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Wednesday, March 18, 1998 - Page updated at 12:00 AM

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Stewart Case: $5 Million Fine -- Republican Fund-Raiser Pleads Guilty To Illegal Campaign Donations

Seattle Times Staff Reporters

A campaign-finance investigation, long shrouded in secrecy, reached a swift and public conclusion today when a federal judge accepted Seattle businessman Thomas Stewart's guilty plea for making illegal campaign donations throughout most of this decade.

Stewart, chairman of the West Seattle conglomerate Services Group of America (SGA) and top contributor to the state Republican Party, appeared in court this morning and admitted to U.S. Magristrate John Weinberg that he had knowingly violated federal election laws in his support of Republican candidates and causes.

"Your honor, I'd just like to say I sincerely regret the actions that have led to us being here today," Stewart told the judge. "I can guarantee it won't happen again."

In one of the most prominent cases in the nation involving campaign-finance violations, Stewart, one of his companies and his chief financial officer, Dennis Specht, agreed to pay $5 million in fines for illegally funneling money to various election campaigns.

The two main beneficiaries of Stewart's illegal contributions both lost at the polls. One was the 1992 congressional campaign of Republican Pete von Reichbauer, the other was a 1995 ballot measure to elect Seattle City Council members by district.

The plea agreement, filed late yesterday in U.S. District Court in Seattle, spares Stewart of jail time but requires the 52-year-old executive to serve a 60-day sentence of home confinement, as well as

perform 160 hours of community service at soup kitchens and homeless shelters.

He can still vote, make donations and attend fund-raisers. He will also be allowed to continue commuting from his home on Vashon Island to his offices in West Seattle, but must be home by 8 p.m. and wear an electronic-monitoring bracelet on his ankle. He won't be able to operate the company helicopter based on his estate.

Speaking to reporters on the courthouse steps after the hearing, Stewart said he is taking "complete responsibility" for what happened.

"Our company cooperated fully in the investigation of this matter and we believe today's agreement brings this to an end," he said. "I love this country and the values for which it stands."

Specht appeared in court and admitted to the same misdemeanor count, but he declined to make any extensive statements or apologies. He answered questions with a simple "yes" or "no."

Agreements were signed by U.S. Attorney Kate Pflaumer, Stewart and his attorneys, and Specht.

State Attorney General Christine Gregoire is requiring Stewart to pay $570,000 to the state for civil infractions involving $60,000 in laundered donations in 1995. Stewart acknowledged disguising SGA money that was given to a city-charter-amendment campaign.

At a news conference, Gregoire and Pflaumer said investigators found a pattern in which Stewart intentionally routed illegally funneled donations to political campaigns from 1990 to 1996. That's longer, they said, than any other campaign-financing fraud previously prosecuted anywhere in the country.

"This is a case that strikes at the heart of our disclosure laws," Gregoire said, asserting that Stewart's violations didn't result from an oversight or carelessness.

"We are talking about an intentional pattern of behavior designed to mislead the voting public."

But Stewart's attorney, Cyrus Vance Jr., said the SGA case was less sinister than that. In a written memorandum to the court, Vance said that while Stewart acknowledges his guilt, this case is "totally lacking in anything even remotely resembling political corruption."

Mark Braden, another Stewart attorney, said today the SGA case was an informal, unsophisticated operation at a company where employees tend to rally around a common cause.

"Enthusiasm overcame providence," Braden said. "They just weren't thoughtful and careful."

State and federal law states that if people are reimbursed, coerced or instructed to donate the money, those contributions would be illegal. Federal law also prohibits someone from making a donation under someone else's name.

Grand jury was convened

The case began last summer when a grand jury began investigating Stewart's donations to the congressional campaign of von Reichbauer, now a Metropolitan King County Councilman.

Nearly one-third of the $197,000 raised by von Reichbauer's campaign came from Stewart's employees and their families.

Despite benefiting from the illegal donations, von Reichbauer was not charged in the case. "We could not prove that Mr. von Reichbauer knew of or participated in the scheme that's at issue in this case," Gregoire said.

Von Reichbauer, R-Federal Way, could not be reached for comment last night or today. He has declined to discuss the case since October, when the U.S. Attorney's Office said he was not a target of the investigation.

In all, Stewart's companies had masked about $100,000 in political contributions through relatives, employees and relatives of employees, federal prosecutors said.

Stewart and Specht had arranged for SGA's supervisory employees to receive bonuses as high as $50,000 with the understanding that the employees would, in return, write checks, often $1,000, to the company's political-action committee.

Pflaumer said the bonuses were not considered extra pay, but were a key part of the employees' annual compensation, making it difficult for them to refuse. She said employees were told "don't ask" about the arrangement but to simply send the money.

The practice "was significant in the exploitation of the culture of the corporation," Pflaumer said, adding that employees had little idea what political efforts the money was going to.

