Employee files fraud lawsuit against Wallace

February 24, 2011

John Wallace


A former employee of the South San Luis Obispo County Sanitation District filed a lawsuit that accuses plant administrators, including the head of the sanitation district, of risking public safety and fraud.

The civil lawsuit, filed in San Luis Obispo Superior Court on Monday against plant administrator John Wallace, the Wallace Group and Jeff Appleton, contends Wallace eliminated former district lab technician Devina Douglas’ position because her refusals to act unlawfully put his lucrative arrangement with the district at risk.

“In the manipulation of self dealing and conflict-plagued business relationships to terminate plaintiff’s employment at the expense of public safety and cost effectiveness of public money, defendant’s conduct was fraudulent and oppressive,” Douglas’ attorney Jeff Stulberg says in the filing. “Accordingly, plaintiff is entitled to an award of punitive damages to punish employees and deter others from engaging in such conduct in the future.”

Wallace is the chief administrator of the district that provides services to about 38,000 customers. He is also owner and president of the Wallace Group, a private engineering consulting firm located in San Luis Obispo that receives about $80,000 a month for plant administration and engineering services.

In 1986, the governing board hired Wallace as a consultant in charge of the district’s day-to-day administrative, budgeting and engineering operations even though he is not technically an employee of district. He sits at the board table with the members of the three-person governing board, writes the agendas and asks the board to approve expenditures.

The attorney for the district, Michael Seitz, claims he is not also the attorney for the Wallace Group. However, a receptionist at the Wallace Group said that not only was Seitz the Wallace Group’s attorney, he also sits in on the group’s board meetings,

In addition, Seitz’s wife, Sharon Seitz, heads the Wallace Group’s Human Resources department.

Over time, Wallace has sent an increasing amount of the plant’s work load to his privately owned company and bills the district for these services.

The suit also contends that Wallace terminated Douglas’ position to keep the district from discovering that the plant’s salaried staff could carry out many of the tasks performed by Wallace Group employees at a much lower cost.

For the past several years, Douglas and recently terminated former shift supervisor Scott Mascolo reported incidents of suspected misuse of public funds and problems with the plant complying with safety and health requirements to several government agencies.

Both Mascolo and Douglas said they first took their concerns to Wallace.

After a lengthy investigation, the State Water Resource Control Board determined that Appleton operated the plant “using fraud and deception,” according to a letter of proposed disciplinary action.

Tony Ferarra

The state’s investigation validated Douglas’ claim that Appleton as plant manager instructed staff to manipulate effluent release numbers in order to make it appear the plant was operating in compliance with pollution and discharge requirements.

The district board, comprised of a representative from Grover Beach, Arroyo Grande and the Oceano Service District, regularly approves all work requests, often without going out to bid, that Wallace suggests.

Tony Ferrara, Arroyo Grande’s mayor and the head of the district’s governing board, claims that paying Wallace for engineering consulting, budgeting and administration has saved the district money, but he hasn’t supplied specific figures to back up that claim.

Douglas’ suit is slated to be heard by San Luis Obispo Superior Court Judge Charles Crandall. The first case management conference is scheduled for June 28.


Speaking of what may be fraud, District staff said Appleton was out on stress leave…..again. First time was shortly after the Regional water quality control board served the District the notice of violation, the one that named Appleton as fraudulent in his duties. Somewhere around that time he was also to be questioned by Wallace’s paid internal investigation team, that sounds like a honest deal.

Second time he excused himself was following his disciplinary action served from the Regional Board. Stress leave? hum I bet he was stressed because he knew he was busted and was about to lose his job if not go to jail, recall the infamous Mike Valverde of CMC case. So how could a person legitimately file a workers comp claim over stress on the job, when their own illegal actions are what caused the stress? Why else would a person in his shoes be stressed?

Wouldn’t this also have to be approved by either the districts HR person or manager who would be Wallace in this case.


