Hubbell Cheated L.A., a City Audit Claims

Webster L. Hubbell, the former No. 3 official at the U.S. Justice Department, lied two years ago to win consulting payments totaling $24,750 from the city of Los Angeles and should face the prospect of renewed criminal prosecution, according to an audit report made public Monday.

The report concluded that a July 19, 1995, letter Hubbell sent to the city itemizing his supposed work “was materially false,” adding: “It greatly exaggerates the services provided.”

“In short, Mr. Hubbell defrauded the City of Los Angeles,” said City Controller Rick Tuttle, who oversaw preparation of the report and announced the findings at a news conference. Tuttle also recommended that the city seek reimbursement from Hubbell, perhaps through a civil lawsuit.

Hubbell, reached Monday at his office in a Virginia suburb of Washington, D.C., referred all questions to his lawyer, who ridiculed the report.

The audit sheds new light on Hubbell’s employment arrangement with the city, which has become a matter of national interest. It is one of a dozen or more deals that quickly fell his way--with the encouragement of top Clinton aides and supporters--after he resigned from the Justice Department in April 1994.

Hubbell at that time immediately came under investigation by a special prosecutor examining the Whitewater affair. He was regarded then as a potential target for prosecution or a witness--in part because he, along with his former law partner in Arkansas, First Lady Hillary Rodham Clinton--had dealings with a failed federally insured savings and loan at the center of the Whitewater probe.

Starr to Receive Results of Audit

Tuttle opened his review last fall after Times articles in 1995 and 1996 had reported Hubbell’s unusual consulting arrangement with the city Department of Airports. Hubbell was retained in August 1994--on the basis of an oral agreement that was not subject to competitive bidding--to lobby the Clinton administration on an airport-revenue matter important to Mayor Richard Riordan.

Tuttle announced that he would forward his office’s findings to Whitewater Independent Counsel Kenneth W. Starr, along with the U.S. attorney’s office in Los Angeles and the county district attorney.

Tuttle, who assigned city auditors and hired a private-sector lawyer, Steven G. Madison, to conduct the review, also was critical of three city officials who handled Hubbell’s arrangement.

The controller’s report did not accuse the three--including former Airport Commission President and mayoral advisor Theodore O. Stein Jr.--of criminal wrongdoing. Stein lacked proper authority to approve the oral agreement with Hubbell, the report said, and John Driscoll, the executive director of the airport department, should have blocked the deal.

But the report said that it will be up to local and federal prosecutors in Los Angeles, Little Rock, Ark., and Washington “to determine whether Mr. Hubbell should be prosecuted for any crimes, including but not limited to wire fraud, mail fraud and presenting a false claim to the city.”

Hubbell’s lawyer, John W. Nields Jr., declined Monday to address specifics of the controller’s report. But Nields noted, critically, that the controller’s office had agreed to limit the scope of the inquiry at Starr’s request.

Indeed, Tuttle did write to Starr on March 4, informing the independent counsel that his office would not interview witnesses outside Los Angeles “until such time as those interviews would no longer present a risk of significantly affecting your investigation.”

Nields said Monday that this amounted to “avoiding obtaining any of the key facts.” Tuttle, in his letter to Starr, said the constrained scope “strikes a reasonable balance of your interests and the city’s interests in this matter.”

The report illuminates various aspects of Hubbell’s deal with the city, along with the intertwined friendships and professional relationships of advisors to Riordan and the Clinton administration. Sworn testimony gathered in support of the controller’s report also reveals a separate instance in which a prominent Democratic Party supporter hired Hubbell.

Efforts to Aid Hubbell Admitted

Hubbell pleaded guilty in December 1994 to separate federal charges of fraud and income-tax evasion, related to his bilking of $482,410 from former partners and clients at the Rose Law Firm in Little Rock. Hubbell pledged to cooperate with Starr’s investigation at the time of his guilty plea.

Two months ago, after media reports of Hubbell’s various deals and related subpoenas from Starr, the White House acknowledged the extraordinary efforts that administration officials and others undertook on Hubbell’s behalf.

