Possible Misconduct by Water District Officials Investigated : Ethics: FBI looks into dealings of two top managers who received thousands of dollars from companies that won contracts. They deny any wrongdoing.

FBI agents said Tuesday that they are conducting an inquiry into possible criminal wrongdoing at the Santa Margarita Water District, where the top two managers have received more than $46,000 in gifts from companies that have been awarded lucrative contracts.

Agents said they will examine whether general manager Walter W. (Bill) Knitz and his deputy, Michael P. Lord, may have violated federal law by recommending that the district hire bankers, developers, contractors and others who had given them gifts.

The law, called the Hobbs Act, prohibits state and local officials from accepting gifts in exchange for public business. Violation of the Hobbs Act can result in a maximum 20-year prison sentence and a $250,000 fine.

Knitz and Lord have said their acceptance of gifts--which ranged from a $1,400 fishing trip in Cabo San Lucas to $300 worth of theater tickets--has no bearing on the contracts awarded. Lawyers for both men said Tuesday that they were not surprised or worried about the FBI investigation.

“As far as the Feds are concerned, they can open up any investigation they want,” said Knitz’s lawyer, Marshall M. Schulman. “But whether they find anything is a matter of conjecture and speculation.”

Thomas M. Goethals, one of Lord’s attorneys, said: “It doesn’t surprise me. Mr. Lord’s actions have been mischaracterized to hurt him tremendously. When the truth comes out, he’ll be all right.”

Before the FBI’s inquiry can become a full-scale investigation, agents must obtain Justice Department approval.

“We are in contact with the Orange County office of the U.S. attorney’s office, and the facts of the case as we know them are currently being discussed with them,” said FBI Special Agent Gary Morley, who specializes in political corruption cases and also acts as the agency’s official spokesman.

The Orange County district attorney’s office launched a similar investigation last week. It is investigating whether Knitz and Lord violated state conflict-of-interest laws by accepting gifts from contractors.

Investigators picked up four years worth of expense reports for Lord and Knitz on Tuesday. Earlier reports fall under a statute of limitations and are off-limits, prosecutors said.

Under the state Political Reform Act, public officials may not use their “official positions to influence the making of any governmental decision” that has a financial impact on a company that has given $250 or more in gifts during the previous year.