Riordan Is Investor in Firm With Metro Rail Contract : Ethics: Mayor’s related actions may have violated conflict-of-interest law, experts say. He defends his role.

Los Angeles Mayor Richard Riordan, who pledged during his campaign to separate his substantial business holdings from any official actions, helped win approval last year for a rail project that has brought hundreds of thousands of dollars to a company in which he holds a major stake, records show.

Riordan’s action, undertaken in his role as a board member of the Metropolitan Transportation Authority, may have violated state conflict-of-interest law, according to legal experts.

Riordan said in an interview that he sought the funding for the commuter rail project to resolve a dispute among MTA board members and had no inkling that the company could benefit. In response to questions posed by The Times, the mayor said that an attorney on his staff has advised him that he did not violate the law.

Last August, Riordan won funding for the rail project between Downtown Los Angeles and Pasadena, activating a $1.05-million contract held by Tetra Tech Inc.

Riordan, a multimillionaire lawyer and investor, owns $9.75 million of stock in the Pasadena-based engineering services company, his largest holding.

During his campaign for mayor a year ago, Riordan said he would place his private holdings in a blind trust “to avoid any potential conflicts of interest.”

“Furthermore,” he added, “I will remove myself from situations where potential conflicts of interest may arise.” Records show that the head of the blind trust, established as of July, 1993, sits on the board of directors of Tetra Tech, along with one of Riordan’s other venture capital partners.

Riordan, who accepts only $1 a year of his city salary, referred questions regarding the operation of the blind trust to others. He said that members of his staff have sought to steer him clear of conflicts of interest with his personal holdings, valued at $70 million.

As mayor, Riordan sits on the MTA board and appoints three other people to the 13-member panel. No other official controls as many appointments to the MTA.

The viability of the Pasadena rail line was in jeopardy last year when Riordan moved to save it. Citing an operating budget shortfall of $126 million and a capital budget deficit of $170 million, MTA staff had recommended delaying or killing the proposed 13.6-mile railway.

An Aug. 3, 1993, staff memo to Franklin E. White, the MTA’s chief executive officer, warned that undertaking costly new rail construction would be “a highly dangerous course of action,” adding:

“There is no money for new rail lines and will not be for at least a decade. This means that we must postpone indefinitely all work on the Pasadena line . . . and all other rail lines that are not currently under way.”

White privately recommended delaying or scrapping the Pasadena line, according to people familiar with those conversations. But the chief executive, who had joined the agency a few months earlier, relented when urged by MTA Chairman Richard Alatorre, a city councilman whose district would be partly served by the new line.

White agreed to propose $40 million in funding to mollify Alatorre, sources told The Times. But then Riordan introduced an amendment to the agency’s budget committing $97 million of MTA funds toward completion of final design engineering work for the project and authorizing preliminary construction.

“I’m concerned, I think we all should be, as to where the money is coming from,” county Supervisor Edmund D. Edelman said in response to Riordan’s amendment. “. . . We are facing some terrible fiscal problems.”

With Alatorre’s active support, Riordan ultimately gained unanimous passage last August for his amendment. White said that day: “The Pasadena line was the single most difficult issue relating to adopting the budget.”

At the time of Riordan’s amendment, Tetra Tech stood to gain.

The company in June, 1993, a month before Riordan took office, had received its $1.05-million contract to perform various engineering services on the Pasadena line. But records and interviews show that no payments would be made under the five-year contract unless the MTA made annual appropriations for the rail project.

Riordan told The Times that his sponsorship of the budget amendment had nothing to do with Tetra Tech:

“There was a conflict on the (MTA) board. Some board members wanted to spend more money on the (Pasadena) line, others wanted to spend less than was proposed. And I was asked to put together a compromise. It just came down to that. . . . It was just simply a way of trying to bring consensus to the board. No deep-seated meaning to it or anything.”

The mayor said he could not recall who asked him to put together the budget amendment.

Passage of Riordan’s amendment last August quickly opened the funding spigot for the Pasadena line. Less than two months later, Tetra Tech received its first $267,000 in payments. As of this month, Tetra Tech had received a total of about $320,000, according to the MTA.

Asked if the $97 million of funding helped trigger the payments for Pasadena line engineering work, Harley Martin, an MTA environmental specialist who administers Tetra Tech’s contract, said: “Sure it did.”

Without that money, said Laurence Weldon, the MTA’s vice president and chief manager for the Pasadena line, the final design and overall engineering services for the project would have ceased.

