Feinstein Relies Heavily on Blum, Associates for Funds : News analysis: They have been involved in major San Francisco projects. She says they got no favors.

By DAN MORAIN

Oct. 25, 1990 12 AM PT

TIMES STAFF WRITER

As mayor of San Francisco, Democratic gubernatorial candidate Dianne Feinstein supported two major projects in which her husband’s close associates had financial interests, according to records and interviews.

In one project, she lobbied for the sale of land to the city for a new Marriott hotel, centerpiece in the biggest urban renewal effort of her Administration. The major representative for Marriott was a longtime friend and business partner of Feinstein’s husband, money manager Richard C. Blum.

In another project, Feinstein endorsed a plan to build an aquarium at Pier 39, already a major tourist attraction at San Francisco’s Fisherman’s Wharf. A client of Blum, Texas billionaire Robert M. Bass, and Bass’ three brothers and father own a majority of Pier 39.

Now, as a candidate for governor, Feinstein, 57, is drawing heavily on the resources of Blum and his associates for donations. She and Blum have loaned the campaign $3 million. Reports show that Blum and his business colleagues have given or raised $450,000 for Feinstein. Bass and his associates have generated $120,000 of that amount, and a former Marriott executive gave $26,000.

Feinstein said she did no favors for the developers. But she was known as a pro-development mayor who long had supported the redevelopment project and Pier 39. Additionally, some of her appointees controlled approval of the projects.

Each development is an example of how, as mayor from 1978 to 1988, her official duties intersected with Blum’s interests. If Feinstein wins on Nov. 6, questions about Blum’s business stand to remain an issue.

“People have a right to know who’s financing a campaign and what those financial sources represent,” said Lisa Foster, executive director of California Common Cause, which advocates stricter ethical standards for officials.

Blum, 55, is a director in one company that has a state contract, invests in major corporations that have state contracts and counts as clients some of California’s wealthiest people and largest corporations, including oil heir Gordon Getty and Bank of America.

In an interview, Blum said that when Feinstein was mayor of a city of 49 square miles, conflicts of interest were relatively easy to avoid. The potential for conflict might grow, he said, “when you’ve got the state of California.”

But insisting he “didn’t marry Dianne to lobby her,” Blum said that if necessary, he will sell off some of his holdings to help his wife avoid any appearance of self-dealing.

“What she does is infinitely more important than what I do,” Blum said. However, he said he would not place his holdings in a blind trust because his clients depend on his financial vision.

Feinstein, who married Blum in January, 1980, in a ceremony at her City Hall office, vowed to place property she owns separately from him in a blind trust if elected.

“I prize my integrity,” she said. “ . . . I would never do anything because either I or my husband would in any way, shape or form profit.”

Long before the campaign began, Feinstein characterized her marriage to Blum as a union between the public and private sectors. In the campaign, that union has become a lightning rod for attacks by her Republican opponent, Sen. Pete Wilson.

Feinstein and Blum have tried to defuse questions about their wealth by reopening their income tax records to reporters. Blum also has disclosed the 70 corporate and individual clients for whom he manages about $400 million.

The public scrutiny was not unexpected. When her name surfaced as Democratic presidential nominee Walter Mondale’s possible running mate in 1984, a fellow San Francisco investment banker asked Blum whether he would be willing to be put under a microscope.

“If Dianne wants to do it,’ ” the banker recalled Blum saying, “ ‘we’ll do it and we’ll get through it.’ ”

Instead, Mondale chose Geraldine Ferraro and Ferraro’s husband, John Zaccaro, underwent the scrutiny and later was convicted of fraud. But Blum said nothing prepared him for what he called Wilson’s lies and media distortions of his finances.

In recent months, the San Francisco Chronicle raised questions about the Marriott deal, reporting that Feinstein failed to disclose that Blum had once held stock in the hotel chain. A San Jose Mercury News article reported Blum’s investment in an Oregon savings and loan that received government bailout funds.

The Times reported that the Securities and Exchange Commission is investigating URS Corp., an engineering firm that has a $3-million contract with the state of California, and one in which Blum is a major shareholder, director and financial consultant.

