Rail: Pork Barrel Land Scam

DEC. 12, 2010


When the bond initiative to build a peripheral canal fell apart this past June it might also have signaled the end of the line for the $45 billion high-speed train proposal. This is another project pegged for funding by issuing state bonds.

What both projects have in common, despite their likely failures in the same years, 1982 and 2010, is the fact that both were classic pieces of low-ball political processes that benefited inside investors, primarily companies connected to Richard C. Blum, Sen. Dianne Feinstein’s husband. On some of these projects, the benefit was best measured in the stock price increases of the corporations earmarked to build them.

On the high-speed train project, investigations by the state auditors and a peer review committee headed by Will Kempton, the former director of Caltrans, are under way. High-speed train litigation is also in progress at the Sacramento Superior Court. The court won’t hear the case until after the first of the year.

The legal action was brought against the project and its lead agency, the California High-Speed Rail Authority (CHSRA). California taxpayers have already spent close to $1 billion for CHSRA operation and its many studies focused on the routing of the train, on its ridership and marketing studies and business plans. The suits are focused on the ridership studies.

The plaintiffs in the court action are the cities of Atherton, Palo Alto and Menlo Park, joined by the Planning and Conservation League, the California Rail Foundation and a group called Transdef which filed amicus briefs along with them . PCL’s executive director Gary Patton says the train project has a bad smell to it. “This whole thing is a scam and a shakedown of California taxpayers. The California High-Speed Rail Authority is running a smoke-and-mirrors show with their studies that we don‘t believe.”

California State Treasurer Bill Lockyer is skeptical whether financial investors think the high-speed train bonds are marketable.

California voters approved the sale of the $10 billion rail bond money in 2008, but whether the bonds will fly is another question entirely. Lockyer would have to sell the bonds, but he’s not convinced he can. Joe De Anda, the press secretary for Lockyer, made the following comment: “His (Lockyer’s) sense from speaking to Wall Street investors is that there is some hesitancy in selling these bonds. Investors would look very seriously at this project before they’d make that kind of investment.’

And so the high-speed train creaks along on its rocky roadbed. The relationships between the legislative backers and the financial beneficiaries of these multibillion-dollar transportation projects like the high-speed train and the Bay Bridge illustrate how political processes can be used to produce profits.

These profit-producing political processes began in 1982 with the first high-speed train project. They continued with the new Bay Bridge process from 1997-98, proceed to the present high-speed train process and conclude with the now postponed peripheral canal project that Gov.-elect Jerry Brown has inherited for a 2012 election.

Some of the corporations involved in these projects have been earmarked with legislation carried by politicians who have a financial interest in these projects. The corporations on the high-speed train are Lockheed-Martin and URS.

URS was owned by Richard C. Blum until 2005. In 1998 when the Bay Bridge process got going, URS was the eighth largest engineering and design corporation in the world. By the time Blum sold URS in 2005, it was Number One.

Feinstein served on a number of different committees that approved contracts for companies owned by Blum. Sometimes she carried federal legislation that earmarked these corporations, including URS on the high-speed train and the San Francisco Airport expansion of 2000. URS won the airport expansion contract in a design competition that was posted on the very day the “competition” closed.

The expansion didn’t go forward, but URS experienced a significant stock price increase during the time the legislation went through. URS stock went from $12 a share to $19 a share in three months time.

URS was earmarked for the high-speed rail project by enabling federal legislation backed by Feinstein in 2001. Another corporation earmarked for high-speed trains was Lockheed-Martin, the owners of Transrapid International, a firm that builds magnetic levitation, or maglev high-speed trains.

URS also builds maglevs. The first such maglev contract URS received was for a $2.3 billion maglev line between downtown Shanghai and the Shanghai Airport. Shanghai is San Francisco’s sister city and was designated as such in 1985 when Feinstein was mayor of San Francisco.

Blum has an interest in a number of corporations that do business in China, including Northwest Airlines, Texas Pacific, Newbridge Capital and the Shanghai-Pacific Group. The new high-speed train CHSRA is promoting was supposed to connect the state’s main population centers of Los Angeles, San Francisco and Sacramento and cost $45 billion. It was recently downsized to a mini starter line that would run between Fresno and Bakersfield.

The first high-speed train bill and the Bay Bridge bill (AB3647 from 1982 and SB80 from 1997) were both primarily authored by Mehdi Morshed. He also was one of the principal bill drafters of SB1856 (2002) with former Treasurer Phil Angelides. After promoting the bill when he was running for governor in 2004, Angelides was forced to recuse himself from any further promotion because of a conflict of interest. Until recently, Morshed was the executive director of CHSRA. Angelides was recently heading the federal investigation of Goldman-Sachs.

