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UPDATE: Salinas Valley Memorial Hospital Board Members May Be Subject To Criminal Investigation

Salinas Valley Memorial Hospital didn’t overpay its top executives—but its board did make decisions about compensation behind closed doors in violation of California public meetings rules, according to an audit released Thursday by State Auditor Elaine Howle.

In addition, on 11 occasions from 2006 to 2010, SVMH forged relationships with business partners that hospital executives or board members had financial interests in, according to the audit—and now two of those matters may now be taken up by prosecutors.

In one instance, former CEO Sam Downing disclosed in 2008 that he had a personal stake of $50,000 in 1st Capital Bank, where SVMH agreed to deposit up to $1 million in March that year. “We believe this action may have violated California’s Political Reform Act, which states that no public officials at any level of state or local government shall make, participate in making, or in any way attempt to use their official positions to influence governmental decisions in which they have a financial interest,” the audit says.

In the second instance, auditors say the board inappropriately signed over $5.6 million to Rabobank. Board member Harry Wardwell is regional president of Rabobank, and while he abstained from voting in 2008 on a $2.5 million equipment lease from the bank, “The board itself may have violated [Government Code] by entering into an agreement with an entity in which one of its members had a financial interest,” the audit says.

In its written response to Howle published with the audit, the board agrees to follow through with some of the audit’s recommendations, like updating its conflict of interest policy.

But the board denies wrongdoing when it comes to the alleged conflict-of-interest violations regarding the Rabobank transaction. “We believe that if [auditors] had taken the time to seek out more complete information, the [Bureau of State Audits] would have reached an entirely different conclusion,”according to the statement, signed by the board members.

“While we welcome the recommendations of [the Bureau of State Audits], we believe SVMHS and the Board have acted prudently and responsibly at all times, acting within all boundaries of the law and in the best interest of the people of this district,” the board added.

Monterey County Chief Assistant District Attorney Terry Spitz says the auditor sent a memo to the D.A.’s office indicating there might be conflict of interest issues. Roy Diaz, a veteran of the San Bernardino and Los Angeles police departments who joined the District Attorney’s office seven months ago, has been assigned to investigate.

The state Fair Political Practices Commission also has been asked to investigate.

“There are a number of facts not covered in the memo that might be critical. We sat down and analyzed what was in the report to come up with what’s missing,” Spitz says. “If there is a conflict, we’re trying to determine what facts we need.”

The clock is running, though, on any potential charges. Government Code Sec. 1090, the criminal conflict-of-interest law that prevents elected officials from having a stake in any contracts they or their boards vote on, has a four-year statute of limitations that kicks in when the possible conflict occurs, or when the act “could gave been reasonably discovered by someone who should have had incentive to report it,” Spitz says.

“We’re not exactly when the time starts (in this case) because we don’t know what the acts are,” Spitz says.

It was not immediately clear if SVMH or its insurance policy would pay attorneys fees for Downing, Wardwell or any board member involved in the District Attorney’s investigation.

Hospital spokeswoman Adrienne Laurent says attorneys aren’t needed, at least not yet: “At this point there are no attorney fees because there is no need for legal assistance,” Laurent writes. “Any speculation on what ‘might’ happen is just that—speculation.”

Board member Pat Egan, a high school teacher who represents Salinas’ East Side, wasn’t on the board when the alleged violations took place. Related to the Brown Act violations, though, Egan says the board should do better than what the Brown Act requires.

Egan’s term on the board may end in November, if the Department of Justice approves plans to move to board from at large elections to a district election system, as will Nathan Olivas, an ag businessman and the board’s only Latino member.

Both will be prohibited for running for the seat again until 2014.

“When you talk about openness and transparency, the Brown Act sets a minimum,” Egan says. “To say we’re following the Brown Act is saying we’re meeting the very minimum requirements, and I think we should do better than that.”

The audit was launched last April in response to a request from Assemblyman Luis Alejo, D-Watsonville, after SVMH came under intense scrutiny resulting from Downing’s pension package. He collected more than $3 million in retirement payments two years before he retired, and was paid an additional $900,000, all on top of an annual pension of $115,000 a year.

The audit found that while Downing’s pay was at the high end of the compensation spectrum, it was still within the spectrum.

In a written statement, Alejo says the audit signals a cultural shift for the hospital.

“The state auditor’s investigation of Salinas Valley Memorial Hospital finally sheds sunlight on the egregious fiscal practices that have been the norm at the hospital for years,” says Alejo. “The hospital has indicated it will implement all the State Auditor’s recommendations, even those it disagrees with, and many of those changes are already underway.”

The National Union of Healthcare Workers, meanwhile, is calling for Wardwell and fellow board member Jim Gattis to resign. Gattis, a longtime Salinas businessman, is founding director of the California International Air Show, and Wardwell its executive director.

According to the audit, the hospital was a financial sponsor of the air show, received tickets for being a sponsor and distributed the tickets without tracking who received them. The hospital views such sponsorships as advertising; the audit says agencies have to disclose who received tickets and whether the gifting of tickets presents a conflict of interest.

“None of the present or past board members are lawyers, nor is any member of the hospital administration,” Egan says. ”We rely on the advice and counsel of our legal staff, and I trust the Monterey County District Attorney will conduct a thorough but fair investigation. I would hope the actions of the former CEO and board members are seen as having followed the advice of our legal counsel.

View SVMH Board President Jim Gattis' response here.

View the Audit along with SVMH's response to it here.

Follow this story and other news about Memorial Hospital’s redistricting at mcweekly.com.