Wells Fargo’s hopes that a $142 million June

The New York Times broke the story after obtaining an internal audit that showed more than 800,000 people who took out vehicle loans from the San Francisco-based banking giant “were charged for auto insurance they did not need, and some of them are still paying for it … . The expense of the unneeded insurance, which covered collision damage, pushed roughly 274,000 Wells Fargo customers into delinquency and resulted in almost 25,000 wrongful vehicle repossessions.”

Wells Fargo executives interviewed by the Times vowed to fully reimburse anyone adversely affected by its policy, but another class-action lawsuit with a massive payout seems likely. While bank executives suggested they deserved credit for having “self-identified” the problem, the size of the scandal seems likely to have a far-reaching effect on a company that has gone from being a stock analyst darling for its considerable long-term growth to a symbol of a banking industry seen as villainous by many Americans for its role in the economic meltdown that began in 2007.

In the previous scandal, besides the class-action payout, the company was fined $185 million by federal regulators in September 2016. CEO John Stumpf abruptly resigned soon afterward, voluntarily giving up $41 million in bonuses he was scheduled to receive.

Wells Fargo initially appeared to have shrugged off the scandal. While its stock price fell under $44 after Stumpf left, it topped $59 in March. Its market value remained well north of $250 billion, its profits were strong and it had a significant presence in all 50 states, employing nearly 270,000 workers.

Of late, however, Wall Street has soured on the company – even before the new scandal emerged. On July 21, CNBC reported a respected analyst predicted a more than 30 percent drop in Wells Fargo’s stock price, then in the $55 range. It plunged 2.6 percent Friday after the Times report came out and is now under $53.

Were wrong workers punished for first scandal?

The new scandal is likely to not only prompt regulators to take close looks at every aspect of Wells Fargo’s business but to re-examine how they dealt with the previous scandal.

Wells Fargo’s CEO may have left, but the company was partially successful in deflecting the idea that the setting up of unwanted new accounts by employees eager to meet quotas was the fault of the employees – not those who set the aggressive quotas. The company fired more than 5,000 mostly low-level workers who had set up the accounts, but the vast majority of managers were unaffected.

This was even though the initial Los Angeles Times investigation in 2013 that broke the scandal depicted the later-fired workers as doing the bidding of their mid-level bosses, who were facing pressure from their top-level bosses – suggesting the wrong people were paying the price for the scandal. The auto loan scandal only adds to the narrative that Wells Fargo’s ethical problems begin from the top down.

The New York Times report on the new scandal said the internal report only looked at “insurance policies sold to Wells customers from January 2012 through July 2016.”

This is likely to prompt calls for regulators and journalists to look back far earlier than 2012. Perhaps the biggest complicating factor in the $142 million settlement of the unwanted accounts scandal was the evidence offered by some plaintiffs’ attorneys that the scandal began in 2002, not 2011. They argued that the high-range estimate of  unwanted accounts created by Wells Fargo agents was far too low and should have been 3.5 million, not 2.1 million.

Mr. Issa goes (back) to Washington

Good morning. Happy Tuesday. The Associated Press projected winners in two of the last and most high-profile races in the state: Rep. Darrell Issa, R-Vista, and Josh Newman, a Democrat who was elected to the state Senate.

Issa was sent back to Washington for his ninth term after squeaking through what was easily the toughest race of his career. He been a constant thorn in the side of the Obama administration in recent years as chair of the House Oversight and Government Reform Committee — a position he recently rotated out of — and had just a 2,348-vote lead as of Monday afternoon. 

Newman’s name is likely not too familiar to most readers, having no prior political career. But his victory over Republican Assemblywoman Ling Ling Chang officially gives Democrats a two-thirds supermajority in the Legislature. In other words, free rein.

Here’s more on what the supermajority means — and doesn’t mean. 

In other news:

• “The presidential campaign focused some attention on the long-simmering debate over policing and the appropriate uses of force, but as is typical with national campaigns, the nuances got lost amid ideologically charged soundbites such as ‘law and order’ and ‘Black Lives Matter.’ Some advocates for police reform worry about what a new Trump administration will mean for these discussions given the president-elect’s expectedly different approach toward the matter than President Obama’s Department of Justice. But others argue the election will send reform back to where it really belongs: at the local level.” CalWatchdog has more. 

