Two Port of Seattle managers have resigned under pressure, and seven other high-ranking employees were disciplined for their role in fraudulent contracting practices, Port CEO Tay Yoshitani announced Tuesday.

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Two Port of Seattle managers have resigned under pressure, and seven other high-ranking employees were disciplined for their role in fraudulent contracting practices, Port CEO Tay Yoshitani announced Tuesday.

Former U.S. Attorney Mike McKay, who identified 10 cases of fraud in a Port-funded investigation last week, said Yoshitani’s disciplinary measures were an “appropriate and proportional” response to his findings. Yoshitani and several Port commissioners predicted the discipline would change the way the Port conducts business.

“I hope this demonstrates this is a new day,” said Port Commissioner Bill Bryant.

But others were skeptical. Port Commission President John Creighton called Yoshitani’s action “only a first step” and suggested he should have gone further in his “zero-tolerance” fraud policy. “Zero tolerance means people should be terminated if caught doing illegal activities,” Creighton said.

Yoshitani’s discipline focused on McKay’s findings of fraud in building Seattle-Tacoma International Airport’s third runway and improprieties in the Port’s awarding of small contracts.

John Rothnie, project manager for the new third runway at Seattle-Tacoma International Airport, and Larry McFadden, general manager of Port Construction Services, submitted their resignations. Yoshitani had initiated disciplinary action against Rothnie and McFadden when both quit last week.

Yoshitani said it wasn’t necessary to fire the duo. “If they were resigning that was an admission of guilt on their part. It took off the table any possibility of them coming back with wrongful-termination” complaints or lawsuits, Yoshitani said, adding he felt sorry for Rothnie and McFadden. “Let’s face it, these two no longer have jobs and are living with the consequences” of their actions.

Yoshitani suspended four Port managers without pay and gave written reprimands to three top executives. Chief Engineer Ray Rawe was suspended for three weeks. Three others received one-week suspensions: David Soike, deputy director of aviation; Paul Powell, contract services manager; and Robert Riley, director of airport capital improvement.

Yoshitani put letters of reprimand in the files of Port Deputy CEO Linda Strout, General Counsel Craig Watson and airport director Mark Reis. He said they should have done more to avert some of the problems discovered by McKay.

No one has been charged with a crime. The report did not find embezzlement, kickbacks or bribes that would be a crime.

The U.S. Department of Justice has been investigating the Port for alleged criminal activity, a move prompted by a scathing state audit last year.

McKay’s report concluded that employees in Port Construction Services, headed by McFadden, committed fraud by steering contracts to preferred vendors and breaking large projects into smaller “subcontracts” to avoid competitive-bidding requirements.

McKay said a Port employee who had questioned some of the practices was admonished “at the direction of his immediate supervisor” and McFadden.

The reprimand stated: “We encourage you to make an attempt to recognize that we do business a bit different at the Port, accept Port contracting for what it is (despite the impression that Port contracting might appear to be too lax or informal) … look for ‘work arounds’ instead of introducing possible problems.”

Hidden conflict

McKay also found that McFadden directed Port business to the owner of 3A Industries, a company he used to work for. McFadden hid this apparent conflict of interest from Port superiors, McKay reported.

In one instance, the Port conducted interviews for two consulting contracts. When the 3A Industries interview was a “disaster,” McKay reported, McFadden changed the procurement plan and ordered that contracts be awarded to the top three contractors instead of two.

“Over $1 million worth of work was directed toward 3A under this and other contracts, while the other two contractors received considerably less work,” according to the report.

Port staff suspected that 3A Industries was making excessive profit of 25 percent to 30 percent on some of its Port work. But construction-service managers told staff that 3A’s rates were “standard,” McKay said.

McKay said contracts were given to 3A Industries, a minority-owned company, to artificially increase the volume of work that appeared to be awarded to minority businesses.

With the exception of McFadden, all of Yoshitani’s disciplinary actions stemmed from a deceptive memo that misled Port commissioners about the true cost of a $125 million third-runway contract.

The memo failed to disclose other troubling aspects of the contract: A Port employee leaked sensitive Port documents to TTI Constructors, the sole bidder on the $125 million runway job; and a Port employee negotiated with TTI on its bid before a contract was awarded. A Port employee also made prepayments to TTI before money was owed to the company.

Creighton said the memo, which was made more misleading as it went through several drafts, was “insidious and disturbing and undermines the public institution that the Port is.”

But McKay and Yoshitani said they couldn’t pinpoint who made key changes in the memo.

Yoshitani said Rothnie, the third-runway project manager, and then-Port CEO Mic Dinsmore were the “central drivers” of the memo. Yoshitani said Dinsmore “decided to accelerate the contract award process and exerted pressure on staff to get it done.”

Suspensions, reprimands

He said engineer Rawe, the memo author, was suspended for three weeks because he “was in a position to identify the misrepresentation but did not do so.”

Riley, Powell and Soike were suspended for one week for failing to mention that a purported reduction in TTI’s bid was largely contingent on a projected decrease in fuel prices and other unrealistic factors that rendered most of the reduction “cosmetic” and not real. Yoshitani contended, however, that the trio did not intend to “willfully misrepresent anything to the commission.”

Yoshitani said Reis, Strout and Watson were reprimanded because they should have reviewed the memo and ensured it was accurate.

“Our leadership team is expected to demonstrate responsibility and knowledge of proper procedures,” Yoshitani said, “and to raise their hand when they see or know differently.”

The incidents described in McKay’s report took place largely between 2001 and 2006, said Bryant, who oversaw the investigation. That was before Yoshitani took the Port’s top job nearly 22 months ago.

Yoshitani has taken steps to correct the Port’s lax practices, which he attributed to a “get-it-done culture.” Yoshitani has reorganized the Port’s procurement practices and centralized them under a new procurement director.

Two citizens told the Port commissioners at a Tuesday public hearing that they hoped the U.S. Department of Justice’s ongoing criminal investigation of the Port reveals more.

McKay stressed he did not have subpoena power to obtain employees’ and contractors’ personal financial records that might have uncovered a crime. “We didn’t find it. But it doesn’t mean it’s not there,” he told Port commissioners Tuesday.

“The unanswered question today is why did individuals allegedly commit fraud? That is a mystery best solved by the U.S. Department of Justice,” said Chris Gower, a former Normandy Park resident and longtime critic of Sea-Tac’s third runway.

Eddie Rye Jr., who represents a coalition of African-American contractors in Seattle, said he hoped the Department of Justice “comes through here and metes out some justice.”

Bob Young: 206-464-2174 or byoung@seattletimes.com