State to probe alleged MTA audit irregularities.

The state Senate has issued subpoenas summoning the managing partner of an auditing firm and the Metropolitan Transportation Authority's chief internal auditor to answer allegations regarding inflated billings and possible cover-up and kickback arrangements.

Rudy Vargas, managing partner of San Jose-based Vargas & Co., and Fil Martinez of the MTA have been subpoenaed to appear Aug. 8 before a special meeting of the Senate Transportation Committee in Los Angeles, confirmed a top aide to Sen. Tom Hayden, D-Santa Monica. The subpoenas were scheduled to be served on Aug. 4.

However, it appears that most of the allegations and evidence against Vargas have come from a disgruntled former employee of Vargas. Rudy Vargas said this former employee was himself investigated by the Resolution Trust Corp., although apparently no charges were filed. The RTC probe could not be officially confirmed and Vargas would not say what was the subject of the alleged investigation.

The Business Journal has learned that Vargas is alleged to have inflated MTA billings by listing employees who did audit work as having more senior positions in the company than they actually held, thereby justifying reimbursement at a higher rate.

Approximately three years ago, the California Transportation Department found that another auditing company headed by Rudy Vargas had done just that, said Carl Brust, Caltrans' audit manager.

Brust said Vargas' company was one of two firms partnered with Price Waterhouse on a Caltrans contract that overcharged Caltrans in this way and others. Price Waterhouse eventually paid back the money, and the Caltrans employee who managed the contract was fired, Brust said. He added that the employee appealed the firing decision and won, and the disciplinary action was later reduced to a one-year suspension.

Vargas said his company billed Caltrans based on its own employee rating system, rather than the state's system, and that the contract did not specify a rating system. He said he continues to disagree with Price Waterhouse's decision to settle with Caltrans, especially since it meant that "Caltrans retained some money they owed us."

On the MTA contract, Vargas said his company appropriately charges the MTA based on the position of each employee involved and the work those employees perform under the contract.

Joel Valenzuela, Vargas' partner heading the firm's L.A. office, said his company is "very careful to bill accurately" and tries to be "extremely ethical and honest" in its MTA dealings.

Both Valenzuela and Vargas said they were unaware of any ongoing investigations related to their MTA contract.

Other allegations

However, in addition to the upcoming Senate hearing, the Business Journal has learned that law enforcement authorities have been looking into the situation. Sources have told the Business Journal that allegations regarding the Vargas/MTA contract being investigated include:

* an allegation that when Vargas, in the course of auditing other contracts, found irregularities, information was edited out into separate reports or in other ways kept from the MTA board.

In one example, it is alleged that information about a questionable change order was separated out of a report. In another case, an audit was allegedly changed to delete evidence Vargas found of large unauthorized consulting fees paid to an MTA contractor.

Vargas said all the information uncovered by his firm was appropriately reported to the MTA and it is "up to them to resolve it."

* allegations that Vargas may have bribed MTA employees to look the other way on overcharges and/or been bribed by companies it audited to leave information it uncovered out of audit reports.

Vargas officials flatly denied this, and Martinez was out of town last week and could not be reached for comment.

Hayden aide Rocky Rushing said the main purposes of the Tuesday hearing are to "review the fiscal crisis at the MTA, review the construction practices and the (Hollywood Boulevard) sinkhole, and conduct an inquiry into allegations of fiscal mismanagement and potential corruption."

Bill Mabie, chief of staff for Sen. Richard Polanco, D-Los Angeles, said Polanco also hopes to get some answers to questions about why Parsons Dillingham is still doing construction management on MTA contracts, while contractor Shea Kiewit Kenny has been fired.