• “Critics of Wells Fargo’s scandal are raising questions about why the California Public Employees’ Retirement System — which for three decades has demanded that corporations it invests in must operate under a clear ethical code — didn’t question illicit banking practices by the San Francisco-based banking giant that were first revealed in 2013 and which resulted in huge federal sanctions in September.” CalWatchdog has more. 

• “Silicon Valley entrepreneur Steve Spinner hopes the end is near for one of Washington’s most abhorred rituals: the daily rounds of fundraising calls by elected officials trying to fill the coffers for their next campaign. He thinks it can happen with an algorithm that improves targeting, and reduces time candidates spend casting around for cash.” Politico has more. 

• The Sacramento Bee explains “How California became a blue state.”

Legislature:

• Gone till December. 

Gov. Brown:

• No public events announced. 

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New follower: @BinduMedia

Critics of Wells Fargo’s scandal are raising questions about why the California Public Employees’ Retirement System — which for three decades has demanded that corporations it invests in must operate under a clear ethical code — didn’t question illicit banking practices by the San Francisco-based banking giant that were first revealed in 2013 and which resulted in huge federal sanctions in September.

Wells Fargo has been one of CalPERS’ largest holdings in recent years. According to Bloomberg financial records, CalPERS’ $950 million-plus stake in the bank is its fourth biggest holding after Apple, ExxonMobil and Microsoft.

A member of the CalPERS board — state Treasurer John Chiang — says it’s unfair to expect CalPERS to be a corporate watchdog in addition to all its other duties. While the Wells Fargo stake may seem large, it amounts to one-third of 1 percent of CalPERS’ $289 billion portfolio.

In a San Francisco Chronicle report earlier this month, CalPERS was also defended on the grounds that many investigators and watchdogs also didn’t do their due diligence.

“It’s something that should have been caught. … It surprises me the fraud went on as long as it did,” former Citigroup risk officer Clifford Rossi told the newspaper.

The Wells Fargo scandal involved bank employees establishing up to 2 million new accounts and credit cards in the name of customers. The employees faced quotas on how many new sign-ups from existing account holders they were expected to get and had financial incentives to create accounts without customers’ knowledge.

Wells Fargo CEO John Stumpf resigned this fall after federal regulators fined the company $185 million in September, forfeiting $41 million in bonuses he stood to make. The company also said that more than 5,000 employees who created the unwanted accounts had been fired.

CalPERS began demanding best practices in 1980s

Despite the strong defense of CalPERS offered by Chiang and finance industry figures, others say that criticism is inevitable because of CalPERS’ long history of demanding corporate accountability.

Beginning in the 1980s, CalPERS began compiling a list of “target” companies with issues of concern — ranging from acting in ways that didn’t benefit the environment or were abusive to stockholder interests, such as overpaying CEOs or board members, or not taking shareholder and regulatory complaints with the seriousness they deserved.

This has led to national coverage of CalPERS, the largest U.S. government pension fund.

In 2004, The New York Times noted an internal power struggle over how hard CalPERS should go after such entities as Disney, Safeway, the New York Stock Exchange and Kohlberg Kravis Roberts. It led to the ouster of CalPERS board President Sean Harrigan. A union official, Harrigan was particularly aggressive about going after what he saw as extreme pay and poor oversight by corporate boards. But he also raised eyebrows when urging CalPERS to criticize hospital pricing tactics and getting CalPERS to support a health insurance reform ballot initiative that failed.

At the time, this was depicted as an anti-oversight coup by business-friendly board appointments made by Republican Gov. Arnold Schwarzenegger.

But that claim was belied by the board’s actions in 2006 when it and other groups sued UnitedHealth Corp. over its decision to sweeten the compensation of CEO William McGuire by allowing him to backdate his stock options to a more favorable point in time.