My information on this issue is from what has been published publicly, but I’d like to offer the following possibility…

Certainly, a person could go out on a stress leave if the conditions that cause the stress are due to orders, under threat of job termination, from a superior.


Mary, A professional who files for stress leave under Workman’s Compensation is effectively black balling themselves from future gainful employment, particularly if they are professionals. WC claims are available to potential employers and when an employer sees a stress claim, they avoid the applicant like the plague and if you think about, you can’t blame them. Would you want to hire someone who sued a previous employer for stressing them out?

It’s fine if an employee visits their medical insurance provider and applies for state disability, as those records are private and even the current employer doesn’t have a right to know why a doctor has placed an employee on disability leave. However beware that if an employee is treated for stress it can end up being morphed into a work related WC claim , unless the employed claimant insists that their stress is NOT job related. The medical providers are always looking for ways to apply subrogation to claims and it’s very common for a medical insurance carrier to deny a claim for a doctors visit, medication etc and pass it on to the Workman’s Compensation carrier if there is the slightest indication that the complaint may be work related. Likewise, SDI can also attempt to demand subrogation, beware when filing stress claims.

In short, your suggestion is NOT GOOD advice. Better to just find another job first.


Makes sense, look what the other two were served up for not going along with Wallace, both have been fired. Guess when you have house payment and a family to support Appleton may have had no choice but to swallow his pride, word was he was looking for another job recently so that adds up. Perhaps his appeal to the Regional Board will open a new can of worms in that Wallace threatened Appleton with termination also unless he followed directions. If you have a copy of Douglas’s lawsuit which Ive seen and is public record, its clear to see they retaliated and worst yet discriminated against her something terrible. Must be quite a feeling thinking you big man on the campus and bullying women, real Manley men indeed.

It is interesting Wallace has managed to spend $8 million dollars of San District money since Appleton was moved into the plant CPO position in 2000 on exclusively Wallace engineered or managed projects. Bad part is none of them actually did anything to improve the marginal and frequently violating effluent quality.. Matter of fact chemical costs have increased almost two fold in recent years since the Contact Chambers installation, 07/08 cost $190,000 and in 09/10 its $383,000.

Looks like Wallace has done a fine job of chrome plating a turd for us.


Recent documents were obtained and the following facts were discovered. Below are actual excerpts from Sanitation District documents prepared by the Wallace group which are related to the sewage spill last December that filled some 30 homes with sewage.

In a summary of events prepared by Wallace for the Regional Board Wallace sites that:

“Apparently due to water in the electrical system conduits feeding the influent pumps the motor on influent pump #4 shorted out. This resulted in the electrical breaker feeding the #4 pump motor tripping, as well as tripping the main breaker that feeds all four influent pumps and other equipment. As a result all four influent pumps stopped pumping at10:26am.

Accusations have been made Wallace was aware of the plants failing electrical system and was for years preparing a rewiring project that had been in the engineering stages for years. Accusations or fact? you make the call.

San Dist Major Budget Item list for fiscal year 2010/2011 contains the following documents.

04 MBI 16 Electrical system upgrade $500,000.*** Note** the 04 at the beginning of this MBI item indicates it was initialized in 2004 yet has never been completed but rolled over for the next year. Yes 7 years ago.

“The original electrical system was installed in 1964-1966. The wiring that connects the various motors with the motor control center, located in the power generation plant, has begun to deteriorate due to being submerged by ground water. The existing wiring is NOT designed for this type of submergence service. As a result there has been several instances where the wiring has failed and either caused an electrical fire or loss of power.

“Staff” otherwise known as Wallace’s employees are 90% complete with the specifications and will be ready to bid this project early in the Fiscal year.

Item #2. 08 MBI 18. 08 indicated this started in 2008.

