Holdings Could Be Burden for Checchi as Governor

By VIRGINIA ELLIS

May 18, 1998 12 AM PT

TIMES STAFF WRITER

SACRAMENTO —

Multimillionaire Al Checchi dipped into his own pockets to run for governor, but if he’s elected, what’s in those pockets could dog him for the next four years.

With his vast holdings in oil and gas, banking, real estate and a 12% ownership of the nation’s fourth-largest airline, many of the decisions that Checchi would make as governor could affect businesses in which he has a financial interest.

In the modern era, no one with his wealth has ever sat in the governor’s chair. His fortune, valued at more than $700 million, is larger than the annual operating budgets of most cities.

Most of Checchi’s money is tied up in Northwest Airlines, the Minneapolis-based company that he and his partner took over in 1989 after engineering a leveraged buyout. Today he sits on the company’s board of directors and holds 11.4 million shares of its stock, valued at $537 million.

An amount believed to be $100 million to $150 million is invested in other stocks, including Royal Dutch Inc., BankAmerica Corp., E.I. DuPont, Nestle, Boeing, Cisco Systems and General Motors Corp.--all of which do business in California.

“You’ve got a huge player out there with huge amounts of money intersecting with the public domain, and potentially that creates conflicts,” said Robert Fellmeth, the director of the University of San Diego’s Center for Public Interest Law.

For Checchi, this vast wealth is both a liberating force and an albatross. It has enabled him to finance his own campaign, making him the only major candidate who is not accepting contributions from special interests.

But, as governor, it also presents ethical concerns that would require enormous vigilance if he is to ensure that no bill he signs or vetoes, no appointment he makes, no directive he gives the bureaucracy would benefit his massive business interests.

Northwest Holdings Would Be Retained

In California, Northwest and its affiliates serve 12 cities, employ about 3,000 people and operate two cargo facilities and 17 ticket offices.

Like other airlines, Northwest is most frequently involved with state government over labor and tax issues--two matters over which the governor has influence. Labor issues are handled by the Department of Industrial Relations, one of the agencies under the aegis of the governor, while tax policy is the purview of the Legislature, although any tax measures must be signed by the governor.

In addition, Northwest is the subject of a pending labor action taken by the state, and Gov. Pete Wilson sided against the airline in a federal dispute over rights to serve the expanding Asian markets.

In an interview, Checchi bristled at the suggestion that as governor he would have potential conflicts of interests, maintaining that he would put his stock holdings--except for Northwest--in a blind trust, resign from Northwest’s board of directors and recuse himself from any issue directly affecting the airline.

Checchi said, however, he would continue to hold the airline stock and it would not be part of the blind trust. One reason, he said, is that the sheer size of his holdings means that they must be reported to the Securities and Exchange Commission, and are thus public and cannot be “blind.” Under federal securities laws, the holdings of any stockholder who owns a 5% or more interest in a publicly held corporation must be disclosed.

As a practical matter, Checchi cannot divest himself of the Northwest stock without harming other stockholders by driving down the price precipitously, said Darry Sragow, his campaign manager. And if he chose to dispose of the stock by negotiated sale, it would take an enormous amount of Checchi’s time and effort as governor, Sragow said. “He determined that the best thing is to let it [the stock] sit there,” he said. “The whole world knows it’s there.”

Checchi argues that conflict of interest is much less an issue with him than with the other candidates who were financing their campaigns with contributions from many special interests that regularly do business before state government.

“Better to have someone like myself in there than someone who has taken campaign contributions,” Checchi said. “[They’ve] taken money from God knows how many of these interests that deal in the state. . . . There is far, far, far, far less potential for conflict for someone in my position than your normal politician who is conflicted because he’s always dealing with a potential funding source.”

With hubs in Michigan, Minnesota and Tennessee, Northwest Airlines is only a small player in the California market, he said. And the major regulation of airlines is conducted at the federal level--not the state.

“I’ve just got to say that issues of Northwest Airlines would be minimal,” he said. “I think the least of the concerns of the people of California would be potential conflicts with Northwest Airlines.”

Fellmeth said Northwest’s day-to-day interactions with the state are a concern but not nearly as troubling to him as the mergers, acquisitions and alliances that could involve Northwest and pose conflicts for Checchi.

“When Northwest buys and sells, then we could have problems,” he said. “It’s the deals I’m worried about. It’s what Northwest does vis a vis third parties and what those parties do to influence public policy that worries me.”

For example, Northwest recently formed an alliance with Continental Airlines that permitted it to acquire 14% of Continental’s common stock equity and 51% of its outstanding voting power. Since 1993, the company also has made arrangements with KLM Royal Dutch Airlines, which permits Northwest to offer wider service between the United States and cities around the world.

A spokesman for the company said its liquid assets total about $3 billion, much of it invested in a variety of securities.

“If Checchi wants to keep Northwest stock, I think he’s got to have a person who sits around and monitors Northwest to see who they’re dealing with and what they’re doing,” Fellmeth said. “And he’s got to have no communications with Northwest, absolutely no communications with them. . . . He’s got to cut himself off totally.”