In 2011 and 2012, CalPERS lobbied and eventually succeeded in getting Apple’s board to be more responsive and open to shareholders’ concerns about corporate governance, such as presenting comprehensive decisions about stock categories and dividends as yes-or-no proposals. It has remained critical of Apple in the years since.

In 2013, CalPERS led the successful push to force Ray Lane out as chairman of struggling Hewlett-Packard.

But there is no evidence that CalPERS followed up on the 2013 Los Angeles Times’ story that broke open the Wells Fargo scandal. The September announcement that federal regulators had fined the bank $185 million had far more information about the extent of the scandal, but its basic parameters were established by the original Times story. It noted that senior Wells Fargo officials had been aware for years of many accounts being opened without authorization but had done little to address the fraud, which came in an era in which the financial services firm’s stock price was soaring.

There is also no documentation that CalPERS, formally or informally, complained about Stumpf’s compensation — which was $19.3 million in 2015 — until Chiang’s fall critique.

Voters choose to speed up death penalty cases

Good morning! You may not have noticed it last week, but a measure to speed up executions in California is now projected to pass. 

Proposition 66, which aims to cap death-sentence appeals at five years, stands at 51.1 percent of the vote. While such a slim margin of victory would usually suggest the electorate is divided, a competing measure to end the death penalty altogether was rejected by 53.4 percent of voters (ballots are still being counted, so totals may change).

“California voters not only want to keep the death penalty intact but they want it to work as intended,” said Anne Marie Schubert, Sacramento County district attorney, who called Prop. 66’s lead “insurmountable.”

Prop. 66 speeds up the appeals process by expanding the number of courts and attorneys able to hear and try death penalty appeals to meet a five-year cap on the appeals process that currently takes decades. A court order could be sought when cases drag on. 

CalWatchdog has more.

In other news:

• “2011 pension fixes in L.A., S.F. not working,” writes CalWatchdog. 

• “7 myths about homelessness in Los Angeles,” by LA Weekly. 

• “Rep. Barbara Lee, a Democrat from Oakland who met with Fidel Castro on numerous occasions, says she will continue to push for normalizing relations between Cuba and the U.S. in the aftermath of Castro’s death,” reports Politico.

• “Donald Trump alleges widespread voter fraud in California. There’s no evidence to back it up,” reports the Los Angeles Times. 

Legislature:

• Gone till December, but the Senate Banking and Financial Institutions Committee will hold a hearing on Wells Fargo’s sales and management practices at 9:30 a.m.

Gov. Brown:

• Hosting the 85th Annual Capitol Christmas Tree Lighting Ceremony today at 4:30 p.m. on the west steps of the Capitol.

Story ideas: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New followers: @MaxChina3

Attorney General Kamala Harris has joined the growing pile-on against Wells Fargo’s improper business dealings.

“California’s attorney general is conducting a criminal investigation into whether employees at San Francisco-based Wells Fargo bank stole customers’ identities in the sales practices scandal that rocked the bank and cost its CEO his job, newly released documents show,” the Associated Press reported. “A search warrant and affidavit released [Oct. 19] by the state Department of Justice show that agents sought evidence related to allegations that bank employees created up to 2 million bank and credit card accounts without customers’ approval in order to meet sales goals.”

The move reinforced both Harris’s bid for a national reputation as the presumptive successor to outgoing Sen. Barbara Boxer and the nationwide push for prosecution around Wells Fargo’s practices. “Harris, a Democrat who is running for U.S. Senate, joins a growing list of law enforcement officials looking into the company since Sept. 8, when regulators disclosed in a settlement that the bank fired 5,300 employees for allegedly opening more than 2 million deposit or credit card accounts since 2011 without customers’ knowledge or consent,” as the San Francisco Chronicle noted.

“Harris’ office is asking the San Francisco bank to provide wide-ranging customer account and other information to see whether it violated Sections 529 and 530.5 of the California penal code. The former makes it a crime to falsely impersonate someone, and the latter makes it a crime to use personal identifying information of another person for any unlawful purpose, including to obtain or attempt to obtain credit, goods, services, real property or medical information without that person’s consent. Convictions under both sections are punishable by a fine and/or imprisonment up to one year.” 

