Orange Suspects It’s Been Used by City Recycler

ORANGE —  It was the kind of deal that would make any entrepreneur salivate: An outright gift of a new $6.5-million business to be paid for by the citizens of Orange. A guaranteed 10% profit margin on the business’ annual income. And an exclusive 10-year contract to process and sell the city’s recyclable waste.

That was how the city of Orange launched the privately owned Orange Resource Recovery Systems Inc. into the orbit of California’s $2-billion-a-year recycling industry, city records show.

That same company is now the focus of a criminal investigation by three Orange Police Department detectives looking full time into the suspected misappropriation of recycling revenue, 90% of which belong, under the terms of the company’s contract, in the city’s coffers.

Several city officials, who spoke on the condition that they not be identified, said police and auditors believe the amount of misappropriated money is substantial--$1 million or more.

While police investigators pore over company documents seized with search warrants two weeks ago from the company’s Glassell Street offices, top city officials are now burrowing through old city files trying to determine why an earlier council--without competitive bidding and with little public discussion--decided in 1994 to bankroll a private venture that city records say is now worth at least $9.5 million.

Although some Orange officials were put on notice in October 1995 that something was suspiciously wrong with its recycling partner’s financial records, the city, for reasons that remain unclear, didn’t swing into action until early this year.

In March, the city manager hired one of the nation’s Big Six accounting firms to conduct a “fraud audit” after the recycling firm’s auditor complained in writing, for the second year in a row, that he had been unable to verify how much the company had earned selling the plastic, aluminum, paper and other recyclable materials it had harvested from the city’s garbage.

Orange police were alerted to the possibility of theft only in April, and the current City Council got its first closed-door briefing on the problem only two weeks ago.

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Initially citing an exception granted by the California Public Records Act, the city attorney, David A. De Berry, declined on June 5 to make public the results of the fraud audit conducted by Arthur Andersen LLP and paid for with taxpayer money, saying that it was incomplete and existed only in draft form. Eight days later, he said it was exempt from disclosure under the Evidence Code because it was “attorney work product” in litigation.

But in a civil court action two weeks ago, when the city won control over a bank account previously controlled by members of the Hambarian family, the owners of the recycling firm, De Berry wrote: “It appears at this stage . . . that salvage revenues belonging to the city may have been misappropriated for personal use by one or more members of the Hambarian family.”

Through their attorney, Z. Harry Astor, the Hambarians declined to comment. “The Hambarians are obviously upset that their good reputation has been maligned,” Astor said.

The city’s probe, which was first made public June 2 in a cryptic city news release, has left some City Hall watchers scratching their heads, wondering just what their elected officials were thinking when the deal was approved in 1994.

“What the heck are they doing with our money?” asked Corrine Schreck, a longtime resident who ran unsuccessfully for the City Council in the last election. “It’s just cuckoo.”

Although city residents will have already paid for the company once--when a $6.5-million start-up loan is paid off by garbage bill surcharges in the year 2003--one term of the contract stipulates that the city would have to buy it again at the current “fair market value” if the city wants another operator.

The mayor, Joanne Coontz, and the other four City Council members have met twice in secret sessions to discuss the matter, but have said very little because the city attorney and police chief told them that Deputy Dist. Atty. Guy Ormes felt public statements could hamper the investigation.

As details of the generous recycling arrangement have come to light, city official have pointed out that Orange residents pay among the lowest rates in the county for garbage collection, $11.48 a month. Only Irvine, at $10.56, is cheaper.

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The affair has brought the harsh glare of public scrutiny on the prominent Orange family of Sam and Alyce Hambarian and their three sons--Michael, Donald and Jeffery. The Hambarians, who have collected the city’s trash for 40 years, own and operate the recycling company as well as its corporate parent.

Their lengthy business relationship with the city has made the Hambarians wealthy. Between their trash hauling company, Orange Disposal Inc., valued at $5.3 million, and the recycling concern, the family members are paid combined annual

salaries totaling $1.2 million, city records show.

As for the suspected misappropriations, their attorney says, “Sam and Alyce Hambarian will see to it that the city will not lose one cent.”

The recycling deal was hatched in 1993, when city officials began studying how to comply with California’s Integrated Waste Management Act. Under that law, municipalities statewide had been effectively ordered to cut in half the volume of trash they dumped in the state’s bulging landfills, and the only way to achieve that goal was through recycling.

City officials kicked around several ideas, including building and owning a recycling center, before deciding to give the business to the Hambarians, said Frank V. Page, the Orange public works director at the time.

No competitive bids were solicited, Page acknowledged, although his staff contacted other Orange County trash haulers to determine their interest and what they might charge.

“There were a lot of downsides to owning a facility, and at the time, it just seemed we didn’t really want to be a part of it,” said Page, who retired in 1994.

So Page and his staff recommended working with the Hambarians. The family had land, long experience with refuse collection, and was willing to share the proceeds from selling recycled material.

“The deal looked OK,” Page said. “We just saw it as another form of public-private partnership.”

Reconstructing how the deal came about has proven difficult for investigators and present city officials who, for the most part, inherited the arrangement.

Four top officials in Orange at the time of the negotiations have since died, including former mayor Gene Beyer and former city manager David F. Dixon, who died two weeks after he left his job in 1995. City treasurer Mark Weiss also died in 1995.

The highest-ranking staff member with the closest working knowledge of the deal is Phillip R. Pierce, who is currently on a monthlong vacation and unavailable for comment.

