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Once, George Argyros was merely the most powerful Republican in Orange County. Now, he's also the Bush administration's nominee for ambassador to Spain and Andorra.

And if not for the intervention of another powerful friend, Argyros might also be something else: under indictment for allegedly bilking thousands of tenants in his Arnel Management Co.-run apartments out of millions of dollars in unreturned security deposits.

In February, District Attorney Tony Rackauckas, whose 1998 campaign received Argyros' endorsement and a $1,000 contribution, stepped in and derailed a meticulous 15-month probe of Argyros by his own investigators.

First, Rackauckas ordered Argyros' name removed from the complaint against Arnel. Then, approximately 90 minutes after charges had been filed against Arnel, Rackauckas ordered them withdrawn. Next, Rackauckas personally presided over negotiations for an out-of-court settlement. Finally, Rackauckas withdrew the Orange County district attorney's office from the case altogether, referring it to the California attorney general's office.

Steve Douglass, the district attorney's lead investigator on the case, is appalled. He spent nearly all of his 18 months with the DA's office investigating Argyros and Arnel, only to have the case suddenly snatched away by Rackauckas. During his 30 years as a lieutenant with the Downey Police Department and six months as an investigator with the Los Angeles district attorney, Douglass says he has never witnessed such an egregious misuse of power by a law-enforcement official.

Douglass subsequently resigned from the DA's office to spend more time with his ailing wife. But he continues to follow the case closely. Douglass recently shared his observations of the case, culled from his long investigation of Argyros and Arnel, during an hour-long interview with the Weekly.

The conversation took place May 7 in the meticulously organized upstairs office of Douglass' upscale home in Huntington Beach. Wearing carpet slippers, blue jeans and a casual shirt and sitting next to a roll-top desk surrounded by plaques commemorating his decades in law enforcement, the registered Republican referred frequently to notes from a thick file as he painstakingly chronicled the disturbing twists and turns of the final case of his career.

OC Weekly:Let's start at the beginning.

Steve Douglass:We started investigating this case at the beginning of November of 1999 after we found several complaints about how tenants were treated with their security deposits—the retention of them by Arnel Management. There seemed to be a common thread that was repeated over and over again. Then we found that a lot of small-claims lawsuits had been filed alleging the same thing. From there, it was like opening Pandora's box. How did you proceed? We looked at it in a number of different ways. I mean, we investigated and interviewed former employees at all levels of the company and former tenants, and we had done a pretty in-depth statistical analysis of all the information that was contained in tenant files to show what they had been charged, how often, what the costs were. And it strongly supported the position that the tenants were being overcharged when they moved out and that it was taken from their security deposits. This goes back pretty far? We have tenants that go back as far as 21 years, but in large numbers, back 15 years. We had hoped to file the case in the latter part of last year, but because of the sensitive nature of the case, obviously it was appropriate to have it reviewed by the DA, Tony Rackauckas, to keep him abreast of what was going on. How did that go? In the beginning, information was presented to him, and he said, “Fine.” He was concerned—and I think it was an appropriate concern—that if the case was filed, he wanted to make sure we could win. So the feedback you got was that Rackauckas was concerned that you had enough to make it stick? Right. Because there was already a judgment against Arnel in 1980. There were similar things alleged, but they didn't plead to that. They pled to another count that dealt with misrepresentation and false advertising, something of that nature. [The DA's office] dropped the other charges, and that was the end of that. But there were allegations that Arnel had kept security deposits as far back as 1980.That was based, I think, solely on small-claims cases that were filed at that time, in 1980. There was another case, an investigation by the DA's office, about 10 years ago. And they were finding the same things that we found. But early on, they were ordered to close the investigation [by superiors], even though it was not finished. A copy of that file still exists, with all of the witnesses and victims in that investigation. Did you find these things out in the course of your own investigation? Yes. But, back to this case . . .About June of 2000, there was a meeting among the DA staff and Arnel defense attorneys. So they were aware of the investigation. There had been documents subpoenaed [from Arnel's offices], and there was interaction going on from early 2000. So in June of 2000—June 22—there was a meeting between the defense and the DA's office, in which the nature of our complaint was presented to them. There was a copy of a complaint draft given to the defense at that time. So, this was the beginning?So this was the beginning of the negotiations for a settlement with Arnel back on June 22. How did the negotiations go?On July 18, 2000, the DA's office sent out a 15-page offer to the defense, asking for an injunction that would prohibit them from doing certain things and require them to comply with the law. Also, it asked for $2.5 million in restitution and $2.8 million in penalties. And these numbers were really fairly conservative because the potential violations would be many times that amount. How did you arrive at those numbers?The two main offenses of the Business and Profession code each carry a $2,500 penalty per offense. So, theoretically, if Arnel commits the same offenses with each of the tenants who move out, you've got a potential of $5,000 per tenant. There's about 4,500 units, and each tenant stays [in an apartment] on average about 13 to 14 months. So there's somewhere in the neighborhood of 3,800 people per year at $5,000 per shot. And a four-year statute of limitations, so that's multiplied by four . . . It adds up to a sizable amount. A report in theRegister suggested seven-figure settlements in such cases are unusual. This is an unusual case. We're asking for $5.3 million. One of the class-action suits that have been filed is asking for in excess of $96 million. And I don't know if we've seen the end of that. How did Argyros' attorneys respond to your settlement proposal?Well, that was July 18. On Sept. 29, the DA's office wrote to Arnel's attorneys, saying there must be a counteroffer in order to continue negotiations. There had never been a counteroffer. We were trying to negotiate, but they weren't responding. There was interaction, but they wouldn't counter or discuss any type of settlement. And on Oct. 10, 2000, the deputy DA on the case had a conversation with one of the defense attorneys, who told her they had no interest in submitting a counterproposal. Let's just back up a moment: all of this is significant because . . .I just find it interesting that later on, Rackauckas said he had pulled the complaint that was filed in order to negotiate with Arnel. It had already been negotiated as far as was humanly possible, so what he's saying makes absolutely no sense. I can think of no reason that is legitimate, lawful or reasonable to do the things that he has done. I have yet to talk to anybody who has seen anything like it.