From bad to worse

With Harris as an adversary, Wells Fargo has faced a snowballing problem well in excess of a public relations challenge. “The investigation by Attorney General Kamala Harris’ office indicates Wells Fargo’s woes have moved beyond a tarnished image, consumer outrage and lost business opportunities, analysts said,” according to the San Jose Mercury News. “Ohio suspended Wells Fargo from doing business with state agencies and excluded the bank from participating in any state bond offerings. The announcement followed similar moves from California and Illinois and the cities of Seattle and Chicago.”

In fact, over less than two months, “15 investigations have been launched into Wells’ phony accounts scandal, including probes by the Justice Department, the Labor Department and the Office of the Comptroller of the Currency,” Kate Berry noted at Bank Investment Consultant. “Fitch Ratings downgraded Wells’ credit rating to negative, the Better Business Bureau cut off its accreditation, and more states suspended the bank from municipal bond underwriting. Top leaders of the bank’s hometown of San Francisco even went so far as to ask if the OCC should revoke Wells’ 160-year-old bank charter.”

California’s probe has already laid bare unflattering and worrisome customer stories about the way Wells Fargo did business. “State investigators interviewed four Southern California residents as part of their probe into the bank’s practices,” the Mercury News added. “Among the customers’ statements: Wells Fargo employees opened a $10,000 line of credit without permission for one person; set up multiple life insurance policies for another; and established unauthorized checking accounts for children. A 74-year-old woman said the bank opened multiple credit or debit card accounts in her name without her knowledge.”

Signaling reform

The bank has made moves in recent days to change the internal process that appears to have encouraged or allowed abuses. “Wells Fargo is changing how it refers to performance meetings for some wealth and investment management employees following the bank’s settlement last month over its retail sales practices,” the Charlotte Observer reported, citing internal communications obtained by the paper. “The communications suggest Wells’ efforts to overhaul its sales process might extend beyond its retail banking operations.”

Very brief debate recap

Good morning. Quite the debate last night. Democrats have largely united behind Hillary Clinton, but many Republicans are still wrestling with what to do, writes the Orange County Register. Fortunately for everyone, the election will be over soon. 

And while many media outlets are focused on GOP nominee Donald Trump’s refusal to say he’d support the results of the election (assuming he loses, since he’d likely have no problem supporting the results if he wins), Joe Scarborough, the co-host of MSNBC’s Morning Joe, had an interesting take on political hypocrisy and the parsing of words.

MSNBC has more.

And that’s enough about the presidential race. Back in California, the state government’s largest union, SEIU Local 1000, is “edging closer to a strike” over the size of its raise, reports The Sacramento Bee.

California’s attorney general, Kamala Harris, who is running for U.S. Senate, has “launched a criminal probe into allegations of criminal identity theft linked to the Wells Fargo unauthorized accounts scandal, the latest sign the embattled bank’s troubles are far from over.” The San Jose Mercury News has more. 

Observers say a new attack ad from Congressman David Valadao, the perpetually vulnerable Hanford Republican, suggests the race is close. The Bakersfield Californian has more. 

Notice anything strange about campaigns against ballot measures proposing an increase in the tobacco tax and an extension of a tax on the highest incomes? Business groups aren’t fighting very hard. The Los Angeles Times explains why. 

Legislature:

• Gone till December.

Gov. Brown: 

• No public events announced, but we do know he left the state. That is all. 

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New follower: @JeffGorell

John Stumpf abruptly resigned Wednesday as CEO and chairman of the scandal-torn San Francisco-based banking giant Wells Fargo.

But much more fallout is expected over the revelation last month that Wells Fargo had fired 5,300 employees for fraudulently signing up customers for 2 million new services and accounts. The bank’s agreement to pay $185 million to the Consumer Financial Protection Bureau hasn’t remotely satisfied its critics.

In Calabasas on Tuesday, the state Assembly Banking Committee held a hearing in which witnesses denounced Wells Fargo for its actions. The criticism continued even after Wells Fargo executive David Galasso told the committee that Wells Fargo would go beyond the $185 million settlement in compensating customers who were victims.