The Times also reported that the SEC questioned Blum this year about his sale of $2.7 million worth of stock in National Education Corp. before a management shake-up that caused the firm’s stock price to plunge.

The Feinstein-Blum family finances emerged as an issue when the couple loaned $3 million to the campaign in the primary. Feinstein, her candidacy faltering, used part of the money to pay for television ads that gave her visibility and helped her win the June primary.

“Had she not had Dick there to put the money in, I don’t think she would have been in it,” said Atty. Gen. John K. Van de Kamp, who lost the primary to Feinstein and has since endorsed her.

As the campaign has progressed, Blum said he has been “spending 16, 17, 18 hours a day with this campaign,” much of it raising money. San Francisco investment banker F. Warren Hellman, a client of Blum, gave $50,000. Alfred Checchi, a former Marriott executive and later a financial executive with the Basses, gave $26,000.

“Certainly, Dick is the single most effective (fund-raiser), I would guess,” said John Plaxco, the Feinstein campaign finance director.

No donor affiliated with Blum has given more than Bass. A native of Ft. Worth, Tex., Bass has an empire worth $1.5 billion, according to Forbes magazine. His holdings are in such entities as the Westin hotel chain and Stockton-based American Savings & Loan, which he bought in 1988 in one of the biggest government-assisted bailouts in the S&L; crisis. Blum said Bass has been a client of his since about 1985.

In June, 1988, when Feinstein was mulling whether to run for governor, Bass donated $21,000 to her. Last month, he added another $36,000. David Bonderman, who helps Bass manage his holdings, has given $26,000. Records show Bonderman has raised another $40,000 from associates of Bass.

“I know Dianne well, and I consider her a friend, and I like her politics,” Bonderman said, adding he had no dealings with any San Francisco project when Feinstein was mayor.

Bass did not respond to a call from The Times. Feinstein said Bass gave her money because he is a Democratic Party supporter and she is “the Democratic candidate in a big race.”

Bass has donated to other candidates, but Feinstein is the biggest recent beneficiary in California. Bass and his wife gave $100,000 each in 1988 to President Bush and his Democratic rival, Massachusetts Gov. Michael Dukakis. The only other California politician to receive Bass money recently was Assemblyman Patrick Johnston (D-Stockton), who got $1,000 in 1989, according to Legi-Tech, a computerized service that tracks contributions.

“Bob Bass is one of the most honest human beings I’ve ever met,” Blum said, “and he never asked for a single thing.”

In San Francisco, Bass’ main holding is Pier 39. The Port of San Francisco leases the concession to a Bass-controlled partnership. With its motorized cable car service, six major restaurants, arcades and 20 curio shops, Pier 39 attracts 10 million tourists a year, said Fritz Arko, Pier 39 president and a part-owner.

Arko visited Feinstein at City Hall in 1986 to tell her about a plan to build an aquarium called Underwater World on the pier. Arko said Feinstein pointed out that Pier 39 had a lengthy permit process ahead and she made no offer to help.

Feinstein voiced her support for Underwater World in the fall of 1987 during a meeting in her office to discuss redevelopment plans for the Fisherman’s Wharf area, Arko said. And in September of that year, Arko took the aquarium proposal to the San Francisco Port Commission, where then-Port Director Eugene Gartland also gave his support.

Feinstein appointed Gartland--an old friend and business partner of hers and a client of Blum--as the port’s executive director. He served as her liaison to the Port Commission, which is appointed by the mayor.

“I thought it was an excellent project, a hell of a lot better than T-shirts and porcelain souvenirs,” Gartland said.

Although the port staff supported the aquarium, final Port Commission approval was postponed for a variety of reasons, including concerns that an aquarium would increase congestion at Fisherman’s Wharf, block the view of Telegraph Hill residents, and steal patrons from the Steinhart Aquarium in Golden Gate Park. But, according to current Port Director Michael Huerta, the commission did direct its staff to act as a co-applicant with Pier 39 when the developer sought approval for the aquarium from city, state and federal agencies governing the bayside project.

The commission’s formal vote to approve Underwater World did not come until last month.

