Authored Articles & Publications Feb 11, 2015

Public Entity May Seek to Recover All Proceeds Derived From a Tainted Contract

By Gary W. Schons

Private contractors who provide financial benefits to government employees of agencies with whom they contract will face forfeiture of all proceeds and profits derived from such tainted contracts, an appellate court recently decided.

In the precedent-setting decision handed down Jan. 27 by the 2nd District Court of Appeal in Los Angeles, the court found that a government entity could sue under Government Code section 1090 and collect all proceeds derived by private counter-parties from a contract tainted by a conflict of interest, even though some of those proceeds were not from public funds of the government entity.

The case, Los Angeles Memorial Coliseum Commission v. Insomniac, Inc. et al., stems from a complex scheme carried out by two employees of the Los Angeles Memorial Coliseum Commission. Patrick Lynch, the general manager, and Todd DeStefano, an event coordinator, doled out labor-related bribes and funneled kickbacks to themselves in connection with event contracts entered into with Insomnia, Inc. and Go Ventures, Inc., which, over more than two decades, put on some 37 music festivals with more than a million attendees at the Coliseum. Both Lynch and DeStefano personally profited from the contracts. Additionally, Lynch and DeStefano oversaw nearly $1 million in cash payments to a union shop steward of a theatrical stage employees union to use as wage payments in connection with the events. This saved the promotion companies employee-related costs, but exposed the Commission to federal payroll and state withholding tax liability.

Both Lynch and DeStefano participated in the making of the various contracts with Insomniac and Go Ventures and had a financial interest in those contracts because of the money they received from the fraudulent scheme. The promotion companies received payments directly and indirectly under the contract from public funds of the Commission and from millions of dollars in revenue and profits derived from the tainted contracts. Additionally, the promotion companies received substantial public finds through their use of the Coliseum property, generated revenue and profits from the music festivals and saved costs through cash wage payments, thereby deriving excess net proceeds from public funds generated by the events. The promotion companies paid kickbacks of nearly $2 million to DeStefano for allowing them to enter in these contracts and as a quid pro quo for their receipt of public funds.

The Coliseum Commission brought suit against the promotion companies alleging various causes of action, including one under Government Code section 1090, seeking to have the contracts declared void and for recovery of all proceeds from those contracts, including all proceeds and profits flowing from the contracts, whether or not public funds.

The court found the contracts were tainted by the financial interests of Lynch and DeStefano, and were void. The court then held that recovery under section 1090 is not limited in scope to transactions in which a private party contractor receives public funds directly from the public entity. Instead, the public entity was entitled to recover any and all benefits the private contractors derived from the contracts, including enhanced profits resulting from cost savings and lost revenues to the public entity.

Note: This article originally appeared on the now-defunct BBKnowledge blog, where Best Best & Krieger authors shared their knowledge on emerging issues in public agency law.

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