The company with a lucrative contract is the focus of an insurance fraud inquiry
POSTED: 1:30 a.m. HST, Dec 18, 2010
LAST UPDATED: 1:41 a.m. HST, Dec 18, 2010
The city is "strongly considering" whether it can award an emergency contract for Oahu's busiest and most lucrative tow zone to a new vendor, replacing a company that is the target of a state insurance fraud investigation.
City spokeswoman Louise Kim McCoy in a statement didn't say why the city is considering such action. But the development follows a Star-Advertiser report Sunday detailing the investigation of Stoneridge Recoveries and the company's controversial seven-year history as the exclusive vendor for police-initiated tows in the region from downtown to Makapuu.
Under a month-to-month agreement, Stoneridge pays the city $13,300 for the exclusive rights - nearly $8,000 less than what the company bid when it tried to get the five-year contract in 2002.
The lower monthly premium, set by the city, has enabled Stoneridge to reap what a city attorney described in 2008 as a "tremendous monetary windfall."
So far, the company has saved close to $500,000 in premium payments - even as its service has generated scores of consumer complaints.
Stoneridge was among three companies that submitted bids in 2002 for the five-year contract. The city rejected all three because none of the bidders at the time had a storage lot in the zone, which reduces tow distances and lowers costs for motorists.
Stoneridge, which was the high bidder, filed a legal challenge over its rejection and, while that was pending, was awarded the month-to-month emergency contract in February 2003. With the exception of about two months in 2004, Stoneridge has held the contract ever since, averaging about 10,000 tows a year, double the number of the next busiest zone. The tows mostly are from accident scenes and tow-away zones.
Several years ago, the Honolulu Police Department's then-Chief Boisse Correa and the city purchasing administrator, Charles Katsuyoshi, separately urged that the contract be canceled, citing the history of complaints, unpaid fines and other problems.
But the city administration maintained that it could not end Stoneridge's contract while the legal challenge the company filed was pending. Although that challenge finally concluded in May, with the city prevailing, the city has continued to renew the monthly contract and retaining the $13,300 premium.
The city also has been working on new specifications to solicit bids for a long-term deal, though that likely is months away.
Responding to a Star-Advertiser inquiry, McCoy wrote: "The city is strongly considering whether the emergency contract can be awarded to another vendor pending the solicitation of the long-term contract. This evaluation includes an assessment as to whether any other vendors have qualified storage lots with proper zoning and sizes sufficient to meet the requirements of the contract."
No information was included on why a possible change was being pursued by the new administration of Mayor Peter Carlisle. Because of yesterday's furlough day, city officials could not be contacted for additional information.
Mark Kawata, Stoneridge's attorney, issued this statement:
"If the city considers Stoneridge's exemplary performance of duties under the towing contract in recent years and the support the company has from (police) officers in the field, and the company is afforded the benefit of the doubt, as the allegations mentioned in the (newspaper) article have not been proven to date, there should be no change pending re-bid," Kawata wrote.
At least one Stoneridge competitor, Oahu Auto Service, which was the previous vendor for the downtown-to-Makapuu zone, yesterday expressed interest in an emergency deal.
"What I want to do is clean up this mess and bring back the (industry's) image," said Brian Kunishige, owner of Oahu Auto, which has an Isenberg Street storage lot that is within the zone. Oahu Auto also submitted a bid for the five-year contract in 2002.
Stoneridge's troubled tenure took a new turn recently when the state's insurance fraud unit started a criminal investigation of the company's pricing practices.
The investigation began after the National Insurance Crime Bureau, a nonprofit company that assists insurers, uncovered evidence that Stoneridge was charging so-called difficult hook-up fees for accident tows at a far greater frequency than other companies, according to people familiar with the investigation.
Insurance companies found invoices that indicated Stoneridge took hours to hook up some crashed vehicles or that the times charged for the difficult hook-ups extended beyond when police records indicated the accident scenes were cleared, industry officials told the Star-Advertiser.
Kawata has said his client is cooperating with state investigators.
Deyton Stone, a Stoneridge owner, declined comment for this story through Kawata. Stone and Trenton Silva formed the company in 2002 to bid on the city contract, according to Stoneridge documents.
The mostly urban zone that Stoneridge covers is considered the most lucrative of the seven regions for which the city issues exclusive towing contracts.
The company offered to pay the city $21,000 monthly when it initially bid for the five-year deal.
When that bid was rejected and the emergency contract eventually offered to Stoneridge, the city set the monthly premium at $13,300, the same amount it was charging the previous vendor, Oahu Auto.
The savings Stoneridge realized from the lower premiums became an important point in the debate about the company's legal challenge. At a January 2008 court hearing, Amy Kondo, a city attorney, highlighted the issue.
"They've had tremendous monetary windfall by being the contractor for this whole time while this matter was proceeding, and we've been wanting to get a new contract in place but we just basically (have) been stuck where we are right now," Kondo told the court.
In an interview this week, Kawata emphasized that the $13,300 premium was set by the city, not Stoneridge, and that the company had been expecting to pay the full amount it bid.
But if the city had set the premium at $21,000, it in effect would have been admitting that Stoneridge met all the requirements for the five-year contract, something the city didn't want to do because that would have strengthened the company's legal case, Kawata said.
Because the contract was only month-to-month, with no guarantee beyond that, Stoneridge was reluctant to invest in revenue-boosting capital improvements, such as new dispatching equipment, due to the risk of losing the city's business on short notice, according to Kawata.
Given such constraints, Stoneridge probably could have made more money had it received the five-year contract, he added.
Katsuyoshi, who retired as the city's purchasing administrator in late 2006, said the city could have canceled Stoneridge's emergency agreement for reasons dealing with performance.
He called the city's contention that its hands legally were tied "a lame excuse," adding: "They need to take action if a city contractor is not performing."
But Kawata said the administration had no grounds to end the contract while the challenge was pending. The number of complaints against Stoneridge, he added, has been relatively low given its huge volume of tows - about 100,000 during the past seven-plus years.
One of those tows involved Adam Mastandrea's 1997 Saab, which was damaged in 2007 when it was transported from a tow-away zone near Kaheka Street.
Mastandrea sued Stone and, when Stone didn't show up in court, won a default judgment for $3,500 plus court costs. Mastandrea said he mailed Stone a copy of the judgment, but said, "I never got any response."
After the Star-Advertiser inquired about the case this week, Mastandrea received an apology and a check from the company. It was the fifth default judgment that the company has paid as a result of the newspaper's inquiries.
Kawata said the five cases were overlooked.