George Argyros
So what do you do when the defense refuses to negotiate?We completed the investigation to the point at which we had sufficient evidence to file. A copy of the case was given to Rackauckas for him to review somewhere in the mid to latter part of November 2000. He had every right to do that. We were just waiting for him to review it and give the go-ahead to file it. And we waited. And we waited. And we waited. On Jan. 6, 2001, one of the head members of the DA's office talked to Rackauckas and asked him if he had made a decision yet. He said he'd lost the file and hadn't read it. He lost the file?He'd had it from mid-November to early January. He hadn't even read it, and now he said he had lost it. Later—I don't know who it was—but somebody went to [Rackauckas'] secretary and mentioned the missing file. She went right to it. She knew right where it was. So there is a real question: Was it ever really missing? I've heard no explanation as to why she could put her hands on it right away but he couldn't find it. But anyway, on Jan. 6, he said he had lost it. So they made another copy and gave it to him to review the next day or two days later. It wasn't until Jan. 22 that we were told Rackauckas had reviewed the file and that he had apparently said to remove George Argyros' name from the complaint. Was that a reasonable request?If there had been no evidence to tie him [Argyros] to the actions of the company, that would have been appropriate. But that was not the case. You knew that Mr. Argyros had firsthand knowledge of these things?I probably shouldn't discuss that at this point. But everybody—former employees—talked about how he [Argyros] ran the company. And there are other violations beside the security deposits [that implicate Argyros]. So to remove his name from the complaint is totally inappropriate, totally outside the normal procedure in a case like this. Everybody was very upset. How can you treat one person one way and treat everybody else differently, when the one person is a campaign contributor and a friend of the DA who is making the decisions? Everyone else was opposed to it. He [Rackauckas] independently said, “Take his name off the complaint.” That was just unheard of. Did you speak to him about this?No. At that point, I never had. He had never come and said, “I'm looking for advice. I have a few questions. What do you think? This is what I'm gonna do.” Nothing. So Argyros' name was removed?Not immediately. [Others] went back to Tony and said, “Won't you reconsider?” Rackauckas said, “No. Remove his name.” That was Jan. 29. On Jan. 30, the complaint draft was rewritten, removing Argyros' name. On Feb. 1, the case was filed. How did Rackauckas react to the filing?Well, there may have been a misunderstanding about that, but it was believed that Rackauckas had given the okay to go ahead and file the case when Argyros' name had been removed. But within an hour and a half, Rackauckas became aware the case had been filed. I'm told that he was very upset, that he ordered it to be pulled immediately. Again, extremely unusual. And there had been no communication between him and the deputy DA or myself or anyone involved in the investigation. At this time, the press picked up the story.I believe it was Feb. 6 that the story came out in The Orange County Register. That day or the following day, Rackauckas met privately with the defense counsel. Again, there was no communication between Rackauckas and the deputy DA in charge of the case. She sat totally in the dark, having no idea what was going on. And there was absolutely no reason for that. She had done an outstanding job with the case up to that point—and to this day. And he came out and said something about how the case was filed through error, that it was filed when negotiations weren't finished. Totally untrue! So it was kind of a professional slight as well.Yeah, as though the thing had been mishandled, and that is absolutely untrue. So there were some negotiations going on between Rackauckas and the defense. I don't know how many times they met, but it was more than once. Rackauckas and—I later learned—Bruce Patterson were present. Who is Bruce Patterson?He's a couple of levels up from the deputy DA and just under Rackauckas. So he was present with the defense counsel and nobody else, so far as I know. Even the deputy DA was excluded. There was no information whatsoever flowing either way, absolutely none. Would it have been usual for you to be involved in the negotiations?In consumer-fraud cases, it is common practice for the deputy DA to have the investigator present—there's nothing unusual about that at all. On March 8, a month later, we met with Arnel's two defense attorneys. I was present at that settlement conference and all the other [conferences], with one exception. There was myself, Wendy Brough, Bob Gannon, Bruce Patterson and two Arnel defense attorneys, Allan Stokke, and Leonard Hampel. Brough and I went downstairs to the lobby to meet the two defense attorneys. One of them—Hampel—the first thing he said was, “Have you been filled in on the prior negotiations with Tony?” And I [rolling his eyes with amazement] turned around and wrote that down, verbatim: “Have you been filled in on the prior negotiations with Tony?” At that point, you must have been . . . I had heard rumors that Rackauckas was giving the case away. So we went