Banking Committee Chairman Matt Dababneh, D-Encino, said he was considering introducing a bill in the Assembly targeting laws and regulations that allow banks to compel disgruntled customers to go to arbitration in just about every circumstance.

Wells Fargo has already used such state and federal laws to get several related individual lawsuits thrown out and sees the rules as a potent tool against expected class-action lawsuits in which former Wells Fargo customers say their credit ratings were damaged by the bogus accounts and services established in their names.

In Washington, meanwhile, senators of both parties have been pressuring the Justice Department to open a full-blown criminal investigation of the company and its top executives — and not settle for a large fine.

Under formal Justice Department policy, the decision to start such a criminal probe partly depends on ”the pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management.” Given that the 2 million phony accounts were being set up from 2009 to earlier this year — and that executives were aware of the problem for at least three years — the pervasiveness standard is seen as highly relevant to the Wells Fargo case. Under federal law, corporations bear responsibility for the criminal behavior of their employees if it arises in the workplace.

“If it was one person or even 100, you might argue that it’s a rogue contingent,” University of Virginia law process Brandon L. Garrett, author of ”Too Big to Jail,” told The New York Times. ”But you can’t seriously argue that 5,000 people have gone rogue. That’s systemic behavior. People above them had to have noticed. … Fines aren’t working. We’re not going to see deterrence until we see some high-­level individual cases.”

Wells Fargo scandal an issue in presidential campaign

The Wells Fargo scandal has also become an issue on the presidential campaign trail. Like Dababneh, Democratic nominee Hillary Clinton has denounced laws that compel arbitration in banking disputes.

There is also additional fallout at the state and local level. California Treasurer John Chiang and Illinois Treasurer Michael Frerichs separately announced that their states would limit use of Wells Fargo on an interim basis.

In Chicago, Mayor Rahm Emanuel’s administration announced that it was selling all its Wells Fargo securities — about $25 million worth. Last week, the Chicago City Council took a first step toward banning any city dealings with the California bank.

These lost customers don’t mean much to a company with $90 billion in sales and $23 billion in net profits in 2015. But in an era of anger over the perception that big banks paid a small price for their role in creating the Great Recession, disinvesting in and banning Wells Fargo could become a proxy way for elected officials to take a stand against Wall Street — even if the company is based in California.

Wells Fargo fallout

Good morning. Happy Hump Day. If last night’s vice presidential debate wasn’t enough debate for you, you’re in luck! Tonight, California’s two U.S. Senate candidates are having what could be their only debate.

We’ll get to the debate by the end of this newsletter. But first, more Wells Fargo fallout.

In the wake of California’s unprecedented punishment of San Francisco-based Wells Fargo for bogus lending practices, legal sanctions spread eastward, with other state officials and Hillary Clinton herself going after the bank. CalWatchdog has more. 

In other news:

• “CA golf club suit deepens Trump’s woes,” writes CalWatchdog.

• “Add navigating California’s byzantine professional license standards to the list of obstacles a job applicant faces after leaving the military or getting out of prison. That system – in place since the Gold Rush – often places a disproportionate burden on some of the state’s most vulnerable residents, according to a new report…” The Sacramento Bee has more.

• Candidates for the California Legislature are running into the red as they enter the campaign home stretch for the Nov. 8 election. Recently filed reports with the state show that campaign committees of candidates for the state Assembly and state Senate reported more than $4.6 million in outstanding debt as of Sept. 24. That is about one-third higher than the outstanding debt listed at the end of June,” writes The Sacramento Bee.

• The Los Angeles Times explains what we should expect from tonight’s U.S. Senate debate. 

Legislature:

• Gone ’til December.

Gov. Brown:

• >Speaking in Sacramento around 12:30 p.m. at the 10th anniversary celebration of the passage of AB32 (major environment legislation).

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New follower: @mercurycalif

In the wake of California’s unprecedented punishment of San Francisco-based Wells Fargo for bogus lending practices, legal sanctions spread eastward, with other state officials and Hillary Clinton herself going after the bank.

