Auditor rebuts John Wallace’s explanation

February 10, 2016

John WallaceEditor’s Note: Carl Knudson’s addendum to his report on the past management practices of John Wallace is at the bottom of this article.


In response to former South County Sanitation District administrator John Wallace’s claim that a report by Knudson Investigations was flawed, Carl Knudson produced a Feb. 6 addendum to his original report. According to the addendum, auditors who find fraud or malfeasance are tasked with reporting the criminal activity, not confronting the suspect.

The sanitation district provides sewer services to about 38,000 customers in Arroyo Grande, Grover Beach and the unincorporated town of Oceano.

Last year, the sanitation district board hired Knudson to perform an audit of the district’s past management practices. The investigation followed a Grand Jury report and multiple allegations that Wallace had used his position as sanitation plant administer to drum up work for his private engineering firm, The Wallace Group.

After reading the Knudson’s report, the sanitation district board voted unanimously to send the 124 page account of mismanagement and malfeasance to the FBI, the San Luis Obispo District Attorney and the Attorney General.

“Finally, there was potential malfeasance in office in the solicitation of payments by Wallace for the Wallace Group while acting in the capacity as the district administrator for the district,” Knudson said. “Malfeasance is a public official’s performance of an act that is contrary to law.”

Two weeks later, both Wallace and his attorney Dennis Law asked the board not to send Knudson’s report on to law enforcement because it was flawed and inadequate. Specifically, that Knudson had not provided Wallace a chance to respond to the allegations of criminal malfeasance and that there were numerous errors in the report.

Last month, Knudsan said he had not spoken to Wallace about the criminal allegations as a matter of practice.

If an auditor finds evidence of fraud or suspected violations of law, the auditor is not  to confront the suspect, according to the U.S. General Services Administration, Office of Inspector General and Office of Audits procurement fraud handbook.

“If the auditor believes the contractor is involved in fraudulent activity, under no circumstances should the auditor confront the contractor with the suspected fraud before providing notice to, and obtaining legal advice from, the Office of Counsel (JC) and discussing the situation with the Office of Investigations (JI),” the handbook says.

Wallace also claimed Knudson had not provided him enough time to respond to the allegations of mismanagement. Another claim Knudson said was untrue.

“Further, there is a misconception that I did not spend enough time with Mr. Wallace covering the issues identified in my report,” according to the addendum. “I spent more time with Mr. Wallace than with any other witness in my review. I spent three hours with him and his attorney, and countless hours on the telephone in response to Mr. Wallace’s concerns and questions.”

Knudson has worked for more than 40 years as a fraud investigator and has testified as a certified fraud expert in more than 50 federal and state trials and proceedings . Knudson was the IRS Agent who uncovered the Colombian cartels and the Oliver North fiasco in the 80’s, and more recently was the ENRON fraud investigator.

On Feb. 4, the staff at the sanitation district sent a redacted copy of Knudson’s report the the FBI, the San Luis Obispo District Attorney and the Attorney General.


Addendum to Past Management Practices Review:

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I think Wallace is headed to prison.

The scope and quality of Knudson’s analysis and report is what’s going to take him there. This isn’t Knudson’s first BBQ. Wallace appears to be seriously out of his depth on this one.

I hope one of the three agencies digs even further and really gives this problem the enema it so deserves.


John, you seem to be instant on digging your grave deeper and wider. Are you planning on taking colleagues with you?


The FBI just raided Palm Springs City Hall, so Ferrara should be an easy find when they’re ready.


During Mr. Wallace’s presentation he criticized Mr. Knudson on several issues.

Now that Mr. Knudson has explained his handling of the investigation and substantiated it with policy, how will Wallace and his attorney Mr. Law respond?


On Feb. 4, the staff at the sanitation district sent a redacted copy of Knudson’s report the the FBI, the San Luis Obispo District Attorney and the Attorney General, come again…….

Was it the Board members or the District staff, which mean who exactly? and why a redacted copy of a report when I suspect the Board members or Wallace removed every bit of first hand accounts by employees and/or wording verifying Knudsens findings?

If there protecting District employees fine, just leave out names, but if you gonna remove pertinent facts and evidence what the hell is the point of spending money on an investigation? Is this the beginning of another circle jerk of wasted time and effort tellig us how Wallace farts butterflies? I call bullshit on the Board members if this was their doing.


Law enforcement agencies can subpeona an unredacted copy.

They’ll get access to the full report.


I was surprised that during last nights Arroyo Grande city council meeting no one asked the council to send a letter to the SSLOCSD asking them to confirm that their district staff has indeed sent everything to the parties the board directed them to do so, hey but at least Starbucks can start selling beer and wine, at least our priorities are inline.


Let the Law Enforcement Authorities decide.

Mr. Wallace’s presentation at the San District meeting was pathetic.

Let the invoices and payables tell the story.


I watched Wallace’s snake oil sales presentation at the San Dist meeting last week.

I also watched Knudson present his report to the Board.

The Grand Jury and Knudson, or Wallace–who has reason to lie?


This whole story has grown an enormously long pair of legs and it gets more reminiscent of Kelly Gearhart every day.

“Nicest guy ever” his buddies say.

“We are being ripped off” his customers say.

Who was right in the end?

Who will be right in the end?


Mr. Wallace you just don’t like the fact you are going to get caught with your hands in the cookie jar.

I hope next week when the San dist board goes to closed session to discuss a possible lawsuit, they consider asking you to pay for all the legal fees the district accrues if you are found guilty.

Your atty is making the threat hoping this does not go to the authorities. We the rate payers have the right to see this thing through to the end, and we are demanding it.

Hopefully they find a reason to charge Ferrara, Shoals, Nichols and Guerrero with some of the fraud and malfeasance that occurred. I think all of you should be wearing orange.