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Lots of Good Faith in San Diego, and Still a Conflict of Interest Mess
Friday, December 19th, 2008
Robert Wechsler
Update below:
Back in August, I wrote a long blog entry praising the way San Diego's Centre City Development Corp.'s (CCDC) board handled a conflict matter. I focused on the board's refusal to pull the usual San Diego (and elsewhere) stunt of denying that anything serious had occurred. Instead, it looked into possible conflict problems with other projects, and it shelved the big project tainted by the too-late-disclosed conflict. The CCDC even hired Bob Stern, California's ethics guru, to help it work things out the right way in the present and the future.
Now, the developer all but finally selected to handle the shelved project has sued the city for $3.8 million, and possibly more (here's the actual complaint).
The developer insists that the CCDC president had no conflict of interest, that the developer had no reason to believe the former CCDC president had had a conflict, and that, therefore, the CCDC was not acting in good faith when it refused to sign the final Disposition and Development Agreement, which the developer said had been fully negotiated and signed by the developer.
The developer's name certainly caused a problem here: Related California Urban Housing LLC. The reason for this problem is that the former CCDC president, before that a developer in Florida, had done a deal with the Related Group of Florida. There is also a company, Related Companies, L.P., which is related to both Relateds. And yet, Related CA insists, Related CA and Related FL are not related according to the controlling state law. And if Related CA is telling the truth about the relationships between the Relateds, it has a good point. But let's talk about an appearance of impropriety! A sprawling group of companies that doesn't want to get caught up in conflict of interest messes should change its name to something else, like Acme or Unaffiliated.
The real question here is whether the CCDC acted in good faith. It certainly believed in good faith that there was a conflict, because it had the matter investigated by an independent attorney, and he said there was undoubtedly a conflict (in fact, according to the San Diego Union-Tribune, he said that the former CCDC president “tainted the transaction to the level that the transaction should not continue.”). And the CCDC also believed in good faith that the former CCDC president had misrepresented her lack of involvement in the negotiations with Related CA.
And yet Related CA may have been acting in good faith as well, having no knowledge of the former CCDC president's past deal with its Florida affiliate or, even if it knew, it may very well not have known that the final payment on the deal was made to the former CCDC president around the time Related CA was chosen as the project's developer, which made it seem like a payoff for her help.
There seems to be a lot of good faith going around here, which is nice to see for a change, but the result could be very costly to San Diego: a big project is on hold at a time when cities are dying for valuable developments, and now there's an expensive suit, as well. And it could be very costly to a developer that may not have done anything wrong.
This mess is one of those unintended consequences of doing the right thing. The CCDC did the right thing, but it may have acted based on a faulty reading of state law and, according to Related CA, it acted without consulting with the developer about its actual relationship with the other Relateds. It appears that the CCDC board wanted to do the right thing so badly, it might have done something wrong.
And the reason it wanted to do the right thing so badly, it appears, is that the CCDC board has been under attack for consisting of people in the real estate development field. This underlines my oft-stated concern with having industry people on boards where they have to deal with industry people. The expertise-independence dilemma is at the center of so many government conflict of interest problems.
I should add here that, although it seems that the former CCDC president failed to disclose her conflict (even if it may not technically have been a conflict, this difficult determination was not hers to make) and allegedly misrepresented her lack of involvement in negotiations with Related CA, she may very well get off without any penalty although she appears to be responsible for this mess. The reason is that her case is being handled by the City Attorney's office as a criminal case, rather than by the city's ethics commission (failure to disclose a conflict is a misdemeanor). She may get off because it will be difficult to prove beyond a reasonable doubt that she knew that she had a conflict, if that is a criterion. As I have written before, I do not believe that this sort of conflict situation should be handled as a criminal matter.
Update (5/2/09): Well, according to an article at today's voiceofsandiego.com, it does seem that the district attorney couldn't prove a conflict, so he settled for a misdemeanor no-contest plea of failure to disclose. That conclusion could have been reached more quickly and far less expensively by an ethics commission.
