Gov. Cancels Magazine Contract

Times Staff Writers

Gov. Arnold Schwarzenegger said Friday that he would cancel his multimillion-dollar consulting contract with a publisher of health and bodybuilding magazines, amid complaints of a conflict of interest.

The announcement came a day after his top aide dubbed the controversy "much ado about nothing" and rejected calls for Schwarzenegger to end his relationship with American Media Inc. The company publishes Muscle & Fitness and Flex magazines, as well as the tabloids National Enquirer and the Globe.

"When I became governor, I pledged to put the people of California front and center," Schwarzenegger said in a statement. "I don't want there to be any question or doubt that the people have my full devotion.

"Therefore, effective today I will relinquish my title as executive editor and forgo any compensation from the magazines. I will continue to promote weight resistance training, health and fitness for all through any avenue that is available to me, as I have done my entire life."

Schwarzenegger's office said the governor would not return money he had already been paid for the contract, which took effect Jan. 1, 2004. The staff would not reveal that amount, but the contract called for a minimum of $1 million a year. The office said Schwarzenegger would continue to write monthly columns for Muscle & Fitness and Flex, without a paycheck.

Margita Thompson, the governor's spokeswoman, said he wouldn't return the money from American Media because the contract was legal and appropriate.

The pact, formalized two days before the governor was sworn into office in November 2003, guaranteed, over five years, a minimum of $5 million, though the company estimated that the figure probably would be more than $8 million.

He also received an equity stake in the publishing firm, granting him a 1% portion from any sale of the company, or about $5.2 million under an estimate in the contract.

The conflict-of-interest concerns arose because Schwarzenegger vetoed a bill last year that would have imposed regulations on the nutritional supplement industry.

Those companies buy the bulk of advertising in Muscle & Fitness and Flex -- and the contract called for Schwarzenegger to receive 1% of the ad revenue from the American Media subsidiary that publishes them.

The cancellation of the pact -- two days after the contract amounts were reported by the Los Angeles Times and the Sacramento Bee -- brought praise from lawmakers and other critics who saw a link between vetoing the nutritional supplement legislation and Schwarzenegger's American Media paycheck.

"It had to happen. I applaud the governor for doing the right thing," said state Sen. Jackie Speier (D-Hillsborough), author of the 2004 legislation and a critic of the nutritional supplement industry.

"I think it's what he should have done a year ago," said Denise Garibaldi, a Petaluma psychologist who testified at a hearing led by Speier last year. Garibaldi's 24-year old son, a USC baseball player, killed himself in 2002, and she blamed the suicide on his use of steroids, which have long been illegal.

Schwarzenegger has opposed taking steroids but has actively promoted the use of nutritional supplements.

An advocate for Speier's legislation to regulate supplement use among high school athletes, Garibaldi said she thought Schwarzenegger's financial ties to the fitness magazines prompted his veto last year.

"It just came across to my husband and I that he was totally ignorant and he was advocating for substances that he had no idea about," she said.

"He's a role model, and he needs to act like one," she added.

Assemblyman Keith Richman (R-Northridge), who had also criticized the Schwarzenegger contract, said Friday: "It's a good move on the part of the governor. I had confidence that when he recognized the perception was not what was best for the state that he would do the right thing."

Assemblyman Ray Haynes (R-Murrieta) said he didn't think Schwarzenegger's magazine deal constituted a conflict, but he understood why the governor extricated himself.

"I think it's a noble thing to do," Haynes said. "Noble but unnecessary. To remove any question is a good thing to do. It's a lot to do, but if anybody had any concerns, then it's settled."

Speier is still pursuing legislation that would regulate dietary supplements, many of which she said were dangerous. She is also pushing a bill that would address conflicts of interest among elected officials.

Schwarzenegger's second job with the magazine publisher was considered unprecedented for modern California governors.

"We have to be thoughtful about making sure this kind of situation doesn't occur again," Speier said. "Once it is exposed as being legal, as it technically is now, you can see how people could use it for their purposes."

In his statement, Schwarzenegger said he originally saw no reason to end his long-standing relationship with Weider Publications, which sold its fitness magazines to American Media in 2003. The subsidiary had been started by his longtime patron, bodybuilding enthusiast Joe Weider, who brought Schwarzenegger to the U.S. in 1968.