Pier 39 had been a modest contributor to Feinstein when she was mayor. When she ran for reelection in 1984, the Pier 39 partnership gave $325, records show. But as she explored a run for higher office, donations increased. Robert Bass gave $4,000 to her campaign committee as she was about to leave office in December, 1987--a few months after she had endorsed the aquarium.

Blum’s relationship with Bass did not become well known until he revealed his client list this summer. Now that Underwater World’s opponents know about the relationship, some wonder whether the proposal received favored treatment from the port in 1987.

“It was like it was on greased sleds, no question about it,” Peter Brown, executive director of a competing mall at the wharf, said of the key support Underwater World received from port officials.

“If it was greased, it sure was a slow grease job,” Arko said.

Feinstein said she gave no special access to Arko and did nothing wrong by supporting Underwater World. “The bottom line is: Did my husband profit? And the answer is he didn’t.”

Neither she nor Blum had an interest in Pier 39. They said conflict-of-interest law did not require that she disclose Blum’s relationship with Bass. Hadley Roff, Feinstein’s chief of staff, said that Feinstein did not know at the time that Bass and her husband were business associates.

Blum and Bass have been involved in various ventures, including buying a stake in a Sacramento television station. Bass also has money in a Blum-managed limited partnership called BK Capital Partners. Blum would not specify how much money Bass has invested with him, or where he has placed that money.

In February, 1984, Feinstein encountered a Bass family holding by appearing at a press conference to endorse the use of high-speed Hovercraft for commuters between San Francisco and the East Bay development of Harbor Bay Isle.

Ronald H. Cowan, the developer of Harbor Bay, had proposed the idea. Cowan said Robert Bass’ older brother, Sid, was an investor in Harbor Bay, but has since sold his interest. The Hovercraft idea remains just that. Feinstein said she did not know that the Bass family ever held an interest in Harbor Bay. Roff said he and Feinstein could not recall who asked her to appear.

Another politician who attended the press conference was Assembly Speaker Willie Brown (D-San Francisco). Brown also acts as lawyer for Cowan’s firm, Doric Development, and represents Bass’s Underwater World.

Both Cowan and Arko said Brown did not lobby Feinstein for them, but neither developer would detail Brown’s work on his behalf. Brown did not respond to phone calls from The Times.

During her recent debate with Wilson, Feinstein made a point of saying that if elected she could “handle” Brown, the most powerful figure in the Legislature, and state Sen. David A. Roberti (D-Los Angeles), the president pro tem.

Brown represented a number of projects that sought city approval during Feinstein’s Administration and had a working relationship with the mayor. “I think there was a lot of access,” said Susan Jetton, Brown’s press secretary from 1985 to 1989. “But it was not lock-step, by any means. . . . One did not always get from the other what one wanted.”

Roff, who had served as Feinstein’s deputy mayor, said that Brown rarely visited her and “Willie had no influence or sway with her.”

Brown had a role in another major development undertaken during Feinstein’s years. He was a lawyer for Olympia & York Equity Corp., which won the right to develop Yerba Buena Center, a $1.5-billion redevelopment project in downtown San Francisco.

In an interview, Redevelopment Agency Director Wilbur Hamilton said that in early 1980, he suggested the names of lawyers who could help Olympia & York gain access to local agencies and officials. Brown’s name was on that list. Hamilton said he was especially interested in Brown’s selection because of the need to increase minority involvement in redevelopment projects.

For environmentalists, the Yerba Buena project was a battle over downtown development. City officials saw a chance to reap big revenue from what had been a Skid Row.

Ten developers, hoping to land a major project in a rich market, competed for the rights to Yerba Buena in 1980. Each builder had a hotel operator poised to build a hotel adjacent to Moscone Convention Center. Olympia & York’s hotel operator was Marriott Corp.

Early in the competition, Blum’s friend Gary Wilson, then a senior vice president of Marriott, called seeking guidance. Blum said Wilson, an investor in one of Blum’s partnerships at the time, wanted to know, “Who should we talk to? We have an interest.” Blum recalled that he introduced Wilson to a city official--either Hamilton or Chief Administrative Officer Roger Boas--but had nothing more to do with the project.

“I thought it was very much in the city’s interest to have people like that competing,” Blum said.

Boas and Hamilton said they do not recall being contacted by Blum. Wilson could not be reached for comment.

