[San Luis Obispo County] ‘Why are we here?’ local judge asks in John Wallace conflict-of-interest case

Blog note: this article references two grand jury reports on the alleged conflict-of-interest.

The felony conflict-of-interest cases against former South San Luis Obispo County Sanitation District chief administrator John Wallace got off to a rocky start Monday with a Santa Maria judge questioning why he’s even hearing the case.

“This case is one that probably should have been a civil compromise a year ago,” Judge Timothy Staffel said Monday at Wallace’s hearing in Santa Maria. “There seems to be a lot of taxpayer money going into this case.”

Wallace, 73, who is accused of steering work to his engineering firm while serving as the head of two local special services districts, was in court for a preliminary hearing in which Staffell heard testimony from prosecution witnesses before ruling whether there’s enough probable cause for each charge to order Wallace to trial.

Wallace has pleaded not guilty to four felony charges of conflict of interest and four misdemeanor charges of public official interference with government policy for financial gain stemming from his time at the South County District and the Avila Beach Community Services District.

The former CEO of engineering firm the Wallace Group, Wallace retired from the sanitation district in 2013 after 27 years. He and his former company, Fluid Resource Management, had also worked for several other local districts that provide sewer, water, road maintenance and other services to unincorporated areas of the county.

He left his position with the South County district as calls for an investigation into perceived conflicts of interest grew. In January 2016, the District Attorney’s Office received a sanitation district-commissioned report from an investigator that concluded Wallace had mismanaged the district for nearly a decade.

It was during that investigation that San Luis Obispo prosecutors learned of Mr. Wallace’s work with the Avila Beach agency, which led to the filing of additional charges, the DA’s Office said in a news release at the time.

The case is being tried in the Santa Maria branch of Santa Barbara Superior Court after the case was transferred following the judicial appointment of Judge Matthew Guerrero, who served on the sanitation district board of directors during Wallace’s tenure and is expected to testify.

Wallace’s attorney, Los Angeles-based Kenneth White, indicated his client’s defense focuses on the statute of limitations and whether or not Wallace was acting in his official capacity with the districts when negotiating his firm’s contracts.

Staffel began Monday’s preliminary hearing — which was scheduled to last through Wednesday — by instructing Deputy District Attorney Michael Frye to “focus this” hearing, noting that many facts in the case are well-documented and not in dispute.

Frye first called Matthew Habber, former accountant for the sanitation district, who testified that the district was his first government job. Habber said he personally thought it seemed as though Wallace had a conflict in his dual roles, but that he didn’t raise the issue to the board.

“(With) me coming on board, that’s how I was told it was done,” he said. “It wasn’t really for me to question.”

Mike Seitz, who formerly worked as legal counsel for the sanitation district and Avila Beach CSD and has long defended Wallace’s work, testified Monday afternoon that a SLO County Grand Jury report from 1993 investigated Wallace’s similar roles with the San Simeon Community Services District and found no conflict.

Seitz — who said he once played on a softball team with Wallace called The Reasonable Doubts and whose wife briefly worked for the Wallace Group — testified that he never witnessed Wallace direct services to his company without approval from the board, and that he never saw what he considered a conflict of interest.

However, in 2011, a SLO County civil Grand Jury released a report saying the district was “exposed to a number of financial, legal and public trust issues” because of Wallace’s dual roles. Though Seitz said he disagreed with the report, he advised that the district split Wallace’s 15-year-old contract into two separate contracts, one for his role as district administrator and another for his role as district engineer.

Seitz said such an arrangement was “OK as long as the board and attorney were vigilant.”

“(The Grand Jury report) provided, perhaps, the appearance of a conflict, but we felt we had mitigated that,” Seitz said.

Staffel last heard from Peter Kelley, an Avila Beach CSD board member since 2001, who testified that as media scrutiny of Wallace grew in 2011, the Avila Beach board began discussing whether it should split Wallace’s contract as well.

“I voted no. I stated I’d be more comfortable if the positions were separated and filled by different people,” Kelley said. “I felt there was a conflict of interest.”

Frye said he expects to call Guerrero, DA Investigator Neil Clayton and a former employee of Fluid Resources Management to the stand Tuesday morning before Staffel issues a ruling.

Before adjourning for the day, a seemingly perplexed Staffel said that Wallace’s perceived conflict “wasn’t a big secret” when his contracts were approved with oversight from the district boards.

“Here you have a Grand Jury report — they seemed to figure it out,” Staffel said, adding that neither district is seeking restitution for money it paid to Wallace Group. He said, noting there are still witnesses to hear, that the cases appear to belong in civil court in some fashion.

“If the entities don’t want their money back, why are we here?” he said. “Let’s get this (case) back to reality where it belongs.”

March 5, 2018

The Tribune

By Matt Fountain