A federal grand jury Thursday delivered the first indictment in a wide-ranging criminal investigation of corruption in Los Angeles city government, alleging that a former public relations executive at Fleishman-Hillard defrauded city agencies and private clients.
The indictment accuses John Stodder Jr., a partner and senior vice president who ran the firm's local public affairs practice, of participating with "others known and unknown" to submit at least $250,000 in false billings to the Department of Water and Power. Also allegedly cheated were the Port of Los Angeles, the Worldwide Church of God and the firm of renowned architect Frank Gehry.
The indictment makes it clear that grand jurors believed Stodder was not acting alone, referring to at least two other "co-schemers." Law enforcement officials declined to say whether they would seek charges against others, but noted that they had not finished their work.
"This is an ongoing investigation, and charges may or may not be filed against other individuals," said Assistant U.S. Atty. Adam D. Kamenstein, who is directing the joint inquiry that involves the FBI, the Los Angeles County district attorney's office and the U.S. Department of Transportation.
The "pay to play" investigation focuses on whether firms doing business with the DWP, port and city airport agency were forced to make political contributions in return for contracts. Under its $3-million-a-year contract with the DWP, Fleishman-Hillard helped promote the department and billed the utility more than $400,000 in 2002 and 2003 for work to bolster the mayor's image and help him with policy initiatives, records show.
The indictment immediately became an issue in the mayoral campaign, with all four of Mayor James K. Hahn's major challengers criticizing his leadership and focusing on his close ties with senior Fleishman executives.
Douglas R. Dowie, a former partner and senior vice president of the firm who ran the Los Angeles office and was Stodder's boss, was a Hahn confidant and major fundraiser. Fleishman ousted both Dowie and Stodder last week.
Dist. Atty. Steve Cooley called Stodder's indictment "an important step in a concerted ... effort to prosecute public corruption in Los Angeles."
Stodder, who turned 49 on Thursday, denied the charges through his attorney.
"Mr. Stodder is shocked and dismayed that the U.S. attorney has filed these serious charges against a mid-level manager at Fleishman-Hillard, especially one who has been there such a short period of time," said Jan Handzlik, a former federal prosecutor.
"He has always conducted himself in an ethical and above-board fashion and believes the evidence will establish this," the lawyer added. "Mr. Stodder denies the charges and looks forward to his day in court."
The Times revealed the alleged overbilling scheme last year, quoting seven former Fleishman-Hillard employees as saying they were encouraged -- and sometimes told -- to falsify their hours each month under the DWP contract.
Two of the employees said Dowie was aware of, and encouraged, phony billings that at times amounted to $30,000 a month.
"There were a lot of people that were disgusted with what went on there," according to Diana Greenwood, who worked at Fleishman-Hillard for a year and said she was ordered to add bogus hours to her time sheets. "I speak for myself -- probably many others -- that we're happy to see some vindication."
The firm's alleged defrauding of the port, the Worldwide Church of God and Gehry's architectural firm was first disclosed in Thursday's indictment.
Even before The Times published its article, federal prosecutors had subpoenaed e-mails related to the Fleishman-Hillard contract, prompting a flurry of action. Hahn discontinued all public relations contracts at City Hall. Fleishman said it would give up all its work for the city.
After the Times story appeared in July, City Atty. Rocky Delgadillo filed a lawsuit against Fleishman-Hillard and City Controller Laura Chick launched an audit, which found $4.2 million in questionable charges by the firm over the last five years.
"The drumbeat of justice is certainly louder and clearer today with this indictment," Chick said. "While this is painful to witness, answers are needed as to why and how this happened, and this indictment is the beginning of that important process."
Officials at St. Louis-based Fleishman-Hillard have said their internal probe found $650,000 in unsubstantiated billings.
"We're saddened and deeply disappointed that a former employee has been charged with wrongdoing," Richard Kline, who succeeded Dowie as director of the firm's Los Angeles office, said after the indictment was returned.
Kline said neither he nor "anyone else in corporate management in St. Louis was aware of any improper activities, and nothing in the indictment accuses [Fleishman-Hillard] corporate management of wrongdoing."
Stodder faces up to 20 years in prison on each of 11 counts of wire fraud, but authorities familiar with past federal sentencing patterns said he would more likely face a total of three to five years, if convicted. He is expected to be arraigned in federal court today.
