Issuing a public apology, Fleishman-Hillard on Tuesday agreed to a $5.7-million settlement of a lawsuit by the city of Los Angeles that alleged the public relations company padded its bills.
Los Angeles sued Fleishman-Hillard and its former local general manager last year. The suit contended that the company defrauded the city while billing more than $20 million from 1998 through 2004. Fleishman performed public relations work for several city agencies and worked without charge for Mayor James K. Hahn.
The lawsuit was filed a few days after an article last July in The Times quoted seven former employees who said workers routinely inflated monthly billings to the Department of Water and Power and were encouraged -- sometimes even directed -- to submit falsified time sheets. A city audit in November identified $4.2 million in questionable and unsubstantiated billings.
A criminal investigation is continuing. One person has been indicted, and prosecutors have said they expect at least one additional indictment.
Richard Kline, the firm’s regional president, apologized to the residents of Los Angeles and said an internal investigation found problems with billings to the city.
In a statement, the firm said: “On the basis of that investigation, the agency believes some senior executives of the Los Angeles office, who are no longer with the firm, caused certain bills to be presented to the city that appear to be improper and indefensible.”
The settlement agreement does not contain an admission of wrongdoing by Fleishman-Hillard, Kline said.
The company, with offices in 80 cities worldwide, discontinued its contract work for the city last year and adopted internal reforms that included an end to political fundraising for local candidates.
“There has been a perception among some unscrupulous people that the city was an easy mark, that taxpayer money could be easily had through fraud,” City Atty. Rocky Delgadillo, who filed the lawsuit, said in announcing the settlement. “Today I am putting those who do business with the city on notice -- my office will pursue anyone large or small who seeks to defraud the taxpayers of this city.”
The settlement calls for the public relations firm to pay $4.5 million in cash to the city and the rest to be covered by forgiving about $1.2 million in outstanding bills for work done for the city.
The Department of Water and Power board voted unanimously Tuesday to accept its $5.5-million share of the settlement, but Delgadillo said the agreement must still be approved by the city Airport and Harbor commissions for their portion of the payments. He said he did not release the settlement agreement because of those pending approvals.
Coming a little less than a month before Hahn stands for reelection, the settlement with a firm that had close ties to him could affect the debate during the next four weeks, some experts said.
Within hours of the announcement, Councilman Antonio Villaraigosa, who is challenging Hahn in the May 17 runoff, issued a scathing statement.
“Jim Hahn needs to come clean with the people of Los Angeles about his relationship with Fleishman-Hillard,” Villaraigosa said. “They wrote his press releases, planned his events and he benefited from their work. Despite this, Jim Hahn has taken the position that he bears no responsibility.”
Kam Kuwata, a Hahn campaign advisor, sent back a stinging rebuttal, noting that the Fleishman contracts were first let during the administration of Mayor Richard Riordan, a Villaraigosa supporter.
“The responsibility for the Fleishman-Hillard debacle originates within Antonio Villaraigosa’s circle of top supporters and advisors,” Kuwata said.
Although the audit by City Controller Laura Chick identified $4.2 million in questionable and unsubstantiated billings by Fleishman-Hillard, an accounting firm hired by Delgadillo to prepare for trial said the city probably would be able to prove that only $850,000 in billings were improper and should be reimbursed.
“In the course of our investigation, we found evidence that bills were knowingly inflated as the company sought to enrich itself at the expense of the residents of Los Angeles,” Delgadillo said at a news conference in front of the Department of Water and Power headquarters in downtown Los Angeles.
Kline said the firm agreed to pay a settlement substantially greater than the amount of improper billings because it was an acknowledgment that the company failed to meet the city’s billing standards, and the cost of a lengthy court battle would be significant.
“Resolving this dispute will help us focus on restoring our reputation in Los Angeles and serving our clients,” he said.
City officials acknowledged that the firm’s desire to restore its reputation was a bargaining chip that Delgadillo’s office held in the negotiations.
The decision by St. Louis-based Fleishman-Hillard to settle rather than undergo a potentially nasty trial was a smart one, according to Jerry Swerling, director of public relations studies at the USC Annenberg School for Communication.
“This is probably the best way to put an end to this chapter,” Swerling said. “This thing has become a political issue because of the mayor’s race, and that exacerbates everything.”
The city attorney said he considers all of the settlement above the $850,000 the city might have won in court to be a penalty against the firm.
The settlement of the lawsuit does not mean the Los Angeles County district attorney and U.S. attorney will drop their criminal investigations into whether Fleishman executives and employees knowingly overbilled the DWP.
That investigation resulted in a federal indictment in January of former Fleishman Senior Vice President John Stodder Jr., alleging that he participated with others in an overbilling scheme. And last week, a federal prosecutor said another indictment was likely this month or next.
“The civil settlement will have no bearing on the pending criminal case against Mr. Stodder or on our ongoing investigation of the matter,” said Thom Mrozek, a spokesman for the U.S. attorney’s office.
Douglas Dowie, the former local general manager named in the city’s lawsuit who was let go by Fleishman-Hillard in January, objected to the settlement, even though it relieves him of civil liability, according to his attorney, Thomas Holliday.
“We are very disappointed,” Holliday said. “We don’t believe anybody did anything wrong, and so they are only doing this to make peace with the city and federal government.”
Settling a civil suit is a common strategy for firms seeking to head off criminal prosecutions, one legal expert said.
The settlement was already starting to have political implications a month before the election because Hahn benefited from extensive work done by Fleishman-Hillard, which prepared news releases and speeches for him, including some that made little or no mention of the DWP.
Billing records and e-mail show that the DWP paid Fleishman-Hillard more than $400,000 in 2002 and 2003 for work that was designed to burnish the mayor’s image or help him shape major policy initiatives.
In addition, Dowie was a major political fundraiser for the mayor until the allegations surfaced last year, and the firm was awarded contracts by city commissions appointed by the mayor.
Villaraigosa has repeatedly criticized Hahn over the Fleishman contract, alleging it to be part of a pattern of misconduct involving city pacts. On Tuesday, a key Villaraigosa supporter, City Councilman Jack Weiss, said the settlement does not absolve the mayor of responsibility.
“The mayor’s handpicked team of elite public relations advisors have admitted that the city is owed millions of dollars as a result of unjustified billings,” Weiss said. “The mayor needs to explain whether he was supervising the Fleishman-Hillard contracts.”
Hahn welcomed the settlement but was not available for press interviews, according to Deputy Mayor Doane Liu.
“From the very beginning, the mayor has said the ratepayers deserve to get their money back,” Liu said. “From what we know, it sounds like the offer for settlement is in excess of the disputed billings.”
Delgadillo thanked The Times during his news conference Tuesday for bringing the overbilling issue to public light.
The only elected official included in the news conference was Councilman Tony Cardenas, who heads a council committee that oversees DWP issues and vowed to bring the settlement into council for a public hearing.
“We were targeted and we were fleeced, and today is a day of reckoning for anybody who considers that to be a practice they are going to take on in the city of Los Angeles,” Cardenas said.