Feds Join Probe of Fleishman-Hillard's Bills to City

By AMANDA BRONSTAD
Staff Reporter

Federal prosecutors have joined the investigation into Fleishman-Hillard Inc.'s alleged overbilling of L.A.'s Department of Water & Power.

Sources familiar with the investigations said the L.A. County District Attorney's Office, which two weeks ago announced it was looking into whether any crimes had been committed in the billing of DWP, have brought the local office of the U.S. Attorney into the case.

Federal prosecutors typically have greater resources to conduct investigations of alleged criminal overbilling by corporations and individual executives.

Thom Mrozek, spokesman for the U.S. Attorney's Office, Central District of California, declined to comment. Jane Robison, a spokeswoman for the District Attorney's Office, said she knew only that "there was a possibility" the investigation might expand to include federal prosecutors or that federal prosecutors may conduct their own investigation into overbilling.

Mark Beck, a partner at Beck DeCorso Daly Kreindler & Harris PLC, coordinating the legal counsel for Fleishman-Hillard, a division of Omnicom Group Inc., said, "We are cooperating fully with the ongoing investigations and wish to get to the bottom of this."

The allegations came to light last month after several former Fleishman-Hillard employees told the Los Angeles Times they were directed to inflate bills to clients, including city departments.

The investigation joins federal and county probes of the contracting practices at the city's airport, harbor and water and power departments, where allegations have been raised that contracting had been tied to political contributions.

Dowie reassigned

In the wake of those earlier questions about the necessity of its contract with the DWP, Fleishman-Hillard in April said it would not seek renewal of the $3 million per year DWP contract when it expired in June. It also did not seek a renewal of a similar contract with the Port of Los Angeles and canceled its contract with Los Angeles World Airports.

As part of that probe, federal prosecutors have served subpoenas at Fleishman-Hillard's St. Louis headquarters, seeking e-mails between executives there and Los Angeles city officials. Los Angeles Mayor James Hahn, whose office was asked by federal prosecutors to preserve all e-mails dating back to 2001, directed city departments to halt business with all public relations firms.

It was also in April that the firm reassigned its general manager for Los Angeles, Douglas Dowie. He was put on paid leave July 16th, the day after the Times' story about alleged overbilling appeared. (DWP's acting general manager, Frank Salas, resigned under pressure on July 20. Salas oversaw the Fleishman-Hillard contract.)

Richard Kline, who replaced Dowie, said last week, "We're going to be completely open and transparent with all investigating authorities, and we have no problem with any authority who might want to look at what we're doing.

"If the allegations are true," he said, "they run counter to everything we've stood for in 58 years of business. We've always observed the highest ethical standards in client service and integrity and business conduct. In fact, in the long history serving thousands of clients, in offices around the world, we've never experienced similar allegations."

In a July 29 e-mail to employees, Fleishman's chairman and chief executive, John Graham, said the firm was conducting its own internal investigation using independent legal counsel, and it was cooperating with investigating authorities in Los Angeles. He also said the firm would reimburse clients if any improper billings are found.

'Document-intensive cases'

County prosecutors, who had been leading the investigation, are usually less practiced in such cases, said James Gallagher, co-chairman of McKenna Long & Aldridge LLP in L.A.

"They're document-intensive cases normally," Gallagher said. "A lot of the (county) prosecutors are used to street crime cases, rather than white collar fraud cases, which is what these are."

If the U.S. Attorney were to pursue charges, they would likely be for mail fraud or wire fraud, which can carry prison sentences of up to 10 years, said Kirby Behre, a white collar criminal defense partner in the Washington, D.C., office of Paul Hastings Janofsky & Walker LLP.

"The government has always made strong and stiff cases for wire fraud and mail fraud," he said. "They have more than enough options if they want to charge someone with substantial crimes that lead to substantial jail sentences."

Still, the reliance on documents can make a successful overbilling prosecution difficult, said Gallagher. Even whistleblowers do not assure a conviction because they generally have access to information about a limited slice of any alleged wrongdoing.

Separately, City Attorney Rocky Delgadillo filed a civil suit brought against Fleishman on July 16, alleging that the firm defrauded the city by inflating the billable hours on $20 million worth of paid invoices dating to May 1999. Delgadillo's suit seeks damages resulting from the alleged fraud and negligent misrepresentation, plus punitive damages.

Fleishman's greatest financial exposure under those claims comes under the California False Claims Act, said Gallagher, because damages get trebled if the city is successful.

Under the False Claims Act, the injured party also may seek up to $10,000 for each invoice or payment that was overcharged, he said. Only a company, not individual executives, can be held liable for monetary damages in a civil suit.

Jeff Modisett, manager of Bryan Cave LLP's Santa Monica office representing Fleishman in the civil suit, said he was "not surprised" that federal prosecutors were now involved in the criminal investigation.

"It makes sense all of this should be handled as uniformly as possible and by one group instead of there being different investigative authorities," he said. "The more you can pull this together, the more you can get to the bottom of this."

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