According to Page, Pierce did most of the work that led the council in 1993 to approve a memorandum of understanding, and one year later, the 10-year contract. The council also slapped a $2.25 surcharge on every garbage bill in 1994 to retire the $6.5-million loan the Hambarians obtained from Wells Fargo Bank to build and equip the recycling company.

Because of the agreement to share recycling proceeds, the contract required the company to submit regular financial statements to the city from an independent auditor.

In October 1995, Steven V. Nakada, a Laguna Niguel certified public accountant hired by the Hambarians to audit their financial statements, dropped a bombshell in his first annual report covering operations from July 1, 1994, through June 30, 1995.

“Because of inadequacies in the company’s records for salvage revenues,” Nakada wrote, “we were unable to obtain sufficient evidential matter to form an opinion regarding the amount of salvage revenues on the income statement.”

Specifically, Nakada could not vouch for the accuracy of the $1.9 million the company reported earning from the sale of salvaged material during that budget year.

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In a follow-up report on April 1, 1996, Nakada revealed that some of the processors who bought salvage material from Orange wouldn’t provide lists of checks or other information about their payments to the Hambarians, even after they had been offered “compensation and assistance” in retrieving their own documents.

Nor could Nakada prepare an accurate 12-month picture of company revenue. He was instructed by the company’s directors, the Hambarians, to “annualize” what figures he did have. In other words, they wanted him to use his best guesstimate, based on the fragmentary information he had. No such estimate appears in his April 1996 report, but Nakada added that he had discovered that deposits had been made into bank accounts of “affiliated companies,” as well as “unknown bank accounts.”

Unable to prepare to the financial statements for the company’s next fiscal year, ended June 30, 1996, Nakada at first asked city officials for extra time to comply. City officials say they granted three extensions.

Still unable to obtain the records he needed to prepare his reports, Nakada finally resigned as the company’s auditor this past February without issuing an annual report for 1995-96.

Citing the pending criminal investigation, Nakada declined to comment.

Nakada’s resignation, said City Atty. De Berry, was a “red flag” to the city staff that something might be amiss in the recycling operation. Shortly thereafter, the city hired Arthur Andersen to look for fraud.

Among other things, the auditors have helped officials understand just how lucrative the recycling arrangement has been for the Hambarians. In addition to the guaranteed pretax profit of 10% of revenue and the salaries, the family bills the company for $319,000 in rent and another $329,000 for hauling fees.

De Berry said city officials had recently disallowed the hauling charge.

When police searched both the Hambarian trash hauling company and the recycling concern, De Berry said, the Hambarians were “very cooperative.” He said officials were told that Jeffery Hambarian, who apparently ran the recycling company, had recently been removed from his position.

Jeffery Hambarian, who lives in a $1.9-million house in the exclusive Peralta Hills section of Anaheim, could not be reached for comment.

Council members said they were first informed of the city’s suspicions that funds may have been misappropriated when they were ushered into an obscure conference room in City Hall on June 3 for the first closed meeting about the matter.

“It was all very hush-hush,” said one, who said that after the meeting concluded, notes taken by council members were confiscated.

The meeting began, the council member continued, “with [City Manager David L.] Rudat saying, ‘We’re going to hear some serious allegations,’ and De Berry telling us not to say anything in public.”

Then Police Chief John R. Robertson and Chief of Detectives Ed Tunstall briefed the council for nearly two hours.

“It was more than I could comprehend,” said a city official who attended the meeting but asked not to be identified. He said Coontz and Councilman Mike Spurgeon, both of whom were on the council when the contract for the recycling facility was approved, appeared to be clearly rattled. He made no observations about Mark Murphy, who was also a council member at the time.

“They looked like they got hit by a car,” he continued. “They were shocked. . . . They were not saying much during the presentation.”

Coontz later defended the “public-private partnership” with the Hambarians, noting, “We do have some of the lowest trash rates in the county.”

And the mayor acknowledged that she has frequently attended the Hambarians’ annual Christmas dinner, at which the family clears the trucks out of a building at Orange Disposal and hauls in racks of lamb to barbecue over oil drums. But Coontz insists she always pays $5 for the party.

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The Hambarians have contributed to her campaign fund. In her first run for the independently elected mayor’s seat in 1994, Coontz reported receiving $500 from Hambarian Properties, $125 from Michael Hambarian, $450 from Sam Hambarian and $400 from Orange Disposal Service Inc. (The city has a $500 contribution limit.)

“That has nothing to do with it as far as I’m concerned,” she said of the campaign donations. “Anybody can contribute to any political candidate. I spend more of my time with people who don’t give me anything than people who do.”

Councilmen Murphy and Spurgeon have also received campaign contributions from the Hambarians.

In 1994, Murphy accepted $150 from Sam Hambarian, $340 from Orange Disposal, $150 from Michael Hambarian and another $200 from Sam and Alyce Hambarian jointly. Other financial disclosure forms also show donations of $100 from Michael Hambarian and $100 from Orange Disposal.

Spurgeon also received donations last year from a family member, $475 from Michael Hambarian.

Councilman Mike Alvarez, who won his first election in 1996 after serving as a planning commissioner, said he made a campaign issue of the subsidies given to the Hambarians.

But he said he was still “shocked” by the disclosures. “I didn’t want to see Mike Hambarian hurt over this. I’ve known him all my life. He’s always been such a wonderful friend.”

Dan Slater, who was not on the council at the time the deal was approved, said, “Quite frankly, there has been a very close relationship between elected officials and owners of this company for many years.”

Said Carole Walters, president of the Orange Taxpayers Assn. and a veteran City Hall watchdog, “Some of us tried to stop them from giving them the money to put up a building on their property. But they wouldn’t listen to the people.”