City of Long Beach

Working Together to Serve

Office of the City Attorney

Date: September 6, 2019

To: Honorable Mayor and Members of the City Council

Patrick H. West, City Manager
Tom Modica, Assistant City Manager

From: Charles Parkin, City Attorney nP

Amy R. Webber, Deputy City Attorney

Subject: Results of Conflicts of Interest Investigation - Councilmember Jeannine

Pearce

Following an article published in the Long Beach Post on May 30, 2019, this office
initiated an investigation using an outside consultant into allegations of conflict of interest
relating to Councilmember Jeannine Pearce. After reviewing the report provided by the
consultant, which considered public and private financial records, public statements and
filings and City Council actions, as well as interviews with Councilmember Pearce and her
private legal counsel, this office has reached the following conclusions:

1. In 2018, Councilmember Pearce failed to disclose $11,222 of income received

from DNS Verde, LLC, a business entity owned by Daniel Zaharoni. Mr. Zaharoni is the
development manager of Urban Commons Queensway, operator/lessee of the Queen Mary,
and owner/operator/manager of several cannabis and other businesses.

2. In 2019, Councilmember Pearce received $30,000 in income from Global

Growth International ("GGI"), for consulting work performed for From the Earth, LLC. These
two entities are both owned or controlled by Daniel Zaharoni.

3. Therefore, Councilmember Pearce has a disqualifying financial conflict of

interest under the Political Reform Act in Daniel Zaharoni as a source of income. The
threshold past which a conflict is triggered under the Political Reform Act is $500 within 12
months of a governmental decision. Councilmember Pearce had contracted to provide, and
did provide, services to businesses controlled by Mr. Zaharoni, and was paid more than $500
for those services in a 12 month period.

4. Because the Political Reform Act prohibits a public official with a financial
conflict of interest from influencing, attempting to influence or otherwise participating in the
making of any governmental decision with respect to a source of income, Councilmember
Pearce and her staff should not be contacted on issues affecting Urban Commons
Queensway or the operations of the Queen Mary by Councilmembers and/or City staff,
including routine briefings. Additionally, Councilmember Pearce may have to recuse herself
Honorable Mayor and Members of the City Council
Page 2

from voting on or seeking to influence voting on any City Council items affecting Urban
Commons Queensway or the operations of the Queen Mary.

5. Similarly, Councilmember Pearce and her staff should not be contacted by

Councilmembers or City staff on issues affecting the cannabis industry, including permits, tax
rates and/or general information, including routine briefings. Additionally, Councilmember
Pearce may have to recuse herself from voting on or seeking to influence voting on any City
Council items affecting the cannabis industry.

6. The prohibited and disqualifying financial conflict of interest and recusal

requirement will persist until 12 months from the final payment received by Councilmember
Pearce in connection with her consulting business for Mr. Zaharoni.

7. Councilmember Pearce's participation and voting on March 12, 2019

requesting the City to conduct a feasibility study into the development of a gondola system
between downtown Long Beach and the Queen Mary may have been taken in violation of the
Political Reform Act because Councilmember Pearce had a prohibited disqualifying conflict
of interest. Her individual vote, therefore, may have been void. However, because a majority
of the City Council voted to approve the recommendation, it was and remains a valid action
of the City Council.

8. Councilmember Pearce's amended 2018 Statement of Economic Interests

("Form 700") does not currently reflect the levels of income actually received, according to
information provided by Councilmember Pearce and her attorney. Her amended 2018 Form
700 shows DHS Verde provided income to her under $10,000. Our investigation indicates
Councilmember Pearce received at least $11,222 in income from DHS Verde.

9. Councilmember Pearce's amended 2018 Form 700 also shows GGI provided
income to her under $10,000. Our investigation indicates that GGI provided Councilmember
Pearce at least $30,000 in income and this income was paid in 2019. Her 2019 Form 700,
which must be filed by April 1, 2020, should reflect income received from GGI in 2019 of at
least $30,000.

10. These actions are in violation of Long Beach Municipal Code Section 2.07.010,
which requires Councilmembers to "make every effort to avoid a conflict of interest" and to
submit a written ethics pledge to the City Clerk's office.

11. These actions are in violation of Long Beach Municipal Code Section 3.80.210,
which requires consultants to obtain a Long Beach business license to perform consulting
work In the City.

12. Daniel Zaharoni was not interviewed as part of this inquiry.

13. Councilmember Pearce, who was represented by an outside attorney

throughout these proceedings, may choose to seek an opinion on this matter from the Fair
Political Practices Commission, an independent state agency.
Honorable Mayor and Members of the City Council
Page 3

14. Attached to this memorandum is a copy of the investigation summary provided

by Best, Best & Krieger.