Already, in Washington, members of the House Financial Services Committee have demanded “that Federal Reserve Chairwoman Janet L. Yellen punish Wells Fargo for creating as many as 2 millions accounts without customers’ permission,” according to the Los Angeles Times. Although Yellen has so far declined, California Treasurer John Chiang’s swift action has created what could be enough momentum to send federal sanctions the bank’s way. In a recent news conference, Chiang “outlined specific sanctions that will remain in place for a year and target Wells Fargo’s ‘most highly profitable’ relationships with his office,” the Times added. In a letter to CEO and Chairman John Stumpf, Chiang asked how he could trust the bank going forward. 

“Chiang also said he will work with the state’s pension funds, which collectively own about $2.3 billion in Wells Fargo stock and bonds, to push for reforms to Wells Fargo’s corporate governance. Chiang sits on the governing board of the nation’s two largest public pension funds — the California Public Employees’ Retirement System and the California State Teachers’ Retirement System. He said he will push for the separation of the bank’s chairman and chief executive roles … and for the bank to review its compensation policies and possibly rescind more pay from executives linked to the fake-accounts scandal.”

Spreading criticism

On the heels of Chiang’s move, Wells Fargo also lost support among officials based in the other most significant financial center west of the eastern seaboard, Chicago. “Illinois is joining California in suspending Wells Fargo & Co. from handling ‘billions’ of dollars in investment work and the underwriting of state debt,” Bloomberg reported. “Treasurer Michael Frerichs said in a statement that he will announce details of the ban during a news conference in Chicago on Monday. The suspension includes municipal-bond underwriting, according to Greg Rivara, a spokesman for the treasurer.” Although some states, including Alaska and Oregon, have said their relationships with the bank are unchanged, “Connecticut decided last week to add Morgan Stanley to serve as lead underwriter with Wells Fargo on a state bond issue planned for next month to help ensure a successful sale,” the site noted. 

Now, Hillary Clinton has seized on the opportunity to make some political hay as well. At a campaign stop in Toledo, Ohio, Clinton described the situation as “[o]ne of the nation’s biggest banks bullying thousands of employees into committing fraud against unsuspecting customers. Secretly opening up millions of accounts without their consent, even their knowledge, misusing personal information, and then sticking customers with hidden fees,” according to Business Insider. “It is outrageous that eight years after a cowboy culture on Wall Street wrecked our economy that we are still seeing a powerful banker playing fast and loose with the law,” she said, introducing a proposal that would give consumers a right to sue instead of enter arbitration under circumstances like those created by the bank. 

Wells Fargo has scrambled to stanch criticism and maintain a firewall with federal officials. “Under fire over the unauthorized accounts, Wells Fargo’s board announced … it was stripping Mr. Stumpf of unvested stock awards valued at $41 million. He will also forgo his bonus this year and a portion of his $2.8 million base salary,” the New York Times observed. But “the move to retract a portion of Mr. Stumpf’s lavish compensation — at the time of Wells Fargo’s latest annual disclosure, he held shares and options valued at around $247 million — has not appeased some senators who criticized Mr. Stumpf,” including Elizabeth Warren, D-Mass., who has flexed her muscle as a financial hawk throughout her tenure. 

Systemic questions

As Wells writhes, questions have arisen as to whether their misdeeds were merely the first to be caught. At media outlets where financial reform has long driven coverage of the big banks, incensed reporters have been stonewalled in their efforts to find out. “Representatives from Bank of America, Citigroup, JPMorgan Chase and US Bank declined to respond when The Huffington Post asked them if they use the same high-pressure, lofty sales quotas that pushed underpaid Wells Fargo employees to rip off customers in an effort to keep their jobs or earn bonuses to enhance their low hourly pay,” the website reported. “Along with Wells Fargo, these banks are the five largest in the country, ranked by total assets.”

By Dave Roberts

If you live near or frequently travel along the Burlington North Santa Fe rail line in north Orange County, you’re probably looking forward to the completion of the $600 million in road improvements that are under construction in that area. Currently, motorists are stuck at intersections waiting for trains to pass through a plethora of at-grade railroad crossings. Nearby residents and businesses suffer the blast of train horns throughout the day.