upstairs and met for two and a half hours in the conference room. And they laid it out: they said they had an agreement with Tony that there would be no injunctive terms and there would be no penalties whatsoever. There would be some restitution. I don't know what was negotiated in their session, but Hampel said what he thought was a fair restitution to the victims was about $100,000 or $200,000. That's almost nothing! It's incomprehensible! Anybody in law enforcement knows that the way you deter people from doing wrong things is to have penalties. You don't merely say, “Please don't do it again.” And to take away all the penalties and allow them to keep all this money that was illegally obtained—millions of dollars—and then tell them, “We're not going to penalize you one red cent, and we're only going to have you give back a small portion of what you've taken”? That's just unheard of. When you said Rackauckas proposed no “injunctive terms,” does that mean Arnel doesn't have to stop the practice?Certainly not by agreement. And the understanding was that if there were any future or continuing violations—and we had evidence that these things were continuing—we would have to start over from square one, as if it were a new violation. Which makes no sense at all. Anyway, we tried to stick to our guns with our original offer. The reason for that was that after the [newspaper] articles appeared, I'd received more than 300 phone calls from people complaining about how they were treated—including a few former employees. From that, we got evidence of additional violations. How did that affect the investigation?Everything changed. We were looking at one thing, and now we were looking at several things. The security deposits were the biggest issue, but there were some other significant problems and violations. So we were expanding the investigation. We thought it would be improper to go where [Rackauckas and the Arnel attorneys] were going. But they said, “No, we've got a deal with Tony, and we're going to stick to it.” So after two and half hours, we left, with no movement on either side. Now the DA says there was no favoritism. I don't see how he can say that with a straight face. That's incredible to me. Who asked the state attorney general to step in?I don't know who initiated the process to get the attorney general involved, but I think it was the right thing to do because obviously our office was not going to be allowed to handle it as it should be handled. And I'm only supposing, but I imagine Rackauckas was very relieved to have them take it over because he was in a corner and I don't believe he knew how to get out of it. Would you have come out as openly if . . .If I was still working there? Couldn't do it. There are others who would like to come forward but dare not. Other people who have spoken up have been terminated, been punished in some way. For personal reasons, I had wanted to leave for a period of time prior to this happening, but I felt an obligation to stay with the investigation until it was concluded. But when Tony became involved—and in my opinion, the case was just being flushed down the toilet—I felt there was absolutely no reason for me to stay. That's when I turned in my resignation. When was that?I turned it in on March 27. For a long time, I had felt that what needed to happen was for a good class-action law firm to step in. There were a lot of things that just were not within the scope of our investigation, that could be better handled by a private law firm. And so when I heard that was happening, I felt very good about it. I felt that now, maybe, some of these people will see some justice. You mentioned that on March 8, you heard rumors the case might be given away, but at what point in the process did it start to seem strange?The first thing was when Tony ordered George's name removed from the complaint. But, you know, sometimes things will happen that you just don't agree with. There can be a difference of opinion. I think Tony was wrong, but he can make those decisions. But when he began negotiating personally, I thought, “We are way out of the ballpark here.” Were you suspicious when the file was lost? Or that it took a long time to get an answer from Rackauckas?You just kind of shake your head and wonder. You don't have all the facts, so you let it ride. But it was always puzzling. Why the delay? We were told that sometime in January, he had made arrangements to meet with them [the defense]. Then we heard—and I can't say for certain this is correct—that they were going to meet in April. Why wait till April? It's to their advantage, and it weakens our case because things are getting stale. It just doesn't make sense. But when we learned that Argyros was being nominated as the U.S. ambassador to Spain, it became pretty clear that there might have been another reason for the delay. I can't see any other way to explain it. From the beginning, you must have known that the name George Argyros was a pretty significant one in Orange County.When we started the investigation, I had never heard of him. And we had no idea who owned the company until several weeks or a few months later, and then it was just a name. I learned that he was a very wealthy man and had a lot of influence in the community, and then I noticed that his name was in the paper a lot. One of the first articles I saw was in the Register, and