Pier Pressure : Southwest Marine, the dominant player in the West Coast’s shrinking shipyard industry, is poised to become even bigger. But deep legal troubles are brewing.
As long as U.S. Navy warships have dominated the Pacific Ocean, the gritty shipyards just south of downtown have played a vital role in keeping the fleet ready for sea duty.
It was along this hardscrabble and highly competitive waterfront that Arthur Engel decided to carve out a life as a young man--starting with a resolute ambition and a yearning for the big time.
The shipyard Engel founded in 1976, Southwest Marine, now ranks as the Navy’s largest ship-repair contractor on the West Coast. And if the Justice Department gives its blessing in a current antitrust review, Southwest Marine will gobble up another major San Diego shipyard and become even more dominant.
Engel, now among the top shipyard executives in America, is a tough and charismatic businessman who has built a personal fortune in the tens of millions of dollars--accumulating a yacht, sports cars, regal homes and, for a time, a share of the San Diego Padres.
But deep trouble is brewing at Southwest Marine, stemming from the lean times the Navy is facing and allegations of fraud. The firm has a long, combative history with government agencies, competitors and former employees, public records show.
Engel, 49, has largely avoided the limelight in Southern California, despite his hard-nosed reputation and occasionally coarse practices. His supporters defend him as an ethical operator in a business where only the brash and wily survive.
Engel, a big political contributor, once demanded a refund from a member of Congress who defied his wishes. He is tenacious in court as well--he battled his own uncle for a decade over allegations that his uncle cheated him. Even legendary San Diego swindler J. David Dominelli proved no match for Engel when the two clashed.
Defense Department investigators are now bearing down on Southwest Marine, looking into allegations raised in lawsuits filed by former company executive Charles Von Fange, according to law enforcement authorities. Von Fange’s suits allege that Southwest Marine stole Navy property and grossly inflated ship-repair costs, among much else.
The company has denied the allegations, and Engel said he is not aware of any federal investigations.
The allegations against Southwest Marine are particularly serious because the firm is among the few survivors in an industry going through a difficult period of consolidation, and the Navy is growing increasingly reliant on the shipyard. The allegations also come at a time when the Pentagon is raising expectations that contractors conduct business ethically.
To be sure, Southwest Marine is not alone in its legal problems. A federal grand jury is investigating the alleged payment of kickbacks by subcontractors to a purchasing agent at Pacific Ship Repair in San Diego, according to key industry officials knowledgeable about the case. Pacific Ship Repair executives declined to be interviewed.
Pacific Ship Repair owner David Bain was convicted in 1992 of evading taxes, cheating the Navy and pilfering from his employees’ pension fund. Stephanie Cardoza, former vice president of Marine Boiler Repair, was sent to jail in 1986 on conspiracy to defraud the Navy. And the Internal Revenue Service is seeking delinquent taxes from defunct A&E; Industries, which collapsed in 1994 after a racketeering suit was filed against the firm by subcontractors.
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After a lengthy career with the Navy as a senior contracting officer in San Diego, Sam Ethridge left the service in the early 1990s, frustrated with the ethics problems he encountered.
“An honest man has a hard time making a living on the waterfront,” Ethridge said. “The whole damn waterfront reeks of problems.”
A sniper once blew out Ethridge’s car windows as he was driving into the entrance of the 32nd Street Naval Station. Though police never solved the 1988 case, Ethridge said he suspects a plot by disgruntled shipyard industry officials.
Problems on San Diego’s waterfront are certainly not new. San Diego journalist Max Miller chronicled the corruption along the city’s docks in his 1932 bestseller, “I Cover the Waterfront.” The docks were then a gateway for illegal Chinese immigrants, who were smuggled into the country inside the carcasses of tuna.
So far, Navy officials insist they don’t see widespread corruption or a problem with the industry’s rapid consolidation.
Ship-repair contracts are awarded by an obscure Navy office in San Diego known as the Supervisor of Shipbuilding, Repair and Conversion, housed in a former World War II torpedo warehouse on the sprawling naval base.
“There are occasional problems,” said Capt. William M. Donnelly, the Navy supervisor. “They are probably typical. Over the last five or six years, it is in line with the rest of the country and the rest of the industry.”
Donnelly said the Navy is not cutting back on repair work, but the industry is less sanguine. Earlier this year, it enlisted Rep. Duncan Hunter (R-El Cajon) to pressure the Navy to drop plans to defer additional ship maintenance, according to a letter Hunter wrote to Navy officials.
“We have told the Navy that the industry is getting hammered,” said Irving Refkin, the 75-year-old owner of Pacific Defense Systems and founder of the Port of San Diego Ship Repair Assn. “We have half the number of ships homeported in San Diego as we used to, and the Navy doesn’t have the money to repair the ships that it does have.”
While Southwest Marine has been forced to restructure operations and lay off workers, the firm has also expanded its presence with shipyards in San Pedro; San Francisco; Port Arthur, Texas; Mexico; and American Samoa, Engel said. It recently announced one of its biggest deals yet, the proposed acquisition of Continental Maritime, the second-largest ship-repair contractor in San Diego.
According to Navy records, the merger would give Southwest Marine 65% of the Navy’s repair contracts awarded out of San Diego. The merger is pending a Hart-Scott-Rodino antitrust review by the Justice Department, Engel said.
As Engel’s empire has grown, he has contributed generously to civic causes, including helping sponsor a center for abused and neglected children in San Diego. For his help in supporting the United Service Organizations, he was once honored at a ball along with former U.S. Atty. Gen. Edwin Meese III’s wife, Ursula.
He also cultivated links to the business elite of San Diego and was included in a group of 15 investors who purchased the Padres baseball team in 1990. He sold that 9% interest two years ago for an estimated $7 million.