Robert Wechsler
Director of Research-Retired, City Ethics
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Back in August, I wrote a long blog entry praising the way San Diego's Centre City Development Corp.'s (CCDC) board handled a conflict matter. I focused on the board's refusal to pull the usual San Diego (and elsewhere) stunt of denying that anything serious had occurred. Instead, it looked into possible conflict problems with other projects, and it shelved the big project tainted by the too-late-disclosed conflict. The CCDC even hired Bob Stern, California's ethics guru, to help it work things out the right way in the present and the future.
Now, the developer all but finally selected to handle the shelved project has sued the city for $3.8 million, and possibly more (here's the actual complaint).
The developer insists that the CCDC president had no conflict of interest, that the developer had no reason to believe the former CCDC president had had a conflict, and that, therefore, the CCDC was not acting in good faith when it refused to sign the final Disposition and Development Agreement, which the developer said had been fully negotiated and signed by the developer.
The developer's name certainly caused a problem here: Related California Urban Housing LLC. The reason for this problem is that the former CCDC president, before that a developer in Florida, had done a deal with the Related Group of Florida. There is also a company, Related Companies, L.P., which is related to both Relateds. And yet, Related CA insists, Related CA and Related FL are not related according to the controlling state law. And if Related CA is telling the truth about the relationships between the Relateds, it has a good point. But let's talk about an appearance of impropriety! A sprawling group of companies that doesn't want to get caught up in conflict of interest messes should change its name to something else, like Acme or Unaffiliated.
The real question here is whether the CCDC acted in good faith. It certainly believed in good faith that there was a conflict, because it had the matter investigated by an independent attorney, and he said there was undoubtedly a conflict (in fact, according to the San Diego Union-Tribune, he said that the former CCDC president “tainted the transaction to the level that the transaction should not continue.”). And the CCDC also believed in good faith that the former CCDC president had misrepresented her lack of involvement in the negotiations with Related CA.
And yet Related CA may have been acting in good faith as well, having no knowledge of the former CCDC president's past deal with its Florida affiliate or, even if it knew, it may very well not have known that the final payment on the deal was made to the former CCDC president around the time Related CA was chosen as the project's developer, which made it seem like a payoff for her help.
There seems to be a lot of good faith going around here, which is nice to see for a change, but the result could be very costly to San Diego: a big project is on hold at a time when cities are dying for valuable developments, and now there's an expensive suit, as well. And it could be very costly to a developer that may not have done anything wrong.
This mess is one of those unintended consequences of doing the right thing. The CCDC did the right thing, but it may have acted based on a faulty reading of state law and, according to Related CA, it acted without consulting with the developer about its actual relationship with the other Relateds. It appears that the CCDC board wanted to do the right thing so badly, it might have done something wrong.
And the reason it wanted to do the right thing so badly, it appears, is that the CCDC board has been under attack for consisting of people in the real estate development field. This underlines my oft-stated concern with having industry people on boards where they have to deal with industry people. The expertise-independence dilemma is at the center of so many government conflict of interest problems.
I should add here that, although it seems that the former CCDC president failed to disclose her conflict (even if it may not technically have been a conflict, this difficult determination was not hers to make) and allegedly misrepresented her lack of involvement in negotiations with Related CA, she may very well get off without any penalty although she appears to be responsible for this mess. The reason is that her case is being handled by the City Attorney's office as a criminal case, rather than by the city's ethics commission (failure to disclose a conflict is a misdemeanor). She may get off because it will be difficult to prove beyond a reasonable doubt that she knew that she had a conflict, if that is a criterion. As I have written before, I do not believe that this sort of conflict situation should be handled as a criminal matter.
Update (5/2/09): Well, according to an article at today's voiceofsandiego.com, it does seem that the district attorney couldn't prove a conflict, so he settled for a misdemeanor no-contest plea of failure to disclose. That conclusion could have been reached more quickly and far less expensively by an ethics commission.
Robert Wechsler
Director of Research-Retired, City Ethics
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