Where Crime Pays

Is the DA's Office bungling the biggest pollution case in Bay Area history?

Laden with copper, lead, and nickel, the sand pile stood 6 feet tall and covered the equivalent of one football field on the shoreline across the cove north of Candlestick Park. A legacy of sandblasting at the Hunters Point Naval Shipyard, the toxic mound poisoned the ground with heavy metals and likely contaminated the bay. But rather than pay the money necessary to properly dispose of the waste in a special landfill — as state law required — Triple A Machine Shop Inc., a San Francisco-based company that ran the shipyard for 11 years under a lease from the U.S. Navy, decided to abandon it in 1987 when the firm closed and moved to Contra Costa County. Triple A did the same with untold thousands of gallons of bilge water it discharged onto the ground at Hunters Point. The water contained petroleum waste and polychlorinated biphenyls (PCBs), a known carcinogen. Paint residues and chunks of brittle asbestos were also left behind.

Tipped to the pollution by a company whistle-blower, the S.F. district attorney at the time, Arlo Smith, filed a civil lawsuit against Triple A. The suit sought to block Triple A from selling off assets during its 1987 move, and to exact civil fines and cleanup costs. Two years later, DA Smith brought a separate criminal action, charging Triple A with five felony counts for illegal disposal of hazardous waste.

The two-pronged prosecution proved prescient. On Aug. 3, 1992, a jury returned guilty verdicts on all five felony charges, and the judge hit Triple A with a record $9.2 million in criminal fines. Although the state appeal court would reduce the penalty in 1995 to a paltry $115,000, the criminal conviction set the company up for far heavier penalties in the still-pending civil case — perhaps $25 million in fines. With the conviction, state and federal authorities also were dealt a stronger hand were they to separately pursue the company for a piece of the $300 million price tag for cleaning up pollutants left by both it and the Navy around the entire shipyard.

Today, however, Triple A is benefiting from one contingency Smith didn't anticipate: his re-election defeat.

In a major shift playing out entirely behind closed doors, the new DA, Terence Hallinan, is on the verge of settling the case, according to knowledgeable sources, and on terms highly favorable to Triple A. Worse, the undisclosed deal amounts to a retreat from the goal of punishing Triple A in any meaningful way and almost certainly will release it and its insurance carriers from ever being pursued by the state — or the city for that matter — for Triple A's share of the cleanup.

A sure sign of a blown opportunity came last month when a key prosecutorial consultant walked away in disgust. “All the details of my communication with the district attorney are privileged,” says Steve Castleman, who retired from the S.F. DA's Office after gaining the criminal conviction of Triple A in 1992. “But, suffice to say, I was no longer comfortable with his [Hallinan's] approach to the case.”

Conversely, Marc Topel, who is Triple A's defense counsel, sounds euphoric. Although he refuses to talk specifics, Topel confirms the existence of a tentative deal: “It is something we are extremely pleased about.”

Hallinan's Triple A play is tethered to a century of historical, legal, and community context surrounding the Hunters Point shipyard.

Jutting into the bay at the southeast edge of San Francisco, the 493-acre shipyard was a private enterprise from the turn of the century until the early 1940s. California ceded control to the Navy during World War II to service the Pacific fleet, which had been decimated at Pearl Harbor by Japanese bombers on Dec. 7, 1941. In 1976, the Navy in turn leased the facility to Triple A to repair Navy and private vessels for the next 11 years.

Today, two of three shipyard dry-docks at Hunters Point are idle. A colony of artists, a smattering of machinists and metal salvage operators, and a skateboard-parts manufacturer occupy various shipyard structures. Under a pact signed after the shipyard joined the national priorities list of Superfund sites in 1989, a five-phase cleanup is under way.

Funded by the Navy, and monitored by the California Environmental Protection Agency's Department of Toxic Substances Control, the cleanup — soil and water testing, plus equipment, tank, and earth removal — is guided by S.F.'s land-use plans for the shipyard. Those plans call for residential, commercial, and recreational development of the land. The Navy estimates it could take $300 million to make the entire shipyard property safe for development, with the polluted shoreline (where Triple A dumped material)accounting for half that total. As for the community context, no segment of the city has more of a stake in the cleanup — and getting the polluters to pay up — than the poor, disenfranchised residents of the adjacent Bayview-Hunters Point community.

In an interview last week, Hallinan said settling the case against Triple A would prove defensible if a deal nets S.F. enough money. He said nothing would necessarily be lost, because the U.S. Justice Department would maintain jurisdiction to sue Triple A in federal court to collect on its share of the cleanup.