San Diego County records show that Engel lives in a 10,000-square-foot home valued at more than $3 million and that Southwest has shipyard equipment in San Diego alone valued at about $17 million.
Engel and Southwest Marine have also made more than $190,000 in political contributions to federal candidates since 1987, including payments to key members of military committees and the California delegation, according to Federal Election Commission records.
Engel clearly expects results for his money. After the shipyard contributed about $5,000 to Rep. Dana Rohrabacher (R-Huntington Beach), Engel wrote a letter in 1993 demanding a refund when the congressman joined the effort to keep the Long Beach Naval Shipyard open. The government-owned facility competed with Southwest Marine. A spokesman for Rohrabacher confirmed the story, adding that Rohrabacher declined to refund the money.
Ultimately, Engel won that fight too. As vice chairman of the Shipbuilders Council of America, a key trade group, he lobbied to shut down public shipyards. Last year, Navy shipyards in Long Beach and San Francisco were designated for closure by a federal panel, an action that will eliminate 10,000 jobs.
“He believes he is invincible,” said Georgia Bankston, a former Southwest Marine supervisor. “Art is very charismatic. He can talk anybody into anything.”
In the 1980s, Engel invested some of Southwest Marine’s corporate funds into the Ponzi scheme operated by J. David Dominelli. But Engel was among the few Dominelli victims to get his money back, reportedly by sending a crew of tough pipe fitters from the shipyard to Dominelli’s office just before news of Dominelli’s frauds became public, according to Bankston, Von Fange and another key former Southwest Marine executive.
Engel, through a spokeswoman, said the shipyard did invest with Dominelli but that he did not recall the story about the pipe fitters.
As Engel’s influence has grown, so have his legal problems. Southwest Marine has been sued by his competitors, suppliers and workers as well as his own uncle, who gave him a start in business.
Engel said the suits are typical of those facing any U.S. corporation and that Southwest Marine has established a “fine record.”
After Engel graduated from UC Santa Barbara, his uncle, Al Engel, gave him a job in the family ship-repair business, Triple A Machine Shop.
Relations soon soured, and the two men ended up in a decade-long lawsuit in which the uncle charged that Engel had cheated Triple A by secretly investing in a subcontractor. It was eventually settled out of court--after Engel had started Southwest Marine--but it remains a bitter memory in the family to this day.
The recent investigations, however, may be the most serious problems Southwest Marine faces yet. Last March, Von Fange, a former production manager at Southwest Marine, filed a federal False Claims Act suit against the shipyard, charging the firm had defrauded the Navy.
Although the federal suit is sealed, Von Fange also filed a parallel open suit in San Diego County Superior Court that charges, among much else, that Southwest hid surplus government-owned material in so-called gold rooms and had engaged in a long-standing practice of “deliberately underbidding contracts” with the intent to “make later claims for substantial extra profits.”
Gary Majors, an attorney for Southwest Marine, called Von Fange “a disgruntled ex-employee” and said the allegations are “meritless.” According to Majors, surplus inventory often occurs in repairing ships, but the firm never kept government property. He added that claims for unexpected cost increases are routine in the industry.
Separately, federal investigators have launched a civil probe into whether the firm overcharged the Navy by inflating the labor hours for repairing boilers, according to federal law enforcement officials.
Southwest’s current legal problems come after a long history of run-ins that include:
* In 1993, the Navy put the firm on probation, threatening to suspend it from receiving new contracts, after Southwest Marine pleaded guilty in San Diego Municipal Court to charges of improperly disposing of hazardous materials, according to an ethics compliance agreement signed by the firm. The company was fined $56,890 in the case.
* In the last 15 years, Southwest Marine has taken 176 contract disputes with the Navy to the Armed Forces Board of Contract Appeals, an administrative law court, according to a Freedom of Information request by The Times. The cases illustrate the company’s many cost overruns--a pattern the Navy first documented in detail in a 1981 memo obtained by The Times.
* The company also ran afoul of the Small Business Administration, which threw the company out of a special program for small contractors in the mid-1980s after allegations were raised by competitors that Southwest Marine would fire hundreds of workers on Fridays to qualify under SBA rules, then rehire them on Mondays.
* The SBA problems also led to a civil antitrust suit by three competing shipyards, including Engel’s uncle. Engel later settled the suit out of court, reportedly for nearly $8 million, according to three sources close to the matter.
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For all of Southwest’s disputes with the Navy, it has also drawn praise. In April, Vice Adm. C.C. Lautenbacher, commander of the 3rd Fleet, wrote to Engel saying he was “impressed with the superior quality of workmanship and exceptional attention to detail” in recent work on the Coronado, a command ship. Indeed, when Navy captains return to San Diego after a tour at sea, the top priority is getting their ships fixed properly and on schedule, according to Jesse Hinojosa, a retired Navy commander and former Southwest Marine supervisor.
“The Navy always gives repairs priority over cost,” he said. “The Navy doesn’t squawk about money.”
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Southwest Marine at a Glance
Employment: 1,600 workers at shipyards in San Diego; San Pedro; San Francisco; Port Arthur, Texas; and American Samoa. Peak employment was 4,300 in late 1980s.
Business: Ship repairs, overhauls and conversions of aircraft carriers, destroyers and supply ships, as well as of some commercial ships. The work includes repairs to conventional power propulsion systems, electrical systems, boilers, pipes, structures and fittings.
Navy role: Southwest Marine is the largest provider of ship repairs to the Navy on the West Coast. According to Navy figures, the firm controls about 45.5% of contracts awarded in San Diego. It plans to acquire Continental Maritime, the second-largest West Coast contractor, which would give it another 19.5% of repair contracts.
Ownership: The privately held firm is owned by eight investors, including three Engel brothers. Chief Executive Arthur Engel is founder and controlling shareholder.
