2 Officials Charged in O.C. Scandal : Investigation: The former top managers of Santa Margarita Water District are accused of illegally accepting gifts from contractors.

LAGUNA NIGUEL — One year after scandal shook the Santa Margarita Water District out of obscurity, prosecutors charged two former top managers Monday with illegally taking thousands of dollars in gifts from companies that relied on their help in securing government contracts.

The Orange County district attorney’s office brought a total of 38 misdemeanor charges against Walter W. (Bill) Knitz, 62, the former general manager of the district, and Michael P. Lord, 51, the assistant general manager, alleging that they repeatedly failed to disclose gifts from business people and then took action on their behalf despite conflicts of interest.

Neither man could be reached for comment, but in the past both have steadfastly maintained that they are innocent of any wrongdoing.

Meanwhile, Assistant Dist. Atty. Wallace J. Wade said his office will continue to pursue an investigation into similar allegations against a former board chairman and an engineer at the district.

The district attorney opened its investigation into the case in March, one day after The Times reported that Knitz and Lord had accepted tens of thousands of dollars in gifts from local business people--from pheasant hunting and fishing trips to theater tickets and golf outings.

The charges came as something of a welcome respite for a new water district board that came into office last November, when most of the old board was swept out in the wake of the scandal.

“I think it will be a great relief to the district and particularly the employees who have had to withstand a great deal of trauma, not of their doing,” said board member Bob Lay, who is chairman of the district’s finance committee.

Said Board Chairman Jim Holmes: “It’s time to finalize whatever’s going to happen and get on with the world. The district would certainly like to get on with things. This was all in the past.”

All of the charges filed Monday involve gifts allegedly provided to Knitz and Lord by two Orange County engineering firms--Robert Bein, William Frost & Associates of Irvine, and MacDonald-Stephens Engineering of Mission Viejo.

Prosecutors alleged in their complaint that Knitz illegally took part in Santa Margarita Water District decisions worth more than $1.1 million in government contracts to the two companies from 1990 to 1992, while Lord allegedly influenced more than a quarter-million dollars in Bein, Frost contracts during that same time at the water district.

The furor over the reports of lavish trips and gifts prompted a newfound public scrutiny for a $28-million-a-year special district that had operated for 29 years in relative obscurity, providing water and sewer service for 84,000 people in South County.

Within weeks of the controversy’s first disclosure, the district adopted a strict new ethics code banning employees from accepting gifts of any amount, and it suspended both Knitz and Lord, who continued to draw their six-figure salaries. Each later resigned.

Lord’s attorney, Gary Pohlson, said the sheer length of the year-long investigation had imposed an emotional and financial “burden” on his client--Lord is considering filing for bankruptcy--but that he continues to maintain his innocence.

“I am surprised (by the filings) simply because it’s taken so long. I was hopeful they wouldn’t file,” Pohlson said. The one bright spot in the day, Pohlson said, was the fact that prosecutors decided not to bring any felony charges, which carry stiffer penalties.

Knitz’s attorney, Marshall Schulman, seemed to take the filings in stride. “We’ll have to deal with them. I wasn’t sweating it. I have to see what they’re charging and see what they’ve got. If they don’t have anything, then you’ll expect us to fight it.”

Knitz and Lord each face fines and/or jail time if convicted on the misdemeanor charges, although prosecutors said they were uncertain of the most severe sentences that could be imposed. Arraignments were set for April 12 in Orange County Municipal Court in Laguna Niguel.

Prosecutors refused to elaborate on the charges filed Monday.

But Shirley Grindle, a civic activist who has successfully pushed political finance reform measures around the county, said such gift-acceptance practices have a corrupting influence on local government.

Water district officials “got too chummy” with the people they were regulating, she maintained.

“It’s a lesson that all public officials need to keep an arm’s length distance from the corporations they govern,” Grindle said.

“It’s unfortunate they got themselves into it.”

Officials at MacDonald-Stephens and Bein, Frost did not return calls seeking comment Monday. While officials at MacDonald-Stephens have refused even to discuss the investigation, Bein, Frost officials say they never sought to influence any contracts through gifts to anyone at the water district.