“Everybody would have gone home,” Weldon said.

For Tetra Tech, its Pasadena line contract represents a new business opportunity in the local government arena. The company, which as of last year held contracts worth $45.8 million, relies most heavily on water cleanup projects overseen by the federal Department of Energy and the Pentagon.

Records show that Tetra Tech began seeking the Pasadena line contract in 1992, when Riordan was still a member of the company’s board of directors. Tetra Tech has received about $746,000 of payments on four other Metro Rail contracts, entered into in 1989 and 1991, during Riordan’s four years on the company’s board. He resigned in December, 1992.

Riordan, who took office as mayor on July 1, 1993, said he had no knowledge of Tetra Tech’s contractual role with the MTA when he took action to help save the Pasadena line. He also said he had not known of the company’s earlier transit contracts.

“Until (now), I did not know that Tetra Tech had any agreement whatsoever, or relationship whatsoever, with MTA,” Riordan said in an interview last week. “. . . I didn’t know they had any contracts. And I also did not know, therefore, that the budget in any way related to that.”

The president of Tetra Tech said Riordan had no role in the company’s pursuit of the Pasadena line contract.

Riordan said that because his holdings were placed in the blind trust, he “did not know, I still don’t know, whether I owned any Tetra Tech stock at the time.”

But financial disclosure statements Riordan signed upon assuming office last July and again two months ago listed his $9.75 million holding in the company.

Riordan referred more detailed questions about the trust to Jeffrey L. Glassman, an attorney at his former law firm. Glassman said that the mayor would have been informed of the sale of any portion of his stock held when the blind trust was created, but not the handling of new securities.

Officials seeking to avoid conflicts of interest can place assets under the control of a blind trust. But the value or sale of any investments that the official held before the formation of the trust must be publicly reported.

The state’s Political Reform Act requires public officials to abstain from governmental actions that can affect their personal investments of at least $1,000.

Legal experts contacted by The Times said that in Riordan’s case, he should have abstained if it was “reasonably foreseeable” that the funding of the Pasadena line could benefit the company. By not abstaining, experts said, the mayor may have violated the law.

“I think it’s very legitimate for the press or possibly an investigative agency to raise this with Mayor Riordan,” said UCLA law professor Daniel H. Lowenstein, who co-authored the state’s conflict-of-interest law and served in the 1970s as the first chairman of the California Fair Political Practices Commission. “It’s a very substantial investment on his part. His relationship to the company is a significant one.”

As a matter of policy, representatives of the Fair Political Practices Commission, which interprets and enforces the conflict-of-interest law, decline to discuss individual matters. The agency’s spokeswoman, Jeanette Turvill, said that an official would risk violating the law by seeking and voting for funding for a project that stands to benefit a company in which he has invested.

Riordan said that a lawyer on his staff has advised him that his championing of the Pasadena line amendment did not pose a conflict of interest.

Riordan and the lawyer, David Michaelson, both said that in their view the mayor’s action did not violate the law because, although the amendment provided $97 million, it did not award a contract to Tetra Tech.

The mayor declined to answer whether he would seek a legal opinion from the Fair Political Practices Commission, advising him whether he should participate in future actions affecting Tetra Tech.

Turvill said the law prohibits officials from participating in any government decision, including a budget amendment, that could “materially” affect a company they have invested in. The FPPC has ruled that for companies such as Tetra Tech, a “material” affect amounts to at least $150,000 within a year.

The law states that an official should not participate in any decision “in which he knows or has reason to know he has a financial conflict of interest.” The extent to which an official would be expected to foresee a conflict was described in an advice letter provided by the commission in another matter.

“As a general rule,” said the 1985 letter, “an official has ‘reason to know’ that a decision will affect a source of income whenever a reasonable person, under the same circumstances, would be likely to know the identity of the source of income and would be aware of the decision’s probable impact on that source.”

According to interviews and public records, including Securities and Exchange Commission filings, the mayor’s relationship with Tetra Tech is extensive:

* Riordan owns $9.75 million of the company’s stock, amounting to 7.4% of the total shares, second only to Tetra Tech’s president.

* Riordan was a founding member of Tetra Tech’s board of directors in 1988. Through one of his separate, venture capital firms, he and a partner purchased 766,000 shares at $1.50 each. Riordan was still a director in 1991, when the company first offered its stock for sale to public investors. The stock price has soared with the company’s expanded revenues, and closed Friday at $18.75 per share. Tetra Tech’s stock is traded publicly on the National Market System, known as Nasdaq.