Among those who either encouraged the hiring of Hubbell or other financial help for his family were then-White House Chief of Staff Thomas F. “Mack” McLarty; Erskine Bowles, who is the current chief of staff; and Mickey Kantor, the chairman of Clinton’s 1992 campaign who served four years in the president’s Cabinet.

Starr is examining whether administration officials or others helped Hubbell financially in 1994 in an effort to discourage him from providing testimony damaging to the Clintons or others. Those who sought to help Hubbell generally have said that they did so out of friendship. Starr, indicating his displeasure with the quality of the cooperation that Hubbell had pledged, sought no leniency for Hubbell when he was sentenced to federal prison in 1995.

The detailed controller’s report released Monday and supporting documents provide several new details that illustrate the unusual nature of the city’s arrangement with Hubbell, who before joining the Clinton administration had served as mayor of Little Rock and, briefly, as chief justice of the Arkansas Supreme Court.

For instance, the testimony shows that Stein--far from acting unilaterally in hiring Hubbell--apprised Democratic stalwart William Wardlaw, who is a close confidant of Riordan and the mayor’s top campaign strategist, of his plan. And Wardlaw’s wife, then-mayoral advisor Kim Wardlaw, testified that she discussed the hiring of Hubbell in advance with Alan Arkatov, whom Stein testified had planted the idea with him.

Arkatov, a former prominent Democratic campaign consultant, has acknowledged recommending Hubbell to Stein and answered questions in January before a Whitewater grand jury in Little Rock. In his testimony for the controller’s report, Arkatov revealed that he also recommended Hubbell to another prospective employer, Nicholas H. Stonnington, a Los Angeles stock-brokerage executive.

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Stonnington, a vice president at the downtown branch of Merrill Lynch, gave $5,000 to the Democratic National Committee last fall. He did not return several phone calls seeking comment Monday.

According to Arkatov’s testimony, Stonnington had been interested in hiring Hubbell to help win a federal appointment “for someone who[m] he was associated with.” Arkatov said Stonnington’s hiring of Hubbell was confirmed to him by other “investigative bodies.”

Arkatov testified that he discussed Hubbell’s Los Angeles arrangement with two other Clinton administration officials: Gerald M. Stern, who was then a presidentially appointed special counsel in the Justice Department, and Marsha Scott, a senior White House aide, who discussed with Arkatov “how unfortunate it was” that the city was delaying its payments to Hubbell.

Kim Wardlaw, whom President Clinton appointed a federal district judge in late 1995, also testified that she discussed Hubbell’s difficulty in getting paid with Arkatov’s wife, Mary E. Leslie. Leslie was Clinton’s chief California fund-raiser in 1992, became a Clinton appointee in the Small Business Administration and, upon leaving the administration, served as a deputy mayor to Riordan.

“I remember one conversation in particular that I had with Mary Leslie where she had raised the subject that Hubbell had been hired [and] wasn’t being paid,” Kim Wardlaw testified. “And I remember saying to her, ‘Well, you’re really close to Rick Tuttle. Why don’t you find out what’s going on from him?’ ”

Hubbell Hired to Work on LAX Fund Transfer

As Tuttle’s report makes clear, Hubbell was retained at a time when Riordan wanted to persuade the Clinton administration not to block the city’s proposed shifting of $58 million from a Los Angeles International Airport account to the city general fund.

Federal law generally prohibits the shifting of airport-generated revenue to a city’s general fund and such transfers are opposed by airlines, which fear higher fees.

In early 1995, a Clinton appointee in the Federal Aviation Administration informed the city that the government would not block Los Angeles’ proposed transfer.

Riordan’s office issued a statement defending the transfer of the $58 million and the intentions of both Driscoll and Stein.

Tuttle’s report criticized both men for keeping Hubbell’s hiring unknown, even to other members of the airport commission. “Had the hiring of Mr. Hubbell not been kept secret, another commissioner or other person might have raised concerns about retaining Mr. Hubbell,” the report said.

The report also concluded that Driscoll’s deputy, Jerald Lee, “backdated his approval of Mr. Hubbell’s invoices to make it appear that his approval took place before news of Mr. Hubbell’s intention to plead guilty . . . was made public. We do not know if Mr. Lee did this on his own or at the request of others.”

Times staff writer Ted Rohrlich and editorial researcher Janet Lundblad contributed to this story.