Thursday, December 19, 2002 Former auditor Hobbs sues city   By Jason Gewirtz, Staff writer Courts: Says he was fired mainly for efforts to settle discrepancies in L.B. cell phone taxes. LONG BEACH A former deputy city auditor says he was wrongfully fired from his 21-year career for challenging discrepancies in the city's cell phone use tax and disputing the city's legal opinions on a variety of audits he performed. In a lawsuit filed in Los Angeles Superior Court, former employee Earl Hobbs claims that conclusions on several audits and reports he prepared were derailed or overlooked by the city. City officials, who approved a search of Hobbs' home after his termination, say Hobbs was fired because he used his access to confidential city records to benefit himself in a private utility tax lawsuit he filed against the city of Los Angeles. They say his actions violated the ethical standards of the auditing profession. "Everything that's happened to him has been a direct result of actions he chose to take,' City Auditor Gary Burroughs said. "Here's a guy that, while he's an intelligent guy, apparently lacks some basic common sense.' According to the warrant authorizing the search of his Belmont Heights apartment, the 54-year-old Hobbs is under investigation for embezzlement and tax code violations for documents he used in relation to the Los Angeles lawsuit. He has not been charged with any crime. Hobbs, who was fired in June, said he sued Long Beach to raise awareness of the utility tax discrepancy for cell phone customers in the city. "This isn't about documents,' he said. "This is about Gary Burroughs and (City Attorney) Bob Shannon know there's a major problem with the utility tax for the people of Long Beach and for the city.' In the lawsuit over his firing, filed against Burroughs and the city of Los Angeles as well as the city of Long Beach, Hobbs seeks unspecified damages. At the heart of Hobbs' suit is the city's tax on cell phone use. The tax is one component of the city's 7 percent utility tax, assessed on all electric, gas, water and phone use. Of all the utilities subject to the tax, cell phones have been perhaps the most complicated from the start. According to his lawsuit, Hobbs was assigned in 1999 to investigate how different cell phone companies were applying the city's tax to their customers. His investigation revealed that in Long Beach, as in other cities, different companies apply the tax in different ways. While some companies tax an entire bill, others tax basic charges but not air time. Still others include a portion of air time when assessing the tax. The result is that different cell phone customers pay different amounts of tax, even though their monthly plans cost the same. Hobbs said the city is owed more than $1 million per year because of the discrepancy and could be eligible for more if it goes after back taxes. The city has known about the issue for at least a decade, said Assistant City Auditor J.C. Squires, who supervised Hobbs. He said the city has been pursuing a solution through a task force established by the League of California Cities in 2000. That task force has been negotiating with cell phone companies on behalf of dozens of cities to establish a uniform taxing policy. Those discussions are continuing today, Squires said. L.A. lawsuit Hobbs, who began working for the city in 1981, received a law degree in 1989. Frustrated with the pace of the league's efforts to solve the cell phone tax issue, he filed a private lawsuit on behalf of a Los Angeles resident challenging a similar tax issue. "I decided, fine, I'll do what I have to do,' he said. In that lawsuit, filed in Los Angeles Superior Court in April, Hobbs claimed Verizon Wireless and AT&T Wireless charged Los Angeles' 10 percent tax differently than other companies. The result was an unfair taxing structure for customers, and millions in potentially lost revenue for the city, the suit claimed. The suit was dismissed earlier this month, but Hobbs has filed an appeal in the case. When Long Beach officials learned Hobbs had filed the suit, they asked him to stop his involvement in the case, Hobbs said. Hobbs said he had a right to pursue the case as a private citizen. But Burroughs said that since Hobbs was working on similar issues for the city, which was negotiating a deal with Los Angeles, other cities and the utilities, Hobbs should have avoided making waves of his own. "He was taking action that professionally was damaging to this office and this city,' Burroughs said. But Hobbs said he filed the Los Angeles lawsuit because that city knew its utility tax was not being applied fairly. "Where's the conflict?' he said. "I'm trying to enforce the law.' In his suit challenging his firing, Hobbs alleges that Los Angeles Mayor James Hahn called Long Beach Mayor Beverly O'Neill to complain about the cell phone tax suit. On June 19, Hobbs' firing suit says, Burroughs told Hobbs he was being terminated because of the complaints O'Neill received. Burroughs, however, says the conversation about O'Neill never took place. O'Neill also said she couldn't remember receiving such a call from Hahn. Other issues While Hobbs' termination issues focus on the utility tax, his lawsuit against Long Beach alleges a series of roadblocks he says he faced with other audits. In spring 2001, Hobbs says, he was