it said his company was sued in small-claims court more than anyone else in Orange County. That's pretty telling in itself. When I first heard about Arnel withholding security deposits, it struck me as a nickel-and-dime case. But on this massive scale, over years and years, I guess it's not nickels and dimes anymore.No, it's not. And there's more to it than that. It hasn't been litigated yet, so I don't want to say anything more about the case itself. But I think what happened is totally wrong. As someone with a long history in law enforcement, was this disillusioning to you?This is a little different. I've got 30 years of police work, where you deal almost exclusively with criminal violations. That's a different ballgame. The rules are different; things are done differently. So the experience I have in this area [as a DA investigator] is more limited, but in the short time I was there, I'd never seen anything like it. And the people I've talked to who have been there for years and years and years have never seen anything like it. Is it disillusioning? Absolutely! From what I have seen and heard in talking to other people, this is the largest case of its kind in Orange County—and maybe in California. And I've gotta say, you develop some strong feelings about it. You've got to be neutral and look for the truth no matter what it shows you. But it's hard not to have some emotional ties to the case, and if you believe in truth and justice, you like to see proper resolution. I'm hoping that will happen someday. Was it exciting when you started connecting the dots and realized you'd found something?The Argyros case started out as consumer fraud. There was nothing big or exciting about gouging renters. But what was kind of compelling is when you talk to [the tenants]. These are not rich people by any means; they're living paycheck to paycheck for the most part. And when they move out, they're counting on getting some refund to get them into the next apartment. Then they find out that they're not getting money back, and some of them—many of them—are being charged way up and above and beyond what they had paid in security deposits, and on such a massive scale. You've got to feel sympathy for these people. What about Arnel employees?When I talked to former employees, almost without exception they couldn't wait to tell me what had gone on. It was like they were going to confession. Several of them said they had quit because they couldn't stand what they were asked to do. When I would contact these people, telling them who I was and why I was talking with them, I would hear comments like, “I've waited three and a half years for this moment.” Or “I can't believe it took you so long!” Or “Thank God somebody is finally doing something about this.” I'd heard mention of a racial element [that Argyros/Arnel allegedly targeted Asians]. . . .I don't want to say things I shouldn't. But if this gets to trial—which I fully expect it will—I think people are going to be very surprised. Will you be a witness in that trial?I believe so. When you're working at the DA's office, are you legally barred from commenting on a case? Or is it purely that you can't risk reprisal? Is there a code of honor at work?You still have the freedom to express your opinion. However, there is some question about whether it is appropriate to discuss a case that is being investigated. Generally, it's not proper. But that's what helps create the problem. What do you do when what is happening is not proper? If you sit back and let it go, you become part of the problem. So I think in those situations, you have a responsibility as a citizen to speak out and let a neutral party come in and determine the true facts. Now that you're outside it, do you see yourself as fighting a battle for those inside the DA's office who cannot speak out?There's an element of that. Many would like to come forward and say things, but they can't. And I've got to say that I really have no animosity toward anyone I worked with in the department. I think they are very dedicated, professional people. The only problem I have is what was done by Rackauckas. I never expected to experience anything like that. Do you think you're looked down upon by your colleagues for shedding light on this?I'm sure there are a few people who disapprove of what I've said. Because it casts the office in a bad light?If that's the case, I'm sorry. I don't mean to cast any aspersions on the office or any of the people there. I just feel strongly that what happened is wrong. And there obviously are other cases that have come to light, other allegations of misconduct, and I've heard of others that have yet to come to public awareness. And so you put them all together, and you think, “Something needs to be done.” Rackauckas campaigned on a promise not to concentrate so much on political-corruption cases. If you heard that, you can't be totally surprised about what has happened.I wasn't there then; I never worked for [Rackauckas' predecessor, former DA Mike] Capizzi. However, people who were in the office at that time told me that whether or not you liked what he did, Capizzi was a person of integrity, and he would not let political influences sway him from doing what was proper. What I'm told is that this never would have happened if Capizzi were still in office.

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