We trust that the investigation and report have responded to the outstanding questions
surrounding this matter.

A19-03175
01G63593.DOCX
 Memorandum
To: Charles Parkin, City Attorney
Michael Mais, Assistant City Attorney
Amy Webber, Deputy City Attorney
City of Long Beach

From: Best Best & Krieger LLP

Date: August 29, 2019

Re: Councilmember Jeannine Pearce: Financial Interests & Conflicts of Interest

INTRODUCTION

Following a story in the local press reporting that Councilmember Jeannine Pearce had
unreported consultant agreements with and had received income from one or more enterprises and
individuals who had, and might in the future have, business before the Council and in the City, the
City Attorney requested that this office investigate the financial interests and potential conflicts of
Ms. Pearce, and the effects of those interests and potential conflicts on past and future City actions,
including votes of the City Council.

Working in cooperation with the City Attorney’s Office, we researched and reviewed
relevant public records and engaged Ms. Pearce, through her counsel, to review some of her private
records pertaining to the subject matter of the inquiry. In addition, we engaged with Ms. Pearce’s
counsel in discussions regarding the legal effects of those facts disclosed by our inquiry.

This memo will describe Ms. Pearce’s report of economic interests (Form 700 filings) over
time, touch on the media revelations concerning her consultant work, detail the results of our
inquiry, identify her “financial interests” under the Political Reform Act (Cal. Gov. Code § 87100
et seq., “the Act”), identify her conflicts of interest under the Act and other relevant conflict laws,
and review votes and actions she has taken and might be called on to take in the future implicating
any conflicts of interest.

MS. PEARCE’S STATEMENTS OF ECONOMIC INTEREST (“FORM 700”)

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 Ms. Pearce was elected to the Second District Council office and assumed office in July
2016.

On her Assuming Office Form 700, filed July 15, 2016, she 1 reported (unnecessarily) stock
“financial planning” mutual fund accounts, and salary from the Los Angeles Alliance for a New
Economy, a non-profit, marking the $10,000-$100,000 checkbox to indicate the range of income
received as special projects director.

In her 2016 Annual Form 700, filed April 3, 2017, she reported her councilmember salary,
which is not legally required to be reported, but can be. She also reported two gifts for events on
the Queen Mary from Urban Commons of $99 and $200, respectively.

In her 2017 Annual Form 700, filed April 4, 2018, she reported TRU Consulting,
consulting services ($1001-$10,000 income) on Schedule A-2, as reflecting a 10% or greater
ownership interest. Our investigation concluded that she derived income from TRU Consulting as
a consultant, but had no ownership interest in the firm. This income should have been reported on
Schedule C.

In her 2018 Annual Form 700, filed April 1, 2019, she reported no income (Schedule C).
She reported one gift for an event on the Queen Mary from Urban Commons of $109. (This report
was materially inaccurate, as detailed below.)

On July 10, 2019, after the press report of her consultant agreements became public,
Ms. Pearce filed an Amendment to her 2018 Annual Report and reported on Schedule C income
of $1,001-$10,000 from two campaign committees and one political consulting firm. Additionally,
she reported income from DHS Verde LLC (“DHS Verde”), identified as a retail cannabis
enterprise, as an independent contractor of $1,001-$10,000, and (as will be discussed below,
prematurely) reported income from Global Growth Investments, LLC (“GGI”), identified as a
retail cannabis enterprise, as an independent contractor of $1001-$10,000. As detailed below, our
investigation has revealed that both DHS Verde, a real estate development company, and GGI, a
property management company, are companies formed and controlled by Daniel Zaharoni.

MEDIA COVERAGE

The Long Beach Post reported on May 30, 2019, that Ms. Pearce admitted in an interview
on May 28th that she had worked as a consultant for Dan Zaharoni, identified as the chief
development officer for Urban Commons, the operator of the Queen Mary, to assist him in forming
a non-profit foundation not related to the Queen Mary. Additionally, the article identified Mr.
Zaharoni as general counsel for From the Earth LLC (“From the Earth”), an El Segundo-based
cannabis business. It was reported that Mr. Zaharoni told the newspaper “the cannabis companies
1
We mention here only economic interests attributable to Ms. Pearce, and not her spouse, as his interests are not
relevant to this inquiry. We also do not reflect reported gifts unless relevant.

