art by Ben Chlapek for inewsource
San Diego has a law on the books that makes the city one of the most open and transparent places to do business in the country — yet it’s never been enforced.
Voters passed the law in 1992 after San Diego almost entered into a real estate deal with an alleged mobster. The policy mandates every company doing business with the city disclose the name and identity of everyone involved in the transaction — whether directly or indirectly — along with the “precise nature” of those interests.
Today, the city has more than $3 billion in contracts with more than 1,000 private companies, yet it rarely knows the financial interests behind them.
inewsource requested the disclosures behind 38 contractors that account for more than half a billion dollars in city business. Only four contractors disclosed the names of their board members or corporate officers. Not one of the 38 disclosed all of the information required under the San Diego law.
The inquiry found — in a sampling of contracts — that Delaware LLCs are common. Those are companies incorporated in Delaware, where laws governing businesses permit non-disclosure of the principals behind them, which can increase the chances of hidden sources of influence.
Three San Diego city attorneys over two decades have recommended to the City Council that this section of the city charter be enforced. Each time the recommendations have been ignored.
One of them, former City Attorney Mike Aguirre, told inewsource it’s in the marrow.
“In San Diego,” Aguirre said, “the government itself has been shaped by those who systematically abuse it.”
He added, “You have layers of LLCs and other entities that are used to hide not only who's behind various projects, but where the money's coming from to influence outcomes.”
Asking these questions, he said, is like throwing a monkey wrench into the way the city works.
An offer to refuse
No one ever proved Al Malnik was the country’s second-highest ranking member of the Mafia.
When the prominent attorney’s Rolls Royce exploded (without him in it) in Miami in 1982, the chief of Dade County’s Organized Crime Unit in Florida said the attempt on Malnik’s life shared characteristics with a typical Mafia car bombing.
But, the chief was quick to add, “I don’t know.”
Nearly a decade later, Malnik’s face was blown up — newspaper articles chronicling his mob ties displayed as props during a City Hall news conference as an irate councilman accused the city’s real estate department of deliberately withholding Malnik’s involvement in a $47 million real estate deal, which was before the Housing Commission for approval.
The deal involved two complexes in Rancho Peñasquitos and Clairemont that the city wanted to purchase from Malnik to use for affordable housing.
Bruce Henderson, the councilman, told inewsource that at the time he wasn’t sure Malnik was a bad guy — but he wasn’t sure he was the type of person with whom the city should be doing business, either.
“If you start getting close to the mob,” Henderson said, “you have to worry about your employees being blackmailed, you have to worry about bribes, you actually have to worry about threats to their physical safety.” These things are unlikely, he said, but you have to worry about them.
The rest of the council, the real estate department and the local news media didn’t agree with Henderson. The executive director of the Housing Commission said at the time, “even if we assume there is a problem with his background, this still is a very sound transaction that I stand by.”
Fights and editorials ensued and eventually the deal fell apart. But out of that public spat came a resolve, Henderson said: “We should never be voting on anything involving any substantial amount of money unless the financial interests have been disclosed to us. There should be the transparency and we should know this.”
The mayor at the time, Maureen O’Connor, agreed, and persuaded the council to place an initiative on the ballot adding a new section to the city charter requiring all city-engaged businesses to disclose the financial interests behind them. More than 86 percent of voters approved the measure, and the law went into effect July 13, 1992.
Since June, inewsource has requested the disclosures behind more than $500 million in transactions involving the city and private companies — the same disclosures mandated by the now 24-year-old law.
inewsource asked for the disclosures behind every purchase and sale executed between the city’s Real Estate Assets Department and private companies over the past two years. These land deals amounted to more than $6 million and involved 10 companies and 110 acres of city property.
“The City of San Diego has no responsive documents,” according to the Public Records Administration Office.
inewsource also asked for the same disclosures behind lucrative city leases. These 18 companies — big ones representing San Diego landmarks such as SeaWorld, Mission Bay’s Paradise Point Resort & Spa and Pacific Beach’s Campland on the Bay, as well as smaller and lesser-known lessees — accounted for nearly half of the $82 million in leases held by the city of San Diego in 2015.
Not one of the leases contained the information required under the city charter.
Finally, inewsource requested disclosures behind more than $500 million worth of contracts involving 10 companies from the city’s Contracting and Purchasing Department. These are for services such as wastewater treatment, auto parts, radio communications and technology consulting, all managed by a department with more than 900 active contracts and a related $3 billion in business.
Four of those 10 contractors disclosed some information about their board or corporate officers. Not one met the full requirement of the city charter.
History repeating itself
The inherent flaw in this local law, known as Section 225, lies in its ambiguity — its four short paragraphs ill-defined around the edges.
This was immediately apparent to at least one department head in 1992 who asked for clarification about the law just two weeks after it passed:
What type or level of identification is required?
What type of interests must we identify?
What does ‘indirectly involved’ mean?
In what was to become somewhat of a tradition among city attorneys, Witt’s office offered clarifying language and interpretations in a proposed council policy, but they weren’t followed.
More than a decade later in 2005, another city attorney — Aguirre — sent a detailed report to a city subcommittee noting “a lack of uniformity and guidance” regarding Section 225. Nothing came out of it.
In 2014, the next city attorney followed suit. Jan Goldsmith’s office offered the council thoughts on updating the charter and recommended those changes go on this November’s ballot. Those recommendations were noted — but not followed — by the city’s Charter Review Committee, chaired by City Council President Sherri Lightner.
Lightner told inewsource in July that anonymity before the city has always been a concern for her and her colleagues, particularly when it came to land-use matters.
