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What's the Harman a Big Checchi Account? 

Conflict of interest and the Democrats' wealthy wannabe governors

Wednesday, Mar 25 1998
The rich are very different from you and me, and Jane Harman and Al Checchi are very rich: Depending on day-to-day vagaries of the stock market, Harman is worth an estimated $200 million, and Checchi has a fortune of more than $800 million. Harman and Checchi are different from you and me in another way: Each plans to spend upward of $20 million of that wealth seeking the Democratic nomination for California governor.

But it is not campaign spending, but what the candidates will have after Election Day that is raising conflict-of-interest concerns among some public policy experts.

Recently released financial disclosure forms show that Harman, a congresswoman from Rolling Hills Estates, and Checchi, a former airline executive, both have the kind of large and relatively concentrated holdings that could spawn regular conflict questions in regard to labor and business issues, if either were elected.

Jim Knox, executive director of Common Cause of California, says it's time for these candidates to tell voters how they plan to shield themselves from potential conflicts. "Conflicts are bound to come up on labor issues alone," he says. "There's no evading the effect state legislation will have on a Fortune 500 corporation."

Harman's second husband, Sidney Harman, owns 6.8 percent (or about $55 million) of Harman International Industries Inc., which makes JBL car stereos and Infinity loudspeakers. The firm has worldwide operations, including a 693,000-square-foot facility in Northridge. He also owns $130 million in other blue chip investments, including Minnesota Mining and Manufacturing Co., the Boeing Co., and General Electric Co.

Checchi owns 10.75 percent ($700 million) of Northwest Airlines, which he acquired when he engineered a leveraged buyout of the company in 1989. His disclosure forms also list up to $150 million in other securities, including stock in BankAmerica Corp. (which the state is currently suing for hundreds of millions of dollars), British Petroleum, and all Big Three automakers.

Officeholders with large personal fortunes often use blind trusts to insulate themselves from apparent conflict of interest. The theory: An officeholder can hand control of his finances to a trustee, who is sworn not to say how those finances are managed; the official is, therefore, unable to know whether his actions will increase or decrease his personal fortune.

But the theory may not fit the realities of the Harman and Checchi estates. Larry Sabato, professor of government at the University of Virginia and a widely published campaign-finance expert, argues that blind trusts may be little more than window dressing for public officials who have highly concentrated holdings. Trustees rarely fiddle with the composition of such focused holdings. A governor Harman or Checchi would, therefore, have a pretty good idea of how legislative or executive action might affect his or her net worth.

"Here's a perfect example of how a blind trust is not a panacea," Sabato says.

A governor is intimately involved in decisions that change the playbook for business. A governor proposes, signs, and vetoes legislation. And in California, a governor appoints more than 1,500 high-level state officials who deal with businesses every day.

How would a Harman administration deal with issues touching upon Harman International? The answer would be nothing but conjecture at this moment. But it is clear that state government can affect the fortunes of Harman International.

In January, the company, which has $1.4 billion in annual revenues, was granted a $2.8 million contract by the little-known state Employment Training Panel to train minimum-wage workers. Four of the panel's eight members are appointed by the governor. And on its Web page, the California Trade and Commerce Agency trumpets its 1996 efforts to help Harman International work out an "environmental concern" raised by the state. The governor appoints the heads of both the state trade and environmental agencies.

Kam Kuwata, Harman's campaign manager, would say only that "there will be no conflicts of interest in her administration." He declined to make Harman available for comment.

Nor was Al Checchi commenting, even though he might have even tougher conflict questions to answer. How would a governor Checchi operate the state, while the bulk of his wealth sits in Northwest stock?

Darry Sragow, Checchi's manager, insists that Northwest-related conflicts won't arise that often "because Northwest is not a major factor in California."

That's a strange argument to make for an airline that operates in and out of major California airports, pays fuel and other state taxes, and has two cargo facilities and 17 ticket offices within the state.

Checchi has not announced whether he will put his Northwest shares into a blind trust. (He has decided to place his $150 million in non-Northwest holdings into trust.) The indecision on the Northwest holdings is understandable: Securities and Exchange Commission rules require any transactions in a publicly traded stock by an entity owning more than 5 percent of that stock to be publicly reported. A "blind" trust containing Checchi's Northwest stock could, therefore, be quite transparent.

Kuwata says Harman will put her $15 million share of the family fortune into a blind trust. But he hedges when the subject switches to the candidate's husband, Sidney, saying that lawyers are wrestling with how to handle his $185 million estate, particularly the Harman International stake, which also falls under the SEC's 5-percent reporting rule.

Under the California Constitution, legal experts say the only way a governor can avoid performing a required official duty is to leave the state, allowing the lieutenant governor to assume the acting governorship. Both campaigns promise that their candidates' conflict problems will be ironed out. But neither feels turning the keys of government over to the lieutenant governor every time a conflict pops up is a reasonable solution.

Harman's camp says it will release a conflict-reduction plan before the primary.

Sragow asserts that a governor can act on legislation, even if it will have a significant impact on his financial fortunes. The key to dealing with such situations, he says, is openness. A governor Checchi, Sragow says, would simply "acknowledge the conflict, and make a decision after having acknowledged the conflict."

Checchi's representatives stress that they have to win the primary and general election before the potential for conflict becomes an issue. Actually, the conflict question might already be an issue, if California's major newspapers (the Sacramento Bee excepted) had not largely ignored the point.

"It's curious to me that the press has let this drop," says Susan Rasky, a journalism professor at UC Berkeley and former SF Weekly columnist who writes frequently about state politics. "Why should the campaigns address it, when they don't have to?"

Another issue the candidates apparently don't want to address is the easiest method of avoiding a conflict of interest: selling investments that might cause conflict, and placing the proceeds in nice, conflict-free government bonds.

"You don't just sell 10 percent of Northwest Airlines by waking up one day and deciding you want to do it," harrumphs Sragow.

To which Common Cause's Knox harrumphs right back: "Why not? Didn't he wake up one day and decide he wanted to be governor of California?

About The Author

Philip Dawdy


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