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are establishing a [charitable] foundation to raise money for underprivileged children…. He said
he referred Pearce to this group to establish the foundation.” The article reported that Ms. Pearce
said, “she does not work for Zaharoni and that he connected her with his business consultants. She
said she is working with him on a non-profit connected to From the Earth that will raise funds to
reduce prison recidivism rates.”

As detailed below, the statements of both Pearce and Zaharoni, as reported, were not
completely accurate particularly as regards the relationship between Ms. Pearce and Mr. Zaharoni.

MS. PEARCE’S CONSULTANT AGREEMENTS AND WORK

This office requested all agreements and payments made to Ms. Pearce as revealed or
suggested in the press account. We reviewed documents provided by Ms. Pearce through her
counsel. These documents included two consultant agreements and cancelled checks related to
her work based on these agreements. Additionally, we requested that counsel provide an
explanation of the work Ms. Pearce was contracted to perform and to provide supporting or
corroborating documentation.

DHS Verde Agreement

The first consultant agreement was between DHS Verde, a Zaharoni controlled company,
reported as being a real estate development enterprise, and Ms. Pearce was to assist in securing a
storefront cannabis dispensary permit for From the Earth from the City of Culver City, and dated
October 1, 2018.

From the Earth is a “full service cannabis management company.” Dan Zaharoni serves as
a General Counsel to the company, and in public filings, is reflected as Chief Executive Officer
and Director of From the Earth. The consultant agreement was signed by Mr. Zaharoni for DHS
Verde. There was no explanation offered for why the agreement was not directly between Ms.
Pearce and From the Earth or why it was with DHS Verde.

Ms. Pearce’s counsel offered this explanation of the consultant agreement’s purpose and
the work performed:

“DHS Verde engaged Councilmember Pearce for assistance with a pending

application for a license to operate in Culver City. The Councilmember
worked on relationship building on behalf of the client with the city council,
city staff and various community organizations to help with the licensing
process. The Councilmember also monitored the status of the application
and received updates on its status on behalf of her client. Despite these
efforts, the city ultimately decided not to approve the license.”

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 Four emails were provided to us supporting or corroborating Ms. Pearce’s work. The first,
dated March 5, 2019, from Ms. Pearce to Culver City Councilmember Daniel Lee, requested a
meeting later in the week regarding From the Earth’s cannabis application. Councilmember Lee
responded the next day saying he was not available for a meeting that week, but asked Ms. Pearce
to “send over any thoughts you may have.” The second email, dated March 5, 2019, from Ms.
Pearce to Mr. Zaharoni and David Moss, who is a Vice President for Development for From the
Earth, reported on a meeting request Ms. Pearce had made to “all the electeds in Culver City.” The
third was an email exchange that same day between Ms. Pearce and Meghan Sahli-Wells, then
Vice Mayor of Culver City, requesting a meeting regarding From the Earth’s application and Ms.
Sahli-Wells’ response that “We’re keeping a healthy distance during the application period,” and
declining a meeting. From the Earth’s application was put on hold as reported in a fourth email
from the City to Ms. Pearce on March 28, 2019. For this effort Ms. Pearce was paid over $11,000.

In relation to this consultant agreement, we reviewed canceled checks drawn on a DHS

Verde bank account made payable to Ms. Pearce and all signed by Mr. Zaharoni reflecting
payments of $3,000 on October 4, 2018, $3,222 on December 10, 2018, and $5,000 on December
24, 2018, for a total of $11,222.

These payments (income) should have been, but were not, reported on Ms. Pearce’s 2018
Annual Form 700 first filed on April 1, 2019.

GGI Agreement

The second consultant agreement was between GGI, also a Zaharoni-controlled company,
reported as being a property management enterprise, and Ms. Pearce to assist in the formation of
a non-profit foundation, related to From the Earth, to address criminal recidivism issues, dated
January 17, 2019.

The consultant agreement was signed by Mr. Zaharoni for GGI. There was no explanation
offered for why the agreement was not directly between Ms. Pearce and From the Earth, or why it
was made with GGI.

Ms. Pearce’s counsel offered this explanation of the consultant agreement’s purpose and
the work performed:

“Councilmember Pearce worked directly with counsel at Bergman and

Allderdice [a Los Angeles-based law firm which specializes in non-profit
law and community and economic development] as the Foundation’s agent
on entity formation, including drafting the organization’s mission statement
and providing content for exempt applications.

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 “In addition to her services related to formation of the Foundation,
Councilmember Pearce also actively recruited other board members for the
Foundation and set up meetings with community organizations that may
ultimately be recipients of grants from the Foundation. The bylaws
document identifies those additional board members.

“The Foundation’s official launch event is August 10, which the

Councilmember has been actively involved in planning. Councilmember
Pearce’s last day doing work for the Foundation will be August 11.”