Jon Austin, a spokesman for the airline, denied that the company would ever benefit from having Checchi in the governor’s chair. He said the airline industry is so highly regulated that virtually anything it does is “available for review.”

Having a major stockholder who is a sitting governor, he said, would probably subject the company to even closer scrutiny. “People are triply sensitive not only to the substance but the appearance of a conflict,” he said. “I think it [having Checchi in the governor’s office] could actually be an impediment” to Northwest.

In past years, California governors have had to consider legislation involving taxes on airline fuel and aircraft spare parts. In January, the Wilson administration filed an unfair labor practices lawsuit against Northwest Airlines, contending that it violated state laws by charging certain job seekers a $25 fee to process their applications. The company contends that the state had insufficient grounds for the pending action, which would force the airline to cease the practice and require reimbursements of the fees.

Last year, Gov. Wilson weighed in on the side of Northwest’s competitors when the Clinton administration moved to negotiate a new compact to increase airline access to Japan and other Asian destinations. A 1952 agreement between Japan and the United States had given Northwest and United Airlines exclusive rights to pick up passengers in Japan, a provision that helped Northwest become the dominant U.S. carrier in the Far East.

Northwest had sought to either maintain the status quo or hold out for total deregulation, or “open skies”--a position that the Japanese had clearly indicated they would never approve.

Wilson argued for some expansion of the rights of U.S. carriers to fly to Asian markets, contending that the increased trade and tourism would provide great benefits to California’s economy.

Steering Clear of ‘Open Skies’ Issue

As governor, Checchi said he would bow out of such issues. “If I were governor, I would keep my mouth shut,” he said. “You just have to keep your yap shut on something like that.”

He said he has already demonstrated his sensitivity to potential conflicts because, even as a candidate, he has steered clear of the “open skies” issue. And he said he has never exploited his thousands of dollars in contributions to Democratic candidates and the party.

“Open skies was a real issue for Northwest . . . but I never uttered a word or spoke to anybody about it. And that is in spite of the fact that I have been an active Democrat and probably could have had access to say something. But I judiciously avoided any contact with anybody in the federal government. . . .”

Checchi insisted that as governor he would studiously avoid conflicts and said he has decided to put his other stocks in a blind trust even though he relies on a money manager to do all his buying and selling.

“I couldn’t tell you five stocks that I own,” he said. “For all practical purposes, it’s a blind trust now. It’s something I’m just not interested in.”

Under California’s blind trust law, Checchi will not remove the potential for conflicts until all the stock he owns is sold and replaced, said Robert M. Stern, a co-director of the nonprofit Center for Governmental Studies in Los Angeles.

“As long as he knows he still owns it, then the conflict is there,” said Stern, who helped draft the state’s political reform act. “But as soon as the trustee says, ‘Hey, we’ve sold your stock. We’ve invested in something and we’re not telling you what,’ then that’s fine.”

Checchi told The Times that he would agree to set up a blind trust by divesting himself of the stock he now owns, other than Northwest, and placing his holdings with a trustee. “I’ll do whatever is the law,” he said.

Checchi’s net worth is higher than the combined net worth of the other candidates for governor, although one, Jane Harman, is also a multimillionaire.

He declined to reveal how much of each stock he owns although he did say that no single holding other than Northwest even approaches 1% of his net worth.

The highest category on the forms where state officials and candidates list their assets is “over $100,000,” and this makes it impossible to determine whether the office seeker’s holding is worth $101,000 or $100 million.

Checchi, for example, lists dozens of stock holdings as larger than $100,000.

Jim Knox, director of Common Cause California, said the economic disclosure requirements need to be “updated” to allow tighter scrutiny of multimillionaires, such as Checchi and Harman, who along with her husband has a reported net worth of $200 million.

“We need some more zeros in there,” Knox said, referring to the “over $100,000 category.”

California’s ethics laws, written when no one imagined that people with fortunes would seek public office, do not have a ceiling on the amount that candidates can spend on their own campaigns. Checchi has spent more than $20 million already.

“Checchi raises the ante for everyone else,” said Stern. “They have to go [to] the special interests to get even more money in order to compete against him.

“Checchi is forcing [Democrat] Gray [Davis] to raise more money than he wanted to raise for the primary. And [presumptive Republican nominee Dan] Lungren is now running ads . . . because he’s worried that the Democrats are establishing themselves and he needs to have his name out there.”

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Checchi Holdings

With a net worth of over $700 million, Democratic gubernatorial candidate Al Checchi has financed his own campaign. But if he’s elected, Checchi has pledged to avoid conflicts by putting everything except his 11.4 million shares of Northwest stock in a blind trust. The Checchi family also owns at least $100 million in other company stock including the following:

Banking and Finance

BankAmerica Corp.

Citicorp

Municipal Mortgage

United Companies Financial

Banco Bilbao

Greentree Financial

Oil and Gas

Royal Dutch Petroleum

Schlumberger Ltd.

British Petroleum

Automotive