state law.

Ormes said he would also investigate whether documents were removed from district files.

The Times reported Sunday that some of Lord’s expense reports, including at least $2,700 in bills, were not contained in files provided to the newspaper.

Ormes said it is a felony--punishable by up to four years in prison--for the custodian of a public record to allow someone to “steal, remove, secrete, destroy, mutilate, deface, alter or falsify” any record filed in a public office.

Ormes would not comment about whether his office would investigate a Times report that the two men billed the district three times for the same hotel bill.

Ron Greek, a South County activist, said people in Coto de Caza are “incensed” by reports in The Times of lavish district spending and gift-giving, especially since his area has the highest water rates in the county.

“We’ve always been concerned about our rates,” Greek said. “Now all this comes out, and all people are talking about is what’s been going on in the water district. It’s going to take a lot of homeowner’s associations to get some action. This has people upset.”

Robert D. Breton, a deputy state attorney general and mayor of Mission Viejo, parts of which are served by Santa Margarita, said high spending at the district is unacceptable, regardless of the effectiveness of the managers involved.

When confronted with some of their expense accounts, Knitz and Lord said their spending had “been measured against the results achieved in accomplishing the goals and objectives of the district . . . and found to be cost effective.”

Breton, however, said: “I don’t think there is any justification for lavish expenditure of public monies, no matter how cost effective the efforts . . . of the managers. They were not entitled to live high off the hog.”

Other public officials expressed dismay over the district’s spending habits.

“It’s always a sad occasion when something like this comes up, because it smears everybody,” said Thomas F. Riley, a county supervisor whose district includes the Rancho Santa Margarita area.

While Riley was reluctant to discuss details of the case without knowing more about it, he added that there appears to be a “laxity” in the district’s use of public funds.

But Riley said he did not think that the system of special districts in the state was to blame. “It works,” he said.

Assemblyman Tom Umberg (D-Garden Grove) said that many ratepayers in the district may not understand the administration’s spending habits.

“I’m not sure the guy who makes $30,000 a year thinks he should be paying higher water rates so this guy can stay at the Four Seasons or ride in a limo,” Umberg said.

The public outcry over the reports of Knitz’s and Lord’s spending habits, the picketing and what they termed the “potential for unruliness” prompted some board members to express concern for the safety of Santa Margarita water district employees.

“We are a little concerned about the health and safety of our people,” Schone said.

Times staff writer Eric Lichtblau contributed to this story.