The owner of an engineering firm contracted by Hollister to work on the sewage system—which experienced two 2016 malfunctions resulting in spills—was arrested last week on accusations of felony conflict of interest charges. The owner, John Wallace, also has a public history overseeing agencies where waste spills occurred on his watch, according to a prosecutor’s statement and media reports.
The San Luis Obispo district attorney in late January filed the felony charges against the owner of the Wallace Group following intense public scrutiny over his government position, according to authorities along with stories in CalCoastNews.com and New Times based in San Luis Obispo county. Authorities’ action came years after six Oceano homeowners in 2012 sued Wallace alleging his financial motivations led him to purposely mismanage a sanitation plant, according to the reports.
That history didn’t deter City of Hollister officials from hiring Wallace.
Wallace Group has consulted with Hollister on an array sanitation issues in recent years. His first contract with the City of Hollister was in 2009, City Manager Bill Avera confirmed, but there have been several since then.
His San Luis Obispo-based engineering consulting firm most recently has been working with the City of Hollister, since October, to find an “appropriate alternative” to permanently fix the slide-gate failure that led to two 2016 wastewater spills into the San Benito River. Those spills involved waste from the San Benito Foods tomato cannery.
The Central Coast Regional Water Quality Control Board issued the City of Hollister a notice of violation Jan. 13 related to the two discharges into the San Benito River. The first spill happened on or around July 16, and the second occurred Sept. 6. The water board requires a submission of information, including a technical report, by Feb. 27.
That was while Wallace had been facing legal issues.
On Jan. 24, San Luis Obispo District Attorney Dan Dow filed conflict of interest charges against Wallace after a 10-month investigation, according to CalCoastNews. The publication reported on numerous occasions in recent months about allegations related to conflict of interest laws during Wallace’s time as the former administrator of the South San Luis Obispo County Sanitation District. The district serves customers in Arroyo Grande, Grover Beach and Oceano.
The Wallace Group was the “district engineer” during Wallace’s time as administrator, according to an article from New Times.
Avera reacted to Wallace’s legal issues Friday.
“I always want to be careful about charges and allegations,” Avera said. “Until they’re founded, I take them with a grain of salt.”
Avera said Hollister officials went through a public process and vetted Wallace Group as a consultant to provide work on an as-needed basis.
“Today, we have been happy with the work product they provide to the City of Hollister,” he said.
The Wallace Group is contracted with the city for work that includes staff augmentation, planned checking services, small capital improvement projects (CIP) and larger capital projects that require approval, Hollister Development Services Director Bryan Swanson said Friday.
Swanson couldn’t pinpoint a dollar amount for the Wallace Group costs to the city because it depends on what the fee schedule is for each project, he said.
Avera said he didn’t think the charges would have an effect on the city’s relationship with the firm.
“As long as they meet the needs of the City of Hollister in a professional manner, I think we’ll continue to move forward with our relationship,” Avera said. “If there is something more to the accusations, we’ll evaluate that at the time. Certainly not now.”
Wallace was not available for comment.
Conflict of interest charges
Wallace is facing two felony counts of violating Government Code section 1090 and two misdemeanor counts of violating Government Code section 87100, according to a district attorney press release.
The felony charges accuse Wallace of having financial interest in a contract he made as a public administrator, while the two misdemeanor charges accuse him of using his position to influence a government-related decision where he had financial interest, the release stated.
According to a Jan. 24 district attorney’s press release, the complaint alleged that between July 26, 2011 and Feb. 28, 2013, Wallace “made, participated in, or influenced” government decisions and made contracts in which he had a financial interest. Wallace Group was the district engineer for the sanitation district at the time.
“I have to see how it ties in with what we’re doing,” Councilman Karson Klauer said Friday. “It’s got nothing to do with day-to-day operations from the city perspective. But obviously if someone gets accused, that’s something you want to look into.”
The press release provided brief background information on the charges. On March 4, 2016, the district attorney’s office received a 629-page report from the sanitation district. The report, written by Carl Knudson of Knudson & Associates, alleged Wallace might have committed criminal malfeasance.
Mayor Ignacio Velazquez when reached Friday questioned the staff’s research on Wallace Group.
“I would hope that the people on staff did a background check on people before they hired them,” Velazquez said by phone Friday. “I don’t know what they’ve done over there in those departments. It’ll be interesting to find out.”
Dow, the D.A. in San Luis Obispo, addressed the charges brought against Wallace in the press release.
“The public has the right to expect that their elected and appointed officials and their administrators will carry out their duties in a lawful, ethical and professional manner,” Dow said. “The District Attorney’s Public Integrity Division will thoroughly and fairly review all matters referred to us and will pursue charges such as these whenever appropriate.”
According to an article from New Times, a San Luis Obispo County grand jury challenged Wallace in 2011 for a perceived conflict of interest in his roles as district administrator for the sanitation district and as owner of the Wallace Group.