Ms. Pearce’s counsel advised us that the initial formation of the Foundation is complete,
and she provided a copy of the Employer Identification Number document issued by the IRS and
addressed to David Moss (Vice President for Development for From the Earth) at the business
address which the Foundation apparently shares with From the Earth, DHS Verde and GGI,
namely 10250 Constellation Blvd., Los Angeles. Ms. Pearce’s counsel also reported that the
foundation submitted its application for 501(c)(3) status in early June and is awaiting
determination letters from the IRS and Franchise Tax Board.

Ms. Pearce’s counsel provided a narrative description of the Foundation, which she advised
was submitted to the IRS, and which, she stated, Ms. Pearce helped create. The Description recites:

“From the Earth Foundation (“FTE Foundation”) is a charitable

organization with the mission of investing in communities to remove
barriers to economic success, advance access to health care and empower
disadvantaged communities through impact investments and justice reform.

FTE Foundation is working alongside From The Earth LLC, a California

limited liability company (“FTE”). FTE has a history of giving to
nonprofits and would like to form a nonprofit corporation to increase its
giving to impoverished communities. FTE would like to formalize a giving
program by making contributions through the round up Point-of-Sale (POS)
option in its retail stores.

FTE Foundation plans to open and operate health resource centers (“Health
Resource Centers”) to provide responsible medical cannabis use education
focused on dosing and usage for new or existing medical cannabis
consumers. The corporation will operate these Health Resource Centers in
conjunction with medical professionals and organizations such as Hoag
Hospital.

The founders of FTE Foundation were driven to form the corporation

because of the shocking statistics showing 65% of those released from

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 California’s prison system return within three years and 74% of recidivists
committed a new crime or violated parole within the first year.

The corporation will engage in anti-recidivism work as well as record

expungement to support those who have been directly impacted by the drug
war in the United States. FTE Foundation will partner with job centers and
legal centers that provide resources for previously incarcerated people and
connect these people with life skills and career pathways to be able to
reincorporate themselves into society and eventually reduce recidivism
rates.

Beyond working in anti-recidivism, FTE Foundation also intends to

empower impoverished and disadvantaged communities by connecting FTE
retail locations to the communities they work in with the goal of bringing
economic activity and resources directly to disadvantaged communities and
local projects. Specifically, FTE Foundation will donate time and resources
to these communities through neighborhood beautification programs,
backpack giveaways, and by working with local Boys and Girls Clubs.”

Ms. Pearce’s counsel also provided a copy of a document entitled “Appointment of Initial
Directors and Adoption of Bylaws of FROM THE EARTH FOUNDATION, a California
Nonprofit Public Benefit Corporation.” That document is attached to this memo as Attachment A.
Also provided was a copy of the by-laws of the non-profit. Ms. Pearce’s counsel noted that this
document lists Ms. Pearce as an initial director and the sole incorporator of the organization. That
document reveals that the other “elected…initial directors of the corporation” are David Moss
(who is Vice President for Development for From the Earth), Ryan Ramage (who we believe to be
an Orange County-based real estate executive), and Kintu Patel (one of the founders and the
Secretary of From the Earth).

Ms. Pearce’s counsel provided no documentation to support or corroborate the claim that
Ms. Pearce had “provided content for exempt applications” or “set up meetings with community
organizations that may ultimately be recipients of grants from the Foundation.”

In response to our questions concerning the connection between the Foundation and From
the Earth, Ms. Pearce’s counsel provided the following response:

“Councilmember Pearce did not have a contract with From the Earth Inc. Her contract to
establish the Foundation was with GGI. Given the limited nature of her contract for work
on the Foundation, and the fact that it did not relate to the cannabis business of GGI or
From the Earth, Councilmember Pearce does not have additional detail about the
relationship between From the Earth Inc. and the Foundation, other than her knowledge
that the Foundation is intended to be the charitable arm of the From the Earth brand.”

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 In relation to this consultant agreement, we reviewed canceled checks drawn on a GGI
bank account made payable to Ms. Pearce and all signed by Mr. Zaharoni reflecting payments of
$5,000 on January 31, 2019, $5,000 on March 14, 2019, $10,000 on April 9, 2019, $5,000 on May
9, 2019, and $5,000 on June 11, 2019, for a total of $30,000. Query whether this is reasonable
compensation for the work performed, mostly by attorneys, to establish the Foundation.

Although Ms. Pearce reported income from GGI in the Amendment to her 2018 Annual
Form 700, because these payments (income) were received in 2019, they ought to be reported in
her 2019 Annual statement, to be filed next year.