“I've got to fulfill my commitment to the [city] budget,” said Hallinan, who has pledged to make white-collar prosecution pay as a source of revenue for local government. “In my opinion, we are going to come out with the most we are able to.”

Cashing in and passing the buck to the feds might make fiscal sense to Hallinan, but it raises doubts about prosecutorial savvy at the DA's Office.

Under the state hazardous waste laws, Triple A could have faced a penalty of $25,000 for each day of dumping and each day since it left the substances on the ground — if the Hallinan administration had pressed the civil suit to trial. [page]

According to Castleman, the departed consultant to the DA's Office, the 1992 criminal conviction of Triple A should have served as an arrow in the DA's quiver. Because the company was already proven guilty of dumping wastes, Castleman argues the DA only needed to prove a date upon which the dumping began. Then Triple A would be liable in the civil case for each day thereafter, more than 1,000 days. “The import of the criminal conviction is that Triple A is precluded from disputing liability, because we've already proved that beyond a reasonable doubt,” says Castleman.

By this logic, little more was left to do in the suit against Triple A than hand the trial judge a calendar and ask him or her for a count of the days that Triple A had violated the hazardous waste disposal law.

Not surprisingly, Topel, Triple A's defense lawyer, takes a wildly different view of his client's circumstance — and, shedding any pretense of an adversarial posture, sings the praises of the Hallinan regime along the way: “His office has handled the case like first-class lawyers. It is a difficult case for the new DA — made worse by the legal errors of the past.”

The foremost flub, according to Topel, was former DA Smith's two-pronged prosecution. Because the old DA prosecuted Triple A criminally, says Topel, the bedrock constitutional rule of “double jeopardy” precludes S.F. prosecutors from then seeking to punish the company a second time — with civil penalties — for the same conduct. “They were extremely arrogant,” Topel says of old DA Smith, and of Castleman. “And, they created a monster.”

Experienced white-collar prosecutors elsewhere are loathe to comment on what transpires on another DA's watch. But on the general principle at issue, many say it would not be so easy for Triple A to wriggle off the hook. For instance, Alameda County's No. 2 prosecutor, Rich Michaels, says double jeopardy would not apply, if the civil suit aims to hold Triple A liable for acts not punished under the criminal case. “That's a distinction with a difference,” Michaels says.

It's also a distinction Castleman had no success impressing upon Hallinan and company. Says Hallinan: “We've considered it and tried to balance it.” In the end, however, it sounds as if the new DA just wasn't interested in the advice of an old hand from the vanquished Smith administration. “He [Castleman] had an approach, the Arlo Smith approach,” Hallinan says matter-of-factly. “He got frustrated, and he withdrew.”

Opinion will differ on whether the Hallinan administration is bent on snatching defeat from the jaws of victory in the Triple A case. But if driving a hard bargain was its goal, the DA's Office picked the wrong place to make a stand. Rather than argue the case before a Superior Court judge, the Hallinan administration agreed to send the case to a private, for-profit mediation and arbitration service in S.F. called JAMS/Endispute. Services like JAMS/Endispute charge steep hourly rates and measure success by the number of cases they've settled. Nothing more. Nothing less.

The wellspring of this unconventional move by Hallinan was the legal experience — and lack of experience — among the DA's new top white-collar prosecutors.

David Millstein, 43, was head of white-collar prosecutions when he steered the case into mediation in March. (Subsequently promoted to Hallinan's No. 2 spot, he resigned last week.) Though he once served 14 months as an assistant S.F. district attorney, Millstein is no prosecutor, and never has held himself out as such. A business litigator, he has generally prepared and settled cases based on the insurance coverage held by the parties involved.

Likewise, Debra Hayes, whom Millstein had recruited to the DA's Office, had no training as a prosecutor when she took on the case this spring. Indeed, the closest Hayes, 37, had ever gotten to criminal prosecution was a job application she submitted in 1985 to the Alameda County District Attorney's Office. Reputed to be bright and tough, Hayes nevertheless was largely an employment-law attorney.

On the other side, Topel, the Triple A lawyer, was a tested white-collar defender who had lived and breathed the case for years.

So, on Aug. 7, when retired Judge Daniel Weinstein, of JAMS/Endispute, convened a mediation session to hear the DA and Topel present their versions of the case, the die was already cast. Any chance for an 11th-hour change of heart by the DA was probably erased when Hayes bypassed Castleman for a greenhorn S.F. assistant district attorney, Paul Kelly, to accompany her instead. (During a second session, Oct. 2, Hayes represented the DA on her own.)

Topel says it is premature to criticize the outcome, noting that the deal has yet to become final. “You're not dealing with a lightweight,” Topel notes, referring to Weinstein.