Flood gate upgrade project $212,337

“This project would include the upgrade of the flood protection gates at the plant. Facilities will be evaluated to determine CRITICAL buildings and areas needed for plant operations. IN THE EVENT OF A FLOOD, ITS CRITICAL THAT THE PLANT RUN AT A BASIC LEVEL DURING A SEVERE FLOODING EVENT. The new gates will provide protection for these CRITICAL SYSTEMS”.

Looks like this flooding concern was taken pretty seriously many years ago. So what happen?

Does this not support an unquestionable lack of performance in duties and incompetence in addressing if noting else safety issues which are now outlines in a OSHA letter siting electrocution hazards and untrained temporary personnel? Wallace acknowledges problems in 2004, the corrective action cost in 2010 now $500,000. Admittedly both Fires and power loss result because of this known failing system yet nothing is done. Wallace group continues to charge between $600,000 and $900,000 annually themselves yet they claim fiscal responsibility is a priority and delay this project for 7 years engineering the fix over and over. A massive system failure causes a still undetermined sewage spill contaminating some 30 homes and Wallace still claims he’s doing his job.

Wallace and his privately owned company the Wallace group are not doing their job. This is not how an individual hired in the name of a public service acts in a responsibility capacity. Wallace’s negligence on these matters have created the conditions that led to the sewage spill as well as for years placed the plants staff in potentially fatal conditions. This needs to be investigated NOW.

Paul Anthony

Just passing this along–

THEY DON’T WANT TO VOTE!!!!!!! So, we need you in Oceano Wednesday March 2 at 6:30pm! 

Wednesday, March 2nd at 6:30pm is the next board of directors meeting for the South SLO County Sanitation District. The district’s agenda for that meeting does not include Surfrider’s requested vote to investigate potential malfeasances by the Wallace Group at their Waste Water Treatment Plant that serves Oceano, Grover Beach, and Arroyo Grande. With public trust sinking fast, it’s time for them to vote! 

Here’s three recent articles about the plant: 




WE NEED YOU THERE! Please help us create a “SEA OF BLUE” at Wednesday’s meeting. We are asking people who care about resolving water issues in our county to wear blue and support a call for a vote. Please spread the word! All concerned parties are welcome! 

Meeting held at: 

Oceano Community Services District 

1655 Front Street 

Oceano, California 93475 

Brad Snook 

Volunteer Coordinator 

Surfrider Foundation, SLO County 


slo@surfrider.org • Surfrider Foundation San Luis Obispo Chapter

A. Newman

i’ve heard the district has flied a ethics complaint thaty will result in the lab tech losing her license for “ethics violations”. can anybody confirm or deny this?


I think you referring to Appleton who just lost his virginity to the EPA when they revoked his certification.


This is an interesting development. However, I am not sure if John Wallace and the Wallace Group will be financially hurt by this lawsuit. I suspect that the contract between the Wallace Group and the South San Luis Obispo County Sanitation District contains an indemnity clause which requires the District to defend John Wallace and the Wallace Group in the event they are sued. I am not a lawyer, but if I recall correctly, such indemnity clause should protect Wallace and Appleton unless there is malice, negligence or fraud. More interesting would be if the District decides to distance themselves from the defendants by claiming that there was malice, negligence or fraud. In that scenario, the District’s argument would help the plaintiff. Unlikely given that Seitz is the attorney for the District.


You are correct in that Wallace’s contract,( A public record) with the District reads “the District will defend, Indemnify and hold harmless engineer from any and all claims disputes or controversies or lawsuits arising from or related to work or services provided by the engineer while he is serving in the capacity of the consulting District Administrator Except in the case of his willful negligence. Willful negligence should be fairly easy to prove at this point, fraud and deceit already have been, however the tax payers will foot the bill to some extent, it is time wise up people. Your already paying for three legal firms involvement in the now confirmed two lawsuits with criminal charges (hooray!!) and a third most likely on the way in the near future and this dosent include their long time business partner, Mr Sietz who runs off with a comfortable $12,000 to $14,000 monthly while you foot the bill. One must ask just how much will the public take of this malfeasance?