Observations on the Consultant Agreements and Work Performed

Why both of these consultant agreements were actually for work for and on behalf of From
the Earth, but executed with two companies purportedly in real estate development and property
management, and controlled by Mr. Zaharoni, is not explained, except to say that Mr. Zaharoni
was responsible for the structure of these arrangements. It raises the question of whether there has
been an effort to conceal the true purpose of the work and source of payments to Ms. Pearce as
being for and with other than a full service cannabis management company with potential interests
in the City. Further, Ms. Pearce failed to disclose the income from DHS Verde in her 2018 Annual
Form 700, and there is a question whether that failure to disclose was inadvertent or deliberate.
Finally, as detailed below, in March 2019, Ms. Pearce brought to the Council a concept from Mr.
Zaharoni for the gondolas connected to the Queen Mary and then voted on that study measure at a
time when she had a financial interest in Mr. Zaharoni as a “source of income,” as discussed below.

ZAHARONI BUSINESS INTERESTS

We have obtained and examined public filings 2 that reflect the following:

DHS Verde, LLC: business address 10250 Constellation Blvd., Ste. 2300, Los Angeles;
manager, Daniel Zaharoni; type of business: real estate development. Additionally, Ms. Pearce’s
counsel advises us that Mr. Zaharoni “is a majority owner of DHS Verde and he does have
authority to direct and control decisions made by DHS Verde.”

Global Growth Investments, LLC: business address 10250 Constellation Blvd., Ste. 2300,
Los Angeles, manager, Daniel Zaharoni, type of business: property management. Additionally,
Ms. Pearce’s counsel advises us that Mr. Zaharoni has authority to direct and control decisions

2
Although not relevant to the inquiry, public filings reflect Mr. Zaharoni is or was a principal in Calle Verde, LLC;
DBO Investments LB, LLC, a cannabis operation, manager: Mr. Zaharoni and Kintu Patel (founder and secretary of
From the Earth); DBO Investments I, LLC; DBO Investments TO, LLC, a cannabis operation, manager: Daniel
Zaharoni. Attached to this memo are two schematic link charts of Mr. Zaharoni’s many business interests and
positions. (Attachment B.)

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made by GGI. However, Ms. Pearce’s counsel describes GGI as a for profit cannabis retail
business, but there is no evidence of that of which we are aware.

From the Earth, LLC: business address 10250 Constellation Blvd., Ste. 2300, Los Angeles;
manager Daniel Zaharoni; additional manager Kintu Patel; type of business: cannabis operation.
The From the Earth website notes it is a full service cannabis management company. The
Management Team is reflected as: Jayson Quinones, Founder; Kintu Patel, Founder; David Moss,
VP, Development; and Dan Zaharoni, General Counsel. The website notes that the company’s
Long Beach operation will be housed in a facility along the 710 freeway.

Urban Commons Queensway, LLC (operator of the Queen Mary 3): business address 10250
Constellation Blvd., Ste. 2300, Los Angeles, type of business: real estate investment; manager
Taylor Woods. The Urban Commons website reflects Taylor Woods as co-founder and principal;
Howard Wu, as co-founder and principal; Salvatore G. Takoushian, as president and chief financial
officer; John Jenkins, as vice president of asset management; and Dan Zaharoni, as chief
development officer.

The City Manager’s Office describes the relationship between the City, on the one hand,
and Mr. Zaharoni, acting on behalf of Urban Commons Queensway, on the other, as follows: For
the Queen Mary, the highest level person the City Manager interacts with regularly for City
business is Dan Zaharoni. While the principals are Howard Wu and Taylor Woods, the City
Manager’s interactions with them are infrequent at best. Mr. Zaharoni is Urban Queensway’s
representative and the chief negotiator for the Queen Mary’s operations. Mr. Zaharoni proposed
the bond that the City eventually floated for the improvements to the Queen Mary. Mr. Zaharoni
is the chief contact with Development Services for their entitlements and development plans. Mr.
Zaharoni is the chief contact for Economic Development for anything related to the lease. Mr.
Zaharoni sends documents for the City to sign to assist with the company’s recently public
offering. Mr. Zaharoni was the contact when the Queen Mary was late on paying Special Events
fees of about $400,000 for their Goldenvoice concerts and he immediately authorized payment.
Mr. Zaharoni was the City Manager’s Office chief contact for the gondola study that
Councilmember Pearce proposed, as he has been working on that concept as part of his entitlement
package for Development Services. From the standpoint of the City Manager, Mr. Zaharoni serves
as the top local contact for Urban Commons and has significant authority to direct and control
decisions of that entity.

