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Audit: Hospital district leaders had financial ties to contractors

March 8, 2012 |  6:21 pm

A Monterey County public hospital district paid $21 million over the last five years to firms in which its chief executive and board members held financial interests, according to a state audit released Thursday.

The audit was launched in response to a series of articles in The Times last year that highlighted the huge supplemental pension and severance received by hospital's former chief executive, which totaled nearly $5 million.

The audit found that the Salinas Valley Memorial Healthcare System regularly did business with firms that the board and top officials had financial stakes in — in some cases in apparent violation of state conflict-of-interest laws.

The report stated that Salinas Valley lacks sufficient safeguards against making decisions that violate conflict-of-interest laws, and that the district therefore can’t guarantee “that its board members and executives do not experience personal financial gain from its transactions with businesses.”

The audit found 11 instances between 2006 and 2010 in which board members had reported economic ties -- including stocks, salaries and other types of payments -- to vendors in which the district did business.

Not all the cases represented violations of conflict-of-interest rules, state auditors said, but in two cases they found officials may have broken the law.

One case involved former CEO Samuel Downing, who had $50,000 in investments with 1st Capital Bank, an institution Salinas Valley and the executive agreed to deposit $1 million into.

In another case, the hospital made $5.6 million in disbursements to financial services provider Rabobank, where a board member, Harry Wardwell, serves as a regional president and receives a salary of more than $100,000, according to his most recent statement of economic interest.

State auditors referred both cases to the Monterey County district attorney’s office for further investigation.

Officials also recommended that Salinas Valley have an independent investigator review the hospital’s business relationships with companies with economic ties to board members and executives.

“This sheds light on some of the most egregious fiscal practices I’ve ever seen, and which were certainly the norm at the hospital for many years,” said Assemblyman Luis Alejo (D-Watsonville), who called for the audit.

Wardwell also has served as executive director of the California International Airshow, to which the hospital has given more than $100,000 in recent years.

Hospital officials said they would implement recommendations made by the state auditors.

The hospital already has discontinued the controversial, supplemental retirement plan, according to spokeswoman Adrienne Laurent.

And, in their response to the auditor's report, board members said they would take steps to update policies on executive compensation, contracting decisions and community grants.

But the hospital strongly defended specific contracting decisions that the auditors called into question.

“The audit report irresponsibly alleges serious violations of conflict-of-interest rules without conducting a thorough consideration of the laws and how they might apply,” the board members wrote in a response to the state’s findings.

In the case of the board member who worked at Rabobank, the hospital insisted he had “at most….a remote” interest in the deal, making him exempt from conflict-of-interest laws.

And when Downing signed off on the 2008 agreement with a bank he held stock in, the district said he was simply carrying out “ministerial duties delegated to him.”

The hospital district also criticized auditors listing for nine other cases in which it paid money to entities with which its board or executives had a financial interest, saying there was no evidence of impropriety in those instances.

John Borsos, a vice president for the National Union of Healthcare Workers, which represents many of the hospital’s employees, called the audit “just a scathing report” and a validation of concerns going back the better part of two years.

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-- Sam Allen and Hector Becerra

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