If im not mistaken California law says that an government entity cannot be sued for punitive damages, therefore its reasonable that any and all lawsuits will name specific individuals like Wallace and Appleton and possibly each Board member for their support of Wallace and refusal to function in the peoples best interest. At this point I would think a class action law suit would be in order and both the Board of Directors and Wallace should be put on notice of legal action.

I will applaud the day when Mr.Wallace arrives at “The Douglas& Mascolo group” for work….. ………in a striped jump suit. May I suggest their logo read “Dedication to Honesty”



There is certainly the possibility of SSLOCSD being forced to pay for Wallace’s defense. However, in the big picture, that is the least of the real costs involved in this situation, which is nothing short of a monument worshipping avarice and greed.

I am a SSLOCSD-using resident of AG.

An issue I’ve not seen addressed yet is the fact that the SSLOCSD has made all of its customers unwitting participants in the board’s unethical and probably illegal actions, and we will all bear the costs, both financial, ethical and ecological..

Most users of the SSLOCSD, if the information ever reaches them, will be outraged at Wallace siphoning off millions over the years from the upgrade fund the users have built up over the years. Of course, Wallace could not run the plant if it was upgraded and expanded, and that makes worse the outrage against the Rizzo-esque three-member board who assisted Wallace in the coverup of Wallace’s actions and the SSLOCSD’s issues.

Clearly, the upgrades and expansion have not occurred because it would mean John Wallace would be out of a job. The fact that the people we elected, who sit on the SSLOCSD’s board, put the best interests of one man ahead of all of the residents this board is supposed to serve, just makes the clear quid-pro-quo nature of the Wallace-SSLOCSD board more clear.

Since the residents of the three cities who use the facility elected, one from each city, a member of the facility’s oversight board, that makes us part of the problems we now face, and losing money is the least of it.

What about the harm that has occurred to the two workers at the hands of the people we elected and the people we pay to run the facility? What about the sewage spill disaster that discharged such a huge amount into the sea (and local neighborhoods!) in December?

Yes, it angers me to no end that we will have to pay the financial costs of all of these Wallace- and SSLOCSD-board led and enabled disasters.

But what about the costs to the two workers who served us well until their ethics had a head-on collision with John Wallace’s incompetence, avarice and greed?

What about the costs to our ocean environment?

What about the costs to the local homes which will never be the same after having been filled with our sewage?

The costs of this Wallace/SSLOCSD-board debacle, when considered in full, are vast and far reaching.

The board members are from an elected governing group for AG, GB and Oceano. They have failed miserably, and perhaps criminally, in their duties.

Since we elected these men, the least we can do is investigate and recall them. To allow them to continue serving as if nothing happened is simply giving free license to the next ones we elect to do the same thing.


As a regular critic of the reporting on this site, let me be the first to congratulate CalCoastNews for breaking this story! Well done! This is the kind of investigative journo that serves the public well, and exposes the slime balls stealing from the public through backroom deals. Bravo!




Sincerely hope Wallace’s strangle-hold in SLO also goes down with this. He’s toxic to our environment.


Mr. Stulberg is a very capable attorney and has a successful history on these types of cases.

He is known for doing his homework before taking on cases like this, they will settle out of court and $$$$ will exchange hands before it’s all said and done.


Of course Wallace will settle. The last thing he would want is to have his dirty laundry hung out in public for al the world to see. That part of the world which still hasn’t discovered CCN, that is.


She’d better hope he’s as good as reported, the counter-suits against her should be significant.


Wallace has to be careful at this point.

Douglas presents a very sympathetic case, especially with the ruling against, and loss of certification, of Appleton.

Companies and local government agencies who are long-time clients of Wallace are probably already starting to distance themselves from the taint of the Wallace Group..

With the spectre of the City of Bell/Rizzo disaster ever present in the background, the public is already primed to expect the worst from a locally powerful person/group and the local area governments for whom they work.