Fleishman-Hillard & the controversy on overbilling the Los Angeles Department of Water and Power

In late 2003, Fleishman-Hillard's (F-H's) Los Angeles office was embroiled in controversy over the firm's $3 million PR contract with the Department of Water and Power (DWP) in Los Angeles, California.

The controversy initially centered on accusations involving the general manager of F-H's L.A. office, Douglas R. Dowie, his relationship with city officials and whether pro bono work and political donations by F-H led to it winning contracts. However it later evolved into accusations - later documented in an audit by the City Controller - that the DWP have been substantially overbilled.

Dowie defended the practive of political contributions telling PR Week: "The way to understand this dynamic is that contributions allow you to build relationships with elected officials, and that while they are not necessarily required in order to do public affairs work, they are door openers, and they are certainly something that is appreciated by people who need to raise money in order to seek higher office or to win office in the first place... The media finds the whole idea of money in politics to be utterly distasteful and evil... This is how our political system works. Unless you want to totally reform, this is how it works," he said.

In April 2004, F-H announced that it would let three contracts with L.A government agencies lapse. In a statement F-H stated that its work for the L.A. DWP "began by helping it prepare for energy deregulation," Kline said. "Today, the challenges are more numerous, including encouraging the wise use of scarce water supplies, environmental threats, state and federal legislation that could have detrimental impacts on the LADWP and the city, as well as the issues of diversity and economic development."

"For the Port, our work has included helping promote initiatives to clean the air, including the AMP program to allow ships to use cleaner shore-side power," they stated. 

F-H drinks deep at the public well
What began as a controversy over political contributions escalated dramatically when in mid-July 2004, the Los Angeles Times reported that seven former F-H employees had stated that they were encouraged to inflate the bills to DWP with two of them saying the practice was also adopted for commercial clients. 

After the allegations that F-H had engaged in overbilling the DWP broke, City Attorney Rocky Delgadillo filed a lawsuit against the company. In a statement, Delgadillo said, "This is more than sloppy billing; it appears to be outright fraud against the ratepayers of this city. And it's particularly egregious since city residents just got slapped with a rate hike. Ratepayers should be furious to learn that their hard-earned dollars are likely paying the fraudulent bills of PR consultants." 

After the legal action, City Controller Laura Chick refused to pay further bills submitted by F-H because of lack of documentation and suspicions that they were inflated. As the controversy grew F-H put Douglas R. Dowie, the former head of F-H's Los Angeles office, on leave. 

Chick told the Los Angeles Times that an audit she had initiated had been frustrated by F-H's reluctance to turn over certain documents. She revealed that F-H had had contracts with the DWP amounting to $25 million since 1998. 

Once the initial story broke, two more former employees contacted the newspaper to state that they too had overbilled. One stated that she billed about 10 fake hours a week, charging commercial clients $180 an hour. "You had to fake your hours or you weren't billing enough time to be [considered] profitable," one said. 

Richard S. Kline, the new manager of F-H's L.A. office told the paper that "we find the notion of fabricating billable hours abhorrent and in violation of everything we stand for as a company."

Jack O'Dwyer, the publisher of the trade publication O'Dwyers PR Daily, blamed the pressure from Omnicon, the advertising parent of F-H, which he described as being "manic about max hours being billed out to clients." "F-H execs have got to 'make their numbers' or face severe consequences," he wrote in an editorial.

In an interview, O'Dwyer said the industry had taken a wrong turn 20 years ago when it started to bill by the hour. "If you hired a writer, would you want to pay him by the hour or the word?" he asked. "If you hired someone to do your portrait, would you want to pay by the hour?"

In late July, F-H CEO, John Graham, announced in an e-mail to employees that the company had changed its policies on political donations, would establish a hotline for whistleblowers and reviewed its billing procedure. 

The controversy though did little to dent F-H's enthusiasm for working up close with governments. In July 2004 F-H's Senior Vice-President, Bill Garber, announced that he would head a new team to help clients sell their products to government agencies. "We can now take them right to the point of sale and help them through the contracting process," PR Week reported. According to Garber the areas with greatest potential included biotech, IT and infrastructure. 

The controversy had spillover effects for F-H on other contracts too. The L.A. City Controller, Laura Chick, refused to pay an invoice for $2,200 from F-H for its work for the Port of Los Angeles due to lack of detail about what services had been performed for the invoiced amount. F-H's regional president, Richard Kline, said he will provide the details and explanation required. 

Aside from reviewing thousands of pages of documents relating to the FH-DWP contract, federal prosecutors investigating the affair have also sought emails and text messages from key staff to government officials. Two of those identified in the search are former F-H staffer and now head of Mayor James Hahn's media office and former deputy mayor Matt Middlebrook, who now works for F-H. 

The audit that has been initiated into the FH contract with the DWP also includes the six sub-contractors working on the account. One of the subcontractors, Consensus Planning Group, undertook "grassroots communications". PR Week reported that a front page story in the Los Angeles Business Journal alleged Consensus billed the DWP at rates normally charged to corporate clients.

Company principal, Julie Gertler, told PR Week "my message is the rates have been fully transparent, fully disclosed, listed in our contract with Fleishman, and paid without question for over a year." 

In November 2004, Los Angeles Controller Laura Chick announced that her audit of F-H's Department of Water and Power work indicated that the PR firm has overcharged the city some $4.2 million, through "unsubstantiated, unsupported and questionable" billings. She urged F-H to repay the city in full. 