The counts listed in the complaint filed Monday are broken down into two types of violations: failure by each man to disclose repeated gifts from local business executives in state-required filings; and attempts by each to use “his official position to influence a governmental decision in which he knew or had reason to know he had a financial interest.”

It is against state law for most government officials to take part in a decision affecting anyone who has provided $250 or more in gifts for up to 12 months.

The complaint gives few details about the actual gifts that the two men allegedly received, but it does break down the contracts that came into question as a result.

Prosecutors alleged that Knitz, despite an apparent conflict of interest created by the gifts that he had received, improperly influenced five different MacDonald-Stephens contracts between 1990 and 1992, totaling $662,620, and influenced 10 Bein, Frost contracts worth $495,380.

For example, during 1991 alone--when Knitz reported receiving at least $3,675 in gifts from Bein, Frost and MacDonald-Stephens--the complaint alleges he used his position to help secure at least $570,980 in contracts for the two companies.

Lord, meanwhile, allegedly played a part in issuing six contracts to Bein, Frost worth $229,150.

Since 1989, Bein, Frost has been paid about $13 million for a variety of engineering projects; MacDonald-Stephens has been paid more than $4 million.

One conflict-of-interest count against Lord also involved a $2-million certificate of deposit that the water district purchased from Mission Viejo National Bank in 1991, even though the bank was on the verge of financial collapse.

Though the district incurred no loss and eventually redeemed the certificate of deposit when it matured, the transaction raised questions about Lord’s handling of customer funds and proceeds from public-sale bonds--in particular, the relationship between the district, Lord and South County banker Charles D. Maranto.

Documents reviewed by The Times showed that the water district’s multimillion-dollar general operating fund followed Maranto as he went from bank to bank over a five-year period. Lord had obtained at least a $50,000 loan, a $45,000 line of credit and another $3,000 line of credit from the same banks involved with Maranto, who was with Mission Viejo National when the district purchased the $2-million certificate of deposit.

Wade, who oversaw the investigation, said prosecutors were working against a tight deadline in filing their criminal complaints. By one interpretation of state law, the statute of limitations on several of the gifts to Knitz would have run out today, he said.

Wade did not rule out the possibility of a plea bargain--as happened in a similar case last year when former Supervisor Don R. Roth pleaded guilty to political gift-reporting and conflict-of-interest misdemeanors. He paid a $50,000 fine and did community service.

But Wade said such discussions will have to wait at least several days, until the defendants’ lawyers have had time to review the complaints “and let us know what direction they want to go.”

Meanwhile, Wade said prosecutors will continue their investigation into several other officials at the water district who have come under fire for their acceptance of gifts.

The ex-chairman of the water district, Don B. Schone, 52, resigned Jan. 16--the same day it was disclosed by The Times that he had taken free trips to Cabo San Lucas, courtesy of Bein, Frost. Schone was treated to stays in Cabo for four days in April, 1990, and again for five days in May, 1991, but did not report the gifts in state-required filings.

Schone, who served on the water district board for 17 years, has denied any wrongdoing.

Later in January, The Times reported that William B. Dye, the district’s top engineer since 1979, and Dan Ferons, his chief assistant, received nearly $12,000 in meals and trips paid for by Bein, Frost. Dye, 58, had never reported receiving anything of value from any contractor on the statements of economic interest he has been required to file every year.

Until this year, Ferons has not been required to file such statements under the law, according to the water district. Both Dye and Ferons have denied any wrongdoing.

Times staff writer Mark Platte contributed to this report.

MORE CHARGE COVERAGE INSIDE

* REFORM--Many changes have been made at the Santa Margarita Water District. A16

* DISTRICTS--The scandal could force consolidation of other small agencies. A16

The Players: Santa Margarita Water District

In the year since state and federal investigators began reviewing the conflict-of-interest allegations that resulted Monday in criminal charges, several district managers and directors have retired, resigned or been voted out of office.