History with spills
Aside from his legal troubles, Wallace has a public history overseeing systems where waste spills have occurred.
On Dec. 19, 2010, stormwater passed the San Luis Obispo sanitation district’s electrical conduits and into pump motors, according to an article from CalCoastNews dated Jan. 29, 2011. The motors shorted out the Oceano treatment plant’s electrical system, which in turn shut down the intake pumps.
Wallace initially reported the spill to health officials as 110,000 gallons of sewage, but then upped his estimate to $384,000 a few weeks later, the article said.
However, the spill was later determined to be around three million gallons.
An intake pump failure on a second-hand pump caused it, another CalCoastNews article said. Plant staff tried to use an emergency pump to avoid the spill, but that pump failed within minutes of being turned on. As a result, raw sewage went into around 40 Oceano homes.
A state water board investigator found evidence that Wallace had been informed that it wasn’t a good idea to purchase a second-hand pump, but Wallace purchased it anyway, the article stated.
The state water board accused Wallace of not properly maintaining or operating the plant, as well as failing to report incidents to the authorities, the article said.
In early October 2012, water board officials slapped the sanitation district with a $1.1 million fine for “negligent behavior” and a lack of proper maintenance leading up to the 2010 sewage spill, the New Times article stated.
Resignation and homeowner lawsuit
Wallace resigned from the sanitation district on Oct. 15, 2012, according to the New Times article. His firm’s resignation was effective Oct. 31, 2012.
In December 2012, six Oceano homeowners filed a lawsuit against Wallace, according to a CalCoastNews article dated Dec. 31, 2012. The lawsuit claimed his financial motivations led him to purposefully mismanage the sanitation plant and that Wallace chose to disregard public safety in an attempt to build up his personal finances, it stated.
An article from CalCoastNews dated Jan. 18, 2016 stated that multiple business owners have voiced concern that Wallace attempted to use his position as a contracted engineer for the Arroyo Grande Public Works Department.
Wallace’s job there was to review and approve proposed project engineering plans, the article stated. Multiple business owners said Wallace had offered to fast track their projects at a rate above average if his firm, the Wallace Group, was hired as the engineer.
The Knudson Report
On March 4, 2016, the San Luis Obispo District Attorney’s Office received a 629-page report from the sanitation district alleging wrongdoing.
The Knudson & Associates report, dated Jan. 14, stated 30 interviews of individuals were conducted. Those individuals include past and present operators at the Oceano wastewater treatment plant, former and current district board members, former district counsel, former district administrators, district engineers, former chief plant operators, affected citizens of Oceano, Arroyo Grande and Grover Beach, water board officials, and more.
“Our past Management Practices Review revealed that Wallace assumed control over all aspects of the financial affairs of the District including the approval of the Wallace Group invoices that were presented to the District for payment,” the report read. “The trend in billings by the Wallace Group grew steadily from $3,600 and 81 hours per month in 1999 to over 600 hours and $70,000 per month by the end of 2010. During this time the Wallace Group received over $6 million dollars for Administrative Fees, Engineering Fees, and Major Budget Item projects. During this same period of time, there was also a trend where Expenses exceeded Revenue by a substantial amount in every year.”
The report found a parallel between the Wallace Group’s increased billing trend and the growth of major budget item projects for the sanitation district.
“We also noted a trend in the number of Major Budget Item Projects (MBI) beginning with seven (7) MBI projects in 2003 to twenty-eight (28) MBI projects in 2011 where the Wallace Group received fees,” the report read. “There was also an increase in the number of Wallace Group employees charging time to Administrative, Engineering, and MBI Projects to the District.”
The report noted that there was a constant reference in staff reports to “district staff” working on major budget items. The report confirmed through interviews with two former board members that the reference to district staff was actually to the Wallace Group employees.
“This is further confirmed in our analysis of the Wallace Group billings related to the MBI projects,” the report read.
Wallace’s arraignment on the current charges is expected within a couple weeks, according to the D.A. press release.
Government Code 87100: “No public official at any level of state or local government shall make, participate in making or in any way attempt to use his official position to influence a governmental decision in which he knows or has reason to know he has a financial interest.”
To read the press release from the San Luis Obispo D.A. about the Wallace charges: http://bit.ly/2k5sJ5g
To read the related grand jury report: http://bit.ly/2l23xAK
For a CalCoastNews story on a report submitted to the San Luis Obispo sanitation district that recommended potential law enforcement action: http://bit.ly/2kC1GBW
For a CalCoastNews report on the investigation that led to Wallace’s arrest: http://bit.ly/2l6ASqu
For a CalCoastNews story on allegations John Wallace intentionally mismanaged a sewage plant for financial gain: http://bit.ly/2l6ASqu