Star-Beachboys Inc., a company accused by federal authorities of skimming $350,000 in cash from a city beach concession in the 1990s, was awarded a new two-year Waikiki contract last month by the city.

City and Star-Beachboys officials defended the deal as a lucrative one for the city: The company is paying $35,000 per month for the concession —$7,000 more than the next closest bidder offered to pay.

Officials said the pending federal criminal charges against Star-Beachboys and its executives, Anthony "Tony" Rutledge Sr. and his son Aaron, did not disqualify them from bidding because their case has not gone to trial.

In a 13-count indictment returned in December, a grand jury charged that from at least 1993 through 1997, Tony and Aaron Rutledge conspired with Arthur Rutledge, Tony's father, to skim "in excess of $350,000 in cash receipts that were earned through the beach concession stand on Waikiki Beach." Arthur Rutledge, founder of Unity House and former head of the Teamsters and Hotel-Restaurant Employees' unions, died in 1997.

The money was hidden in bank safe deposit boxes and was not reported on federal income tax returns or state general excise tax forms submitted by Star-Beachboys, according to the indictment.

Last month, the Rutledges and Star-Beachboys entered guilty pleas to reduced charges in the case, but the pleas are not official until a federal judge approves the controversial agreement worked out with prosecutors. That's not scheduled to occur until next year.

INCOME UNDERREPORTED

When Tony Rutledge entered his guilty plea, he admitted that Star-Beachboys had underreported its 1997 city beach concession income by nearly $42,000 on its federal income tax returns.

The company agreed to pay a $40,000 fine to the federal government but prosecutors said they would accept payment over a two-year period because the firm claimed it couldn't afford to pay the fine all at one time. This was two weeks after Star-Beachboys on Aug. 11 paid the city $105,000 — three months' advance rent — for the Waikiki surf and beach concessions contract, according to city and federal records.

Asked if Star-Beachboys couldn't pay the fine all at once because the company had depleted its finances getting the new concession contract, Aaron Rutledge said: "When they (prosecutors) proposed the plea agreement to us, they allowed us to pay it over a two-year period, so we're not going to argue with that."

Aaron Rutledge acknowledged that Star-Beachboys bid high for the new city concession.

"We had to get back on the beach. It's been six years since we were here and the way the city writes its bid specs, we wanted to be able to show experience when the contract comes up again in two years," he said. "We're basically working for the city, not making any money. I haven't had a day off since Aug. 16."

Tony Rutledge could not be reached for comment through calls to his home and messages relayed to him through his son.

INITIALLY DISQUALIFIED

Star-Beachboys and three other companies were initially disqualified from competing for the city beach concession because they did not have all of the necessary bidding documents, such as state and federal tax clearances, financial statements or financial commitments from banks.

But city official Patrick Kubota, a former executive director of the Tony Rutledge-controlled Unity House nonprofit organization, signed the city paperwork on July 7 that allowed Star-Beachboys and two other companies to bid on the concession, according to public records.

The fourth company, C&K Beach Service Inc., was finally disqualified because it still owes the city $103,000 in rent from a previous concession contract.

Kubota, deputy director of the Department of Budget and Fiscal Services, initially said he had no involvement in the beach concession contract, then said he signed a 10-day extension of the bidding deadline because his boss, department director Mary Patricia Waterhouse, was unavailable to sign it.

Waterhouse said the deadline extension had to be approved by the department director or deputy director and she was unavailable to sign it.

"It was not the ideal situation," Waterhouse said. "I was out on vacation during that period."

City spokesman Bill Brennan said Kubota had no conflict of interest in signing the document and could not have delegated the duty to anyone else in the department.

Brennan said delaying bid deadlines occurs regularly in city procurement and increases competition by allowing more firms to submit bids.

KUBOTA ROLE, 1999-2000

Kubota said he was not involved in Star-Beachboys activities when he was a Unity House executive under Rutledge in 1999 and 2000. He also said he was not questioned about Star-Beachboys when he testified before the federal grand jury that indicted the company and the Rutledges on tax and fraud charges.

IRS agents seized control of Unity House in December after prosecutors alleged in a new indictment that Tony and Aaron Rutledge had misused assets of the $40 million labor benefits organization. Unity House has been run by a court-appointed receiver since then.

Under the pending plea agreement, Tony Rutledge would be sentenced to five years of probation for pleading guilty to a single count of filing a false 1997 tax return for Star-Beachboys. His son would plead guilty to a misdemeanor charge of witness tampering and would be sentenced to one year of probation.

Tony Rutledge also would be banned for life from returning to an executive position with Unity House, but could be hired for Unity House consulting work. His son could return as a Unity House official only after finishing a five-year probation term recommended under the agreement.

The older Rutledge faced a maximum of 93 years in prison if convicted of the fraud and conspiracy charges made against him in the December indictment. Aaron Rutledge faced a maximum penalty of 53 years in prison.

In August, Chief U.S. District Judge David Ezra questioned the terms of the plea agreement, saying he had "grave and serious reservations" about it. He told prosecutors the original charges in the indictment "were far more complex and serious" than those in the plea agreement.

Ezra won't rule on the agreement until April 2006 and said the government will have to supply "a considerable amount of justification before this court is inclined to accept it."

Edward "Ted" Groves, the prosecutor who secured the grand jury indictments of the Rutledges and Star-Beachboys, called the plea agreement a "travesty of justice." Groves retired from government service earlier this year and is now a private attorney in Washington, D.C.

Reach Jim Dooley at jdooley@honoluluadvertiser.com.