The $5 million fine is the third-largest financial penalty imposed on a donor anywhere in the country.

The two that have carried stiffer fines than the Stewart case were an $8 million case in Pennsylvania resolved last October, and a $6 million plea bargain in Boston.

The bulk of the money will be paid by SGA subsidiary Food Services of America, which faces $4.8 million in penalties on 24 misdemeanor counts. Stewart will personally pay $100,000, as will Specht.

Specht, former treasurer of the company's political-action committee, also will serve a 60-day sentence of home confinement and community service identical to Stewart's.

In the state's civil case, the $570,000 in fines - levied against Stewart, SGA and SGA President Larry Riggs - are the maximum allowable and have been tripled against Stewart individually due to the "intentional nature" of the violations, the state said.

The state penalty alone would be the largest campaign fine in state history, dwarfing the $400,000 assessed to Democratic and Republican organizations in the state Legislature in 1992 for illegal campaign practices.

Republicans say they won't distance themselves from Stewart in light of the plea agreement. They give him credit for cooperating with the government, paying the fine and admitting responsibility for his actions.

"I think it's important that he admitted guilt and cooperated fully with the investigation," said GOP Chairman Dale Foreman. "Now that he has agreed to pay a substantial fine, he should be allowed to continue to participate in politics."

Republican consultant Brett Bader said he'd be surprised if any party candidates decline to accept money from Stewart in future campaigns out of any concern it would be viewed as being tainted.

"We've never called on the Democrats to be booted out of politics for their misdeeds. Neither should he," Bader said.

But state Democratic Party Chairman Paul Berendt maintains that Stewart should be banned from the political scene. His complaint to the Federal Elections Commission ultimately made its way back to Seattle and planted the seeds for the federal case against Stewart.

"It's outrageous to me that even after the magnitude of these offenses, the Republican Party would still say they would want to take this man's money," Berendt said this morning. "(Stewart's) been their biggest sugar daddy and they can't wean themselves from his money."

Plans, nonetheless, are under way for the August picnic held at Stewart's estate on Vashon Island. It's an annual event in which hundreds of Republican supporters and politicians gather on Stewart's homestead to munch on hamburgers and energize the rank and file for fall elections.

Foreman said House Speaker Newt Gingrich, R-Ga., is anticipated to be this year's guest of honor.

Some Republicans have been angered by the public attention on Stewart's alleged misdeeds. Foreman last fall suggested that the federal and state investigations - overseen by two Democrats, Gregoire and Pflaumer - may be a partisan attempt to turn one of their top supporters into a campaign-finance poster child.

Stewart's punishment, especially being confined to his Vashon Island home for 60 days, was "excessively harsh given the infraction he committed," said Reed Davis, chairman of the King County Republican Party.

"I'm no expert on the history of campaign contributions, but this kind of punishment has taken everyone's breath away," Davis said.

Davis said that most other Republicans he had spoken with yesterday about the settlement believed that what Stewart did was well within his First Amendment rights.

Indeed, there is little indication Stewart and his corporate executives plan to rein in their political involvement.

Two SGA lobbyists attended a breakfast fund-raiser yesterday for U.S. Rep. Jennifer Dunn, R-Bellevue, who walked around the room quietly informing select Republicans of the pending announcement, telling them the settlement was "imminent."

Davis said if Stewart's punishment is a warning to wealthy GOP supporters, it will not intimidate them or make them shy away from Stewart or his cash. "Tom's money is always welcome here," he said.

Misdemeanor charge was key

Sources close to the case said the distinction of Stewart being charged with a misdemeanor, rather than a felony, was key to acceptance of a deal by him and his company.

Many regulatory agencies require companies to disclose whether the business or its officials have been convicted of a felony, and Stewart's Eagle Pacific Insurance is overseen by the State Insurance Commissioner's Office.

A memorandum prepared by Stewart's attorneys notes that a rejection of the plea agreement would jeopardize SGA's negotiations for food-service contracts with the United States Defense Logistics Agency. The memo says that for SGA to compete for the contract, it needs to resolve its federal charges by May.

Additionally, the state announced that Insurance Commissioner Deborah Senn has levied a separate, $120,000 regulatory fine against Food Services of America.

Washington insurance laws empower Senn to take action against an insurer convicted of any crime involving "fraud, dishonesty or like moral turpitude."

Stewart is widely regarded as one of Washington state's most powerful private citizens. SGA, a global holding company whose subsidiaries include Food Services of America and several insurance and real-estate spinoffs, is repeatedly ranked in the upper tiers of Forbes Magazine's "500 Largest Private Companies" list. It has 2,300 employees and annual revenues estimated at more than $1 billion.

Stewart's company has donated more than $1.2 million to GOP candidates and issues this decade, and he also helps fund the Washington Institute for Policy Studies, a conservative think-tank based in a suite at SGA's West Seattle complex.