The high-speed train from 1982 was scheduled to run between San Diego and Los Angeles. It was never built and Californians forgot about bullet trains for a few years.

But in the 1980s the high-speed train process got started again. In 1996, then-Sen. Quentin Kopp joined with fellow Sen. Jim Costa of Fresno to co-author SB1420.This bill revived the dormant California High-Speed Rail Authority. In 1998, Congress authorized the Transportation Empowerment Act for the 21st Century, known by its acronym, the TEA 21 Act. The table was set for a new high-speed train stock trading bonanza.

“The fortunes of these companies (like URS) and the market’s reflection of them tend to be driven by trends, like the Kobe earthquake or the TEA-21 Transportation package that Congress passed that tends to affect the market,” said Chris Hussey, an analyst with Goldman-Sachs. Hussey specializes in engineering stocks like URS.

The new high-speed rail project got up to full speed in 2001, when U.S. Sens. Jim Jeffords and Frank Lautenberg authored S1900, a bill that allowed Amtrak to sell $10 billion in bonds for high-speed rail projects. It envisioned the project as a private/public partnership.

Additional federal legislation was passed to provide $950 million to implement maglev trains in a number of pilot programs, including one in California being led by URS. On the maglev part of the package, the federal legislation named Transrapid International as the company who would provide the maglev trains. Transrapid had been acquired by Lockheed Martin in November 1999.

After a trip to Germany in the fall of 1998, where the maglev was shown off, some members of the CHSRA began lobbying for maglev. But Dean Dumphy, California secretary of Business, Transportation and Housing in the Pete Wilson administration, thought the promoters of maglev were a bit too zealous. In a Dec. 9, 1998 letter, he wrote to Michael Tannenbaum of CHSRA: “Neither the Governor, any part of his administration, nor I support the California application that commits the state to build a multibillion-dollar high-speed train with technology that is not in revenue service and has no record of reliability.” Dunphy went on to say that the application would “benefit one vendor — Transrapid International,” and that he found “such underhanded and meddling behavior reprehensible.”

The letter might have slowed the high-speed train process but it didn’t stop it. Gov. Arnold Schwarzenegger was a keen high-speed train advocate, as is Jerry Brown. Schwarzenegger pushed for the high-speed train project at the same meeting in 2009 when he laid out his ambitious plan for the water bond initiative to build a new peripheral canal. Jerry Brown signed the first high-speed train bill in 1982. Attempts to contact Mehdi Morshed to ask him about his work on these transportation spot bills and the connections to stock price increases of the corporations in line for the contracts proved unsuccessful.

Train activist Richard Tolmach wrote a story in the Sacramento Bees Sunday Forum section on Jan. 14, 2004 titled “Playing Fast and Loose with Fast Trains Here.” Tolmach ripped the new high-speed rail plan to shreds. “Critics say the authority’s work during the past five years has been tainted by a uniquely Sacramento combination of campaign contributions, sole-source contracting and questionable back-room technical decisions,” Tolmach wrote. “The result is that the California High Speed Rail project now looks like a combination of a pork barrel and a land scam… Some observers even suggest that the route planning process is being abused by project insiders to manipulate investor expectations.”

Whatever the outcome of the new high-speed train project, the money was already made in the stock market. Between Oct. 29, 2001 and April 4, 2002, insiders on the board of directors at URS and Lockheed Martin made $203,416,298 from non-general issue penny stocks they cashed out in insider trades. On one trade alone, on Jan. 4, 2002, Richard Blum sold more than 5 million shares of URS stock and made $20,778,320.

Some of the financial analysts who reviewed the data relating to these transportation projects believe they indicate a pump-and-dump scheme at work.

The late Kord Hennessy, a stockbroker who specialized in construction industry stocks reviewed a file on URS. The analysis he provided had to do with the Bay Bridge and a series of URS stock issuances that took place in the springs of 1997 and 1998, “It’s pretty clear what’s happening, and the correlation between the legislation and URS stock prices is pretty revealing. When the (Bay Bridge) bill (SB60) is introduced, they’re chugging along with 70,000 shares traded a day and level around $7 a share. Then the bill is amended and the prices and volumes go up. They’re dumping, look you can see it,” said Hennessy, directing me to the insider index. “This is a classic pump-and-dump scenario. And we’re talking about Richard Blum here, right? This isn’t peanuts; this is wealth and how it’s really created that we’re seeing at work here.”

Repeated calls and emails were made or sent to Feinstein seeking comment. Feinstein’s communication director Gil Duran, Jerry Brown’s press spokesman when he was mayor of Oakland, didn’t return this reporter’s request for a comment on high-speed trains. Duran and Sen. Feinstein were both informed what the contents of this story would include.

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