The governor has extensive real estate holdings and financial stakes in numerous companies across the country -- many of which have business before California government. One day after he agreed to work for American Media, Schwarzenegger voluntarily placed his assets in a blind trust managed by a longtime friend.

As state law requires, the governor disclosed that he was taking money from American Media. But because the state Supreme Court has ruled that elected officials have a right to privacy when it comes to revealing the exact details of their holdings, the governor was obligated only to disclose that the amount exceeded $100,000.

Assemblyman Mark Leno (D-San Francisco) said Friday that he would introduce legislation this year to add higher benchmarks for disclosure -- instead of "over $100,000," the category could expand to include "over $1 million" and "over $5 million."

Schwarzenegger was also candid about a $1.5-million contribution that American Media made to his tax-exempt nonprofit group promoting fitness. But he never revealed that the contract obligated him to "further the business objectives" of the magazine publisher in exchange for 1% of Weider's advertising revenue.

In a filing last month, American Media disclosed that it held a contract with an unnamed "third party."

The company identified that person as Schwarzenegger in a Securities and Exchange Commission filing this week, more than a year and a half after the contract took effect.

Academic experts said the company should have immediately disclosed the governor's name.

"The fact that you're keeping this secret is a problem," said Marianne Jennings, a professor of legal and ethical studies in business at Arizona State University. "If it's good for the company and a good deal and something they need, why are you so worried about disclosing it? Why is this a problem?"

SEC rules say that if a "material contract ... becomes effective" in the period covered by a company's financial reports, it "shall be filed as an exhibit...."

A spokesman for American Media, Stuart Zakim, said the company "followed the advice of counsel" in its handling of the Schwarzenegger contract and SEC filings.

In 2001, the National Enquirer ran an article alleging that Schwarzenegger had had an extramarital affair. But as the deal with the soon-to-be-governor was being finalized, American Media turned decidedly positive, even producing a 120-page magazine likening him to a national hero.

Since the public disclosure last week of Schwarzenegger's contract, Republican and Democratic attorneys have been poring over the laws prohibiting public officials from making decisions that would affect them financially.

Current law requires Schwarzenegger to avoid making decisions that affect his financial interests. The law requires that all public officials "perform their duties in an impartial manner, free from bias caused by their own financial interests or the financial interests of persons who have supported them."

But in legal cases concerning two California mayors -- Dianne Feinstein of San Francisco, now a U.S. senator, and Jerry Brown of Oakland -- the courts have been clear: Chief executives cannot avoid doing their jobs simply because they have conflicts of interest. It's called a "rule of necessity."

"It's clear [Schwarzenegger] has a financial conflict, but it's also clear under those cases that he would be allowed to sign or not sign legislation," Karen Getman, former chairwoman of the state Fair Political Practices Commission, said a few hours before the governor ended the contract. "He has to be able to perform the functions of governor."

Getman, who has represented Democratic candidates, said the only solution was for Schwarzenegger to cancel the contract on his own: "We voted for him to be governor. If something causes a conflict, he needs to get rid of the financial conflict."

Tom Hiltachk, a Republican attorney who does work for Schwarzenegger, said the governor was concerned not just about the technicalities of the law but also its nuances. "I just know the governor is very careful about those type of things, and there is no law being broken" with the contract. "He is very cautious about the perception, and not just the law."

Only a few states ban governors from collecting a salary from an outside job. Illinois and Washington state appear to have the strictest rules.

In 2001, Minnesota lawmakers tried to stop Gov. Jesse Ventura's moonlighting. Ventura, a former professional wrestler, had just signed a contract to announce games for the now-defunct XFL football league.

Ventura opposed a bill on the matter, and it died in the Legislature. He said that most members of Minnesota's part-time Legislature had separate jobs and that nobody was calling on them to resign.

Staff writers Evan Halper and Nancy Vogel contributed to this report.

For The Record Los Angeles Times Friday July 22, 2005 Home Edition Main News Part A Page 2 News Desk 1 inches; 51 words Type of Material: Correction Disclosure requirement -- An article in Saturday's Section A about Gov. Arnold Schwarzenegger's decision to cancel a consulting contract with the publisher of two bodybuilding magazines incorrectly said that the public disclosure threshold for officials receiving outside income was $100,000. The governor must disclose income exceeding $10,000 from any one source.
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