Under the plea agreement, Stewart won't be allowed to use his helicopter, which drew a flurry of public attention in 1995 when his application to build a helipad on his Vashon Island property came to a vote before the King County Council.

Stewart will be confined to his Vashon Island estate between 8 p.m. and 6 a.m., leaving only to go to work or church.

Family and visitors will be permitted, but Stewart will not be able to travel out of state during his 60-day sentence.

Seattle Times reporters Charles E. Brown, Florangela Davila and Lynne K. Varner contributed information to this report.

Jake Batsell's phone message number is 206-464-2595. His e-mail address is: jbatsell@seattletimes.com

------------------ The plea agreement ------------------

Elements of the Thomas Stewart plea agreement:

-- A combined $5 million in fines, of which $570,000 will be paid to the state for civil election-law infractions. Thomas Stewart, chairman of Services Group of America and its subsidiary, Food Services of America, will pay $100,000, as will SGA executive Dennis Specht. The remaining $4.8 million will be paid by Food Services of America.

-- Food Services of America pleads guilty to 24 misdemeanor counts of violating federal election laws. Stewart and Specht plead guilty to one misdemeanor count each.

-- Stewart and Specht will serve two months of house arrest, in which they will be permitted to go to work and to church but must report home by 8 p.m. Both will wear electronic-monitoring ankle bracelets, and Stewart will not be permitted to use the company helicopter based on his Vashon Island estate. In addition, both Stewart and Specht will perform 160 hours of community service at soup kitchens and homeless shelters.

-- Food Services of America agrees to adopt a political fund-raising "compliance program" to ensure that any future donations are given legally.

-- The federal government agrees not to pursue further charges against Stewart, Specht or Food Services of America.

------------------------------------------------------- Chronology of campaign-finance probes involving Stewart -------------------------------------------------------

-- 1992: Congressional candidate Pete von Reichbauer receives a total of $68,670 in campaign contributions from Seattle businessman Thomas Stewart and 43 of his relatives, employees and their relatives. Stewart's political-action committee, Services Group of America PAC, gave the $10,000 legal maximum; the remaining $58,670 came from individuals.

-- Summer 1992: Ken Wagner and Paul Junker, two former executives of one of Stewart's companies, Food Services of America, sue their former boss for wrongful dismissal. They allege, among other things, that Stewart violated federal campaign laws by requiring them to make contributions from their bonuses. The two win their suit and are awarded $900,000 each. Although Wagner and Junker contributed to the Services Group of America PAC, they weren't among Stewart employees who made direct contributions to von Reichbauer's campaign.

-- November 1992: Von Reichbauer loses congressional race.

-- November 1993: Von Reichbauer wins election to the Metropolitan King County Council.

-- October 1995: The County Council considers a request by Stewart, filed more than three years earlier, to legalize his helicopter commute from his Vashon Island estate to Services Group of America's headquarters in West Seattle by granting him a permit for a helipad at his home. The request becomes a matter of dispute between Republican and Democratic council members and is put on hold for six months.

-- Fall 1995: Stewart arranges to funnel $60,000 in campaign contributions to a city initiative. If it passes, it will amend the city charter to require Seattle City Council members to run from designated districts rather than for at-large positions.

-- November 1995: The Seattle initiative fails.

-- April 1996: After a partisan fight, the County Council awards Stewart his helipad permit. Von Reichbauer abstains from voting because of his friendship with Stewart.

-- June 5, 1996: After an investigation by the Seattle Ethics and Elections Commission of his contributions in the initiative campaign, Stewart and an SGA executive, Lawrence Riggs, agree to pay $60,000 in penalties, the highest in city history for an election violation.

-- June 11, 1996: King County Prosecutor Norm Maleng refers criminal investigation of Stewart's action in the initiative campaign to the Public Disclosure Commission to avoid any appearance of impropriety. An SGA executive is a member of Maleng's gubernatorial campaign committee and gave him a $1,000 contribution.

-- June 17, 1996: State Democratic Party Chairman Paul Berendt asks the Federal Elections Commission to investigate potential wrongdoing by Stewart in von Reichbauer's 1992 congressional campaign.

-- July 1996: The state Attorney General's Office begins to review evidence of possible felony acts involving Stewart's illegal contributions to the Seattle initiative campaign. Meanwhile, the FEC has begun an investigation stemming from Berendt's complaint.

-- March 4, 1997: The FEC drops its investigation.

-- October 1997: Reports surface of a federal grand-jury investigation of Stewart, apparently involving the contributions to von Reichbauer. U.S. attorneys say von Reichbauer is not a target of the investigation.

-- March 17, 1998: Plea agreement is reached.

Copyright (c) 1998 Seattle Times Company, All Rights Reserved.

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