When the Orange County Transportation Authority’s OC Bridges program is completed in 2015, seven at-grade crossings will be replaced by a series of bridges separating cars from trains. Without these improvements, by 2030 a train would be blocking an intersection every 10 minutes, according to the OCTA.

But, while the project is a godsend to many, it is threatening to rob the savings of Kathy Hoke, a widow who owns an office building stuck in the middle of the construction. As a result of the noise, disruption and concerns about limited access to the building, half of her tenants have fled the building with more likely to follow. The building has lost more than half its value. Upside down on the mortgage and unable to keep up the payments, Hoke is now facing foreclosure and potentially owes another $1 million to the bank.

“Needless to say, this has turned my life upside down at the age of 54, and I may now face bankruptcy,” said Hoke. “I am a widow about to lose everything that my late husband and I have worked for. This has consumed my life for almost three years. I go to sleep thinking about it, and it is the first thing on my mind when I awake. This has turned my life upside down, while OCTA sits back and takes absolutely no responsibility for what has occurred with the building and this Bridge Project. I am all alone fighting this, and it simply isn’t fair what they have done to me.”

The 17,000 square-foot HFT Professional Building at 1150 East Orangethorpe Avenue in Placentia started out as a good investment, promising to provide steady income for Kathy and her husband, Edward’s, retirement. It’s an attractive building in a good location with underground parking and nearby shopping centers. It was nearly fully occupied with tenants, some of whom had been there for 10 or more years. It’s also not far from the Hokes’ home in Yorba Linda. So it seemed well worth the $2.8 million that they paid in December 2007 with a $1 million down payment from the proceeds of the sale of Edward’s business.

“We did not know about the OCTA Bridge project at the time of this purchase,” said Kathy. “And if we had known, we never would have purchased the building.”

For the next 21 months, things were fine. But things began to unravel on September 28, 2009 when Kathy woke to find that her husband had died of a heart attack in his sleep. A reappraisal of the building as part of the estate settlement revealed that it had already lost $400,000 of its value due to the real estate and economic slowdown.

OCTA nightmare

Kathy’s OCTA nightmare began not long after that in the spring of 2010 when she found out that the building, which is on the south side of Orangethorpe Avenue, would be sandwiched between two major construction projects.

Orangethorpe Avenue is being reconstructed as a bridge over the railroad tracks, descending back to street level just west of Hoke’s building. The project will be constructed in phases, allowing Orangethorpe to remain open during construction. But its six lanes will be reduced to one lane in each direction. Construction is scheduled to be completed in mid-2015.

On the other side of the building to the east, a bridge will be constructed over the tracks at Orangethorpe Avenue where it intersects with Tustin Avenue and Rose Drive. Orangethorpe will be widened and restriped to accommodate turn lanes. The intersection will be closed for a substantial portion of the construction, which is scheduled to be completed by 2015.

In essence, for the next two years Hoke’s building is going to be in the path of a blitzkrieg of construction. And her tenants have been fleeing like refugees.

One business that had been in the building for 15 years sent a letter citing the “inconvenience with regards to traffic, loudness, pollution and other things that come along with construction” as reasons for leaving.

“I, for one, would not recommend any prospective tenant to move in this building given the construction that will be taking place!” added Naren Mistry, manager for BeyondTek IT.

The building’s anchor tenant, Fullerton Insurance, which occupied 5,700 square feet, wrote in its “Dear John” letter, “[W]e are a sales organization and with 15 sales people who have to have access in and out of our office throughout the day. We could not afford the loss of time trying to go around the closure for the year to year and a half that is planned.”

Many other tenants have fled as well. Those that have stayed have declined to renew their leases, preferring to keep their options open with a month-to-month arrangement. In July 2010, Hoke was collecting nearly $27,000 in monthly rent from the building tenants. A year later, in July 2011, that had been reduced to just over $12,000. For a year and a half she dug into her savings to keep up the mortgage payments.

“After paying $175,000 from my personal funds, I realized that I could not continue to subsidize the building due to the length of this three-year project,” she said.