MS. PEARCE’S FINANCIAL INTERESTS UNDER THE POLITICAL REFORM ACT

3
On August 8, 2018, the city consented to a transfer of the ownership of Urban commons Queensway, LLC, to
USHIL Holdco, LLC (a Delaware corporation) at the request of Mr. Zaharoni. (City File No. 34432_002.) this
change is not a relevant consideration to this inquiry.

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 As an elected member of the Long Beach City Council, Ms. Pearce is a “public official”
(Cal. Gov. Code § 82048) subject to the conflict of interest provisions of the California Political
Reform Act (Cal. Gov. Code § 87100). That core provision provides:

“No public official at any level of state or local government shall make,
participate in making or in any way attempt to use his official position to
influence a governmental decision in which he knows or has reason to know
he has a financial interest.”

Section 87103 of the Act spells out five separate “financial interests.” Relevant here is
“[a]ny source of income…aggregating five hundred dollars or more in value provided or promised
to, or received by, the public official within 12 months prior to the time when [a governmental]
decision is made.” (See also, Tit. 2, div. 6 Cal. Code of Regs. § 18700, subd. (c)(6)(C), § 18700.1,
subd. (a)(1).) 4

Clearly, under the Act and FPPC regulations, both DHS Verde and GGI are “sources of
income” to Ms. Pearce.

Further, the FPPC has held that one may “pierce” through entities like corporations and
companies to consider the true nature of the relationship between the entity and the person or
persons who control it.

“For conflict-of-interest purposes, the Commission has ‘pierced’ through

entities, such as corporations, to consider the nature of the relationship
between the entity and the person or persons who control the entity. In two
opinions, the Commission has ‘pierced the corporate veil’ and treated the
controlling shareholder as one with a closely held corporation. (In re
Lumsdon (1976) 2 FPPC Ops. 140 [closely held corporation pierced to reach
majority shareholder for reporting purposes]; In re Kahn (1976) 2 FPPC
Ops. 151 [presumption that parent corporation and its wholly owned
subsidiaries are “combination of persons” for reporting purposes].)

When this piercing occurs, the economic interest is deemed to exist in the
owning or controlling person(s) as well as the business entity. (In re Nord
(1983) 8 FPPC Ops. 6.) [limited partner has an economic interest in each
controlling general partner]; Lahr Advice Letter, No. I-98-298 [public
official who has an economic interest in a corporation also has an economic
interest in the corporation’s sole shareholder].)” (Deitsch Advice Letter, A-

4
To assist in complying and enforcing the Act, officials are required to report such sources of income on Schedule C
of the Statement of Economic Interest, Form 7000, which is required to be filed upon assuming office, thereafter
annually, and when departing office.

65192.00012\32268222.4 -9-
 08-071 (2008); see also Schenirer Advice Letter, A-06-168 (2006)
(concerning gift donors).)”

In an earlier Advice Letter, the Commission explained:

“While ‘income’ is defined in the Act, ‘source’ is not, and whether a person
or entity is a ‘source of income’ to a public official depends largely upon
the facts of the particular case. Consistent with the purposes of the Act, we
have not hesitated to pierce through intermediaries to sources which would
cause impartiality and bias. (Section 81003.)

In determining whether a person or entity who indirectly provides income

to a public official is actually a ‘source of income,’ we have considered the
relationship between the public official and the purported ‘source,’ the
amount of control the purported ‘source’ has over the flow of income to the
public official and the amount of control the purported ‘source’" can exert
over the decision making of the public official. …We have also said that a
corporation's president or major shareholder who effectively controls the
employment relationship with the corporation's employee is a source of
income to the employee. (Hentschke Advice Letter, No. A 80 03 069 [].)”
(Savage Advice Letter, I-90-662a, (1991), superseded on other grounds by
Alperin Advice Letter, I-91-324 (2001).)”

Based on the facts as revealed through our inquiry, the DHS Verde and GGI
entities/companies can be justifiably “pierced” to conclude that Mr. Zaharoni is the true “source”
of the income received by Ms. Pearce under the consultant agreements. Indeed, Ms. Pearce’s
counsel has conceded that “Mr. Zaharoni is a source of income to the Councilmember because he
is a majority owner of DHS Verde and he does have authority to direct and control decisions made
by DHS Verde and Global Growth Investments.”

