Charges seen as way to widen probe.

The indictment of a former Fleishman-Hillard executive suggests that federal prosecutors are using a simpler billing fraud case to build the larger and more mutable pay-to-play investigation involving L.A. city officials, former federal prosecutors and law enforcement officials said.

At first glance, the 11 counts of wire fraud brought earlier this month against John Stodder, a former senior vice president at the public relations firm, appear far removed from the year-long federal investigation into allegations that city contracts were won in exchange for political contributions. But some law enforcement officials say that the billing fraud case is only the first concrete piece of the broader pay-to-play investigations.

The connection comes in Fleishman's well-documented ties to the administration of Los Angeles Mayor James Hahn--from campaign contributions to the number of staff members who have moved between the two offices.

By exerting pressure on Fleishman in the billing probe, where a clear-cut paper trail can aid in prosecution, investigators are looking to gain the cooperation of people with direct knowledge of harder-to-prove corruption.

Pay-to-play investigations, particularly those involving political contributions, are among the most difficult public corruption cases to develop, former federal prosecutors said. To prove a corruption case of that type, investigators need testimony about conversations that can be verified by others or were caught on tape through wiretaps.

Getting people to cooperate and provide information about that relationship is critical, said former prosecutors.

"In the vast majority of cases, they can't make that connection in court because if it's done, the agreement is not expressed, it's implied," said William Portanova, a former federal prosecutor and white-collar criminal defense lawyer in Sacramento. "These sophisticated politicians understand that some things are simply not said. They have such plausible deniability, with layers of people and layers of lawyers, that it's a disgraceful hideous mess."

Stepping up pressure

Most people familiar with the overbilling investigation believe prosecutors are likely to indict more Fleishman executives.

Prosecutors allege that Sledder was involved in the inflating of bills to the city's Department of Water & Power by $250,000. In a Jan. 13 statement, Los Angeles County District Attorney Steve Cooley, whose office is working with federal prosecutors in the investigation, hinted at additional charges by calling the recent indictment an "important step" in prosecuting public corruption and saying that other "cases that may arise out of the ongoing investigation."

"I don't see this as potentially isolated fraudulent billing," said City Controller Laura Chick, whose audit of the airport department helped fuel the corruption investigation and whose audit of the Fleishman contract preceded the recent indictment. "This investigation has been a bit like an amoeba. It has changed shape and forms multiple times. It's an active, living process that is not over."

While federal prosecutors are said to be using the overbilling probe to put the heat on those who might have information about city corruption, they failed to get Sledder to agree to a deal to implicate others in the alleged scheme.

The indictment alleges that Stodder and "others known and unknown to the Grand Jury. knowingly and with intend to defraud, devised, participated in, and executed a scheme to defraud Fleishman-Hillard clients." Specifically, prosecutors claim that Sledder directed "co-schemers" to increase billings in order to meet monthly forecasts, the indictment said.

His lawyer, Jan Handzlik, a partner at Howrey Simon Arnold & White LLP, said Stodder maintains his innocence.

"Mr. Stodder is shocked and dismayed that the U.S. Attorney would file these serious charges against a mid-level manager at Fleishman-Hillard, especially one who has been there such a short period of time," he said. "He has always conducted himself in an ethical and above-board fashion and feels the evidence will demonstrate this."

Still, at least one former senior executive and several low-level Fleishman employees have cooperated, said people familiar with the investigation.

Prosecutors are especially interested in Douglas Dowie, former general manager of the firm's L.A. office, who had been an active fundraiser for Hahn, said people familiar with the investigation.

Campaign contributions could become an important part of the process in looking for connections between Fleishman and pay to play.

Since 2000, Fleishman employees, including Stodder and Dowie, have given $31,200 to Hahn's mayoral campaigns. The firm gave $3,725 to Hahn's campaigns, plus $1,000 in breakfast expenses in 2003 for his current campaign. Fleishman's St. Louis office also gave $35,000 to LA United, the Hahn-backed campaign to defeat secession of the San Fernando Valley in 2002.

Making connections

Where the otherwise disparate probes are tied is in audits conducted by Chick.

"This latest (Fleishman) audit of mine, and the latest material, that was turned over to federal and county grand juries was of a different aspect or nature and much more factual and easier to jump on," she said. "I don't think they took the audits and that's how they came up with the case. They did a lot more work than that. I do think, however, that the audits--my audits played a significant role."

In addition to Chick's airport audit, which criticized the department for not documenting reasons for awarding its contracts, federal prosecutors subpoenaed documents from the airport, water and power and harbor departments. They also asked city officials to keep e-mails sent to or from Hahn's office since 2001 and have subpoenaed some city officials, particularly at the Port of Los Angeles.

But documentation rarely proves a pay-to-play case, former prosecutors said. And it's not unusual for prosecutors to switch over to a case with more concrete evidence.

"They'll follow quite a few leads," said Stanley Friedman, a former federal prosecutor and current white-collar criminal defense attorney. "Law enforcement officials could follow one track and a witness says, 'You should take a look at this other thing.' Sometimes, there could be various tentacles of the octopus. They'll follow one lead, and it goes to another area."

Prosecutors also have a more clear-cut case with documents from Fleishman's internal investigation and Chick's audit, released in November. The audit concluded Fleishman over-billed the city by $4.2 million under contracts with the Department of Water & Power and that the agency did work for the mayor for which it billed the DWP. Fleishman, through its own investigation, admitted it cannot document $652,457 in billings.

Billing fraud often becomes a component of a public corruption case. Friedman said. The recent indictment outlines a strong case, too.

For instance, prosecutors' use of quotes means they have several people corroborating an alleged conversation, or they have e-mails or a taped conversation. The indictment said an unnamed "co-schemer" asked Stodder if they could "pad" the DWP bill by $30,000 with "ambiguous counseling for the mayor, (DWP General Manager) Wiggs, (DWP Chief Operating Officer) Salas, etc.," referring to Hahn, former DWP General Manager David Wiggs and former DWP Operating Officer Frank Salas.

Stodder said $30,000 was "more than the system could bear" but that another "co-schemer" said she could "slip through another $15,000 without incurring too much more scrutiny," the indictment said.

"My experience with quotations is that they are very careful," Friedman said of the prosecutors. "They're sure these exact words were stated or written."