Feinstein said Blum had introduced her to Wilson before they were married in January, 1980. She said she did not disassociate herself completely from the Yerba Buena matter because, as mayor, she had no role in the selection.

“Put another way,” Feinstein said, “should anybody be disadvantaged because they have met the mayor or the mayor’s husband?”

At the suggestion of Redevelopment Director Hamilton, Feinstein met with the president of Olympia & York on April 16, 1980. At the time, the firm was considering bidding on Yerba Buena, and wanted to “hear your commitment to the program,” Hamilton wrote in a memo to the mayor. Feinstein reaffirmed her support during the meeting. She did not meet with other competitors.

In October, 1980, the Redevelopment Commission, which was in charge of the selection process, chose two finalists: Olympia & York with Marriott as its hotel developer and Cadillac Fairview Corp. In November, 1980, the commission, composed of appointees of both Feinstein and the late Mayor George Moscone, unanimously selected Olympia & York and Marriott.

San Francisco lawyer Howard Wexler, then Redevelopment Commission president, said he never was contacted by Feinstein--or Brown--in the process leading up to Olympia & York’s selection.

Blum’s friendship with Wilson was publicly known in 1980, having been reported in San Francisco newspapers. But what was not known until the current campaign was that Blum owned 2,400 shares of stock in Marriott in 1980.

His tax returns show he bought the stock in 1979, and sold it for a $14,000 profit in March and September, 1980. He said he sold the stock once he knew his new wife would be involved in the selection process, and the Marriott would be a bidder.

“When I married him,” Feinstein said, “I had no knowledge what he owned.”

Blum’s holding was not disclosed on Feinstein’s 1980 statement of economic interests. Blum said that he and his wife were given what may have been erroneous advice that the stock holding did not need to be reported because it was sold before the end of the year. Modest though the stock holding was, its disclosure probably would have led to a controversy that might have “eliminated Dianne from playing any role” in the project, said lawyer and slow-growth activist Sue Hestor, a Feinstein critic.

State Sen. Quentin Kopp, a San Francisco independent and a Feinstein rival since their days on the Board of Supervisors, had opposed awarding the deal to Olympia & York and Marriott. He said recently that Blum’s ownership of Marriott stock “raises the question of whether she should have stepped aside.”

Feinstein’s involvement became greater once Olympia & York won the rights to develop Yerba Buena.

In 1982, she went to Washington to ask Gerald Carmen, then head of the General Services Administration, to approve the sale to the redevelopment agency of a key parcel of land. Carmen approved the sale and the city bought it for $17.4 million in 1983. The land, leased to the Marriott, now is the hotel entrance.

In 1984, Feinstein met with City Planning Director Dean Macris, Hamilton and Marriott representatives, including Wilson, to resolve a dispute over whether the hotel should be redesigned and made smaller. Marriott was required to reduce the number of rooms from 2,000 to 1,500, as city planners wanted. But Hamilton said Feinstein sided with him and the Marriott in allowing the hotel operator to construct a 1-million-square-foot building, rather than 700,000 square feet that Macris had wanted.

“Dianne was concerned that the (hotel) deal take place because the Marriott was the economic linchpin” for the entire Yerba Buena project, said Hamilton.

The city uses revenue from the Marriott to pay for gardens at Yerba Buena. Redevelopment officials say the Marriott will pay $4 million to the city in this first year of operation. “The deal will stand the test of scrutiny,” Hamilton said.

When they met, Blum was a successful businessman, and Feinstein had money of her own. Many of Feinstein’s separate holdings come from her marriage to San Francisco neurosurgeon Bertram Feinstein, who died in 1978. At the time of her marriage to Blum, Feinstein, a Stanford graduate, owned a home in Pacific Heights, plus the Carlton Hotel in San Francisco, and modest amounts of stock in several companies.

But during the 1980s when she was mayor, their wealth reached new heights. And as Blum added to his client list, he gained some positions of prestige, joining the Board of Directors of Sumitomo Bank of California in 1985.

Last year, he became involved in his biggest deal. Blum was invited to join in a $3.7-billion buyout of Northwest Airlines by Wilson and another former Marriott official--Checchi, who later became a financial executive for the Bass family.