Accordingly, Ms. Pearce has a “financial interest” in Mr. Zaharoni as a “source of income”
to her. (See, Teichert Advice Letter, A-17-118 (2017) (public official who provided consultant
services has a financial interest in entities to whom those services were provided).) 5

CONFLICTS

The Basic Rule and Guide to Conflict of Interest Regulations (§ 18700, subd. (a)) provides:

“Basic Rule: A public official at any level of state or local government has
a prohibited conflict of interest and may not make, participate in making, or

5
We note that as a Councilmember, Ms. Pearce had an obligation “to make every effort to avoid a conflict of
interest.” (Long Beach Municipal Code, ch. 207, § 2.07.010 D.)

65192.00012\32268222.4 -10-
 in any way use of attempt to use his or her official position to influence a
governmental decision when he or she knows or has reason to know he or
she has a disqualifying financial interest. A public official has a
disqualifying financial interest if the decision will have a reasonably
foreseeable material financial effect, distinguishable from the effect on the
public generally, directly on the official, or his or her immediate family, or
on any financial interest described in subdivision (c)(6)(A-F) herein
[including a “source of income”].”(Emphasis added.)

Thus, Ms. Pearce has a prohibited and disqualifying financial interest in any governmental
decision that has a reasonably foreseeable material financial effect on Mr. Zaharoni. The FPPC
defines “materiality” for these purposes as follows:

Ҥ 18702.3. Materiality Standard: Financial Interest in a Source of Income.

“The following standards apply to determine when the reasonably foreseeable

financial effect of a governmental decision on an official's financial interest, identified as
a source of income under Section 87103(c), is material.

(a) Income from the Sale of Goods and Services: For income received by
the official or his or her spouse for goods and services provided in the ordinary
course of business, including a salary, the financial effect is material if:

(1) The source is a claimant, applicant, respondent, contracting party,

or is otherwise named or identified as the subject of the proceeding; or

(2) The source is an individual that will be financially affected under

the standards applied to an official in Regulation 18702.5, or the official knows or
has reason to know that the individual has an interest in a business entity or real
property that will be financially affected under the standards applied to a financial
interest in Regulation 18702.1 or 18702.2, respectively 6;”

Ҥ 18702.5. Materiality Standard: Financial Interest in a Personal Financial

Effect.

“(a) A personal financial effect means the financial effect of a governmental

decision on the personal finances of a public official of his or her immediate family.

6
Our inquiry disclosed that Mr. Zaharoni is the Director of Development for Urban Commons Queensway LLC.
Our inquiry did not determine whether Mr. Zaharoni has an “interest” in that business entity or the lease with the
City. Thus, we express no opinion whether this could provide an additional basis for the determination whether a
conflict exists.

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 The financial effect is material if the official or the official’s immediate family
member will receive a measureable financial benefit or loss from the decision.”

Under these regulations, given Mr. Zaharoni’s relationship with and interests in From the
Earth and Urban Commons Queensway, a “governmental decision” in which those entities are an
applicant, contracting party or subject of a proceeding, or financially affecting those entities will
likely have a material financial effect on Mr. Zaharoni’s “personal finances” because the financial
fortunes of those entities will likely have a financial effect on Mr. Zaharoni, whether he has any
ownership interest in or controls those entities or not. (See, Magsig Advice Letter, A-17-202
(2017).)

Under section 87103(c) of the Act, Ms. Pearce had a source of income financial interest in
Mr. Zaharoni, and potentially any entity connected to him as defined in the regulations, including
From the Earth and Urban Commons Queensway LLC, beginning on October 4, 2018, when Mr.
Zaharoni paid her $3,000 in connection with the DHS Verde Consultant agreement. That financial
interest will persist until, at least, June 12, 2020, 12 months from the final payment of $5,000 in
connection with the GGI consultant agreement.

The scope of “governmental decisions” affected by this conflict is relatively clear as to

Urban Commons Queensway which has a direct relationship with the City through the lease and
operation of the Queen Mary. What is less clear is what effect a particular decision may have on
Mr. Zaharoni’s personal finances. However, there is, at least, a likelihood that decisions involving
and affecting Urban Commons Queensway and the Queen Mary and the lease with the City, will
have “a measureable financial benefit or loss” on Mr. Zaharoni as an employee and Director of
Development of Urban Commons Queensway. Thus, Ms. Pearce will likely not be able to
participate in any number of decisions affecting Urban Commons Queensway or the operations of
the Queen Mary. As regards From the Earth, a full service cannabis management company
operating in the area, any decision of the Council bearing on the regulation of the cannabis industry
in the City will likely be subject to this prohibited, disqualifying conflict as it will affect the
financial and business fortunes of From the Earth. (See, Mollica Advice Letter, I-18-270 (2018).).
Accordingly, Ms. Pearce likely ought not to participate in any decisions affecting the cannabis
industry.