asked to look into issues surrounding the rent owed the city by Queen's Seaport Development Inc., the group that runs the city-owned Queen Mary. After looking at financial information, Hobbs concluded that the company had shorted the city $800,000. The shortfall, he said, came from rent credits the Queen Mary was receiving from the city for work Hobbs said should not have been credited. Under the Queen Mary's lease, the company was allowed credit against rent for improvements it did to the surrounding property but not for work on the ship itself. Hobbs' lawsuit alleges that in 2000 the company received credits for such work anyway. Hobbs' suit alleges that Burroughs told Hobbs he was looking for "wiggle room' in the lease. Burroughs said he could not recall such a conversation. "My belief at the time, based on what I know about the Queen Mary lease, and I think I know more than anyone about the Queen Mary lease, was that Earl was off base,' he said. City Attorney Shannon said his office initially had concerns about the rent issue but that he was satisfied there was nothing inappropriate or illegal with the payments made. Last month, the City Council approved an amendment to the Queen Mary lease that allows various rent credits for future projects performed on the ship. The change was attributed to work the operators want to do in preparation for a new Carnival Cruise terminal. Hobbs' suit also alleges that: An audit he performed revealed that $1 out of every $7 of parking revenue at the Long Beach Convention Center was being diverted into city promotions and advertising, in violation of the Tidelands Trust. Hobbs says he was reprimanded and discouraged from conducting further inquiries on the topic. City officials said at the time that the $1 in question was being used for promotions in the tidelands area and was therefore legitimate. Shannon this week called the issue a legal one that should be addressed by the city attorney's office, not the auditor; An audit Hobbs performed on an environmental impact report for the city's delayed sports park project, on contaminated land near Signal Hill, concluded that Long Beach was not holding current or former oil field operators liable for cleanup costs. Hobbs says Burroughs terminated the investigation on the issue. Shannon says this issue, too, was a legal question inappropriate for the auditor's office to address; An audit Hobbs performed on the city's gas franchise with Southern California Gas Co. revealed that the company owed the city $7 million in taxes. In response, the city warned Hobbs not to investigate the issue further. Shannon counters that the city is in litigation with the utility, and the amount owed to the city is in dispute; An audit Hobbs performed on a city dispute with Earth Tech, an L.B. engineering firm, revealed a claim the company was making for $5 million was unwarranted. The company had a contract with the city to sell items from the former Long Beach Naval Shipyard. The equipment was appraised at $38 million, but only $9 million was raised. The company sued the city, saying it was owed another $5 million under the agreement because city actions had devalued the property. The city countersued, and the matter is still before the courts. Hobbs' suit claims that before any lawsuits were filed over the Earth Tech contract, city officials asked him whether the auditor's office would drop its inquiry if the city found a way to pay Earth Tech. Hobbs says he replied that if Earth Tech were paid off, it might eventually come out in the Press- Telegram, which had already interviewed him on the topic. This week, Shannon said he does not understand Hobbs' complaint because the city has sued the company. "I've taken a very aggressive opinion on Earth Tech that we don't owe them any money,' he said. House searched Although Hobbs was fired in June, his termination was originally set for Sept. 30, more than a month after improved pension benefits for city employees were to take effect. For Hobbs, who made $125,000 per year, the new pension plan would mean the difference between his collecting $4,500 per month and $6,500 per month. But when city officials saw an amended complaint in his Los Angeles lawsuit, filed in August, they terminated him the week before the improved pension plan was to begin. Hobbs' amended complaint contained quotes from various city utility tax documents, which Hobbs had obtained during his time as a city auditor. Hobbs said the documents were copies, but city officials said they were confidential nonetheless. Armed with a warrant, police searched Hobbs' Belmont Heights apartment and his 8th floor City Hall office on Sept. 18 to get the copies back. According to the search warrant, city officials believed Hobbs had violated two tax codes by being in possession of the audit-related documents. Also, if the value of the documents is determined to exceed $400, his possession could be considered a felony embezzlement, City Prosecutor Tom Reeves said. According to the warrant, police took eight folders with miscellaneous documents and two city identification cards from Hobbs' apartment. From his City Hall office, they took two computers, a personal appointment book and other miscellaneous city documents. Police Det. Gary DePhillippo with the fraud/forgery detail confirmed that Hobbs is under investigation.