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San Diego moves to ban contractor at center of gift-giving controversy

The city of San Diego is moving to ban a company involved with a former city employee in a gift-giving scheme from bidding on any city contracts in the future, part of the fallout from an auditor’s report released in April that laid out the years-long fraud.

The company is American Asphalt South, a powerhouse in the business of getting public contracts to apply slurry seal to roads and streets. Since 2015, when a tip into the city’s fraud hotline first alerted officials to suspected fraud by a city employee, AAS has been paid $72.4 million under contracts for working on miles of city streets.

The company was not identified in the auditor’s report, but documents obtained under the Public Records Act show the city formally suspended the company on June 16.

In an eight-page letter on that same day to AAS President Allan Henderson, the city’s then-Chief Operating Officer Kris Michell wrote the company “frequently and actively engaged in dishonest and corrupt behavior” on city contracts.

The move to ban AAS from all future work is known as debarment, and is the most significant step a government can take against a contractor — the equivalent of the death penalty in public contracting. It is also rare, at least in San Diego: the city has not debarred a contractor since 2012, records show.

Henderson and a lawyer for the company strongly denied any wrongdoing. They said investigators from the FBI and the San Diego County District Attorney’s Office looked into the allegations and filed no charges.

“They misconstrued the whole thing,” Henderson said about the city. “We have done everything according to their process. All of that is false accusations.”

For now, AAS remains suspended and can only do work on existing contracts. No date for a hearing on the debarment, where the company can fight the charges, has been set.

Getting banned from city business would cost the company, which substantially increased its share of city business over the past five years — the exact time period when it was under scrutiny by the federal and local prosecutors, neither of which decided to file any charges.

According to tabulations by the city, the company was awarded $4.6 million in city business for fiscal year 2016, which began on July 1, 2015. That amount jumped in the following four years: $19.5 million in 2017, $15.3 million in 2018, $21 million in 2019, and $11.8 million in fiscal year 2020.

The auditor’s report said a city employee received several gifts from AAS and another company, including a trip to a San Francisco 49ers game on Dec. 20, 2014, where AAS paid for the ticket, airfare and hotel. Other gifts were home improvement work at the employee’s residence, tickets to shows in Las Vegas, passes to Sea World and tickets to participate in a golf tournament for several years.

The total amount of gifts came to more than $3,000.

The employee at the heart of the scandal has never been named and was identified only as Employee A in the report.

City records show that on June 6, 2018, employee Walter Gefrom filed amendments to his economic interest disclosure reports, listing gifts he had received years earlier, including a trip to a 49ers game in December 2014. Gefrom originally had reported receiving no gifts each year from 2010 through 2016. The new reports identified gifts, including repair work at his home and tickets to play in a charitable golf tournament, from AAS and a second company in 2012, 2013, 2014 and 2015.

Gefrom no longer works for the city. He retired on June 26, according to the city Personnel Department. He did not respond to numerous messages seeking comment.

City records in addition show that a second city employee, who was not mentioned in the report, also received one unreported gift from AAS.

That employee, Richard E. Matter Jr., admitted getting a game ticket, round-trip airfare and a hotel stay to the same San Francisco 49er football game on Dec. 20, 2014. Matter did not have any oversight or contact with the contractor, however, and at the time did not even work in a department dealing with streets.

He said he had known Henderson for 20 years and when offered a chance to see the 49ers play the San Diego Chargers he did so. Four years later he was promoted to a position that involved dealing with street maintenance and decided he should file an amendment to his economic disclosure forms listing the gifts, he said.

That caught the attention of the city Ethics Commission, which said he should have reported the trip in 2014 because it exceeded the annual cap on reportable gifts of $440. On April 11, 2019, Matter agreed to pay a $500 fine, records show.

The auditor’s report also recommended debarment action be taken against a second, unidentified company by July 1. But city records show no additional debarment or suspensions are pending against any other company.

Michell’s letter provided more details on the alleged misconduct of AAS than was outlined in the auditor’s report. They include:

  • In one instance, an AAS employee and the city employee worked to change the type of slurry material so the company could bid on a project. The originally specified material was a product made by another company, and competitor to AAS. Emails show the city worker and an AAS employee working to alter the contract to allow for other materials so AAS could bid, Michell wrote. The move delayed the bid opening on that project, and apparently others, one month.
  • Michell said the company listed two minority-owned and disadvantaged companies as subcontractors on a project, as required by the city rules. AAS won the project with the low bid, then substituted out the subcontractors and did the work itself in-house, earning $715,000.
  • AAS would submit intentionally low bids on city work with what Michell wrote was the “covert understanding” that the city employee would approve change orders to the contract that increased the final cost.
  • The city also contends that AAS often communicated with the employee on non-city email accounts to avoid scrutiny, and gained inside advice on how to work contracts to get more money. “AAS has shown their willingness to manipulate prices and the contract process,” Michell wrote.

The accusations in the letter rely on excerpts from emails sent between an AAS representative and the city employee. But Scott Dauscher, a lawyer for AAS, said that the letter takes the emails out of context, and city officials who conducted the investigation did not understand the intricacies of city contracting regulations and processes.

“From our position the letter is incomplete, and very misleading and has taken a number of things out of context,” he said. “The city has total control over the contracting process. AAS can’t dictate what product the city decides to use or not use.”

The first complaint against AAS came in to a city fraud hotline on Sept. 30, 2015. City officials have said the case was referred to law enforcement, but no charges were ever filed. Both the FBI and the District Attorney interviewed AAS officials, but passed on filing a case.

“This is not recent, they have been sitting on this for years,” Dauscher said. “Multiple law enforcement agencies
looked at it, and did not pursue charges against anyone.”

The city did not begin conducting its own investigation until March 2019, the auditor said — nearly for full years after the initial hotline report.

By then, AAS had been awarded tens of millions in city business.

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