Plummeting property value

She stopped making loan payments in April 2012, resulting in Wells Fargo placing the building in receivership to manage the building and requiring another appraisal. This time the building’s value had plummeted dramatically to just $1.4 million. Another appraisal last October revealed a continued bleeding of value, dropping it to $1.3 million, less than what Hoke owes on it.

The shopping centers near her building have been purchased by OCTA, with one razed to make way for construction and the other used by the contractor for construction staging. But, while OCTA initially indicated interest in also purchasing Hoke’s building, it decided not to make an offer.

In August 2011, Hoke’s attorney Mike D’Angelo wrote a letter to the law firm representing OCTA, requesting that the agency also purchase Hoke’s building.

“Ms. Hoke’s property is the only one within the entire O.C. Bridges Project that is situated as it is, directly between two bridge constructions, and not slated for acquisition,” D’Angelo wrote. “OCTA’s acquisition activities have left the property as an island surrounded by project construction. To date, OCTA has responded to Ms. Hoke’s concerns simply by noting that, because it will not be acquiring any portion of the subject property, none of the project-related damages to her property are compensable.

“But that is not the law. The California Supreme Court has long held that a landowner is entitled to just compensation for a substantial impairment of access to her property. No reasonable dispute can exist but that access to the subject property has been impaired as a result of the project. Based upon the substantial and ongoing impairment of access to the subject property and damages resulting there from, we are requesting OCTA to acquire the subject property immediately and for fair market value.”

Craig Farrington, representing OCTA, responded last April, denying the request.“As you are aware, no part of the project is designed to directly touch Ms. Hoke’s property,” he wrote in his letter. “At this time, we are not aware of any legal theory which would justify payment of public funds to Ms. Hoke for any loss of tenants.”

This week Joel Zlotnik, OCTA media relations officer, confirmed that OCTA’s position has not changed.

“Regarding Ms. Hoke, OCTA has been in contact with her and we understand her concerns,” he said. “Throughout the design and construction process, OCTA works closely with the community to minimize the impacts of construction. Ms. Hoke’s property was not identified as being needed for the project, and per state and federal law, OCTA can only acquire properties that are necessary to construct the project. The construction and outreach team will continue to work with the businesses in the area during construction on access and signage, so the public is aware that businesses are open during construction.”

Law works against property owners

D’Angelo acknowledged in an interview that Farrington is correct that the law does not permit compensation to a building or business owner for lost income or value due to the nuisances and inconveniences of a nearby public construction project.

“The case law in recent years has been very restrictive against property owners in situations like that,” said D’Angelo. “Usually they are more helpful when the property is going to be taken. The problem for Ms. Hoke is that it wasn’t designated for action. That’s not to say we might not have courses of action accruing once construction commences and access to the property is significantly impaired, as we anticipate it is going to be. If the property is physically damaged or impaired, then we can revisit the issue to see whether we can seek damages. In the meantime, what I was trying to accomplish is basically appeal to their sense of fairness and step up and help this woman who’s unequally impacted by this project to her tremendous detriment.”

The only winner in this situation may turn out to be Wells Fargo. The bank might foreclose on the building, getting it at a significant discount under its current appraised value; then collect nearly another million dollars from Hoke in unpaid mortgage, loan interest, penalties and legal fees; then sell the building in a couple years at its restored market value when the road construction is completed.

“This is truly a unique circumstance,” said D’Angelo. “I have never seen anything like it in 16-plus years in practicing in this area. She’s being double penalized. Not only is the property not turning over enough money, but it’s being foreclosed. And the very same conditions causing lost rent and inability to pay the mortgage and default are being used to depress the value of the property and increase the [loan] deficiency she’s responsible for. So she’s really getting screwed at both ends here — it’s awful.”

Hoke said, “I don’t feel like I have anyone to turn to. The bank is not cutting me any slack. If they foreclose on me, then they can go after my personal assets, my home and everything else. It’s a stressful situation. Everybody is sympathetic, everybody feels sorry for you. But that’s as far as anything goes.”

Hoke’s initial court date in the Wells Fargo lawsuit against her is May 17.