Finally, even if Ms. Pearce does not have a conflict of interest under the Act, given her
relationship with Mr. Zaharoni she might have to examine whether she has a common law conflict
of interest that would require that she recuse or abstain from matters in which Mr. Zaharoni is
involved. Such an examination could include the prospect of future business or financial support
from Mr. Zaharoni and his business interests that might “divide” her duty of loyalty to the City.

Common law conflict of interest is based on the premise that a public official has a duty to
exercise the power conferred upon him or her “with disinterested skill, zeal, and diligence, and
primarily for the benefit of the public.” (Noble v. City of Palo Alto (1928) 89 Cal.App. 47, 51.)

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Public officials are therefore prohibited “from placing themselves in a position where their private,
personal interests may conflict with their official duties.” (Clark v. City of Hermosa Beach (1996)
48 Cal.App.4th 1152, 1171.) Stated another way, public officials owe “absolute loyalty and
undivided allegiance” to the public agency they serve. (Hobbs, Wall & Co. v. Moran (1930) 109
Cal.App. 316, 319.)

An official can avoid a common law conflict of interest by abstaining from any official
action on the matter at issue. (92 Ops. Cal.Atty.Gen. 19, 24 (2009).) If the conflicted official does
vote on the matter, the action taken by the legislative body is invalidated. (4 McQuillin, The Law
of Municipal Corporations (3d ed. Rev. 1992) § 13.35, pp. 840-41.) Violation of the common law
conflict of interest doctrine can constitute official misconduct and result in a loss of office. (Gov.
Code §§ 3060-3074; Nussbaum v. Weeks, 214 Cal.App.3d 1589, 1598.)

As explained in Clark v. City of Hermosa Beach, “a finding of self-interest sufficient to set

aside municipal action need not be based upon actual proof of dishonesty, but may be warranted
whenever a public official, by reason of personal interest in a matter, is placed in a situation of
temptation to serve his or her own purposes, to the prejudice of those for whom the law authorizes
that official to act . . . .” (Clark v. City of Hermosa Beach, supra, 48 Cal.App.4th at 1171.)

PAST ACTIONS

At its March 12, 2019 meeting, the Council took up Item 15 on the Agenda, 19-0223, a
“Recommendation to request the City Manager to work with Urban Commons, The Wave team
and other key stakeholders to determine the cost of a Feasibility Study pertaining to the
development of a Gondola system connecting Downtown Long Beach with Queen Mary Island;
and Request City Manager to work with Urban Commons to identify key stakeholders to create a
multiparty partnership to conduct an initial Feasibility Study pertaining to the development of a
potential gondola system connecting Downtown and Queen Mary, and identify potential public
and private funding sources to begin the initial feasibility study.”

This gondola project was originally brought to the City by Mr. Zaharoni acting on behalf
of Urban Commons Queensway and proposed, in part, by Ms. Pearce, who also spoke on the item.
Ms. Pearce then made a motion to approve the recommendation, which was seconded. All seven
of the Council members present voted to approve.

At the time Ms. Pearce brought this matter to the City Council, spoke on it, moved for its
approval and voted on it, she had financial interest in Mr. Zaharoni under the Act. It is possible
that her participation in bringing the project forward and voting on it could have had “a
measureable financial benefit or loss” to Mr. Zaharoni, particularly in light of the fact that it was
a “development project” directly related to the Queen Mary, first proposed by Mr. Zaharoni, the
Director of Development for the company. Thus, her actions and vote could have been in violation
of the Act, and her vote would be a nullity or void. However, because a majority of the Council

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voted in favor of the Recommendation, it was and remains a valid action of the Council. (See,
Smith v. Superior Court (1994) 31 Cal.App.4th 205, 208; Downey Cares v. Downey Community
Development Com. (1987) 196 Cal.App.3d 983, 987-988 (“The trial court issued a writ of mandate
invalidating the ordinance primarily upon the ground that city Councilmember James Santangelo,
whose affirmative vote was essential to the three-to-two passage of the ordinance, was disqualified
to vote due to conflict of interest, because he had a financial interest in the decision, by virtue of
his ownership of five properties in the project area and a real estate business in the project area. (
Gov. Code, § 91003.)”)

Our research has shown that the Council voted on five separate cannabis-related matters in
2018 with Ms. Pearce voting on each. However, each of these matters were voted on prior to the
conflict arising on October 4, 2018. There was one vote in 2019 on a cannabis related matter, on
July 2, but Ms. Pearce recused from that vote. Thus, those actions are not tainted in any way.

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