The administrators

Walter W. (Bill) Knitz

Title: General manager

Age: 62

Hired: Nov. 15, 1975

Retired: May 24, 1993

Michael P. Lord

Title: Assistant general manager

Age: 50

Hired: Aug. 15, 1977

Retired: May 24, 1993

The board of directors

Don B. Schone

Title: Chairman, board of directors

Age: 52

Elected: 1977

Resigned: Jan. 17, 1994

Richard F. Boultinghouse

Title: Vice chairman, board of directors

Age: 53

Elected: 1980

Voted out of office: Nov. 2, 1993

John F. Van Dam

Title: Director

Age: 81

Elected: 1981

Resigned: May 14, 1993

James S. Neidert

Title: Director

Age: 47

Elected: 1992

Voted out of office: Nov. 2, 1993

William F. Krasho

Title: Director

Age: 52

Elected: 1987

Voted out of office: Nov. 2, 1993

Santa Margarita Water District at a Glance

* Established: Dec. 23, 1964

* Population served: 84,000

* Ratepayers: 26,500

* Communities served: Rancho Santa Margarita, Mission Viejo, Coto de Caza, Rancho Trabuco and other unincorporated areas

* Area covered: 62,000 acres

* Operating budget: $28 million

Source: Santa Margarita Water District

Water District Woes

Key dates in the Santa Margarita Water District controversy:

* March 28, 1993: Times reveals that Santa Margarita Water District General Manager Walter W. (Bill) Knitz and his assistant, Michael P. Lord, billed the district for tens of thousands of dollars in questionable expenses.

* March 29: Times reports that Knitz and Lord accepted more than $40,000 in gifts from contractors, bankers, developers and consultants, many of whom they recommended for millions of dollars’ worth of contracts in apparent violation of state law. Total amount increases to $60,000 as they file new disclosure forms or amend old ones.

* March 30: County prosecutors open investigation into possible conflict-of-interest-law violations. A week later, FBI announces investigation into possible criminal wrongdoing. FBI and district attorney’s office eventually form task force.

* April 9: District’s board of directors place Knitz and Lord on paid administrative leave.

* April 16: State Assemblyman Mickey Conroy (R-Orange) proposes legislation that would change board elections from system in which property values determine number of votes to a “one man, one vote” arrangement.

* May 5: Times discloses numerous instances of district employees’ relatives working for contractors doing business with the district.

* May 9: Times reports that Knitz blocked repeated attempts by financial officers to require a contractor--and gift-giver--to justify more than $500,000 in questioned billings, and ordered write-offs of some overcharges.

* May 12: U.S. Securities and Exchange Commission opens own investigation into district’s handling of $150-million investment portfolio, which Lord managed.

* May 14: Board member John F. Van Dam resigns. A member since 1981, he says he was so disgusted with the actions of Knitz and Lord he was prepared to resign the day first disclosures were revealed. He is replaced by Sean Barrett.

* May 17: Board of directors adopts a strict new ethics code prohibiting employees from accepting gifts of any amount. It also prohibits employee “dependent offspring” from working for district contractors.

* May 19: Knitz announces retirement from his $113,292-a-year job. Lord submits retirement papers on his $109,116-a-year job the next day.

* Oct. 11: Gov. Pete Wilson signs Conroy’s bill requiring that district board members be elected by popular vote.

* Nov. 2: Four board members are swept out of office. County registrar of voters later determines ballot returns were miscalculated by more than 122 million votes. Sean Barrett is returned to board under new results.

* Dec. 21: Orange County Grand Jury launches inquiry into possible consolidation of four agencies wholesaling water to retail districts that sell to customers. Two weeks later, Board of Supervisors approves nearly $38,000 to study potential mergers.

* Jan. 16, 1994: Board chairman Don B. Schone resigns after Times reveals he took free trips from a prominent engineering firm that has received millions of dollars in contracts. Schone did not report the trips on his statements of economic interest, in apparent violation of conflict-of-interest laws.

* Jan. 31: Times reveals that the engineering firm spent nearly $12,000 entertaining chief engineer William B. Dye and Dan Ferons, his chief assistant, between 1989 and 1992. Dye did not report the expenses on his statements of economic interest, although he has since amended his forms. Ferons was not required to file such forms until this year.

* March 21: County prosecutors file criminal conflict-of-interest charges against Knitz and Lord.