* Riordan, along with a co-general partner of one of his venture-capital firms, composed a majority of Tetra Tech’s three-member board of directors from 1988 to 1992. That partner, J. Christopher Lewis, remains on the board and is the trustee of Riordan’s personal blind trust.

* When Riordan withdrew from Tetra Tech’s board in December, 1992--as he prepared to run for mayor--he was succeeded immediately as a director by Patrick C. Haden, another general partner from Riordan’s venture capital firm. Haden, the former USC and professional football quarterback, continues to serve as counsel to Riordan’s former law firm.

* The law firm co-founded by Riordan, called Riordan & McKinzie, has served as general counsel to Tetra Tech since 1988. That year Riordan planned and helped carry out a leveraged buyout that enabled Tetra Tech’s managers and Riordan to purchase the company from Honeywell Corp.

Tetra Tech initially won the Pasadena line contract based on an evaluation of the company’s capabilities and its pledge to allocate 35% of its work to minority subcontractors, records show.

Steve D. Rhee, an MTA contracts administrator who oversees Tetra Tech’s work, said the $1.05-million contract value was based on transit staff estimates, not on competitive bids. It is likely, Rhee said, that the contract would be expanded over the five years required to build the Pasadena line.

Tetra Tech’s role includes identifying the environmental consequences of final design changes, such as relocations of proposed station sites.

In its most recent annual report, the company noted its 1993 contract with the MTA, and cited it as one of a handful of new business opportunities.

“This year, we were pleased to win substantial new work in the commercial and state and local government sectors. . . . Work was also initiated on a five-year contract with the Los Angeles Metropolitan Transportation Authority for environmental services related to Metro Rail construction,” the report said.

As a private lawyer, investor and, finally, as mayor of Los Angeles, Riordan has over the years played a central role in shaping the future of Tetra Tech and commuter rail service to Pasadena:

It was Riordan who, as a lawyer, negotiated the public transit agency’s purchase of the passenger line right-of-way from Santa Fe railroad during 1991 and 1992. The transit agency paid Riordan & McKinzie about $900,000 for overall legal services during 1991-1993, records show.

It also was Riordan, according to a securities analyst familiar with the matter, who advised the president of Tetra Tech in the late 1980s how to purchase control from Honeywell. Riordan also brought his law firm aboard as general counsel and, with Lewis, his business partner, controlled the board of directors.

The president of Tetra Tech, Li-San Hwang, contributed $1,000 to Riordan’s mayoral campaign on Nov. 30, 1992, according to election records. Hwang said he made the contribution because he believes that Riordan’s “action-oriented” approach to policy decisions and his business background are what Los Angeles needs.

Riordan has played no role with the Pasadena line contract, Hwang said. Although Riordan remained on Tetra Tech’s board in 1992, “I don’t think he ever knew we bid on that job,” Hwang said. “He didn’t really participate in those type of decisions.”

Hwang said that he and others at the company thought the contract would be worth “another few million dollars by now. But apparently they (MTA officials) don’t have the money for it.”

Securities analyst David McDonald, whose underwriting firm, Wessels Arnold & Henderson, helped structure Tetra Tech’s first public stock offering, said Riordan as a board member worked cooperatively with Hwang’s management team. “It’s a good relationship,” McDonald said. “It’s worked well for both parties. It’s an extremely well-managed company.”

McDonald said the 1993 MTA contract won by Tetra Tech “was nice . . . one of the new contracts they’ve gotten with local government.” Overall, he noted, Tetra Tech’s federal environmental services contracts are of the greatest value.

As of last October, Tetra Tech had 607 employees and generated net income for the most recent year of $4.3 million, according to the company’s financial statements.

Chronicle of a Contract

Los Angeles Mayor Richard Riordan last August saved the proposed Pasadena Line railway by winning approval for a budget amendment providing funding for the project. The funding activated an engineering-services contract held by Tetra Tech Inc. The mayor was the company’s No. 2 shareholder.

1) Riordan reported his ownership of $9.75 million of Tetra Tech stock on this public disclosure form. The investment, as of the end of 1993, was Riordan’s largest holding.

2) With this motion, Riordan won unanimous approval from the Metropolitan Transportation Authority board to spend $97 million on the proposed Pasadena-to-Los Angeles railway project.

3) This ledger shows that seven weeks after Riordan won approval for the Pasadena Line, Tetra Tech received its first payments on a contract that had been inactive.

Sources: Los Angeles Ethics Commission, Metropolitan Transportation Authority