The March 27 sentencing of Sam Bankman-Fried to 25 years in prison for his role in a multi-billion-dollar fraud scheme brings closure to years of high living off the backs of his investors in his online crypto trading platform FTX.
Fraudsters like Bankman-Fried, Elizabeth Holmes of Theranos, Bernie Madoff, Jeff Skilling of ENRON, and Bernie Ebbers of WorldCom, are particularly insidious as they use the imprimatur of corporate legitimacy that comes from educational and social pedigrees, prominent but often clueless supporters, and the success of early investors to advance their schemes. Their collective take is in the hundreds of billions of dollars and the white-collar crime and enforcement divisions of the FBI and SEC have been busy.
Auditors and some county controllers in California have been no less busy, but in their investigations, it isn’t investors in risky and fraudulent enterprises who are the victims. It is the people of California.
Recently identified fraud schemes around state include:
- Shangri-La Industries, a Project Homekey contractor, who has received $114 million in state funds to repurpose motels and hotels for homeless housing, is being sued by the State of California for allegedly misspending $40 million in state funds. Shangri-La says the fraud was allegedly perpetrated by their CFO Cody Holmes to finance a lavish lifestyle that included luxury homes, private jet travel, and expensive gifts.
- The San Francisco Chronicle reports that six non-profit charities tasked with providing services are currently under investigation for misuse of San Francisco public funds. Altogether San Francisco spends nearly $1 billion per year to contract with 600 non-profit charities for social services. This includes $25 million in payments to nonprofits that were “revoked, suspended, or were delinquent” according to the San Francisco Standard.
- City and County building officials in San Francisco and Los Angeles have been investigated and convicted for allegedly operating “pay for play” schemes wherein real estate developers and builders paid cash, travel, and gifts to have their projects pushed through California’s seemingly byzantine approval process.
- In San Francisco former Public Works Director Mohammed Nuru is serving seven years in prison for allegedly soliciting hundreds of thousands in brides from city vendors. His alleged co-conspirator Nick Bovis is also serving a two-year prison sentence.
- Bernard Curran, a SF building official is serving a one year sentence for allegedly accepting bribes.
- San Francisco Public Utilities Commission Chairperson Harlan Kelly was sentenced to four years in federal prison on March 18 for allegedly accepting a “stream of bribes” bribes from developers for over six years.
- In Los Angeles, former Deputy Mayor Raymond Chan was convicted on March 27 for allegedly accepting bribes as part of a larger bribery scheme led by former Los Angeles Councilmember Jose Huizar, who is currently serving a 13 year prison sentence. This case comes after a long series of fraud, corruption, sexual misconduct, and civil rights investigations involving dozens of city officials and councilpersons and even the mayor.
- In Antioch and Pittsburgh, ten current and former police officers were charged in a wide-ranging corruption scandal that included falsifying police reports, civil rights violations, sales of steroids, and paying to have others complete their online college degrees in order to obtain pay raises. Several have already pleaded guilty.
These and other abuses of power, too numerous to include here, point to a fundamental danger to democracy that takes me back to my California State and Local Government class at Sacramento State. My professor was Dr. Donald Seney, a curmudgeon on a good day, who required that we read Alexis de Tocqueville’s Democracy in America. The class and I chafed at so old a volume being used to teach a modern government class.
Yet today I see that Seney was right – in it de Tocqueville wrote, “Municipal institutions constitute the strength of free nations. Town meetings are to liberty what primary schools are to science; they bring it within people’s reach, they teach men how to use it and enjoy it.”
It seems California’s broken system is providing unscrupulous individuals the ability to engage in crime, corruption, and malfeasance, often relying upon the belief in government legitimacy to advance their schemes.
Until last year, California anti-corruption statutes only applied to public officials elected to statewide office. However, with the passage of SB 1439 in 2022, so called “pay to play” laws have been extended to include elected local government officials.
The larger question is whether local jurisdictions and the California Attorney General’s office have the capacity to investigate what seems to be a growing trend.
“Pay to play” represents just a small slice of the corruption pie. Without effective oversight of public funds, the opportunities for theft and corruption will continue to be a problem, whether it be a non-profit in San Francisco or a building official in Los Angeles. So far, most of the criminal prosecutions have been in the Federal Courts.
I recently wrote that Prop 47 enabled the theft of billions in shoplifting, fence operations, and stolen cars. Those thieves needn’t look much farther than city hall for their role models.
Steve Smith is a senior fellow in urban studies at the Pacific Research Institute.
