City Hired Lobbyist Despite Fraud Probe : Ethics: Records show Webster Hubbell was under investigation while he helped L.A. officials secure transfer of airport revenue. He is now serving a prison term.

At the same time that he was being accused of cheating his ex-partners and law clients, former Associate Atty. Gen. Webster Hubbell was hired by the city of Los Angeles to lobby the Clinton Administration over a sensitive issue involving millions of dollars in airport revenue, records and interviews show.

Hubbell was hired to help persuade the U.S. Department of Transportation not to block the city’s efforts to transfer $58 million from a Los Angeles International Airport fund to the city’s treasury. The matter was of critical importance to Mayor Richard Riordan, who had campaigned on a pledge to use airport-related revenue to help pay for city services, including the hiring of police officers.

Ultimately, Administration officials agreed not to block the transfer, even though federal law technically prohibits the use of airport money for unrelated city purposes.

Hubbell last month began serving a federal prison term after pleading guilty to income tax evasion and to bilking his former law clients and law firm partners out of about $480,000.

Hubbell was hired by the city in September, 1994--three months before he pleaded guilty to the felony charges brought by a special prosecutor who was investigating the Whitewater real estate development controversy. A city official said that he terminated Hubbell’s contract after he entered his guilty plea and in retrospect would not have hired him.

Hubbell, for years a golfing partner and close friend of President Clinton and a former law partner of First Lady Hillary Rodham Clinton, resigned his No. 3 post at the Justice Department in March, 1994.

The city hired Hubbell at the direction of Theodore O. Stein Jr., who is both president of the Airport Commission and a senior policy adviser to Riordan.

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Stein, who also is a lawyer and a developer, confirmed in an interview that he had directed a subordinate to hire Hubbell in an attempt to bolster the city’s airport-related advocacy with the Clinton Administration. Stein acknowledged that Hubbell was under “a cloud” at the time of the hiring.

“‘But there was no suspicion, I believe, that there was any criminal involvement [on Hubbell’s part],” Stein said. “No one that I knew had a clue that he was going to be indicted for something. He was innocent until proven guilty.”

However, Hubbell had been at the center of controversy months before Stein hired him. In March, 1994, the Rose Law Firm of Little Rock, Ark., of which he was a partner, accused Hubbell of improper billing practices and reported their allegations to the disciplinary unit of the Arkansas Supreme Court.

In December, 1994, Hubbell admitted that he had falsely claimed $482,410 in expense reimbursements from partners and clients and evaded $143,747 in federal income taxes. He was sentenced this year to 21 months in federal prison and ordered to pay restitution of $135,000.

Records obtained by The Times show that early this year the office of Los Angeles Controller Rick Tuttle challenged the propriety of the city’s $8,250-a-month payments to Hubbell. Last week, Tuttle agreed to pay Hubbell $24,750 for his three months work, according to Deputy Controller Tim Lynch.

With hindsight, Stein said Wednesday, he would not have hired Hubbell.

“Clearly, if we had thought he was guilty of a criminal offense, we never would have hired him,” Stein said. “At the time, there were suspicions, but he was presumed innocent. . . . With the benefit of 20/20 hindsight, I’m sure we wouldn’t have” hired Hubbell.

Stein said that he terminated the lobbying arrangement in December when Hubbell entered his guilty plea.

Records show that Hubbell provided a detailed summary of his work for the city in March, after the controller’s office questioned the lack of documentation to substantiate his arrangement with the Department of Airports.

In a letter addressed to Stein, Hubbell wrote that his responsibilities included “almost daily contact” with Administration officials--particularly the Transportation Department and the Federal Aviation Administration--to get agreement on the transfer of funds.

Federal ethics guidelines would have prohibited Hubbell from attempting to influence officials at the Justice Department for at least one year after his departure from the government in March, 1994.

Hubbell, who began serving his prison term on Aug. 7, could not be reached for comment, nor could his Washington-based attorney, John Nields.

According to Stein and others familiar with the matter, Hubbell was hired at a point when Los Angeles officials had grown impatient with the pace of the federal transportation department’s review of its proposed revenue transfer. The $58 million came from the sale of airport land to the state of California for construction of the Century Freeway.

The transfer to the city’s general fund of the $58 million was a top priority for both Stein and Riordan, who was eager to make good on his campaign pledge.

“We wanted to move it forward, so far as getting a determination,” Stein said. “We needed someone who understood the administrative workings of Washington, D.C.”

The city already had hired the law firm of Morrison & Foerster; Stein said that people, whose names he could not recall, suggested he consider retaining Hubbell.

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After meeting with Hubbell at the former official’s law offices in Washington, Stein said, he agreed to hire him. “I thought he understood how the administrative remedies worked” in the Clinton Administration, Stein said. The aide to the mayor said that he informed Riordan soon thereafter that he had hired Hubbell. Riordan, he said, did not object. Riordan could not be reached for comment.

Among the Clinton Administration officials Hubbell contacted was Stephen H. Kaplan, then the general counsel of the Department of Transportation.

“I think I spoke to him once or maybe twice about this issue,” Kaplan said. “He basically made two points. One is, the city needs a decision. And the second is, this is very important to the city.”

Kaplan, who left the Administration in June, said he thought Riordan and Stein made the most effective arguments in favor of transferring the $58 million and that he was puzzled by the city’s hiring of Hubbell.

“I thought his hiring was totally unnecessary,” Kaplan said.

An FAA official informed the city in February that the agency would not seek to block the transfer of funds, saying that factors existed “that appear to make this situation unique and exceedingly unlikely to be repeated” elsewhere in the nation. The FAA’s decision is being challenged by the Air Transport Assn., an aviation trade group. Noting that the city has paid the Morrison & Foerster law firm about $400,000, in addition to the $24,750 paid to Hubbell, Stein said that the expenditures were worthwhile.

“I’ll spend [that] to get $58 million any day of the week,” Stein said.