Frederic V. Malek, a former Marriott president and now a Blum client, is vice chairman of the company that owns Northwest. Blum pumped $100 million of his and his clients’ money into the deal, and sits on Northwest’s Board of Directors. He said “the jury is out” on whether the Northwest deal will be a success.

“People like to do business with people who are of importance,” said Rubin Glickman, a San Francisco lawyer who once shared an office with Blum. But while Glickman said there was some “benefit to be the husband of the mayor of San Francisco,” he added, “I don’t think he played on that.”

As mayor, Feinstein was interested in increasing trade between San Francisco and the Pacific Rim. To this end, she helped form a sister-city relationship with Shanghai in 1979. In 1985, Shanghai officials asked Blum and three other Californians to form a corporation, Shanghai Pacific Partners, to foster trade between San Francisco and Shanghai.

Feinstein had named two other partners in Shanghai Pacific to city commissions. William Chang, the son of another partner, was a Feinstein appointee on the Port Commission and supported the aquarium.

Shanghai Partners continues to operate as a trade office out of the same San Francisco office building that Blum uses. Though he remains an officer of the corporation, Blum said that he had made no money on his $375,000 investment in the venture and has no plan to do business with Shanghai until China stops its crackdown on pro-democracy activists. “I’ll have to live a lot of years before I will ever see it (Shanghai Partners) turn around,” he said.

Other deals made up for the such losses. Tax returns show that the couple’s income rose from $292,000 in 1980, the year they were married, to $7.4 million in 1989. They paid $2.5 million in income taxes last year.

In other years, business losses substantially reduced their tax liability. They paid less than $4,000 each year in taxes on income of about $300,000 in 1983 and 1984. In 1985, they paid no federal income tax as a result of losses stemming mainly from their ownership of a San Francisco hotel.

Tax records released by Blum and Feinstein do not tell the complete story of Blum’s wealth. Much of Blum’s money is invested in various partnerships controlled by Richard C. Blum & Associates. According to Blum and Feinstein, his firm is not part of the couple’s community property, though they benefit from the income.

In business, his practice has been to invest in companies down on their luck, hoping that an infusion of his clients’ cash and his advice will result in a turnaround.

He also puts his own money into the deals, and his tax records provide snapshots of his success: A $2,036 investment in one of the partnerships in 1980 was worth $100,000 in 1986; he paid an average of $10 a share for 2.5 million shares in BankAmerica in 1987 and it has more than doubled. Bank of America, a client of Blum, has several contracts with the state of California.

On Wall Street, a money manager of $400 million is relatively small. But Blum’s track record and clientele make him a force on San Francisco’s Montgomery Street and sometimes a player on Wall Street.

“This is not widows’ and orphans’ money,” said a San Francisco financier who has worked with Blum. “He can afford to . . . get into situations that are somewhat speculative.”

Blum on occasion has found himself entangled in litigation. In the last two years, three firms in which Blum is a leading shareholder and director have settled shareholders’ suits that accused him and others of misstating the companies’ financial condition to inflate the stock value. While denying wrongdoing, the corporations settled the suits for a total of $35.05 million. Blum said he neither knew of nor participated in any alleged stock manipulation.

Blum and his lawyer said that the Securities and Exchange Commission may censure one of those firms, URSCorp., but predicted that the agency will take no action against Blum personally. Records and interviews show that the SEC continues to examine activities involving a second firm in which Blum is a major shareholder and director, National Education Corp. of Irvine.

“All I can tell you is . . . they took my deposition (Feb. 14), and we’ve never heard from them since,” Blum said.

Blum sold $2.7 million worth of stock in the company last year during a two-day period before the announcement of a management shake-up that sent the stock price plunging. Blum said the sale was proper because he had no inside information about the shake-up.

As the campaign enters its final weeks, Feinstein said she is concerned about the impact of what she believes are distorted news accounts about Blum.

“I feel very badly for what has happened,” Feinstein said. “Here is a man who has built up I think 30 years of integrity of credibility and he has been damaged in the process. And I have a very great regret about that.”

Times staff writers Douglas Frantz, Dan Morain and David Willman reported this story.