Brett Kelman, and Jesse Marx

The Desert Sun

Prosecutors Tuesday filed embezzlement charges against the former Beaumont city manager, finance director and other officials, alleging that they siphoned as much as $43 million from city coffers over the past three decades.

As a result of a yearlong public corruption investigation, the following six officials were arrested on Tuesday: Former City Manager Alan Kapanicas, former Police Chief Frank Coe, former Public Works Director Deepak Moorjani, former City Attorney Joseph Aklufi, former Economic Development Director David William Dillon and former Finance Director William Aylward. A seventh suspect, former City Planner Ernest Egger, is expected to turn himself in on Wednesday.

All seven suspects have been charged with felonies, but Aylward and Kapanicas, a Palm Desert resident, face the heaviest allegations — 33 felony charges each, including embezzlement by a public official, misappropriation of public funds, and criminal conspiracy. Authorities say the suspects used their positions as city officials to funnel tax dollars into their own private companies, puppeteering the city for their own financial gain.

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“The bottom line is, they victimized the entire city,” said FBI agent Colin Schmitt, who oversees a task force that raided Beaumont City Hall last year. The same team raided Palm Springs City Hall in September.

None of the arrested officials were available for comment Tuesday or have defense attorneys listed in the court system.

Beaumont Mayor Mike Lara responded to the arrests during a City Council meeting on Tuesday night, saying the city had cooperated with the investigation and brought in outside experts to "improve its financial accountability." Lara urged residents not to lose faith in the city's rank-and-file employees, who were not implicated in the case.

"They are just as disappointed, if not more so, regarding what has transpired," Lara said.

The City Council meeting also included the hiring of a new interim city manager, Richard Warren, who promised transparency in his opening remarks.

District Attorney Mike Hestrin estimated the corruption scheme had cost taxpayers about $43 million, including $36 million in "illegally maintained" fees and a $6 million loan given to a Beaumont business without any payback plan.

It is unlikely Beaumont will get all that money back, Hestrin said.

“I don’t know what the chances are. Probably not good," Hestrin said. "But we are going to work hard to get restitution."

During a press conference on Tuesday afternoon, Hestrin explained at least four prongs of corruption attributed to the suspects. The allegations dated back to the 1990s, when Beaumont began work with Urban Logic Consultants.

Three employees from that company — Dillon, Egger and Moorjani — were put in charge of Beaumont’s planning, economic development and public works. From these positions, the suspects advised the city to issue new bonds while making payments to their own company with money from the bond sales.

In 2003, the city began collecting a new fee — called a Transportation Uniform Mitigation Fee — on all development. The funds were supposed to be sent to Western Riverside Council of Governments (WRCOG) for big infrastructure projects, but the suspects allegedly kept the money, then spent it on Beaumont projects that were awarded to their own companies. As much as $36 million was “illegally maintained” in this way, Hestrin said. Independent of this corruption case, WRCOG has sued Beaumont for failing to pay transportation fees. Two years ago, a judge ordered the city to hand over $43 million plus interest. The city has appealed.

Between 2010 and 2013, Kapanicas and Aylward loaned $114,000 in city money to Coe, who was then police chief, and several unnamed members of the Beaumont police department. The loans were interest free and never approved by the city council. Coe received $45,000. No other loan recipients have been identified or charged.

Between 2009 and 2015, Kapanicas and Aylward loaned more than $6 million to Beaumont Electric without approval from the City Council. The loan was interest free and there was no plan for repayment. The scheme was designed to falsely inflate the city’s sales tax by giving the company money to purchase electrical equipment that would otherwise have been bought elsewhere, Hestrin said. No one from Beaumont Electric is being prosecuted.

Hestrin said the Beaumont arrests should serve as a warning to cities who heavily outsource to private companies.

“Cities have to be very careful, and proceed at their own peril, when they invite private companies to be in charge of finance or in charge of their city,” Hestrin said. “The officials of a city have an obligation to the taxpayer, not the profit line.”

Tuesday's arrests are the culmination of FBI raids conducted in the Coachella Valley and the Inland Empire more than a year ago. Last April, an FBI-led public corruption task force confiscated hundreds of boxes of documents, computers and other items from the Beaumont City Hall. Agents also went to Urban Logic Consultants and to Kapanicas' home in Palm Desert.

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At the time, law enforcement wouldn’t say what the raids were about, but clues began to surface soon.

Three weeks after the raids, State Controller Betty Yee announced she was launching an investigation into “significant discrepancies” in the financial reports at Beaumont City Hall. Six months later, in November, Yee’s audit said Beaumont’s internal accounting controls were “non-existent” and that three officials — Kapanicas, Moorjani and Aylward — had “complete control” over the city’s bond money.

Worse still, all three of these officials were using this control to make money off the city.

Kapanicas and Moorjani both held second jobs as the executives of consulting firms, General Government Management Services and Urban Logic Consultants, respectively. Both men had used their city positions to approve payments from the bond money to their own companies, the audit said.

Aylward’s money-making scheme was even less complex. As finance director, he was responsible for the accounting of city bonds, from which he just paid himself directly, billing the city for working with the bond money. Essentially, Aylward paid himself more money for doing the job he already had.

None of this should have gotten past the City Council, the audit said, but somehow it did.

“It is difficult to understand why the City Council would ever approve or condone having the city’s executive management team’s personal business enter into such agreements with the city,” the audit stated. “Basically, the city management and the City Council failed to exercise its fiduciary responsibilities in protecting taxpayer dollars.”

Last month, Beaumont City Councilman Mark Orozco criticized the DA's Office for dragging its feet. On Tuesday, Orozco credited the DA for his "diligence," saying he hoped the arrests restore trust in the local government, but declined to comment further.

The Beaumont arrests provide some perspective on a similar raid conducted at Palm Springs City Hall last September, showing that investigations of public corruption can take a long time before any arrests take place, if ever.

Beaumont City Hall investigation leads to Palm Desert

Both raids were done by the Inland Regional Corruption Task Force, which is led by the FBI but includes the IRS, the U.S. Attorney’s Office and district attorneys in both Riverside and San Bernardino counties. The Palm Springs probe continues today, as investigator study the relationship between former Mayor Steve Pougnet and developer Rich Meaney, who paid Pougnet more than $200,000 for undisclosed consulting work.

Reach reporter Brett Kelman at 760-778 4642, brett.kelman@desertsun.com or @TDSbrettkelman on Twitter. Reach reporter Jesse Marx at jesse.marx@desertsun.com or @marxjesse on Twitter.

SEVEN OFFICIALS CHARGED

Alan Kapanicas – 33 felony charges, including embezzlement by a public official, misappropriation of funds, and conspiracy

Joseph Aklufi – Four felony charges, including misappropriation of funds and conspiracy

William Aylward – 33 felony charges, including embezzlement by a public official, misappropriation of funds, and conspiracy

Frank Coe – Four felony charges, including misappropriation of funds and conspiracy

David William Dillon – Seven felony charges, mostly embezzlement by a public official

Ernest Egger – Seven felony charges, mostly embezzlement by a public official

Deepak Moorjani – Seven felony charges, mostly embezzlement by a public official

Source: Riverside County court records