The Delaware loophole
The majority of limited liability companies, or LLCs, aren’t operating with the intent to launder money, hide assets or conceal bribes, but in the city dubbed “Enron-by-the-Sea” a decade ago during a pension scandal, they tend to surface during turbulent times:
Randy “Duke” Cunningham, a long-serving congressman from San Diego’s 50th District, fell from grace in 2005 after he pleaded guilty to tax evasion and conspiracy to commit bribery, mail fraud and wire fraud in connection with private defense contractors. Central to the conspiracy was 1523 New Hampshire LLC — a shell corporation used by a contractor to funnel more than $1.6 million to the congressman through land purchases. The Washington Post called the affair “the most brazen bribery conspiracy in modern congressional history.”
The shell company used in that scheme, registered in Nevada, wasn’t even the most opaque option available. For that, there’s the gold standard of Delaware, a state with a particular set of laws allowing near-complete anonymity for those looking to hide assets or identities.
Take a more recent San Diego conspiracy, for example.
Now under federal indictment, Jose Susumo Azano Matsura — a Mexican billionaire with high-level connections — dumped $100,000 into a San Diego-based political action committee for District Attorney Bonnie Dumanis’ mayoral bid in 2012. The check didn’t come from Azano’s bank account. Instead, he funneled the money through a Delaware corporation called Airsam N492RM LLC.
Cunningham and Azano aren’t isolated cases. In fact, some of San Diego’s most recognizable developments over recent years fit this pattern: The development of Liberty Station, the land purchases prior to the construction of Petco Park and the interests behind the Lane Field hotels and Navy Broadway Complex are all cloaked in Delaware anonymity.
Navy Broadway, downtown San Diego’s $1.25 billion project, is being carried out by Manchester Pacific Gateway LLC, a Delaware corporation. Anyone familiar with local power players may associate prominent hotel developer Doug Manchester with the deal, but that’s not necessarily the case. Manchester Pacific Gateway is managed, according to Civic San Diego disclosure documents, by Manchester Financial L.P., another corporation.
The same goes when trying to unravel the hundreds of millions of dollars in land deals that took place before and after the construction of Petco Park. The parcels around the stadium today are flooded with Delaware ownership:
- San Diego Ballpark Hotel Company LLC
- LHO San Diego Hotel One LP
- DiamondView Tower CMCG LLC
- 10th & Park LLC
- SVF Richman Thirteenth Street San Diego LLC
- 1310 K Street Apartments Investors LLC
Henderson, the city councilman from the 1990s, said he can’t imagine the reasoning behind not wanting to know who these people are, or what connections or influence they may have with city officials.
“The word corruption comes to mind,” Henderson said. “That's the only thing that I can think of that would cause people not to want to know that information.”
On the national stage, the U.S. Treasury Department recently expanded its crackdown on the illicit use of LLCs to launder money through real estate purchases. The department’s Financial Crimes Enforcement Network will temporarily require title insurance companies “to identify the natural persons behind shell companies used to pay ‘all cash’ for high-end residential real estate in six major metropolitan areas,” according to a July 27 press release.
San Diego County is one of those six locations.
To be clear, LLCs are a common and permissible corporate structure, a hybrid capitalizing on the income tax benefits of a partnership and the liability shield of a corporation. They were born in 1977, and all 50 states plus the District of Columbia have separate laws governing their operations, with Delaware being the most popular.
In fact, there are more businesses incorporated in Delaware than there are people.
Phil Jelsma, a partner at the law firm CGS3 and an expert on LLCs and partnerships, said Delaware offers the highest level of anonymity out of all the states.
“I can create a Delaware LLC,” said Jelsma, “and there's really nothing you can glean from looking at my public filings to figure out who's behind this LLC.”
What kind of information is a Delaware LLC legally obligated to provide?
“The name of the LLC, the registered agent, the registered office,” Jelsma said.
“That's literally it.”
LLCs registered in California, by contrast, must also list their officers or members with the secretary of state, meaning at least some identifying info about California-based businesses engaged with the city is available, but no one’s asking for it.
And actually‚ in an interesting twist, they shouldn’t have to. According to a legal decision from the 1990s, it’s actually the contractor’s responsibility to know every law in the city’s charter.
“The burden is on the contracting party to disclose,” Goldsmith said. “That is clear.”
But on the city side of this, he continued, “it needs to be cleaned up.”
inewsource asked to speak to anyone within the two city departments — Real Estate Assets and Purchasing and Contracting — about their lack of records. Both departments declined to speak and instead sent statements by email through a city spokesman.
One statement said the Real Estate Assets Department does receive copies of a company’s financial disclosure forms when it reviews proposals, but “those documents have not been retained” because there’s no law mandating their retention.
After several inewsource calls and inquiries into the disclosure files, the department said, “as part of the city’s continued efforts to be more transparent, the Real Estate Assets Department recently modified its internal operations and will retain the disclosures.”
inewsource repeatedly requested to speak to Mayor Kevin Faulconer and all nine City Council members about this story. Only Councilman David Alvarez and Council President Lightner agreed to talk.
Alvarez told inewsource that although he’s been a proponent of transparency related to city business, Section 225 “hadn’t been brought to my attention until you asked about it.”
“I’ve been pretty vocal about how backroom deals have been problematic in San Diego in general,” Alvarez said. “To the extent that this can help ensure that there’s full transparency in all the actions that we take, I think it should be put into place as soon as possible.”
Lightner sat down for a lengthy interview with inewsource a few weeks back. After learning the history behind Section 225, she sent a memo to Goldsmith’s office asking for specific recommendations and analyses on the topic.
According to the memo, this long-ignored policy will have its day in the sun at the Oct. 26 meeting of the City Council’s Rules Committee.
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