A former news reporter, Stodder served as an advisor to Mayor Tom Bradley and as a communications aide to county Supervisor Ed Edelman, who stepped down from public office in 1994.
Stodder went into public relations and specialized in environmental matters before joining Fleishman-Hillard to run the public affairs unit under Dowie in May 2002.
Almost immediately, the indictment says, Stodder became involved in a fraud scheme in which he and "other unindicted co-schemers" padded employee worksheets if the actual time logged for a client fell short of what the office had forecast for the month.
The practice -- "write-ups" -- would occur as the Los Angeles office was reconciling its billings with headquarters in St. Louis, and would "falsely increase the amount of billable time ... or would record time for services that actually had not been provided at all," the indictment alleges.
From June to September 2002, Stodder and others inflated an undetermined amount of billings for the port and Gehry's firm, the indictment says.
Stodder also asked a Fleishman-Hillard employee identified only as "J.M." to fraudulently overcharge the Worldwide Church of God by $5,000, the indictment says. A spokesman for Gehry declined to comment; church officials did not return phone calls.
The most detailed part of the indictment, however, deals with Stodder's management of the DWP account, which former employees told The Times was regarded as the firm's "cash cow."
The court document says that in 11 months between December 2002 and January 2004, DWP billings were inflated by amounts ranging from $6,527 a month to $46,277 a month, for a total of nearly $250,000.
Although the sums represented a small percentage of the monthly billings -- which averaged slightly more than $200,000 -- Stodder personally made sure in at least one instance that they were added to the invoices in a way that could not be detected, the indictment says.
In January 2003, a Fleishman-Hillard employee identified only as a "co-schemer" allegedly approached Stodder to pad the DWP's bill by $30,000 using "ambiguous counseling for the mayor, [DWP General Manager David] Wiggs, [DWP Chief Operating Officer Frank] Salas, etc."
Stodder allegedly told the co-worker that $30,000 was "more than the system could bear," yet added that a third employee could "slip through another $15k without incurring too much more scrutiny."
Stodder then told the co-worker that rather than adding hours to "Doug or Marcom" -- apparent references to Dowie's billable time or that of the firm's marketing communications group -- extra hours would be added "across the board," the indictment says.
News of the court action ricocheted Thursday around City Hall, where a Hahn spokesman said the mayor was "outraged that anyone would even try to misuse the public trust and its money."
"Jim Hahn, for his entire political career, has played by the rules and believes that everyone should," said Deputy Mayor Doane Liu. "And he's also been very clear about the fact that we should get our money back and Fleishman should be punished."
Lucy McCoy, a City Hall lobbyist, called Stodder a "smart, well-liked guy -- one of those guys who is very down-to-earth, pleasant with everyone. The opposite of many folks in the services and political arena.
"We all hear about how the big firms, PR and law in particular, put tremendous pressure on their employees to meet their billable goals," she added. "I suspect it happens more often than not. I do not believe for one minute that he created the culture at Fleishman-Hilliard that promoted fraudulent billing practices."
All four of Hahn's main challengers seized on the indictment to continue their criticism of his leadership.
"It's a sad day when city contractors are indicted in corruption probes," Councilman Antonio Villaraigosa said.
State Sen. Richard Alarcon said the indictment cast a cloud over city government and should give momentum to his initiative drive to ban political contributions from city contractors.
Councilman Bernard C. Parks said Hahn's close relationship with the public relations firm and the failure of his administration to properly oversee the contracts meant he was partly to blame.
"This falls right at his feet," Parks said.
Matt Szabo, a spokesman for former Assembly Speaker Bob Hertzberg, said that "the city never should have squandered taxpayer dollars on a public relations firm to enhance the mayor's image."
Political analysts, however, cautioned that it was too soon to judge how the indictment would affect the mayor's race. Several said it might harm Hahn's campaign as his opponents mention the indictment frequently to attack his leadership.
"Is it a significant development in theory? Yes," said political analyst Darry Sragow. "Will it turn out to be a significant development in the race? Depends on how the mayor handles it.
"The only advice I would give all of them is to handle it with great care," he said.
Times staff writers Jessica Garrison, Patrick McGreevy and Jeffrey L. Rabin contributed to this report.