The point is well taken. Before Weinstein joined JAMS/Endispute in 1989, he served as a trial court judge from 1978 to 1984, and on temporary assignment on the state court of appeal and California Supreme Court. Before becoming a judge, he was the chief assistant to DA Joe Freitas — whom, by the way, former DA Smith beat to get elected to office in 1979. And, in its marketing literature, JAMS/Endispute identifies Weinstein as one of the group's “most successful mediators” with “a settlement rate of more than 95 percent.”

For his part, Weinstein bristles at the idea that taking the case to him was unwise. Or that Hallinan's office somehow cut a bad deal for the people of California, which the office represents. “It sounds good, but it ain't right,” says Weinstein.

Echoing Triple A's defense counsel, Weinstein says the DA had “huge problems” associated “with retrying the case,” though he wouldn't specify them. “Overall,” says the mediator, “it was a very good use of public funds” to mediate the case, adding it saved S.F. taxpayers “a lot.”

That may be true. But it assumes that an S.F. trial judge wouldn't have brokered an equivalent deal; or that Judge Weinstein's $500 hourly bill (divided by the two sides) doesn't end up costing the DA more than it would have to prepare for a public trial. In any event, the big saver is probably Triple A. [page]

In 1987, when Triple A closed shop at Hunters Point, it chose to leave its hazardous wastes behind. If the $115,000 fine from the criminal case plus what it pays to settle the civil suit is less than what it would have cost to dispose of wastes legally, it will have come out ahead. And, there's a fair chance Hallinan is about to assure just such an outcome.

Cut to Aug. 7 and JAMS/Endispute's Embarcadero offices. A third interest was represented at the mediator's table: Triple A's insurance carriers, led by Lloyds of London.

By virtue of Lloyds' participation — and the fact that Weinstein has substantial experience in environmental insurance litigation — it is all but certain that Hallinan has given up on going after Triple A's assets to punish the crime. Instead, he's willing to settle under insurance policies Triple A carried. Hallinan, in essence, is saying that what is important isn't retribution for illegal conduct, but leveraging the defendant's insurance coverage.

It is a fundamental point of departure from the old Smith regime. “We weren't particularly interested in dealing with insurance companies,” says Castleman, “because they did not do the dumping. Triple A did the dumping, knowingly and intentionally.” Topel's experiences confirm the point: “I have made at least five attempts to settle over the years, including a letter I sent to Arlo right before the election. He never responded.”

To Hallinan, the change of course is much ado about nothing, provided he shakes plenty of money out of the insurance carriers (a statutory formula divides payments from defendants between local and state officials). Says the new DA: “A mediation doesn't necessarily mean less. It is one way of trying a case. I agree it was appropriate under the circumstances.” He adds: “If it's a fair figure, let's close this case and move along.”

In point of fact, however, the DA is likely to come away with only a fraction of the $25 million in fines sought under the civil suit against Triple A — and at a potentially high price.

Here's why: Though insurance companies generally are not required to cover illegal acts, Lloyds might agree to cover Triple A, if it comes away with something of value — a release from liability on state and local cleanup costs. (The DA doesn't have the authority to issue a liability release on costs borne by the federal government.)

Under this probable scenario, Triple A itself may be called on to pay no more than its policy deductible, an unknown figure, but one which might be responsible for Topel's euphoria. Only the feds would still be free to pursue any of the $300 million for full shipyard cleanup.

White-collar prosecution — of environmental crime in particular — is one area in which Hallinan has sought to appear more vigorous than his predecessor, four-term DA Smith. Now, three different assistant district attorneys are assigned to handle environmental prosecutions, instead of one under Smith. With greater emphasis also being applied by police, more cases are indeed being filed, though none of them on the scale of the prosecution of Triple A.

That's no slight. Due to the decline of heavy industry in S.F., hazardous disposal violations as heinous as Triple A's are unlikely to be matched in the future.

“Obviously, it [environmental crime] is something we take very seriously,” says John Shanley, spokesman for the DA's Office. “And, I think it has been a higher priority with us than past administrations.”

Nonetheless, a settlement with Triple A releasing it and its insurers from liability for any future state or local cleanup costs could be a spot on Hallinan's record — particularly if the company is not forced to pay its own civil fines. It won't look any better if he passed on chances to punish Triple A at trial because of his political antipathy for DA Smith's administration.

Hallinan notes accurately that Triple A could still be on the federal hook for its share of the costs paid by the Navy, thus far the vast majority of outlays on planning, carrying out, and monitoring the cleanup. However, he should be mindful that Navy spending, in fact, is taxpayer funded.

And S.F. voters can rightly ask if their DA is wise merely to hope that federal prosecutors will pursue an environmental criminal that he could have nailed himself.

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