F-H's regional president, Richard Kline, "acknowledged for the first time in public," on the day the city's audit was released, "that some of the firm's bills were not supported by documentation." However, F-H claimed that it had only overcharged the city some $652,457 over five years. The firm said it would submit to mediation to reach a financial agreement with the city. "We have been working with the U.S. attorney and district attorney since July to fully understand what happened," said Kline. 

In mid-December F-H's Regional President, Richard S. Kline wrote to the Los Angeles Times defending the company?s achievements in promoting energy efficiency and water conservation under its contract with the DWP. "Fleishman-Hillard would never knowingly tolerate improper behavior and will keep its promise to take appropriate action, including reimbursing the city for any unjustified charges," Kline wrote.

In papers filed with the court on November 22, 2004, Fleishman-Hillard disputed the allegations against it and claimed that they were "designed to depict Fleishman as an outsider who has taken advantage of Los Angeles residents". .

Fleishman applied to the Los Angeles Supreme Court to move the trial from Los Angeles to Ventura County so that the lawsuit can "proceed in a fair and neutral forum". Fleishman's application was opposed by Los Angeles City Attorney.

In mid-January 2005, Judge Mary Thornton House agreed with Fleishman-Hillard attorney's argument that news coverage of the overbilling controversy warranted the case being heard by a court outside Los Angeles county. "Most likely, the public in Los Angeles has little or no knowledge of the defendant other than that presented in the press concerning the recent dispute," House wrote in her order.

In January 2005, Associated Press reported that the three F-H employees who handled the DWP account, Doug Dowie, the former head of the firm's Los Angeles office, and senior vice-presidents Steve Getzug and John Stodder were no longer working for the company. F-H regional president Richard Kline told AP "We're making no accusations. No individuals have been accused of wrongdoing by the legal authorities, outside of the civil suit," he said. Dowie's lawyer said his client had not been informed on the reasons for his removal. 

In mid-January federal prosecutors charged Stodder with 11 federal wire fraud counts which they state accounted for approximately $250,000 in fraudulent bills sent to the DWP charging for more hours than F-H staff on the account worked. KABC TV Los Angeles reported that the indictment alleges several other F-H clients were also overbilled "including the Port of Los Angeles, architect Frank Gehry's office and the World Wide Church of God". Stodder's attorney has denied the charges.

In late October the trial of Dowie and Stodder was delayed from mid-November to March 2006. 

Sentencing
In a plea deal in 2005, Steve Sugerman admitted that he had assisted in the overbilling the Los Angeles Department of Water and Power by over $120,000. In September 2006 Sugerman was sentenced to three years probation and ordered to 250 hours of community service. 

The settlement
In April 2005, Fleishman-Hillard agreed to pay $5.7 million to settle the lawsuit brought against it by the city of Los Angeles. Under the agreement, the firm "will pay about $5.5 million to the Department of Water and Power, and the remainder will be split among the agencies that oversee the airports, harbor and visitors bureau." The firm will pay the city some $4.5 million in two installments, and waive $1.2 million in unpaid invoices, reported Associated Press. 

In a memo on the settlement agreement circulated among North American staff, Fleishman-Hillard's John Graham wrote:
 * As you know, we conducted an extensive internal investigation of these issues. On the basis of that investigation, the agency believes some senior executives of the Los Angeles office, who are no longer with the firm, caused certain bills to be presented to the City that appear to be improper and indefensible. We turned over the results of our investigation to the appropriate federal and county authorities, and we continue to cooperate fully with them.


 * This is a significant payment, substantially more than the amount of questioned billing, but our firm’s reputation for honesty and integrity is a vital business asset and I am convinced that the cost of a prolonged legal and political battle would ultimately be far greater to our reputation than the cost of this settlement. This agreement also will allow us to avoid significant litigation expense, and it will help us focus more resources on serving our clients instead of defending these actions. ...

The memo also listed new measures, adopted "to ensure the integrity of our billing process," including the following:
 * A strong and entirely new management team in Los Angeles
 * Improved procedures and oversight for financial reporting
 * A requirement that employees must now personally certify the accuracy of time billed to clients
 * A new agencywide case-based ethics training curriculum
 * The launch of a hotline to allow anonymous reporting of any inappropriate acts
 * The elimination of all political contributions using company funds
 * Engaging independent auditors to test compliance with our policies and procedures by conducting audits on a continuing basis

Appeals
In January 2009, former Fleishman-Hillard executives Doug Dowie and John Stodder appealed their conviction for overbilling the city of Los Angeles. "Stodder contends that prosecutors failed to disclose that Monique Moret, another Fleishman-Hillard employee who testified against him under a grant of immunity, had 'a strong reason' to tell prosecutors what they wanted to hear: protecting her father from possible prosecution in another case." The U.S. attorney's office rejected the claim, stating that prosecutors were unaware of any connection between the cases. In 2006, Stodder and Dowie were sentenced to serve 15 months and 3 1/2 years in prison, respectively, but both were granted bail pending an appeal.

Related SourceWatch articles

 * Douglas R. Dowie
 * Fleishman-Hillard
 * John Stodder
 * Steve Sugarman

External articles
See Fleishman-Hillard & the controversy on overbilling the Los Angeles Department of Water and Power/External Links for an extensive set of links to news articles and other reports.