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Friday, February 11, 2005 | Several prominent securities attorneys agreed City Attorney Mike Aguirre laid out a sound argument when claiming that several of San Diego’s top elected officials engaged in civil securities fraud and that the council members’ reliance on experts does not exonerate them from responsibility over financial statements they approved.
“Mike Aguirre is on point here,” said Edward McIntryre, a partner at Solomon Ward Seidenwurm & Smith, who has argued securities fraud cases for 30 years. “The report makes a strong case that the city acted in reckless disregard and failed to disclose material information.”
Aguirre issued the report Wednesday alleging Mayor Dick Murphy and several former and current City Council members committed civil securities fraud by consciously withholding information vital to the city’s credit rating.
During a press conference Wednesday evening, Murphy called Aguirre’s allegations “untrue, irresponsible and defamatory.” Murphy argued the jurisdiction over this matter belonged to the Securities and Exchange Commission, not Aguirre, and that the City Council could not be held responsible for legal advice hired out by then-City Attorney Casey Gwinn.
More than $1 billion in San Diego municipal bonds were issued after release of faulty financial statements approved by Murphy and the City Council in 2002 and 2003, according to the report.
Murphy said the entire council relied on the expertise of outside bond counsel, regardless of the members’ educational background.
“The City Council and I properly relied on the advice of the securities law experts who were hired by the city attorney’s office,” Murphy said. “Why would anyone hold city office if they are liable for following the advice of the city attorney?”
Nonetheless, the attorneys agreed, the onus is on the council once it approves the city’s financial statement.
“Reliance on experts is not going to be an excuse,” McIntyre said. “Thou shall not issue securities without full disclosure, and municipalities don’t get a pass.”
The attorneys were divided on issues regarding Aguirre’s jurisdiction over the investigation and whether council members with law or business backgrounds should be held more responsible than the others.
Attorneys differed on Aguirre’s inference that Murphy and Councilman Scott Peters should be held to a higher standard given their background in law and economics or whether the city attorney’s investigation was appropriate given that a SEC investigation is also underway.
“He is correct that specific individuals like Murphy, given his education and training, are well equipped to spot material disclosure omissions and misstatements like this,” said a retired securities attorney who wished to not be identified.
Equipped they may be, but other legal experts said the members identified by Aguirre as having less expertise have no excuse.
“Every council member knows that one of the parts of the job is to be responsible for the issuance of securities,” McIntyre said.
“Sarbanes-Oxley got rid of the ’empty head’ defense. You can’t have your head in the sand when acting,” said Mike Kaufman, a securities law scholar and professor at Loyola University’s School of Law in Chicago, referring to the 2002 federal act that tightened the accountability of organizations issuing investment securities.
Each bond sale requires a council-approved financial statement, and five of the seven bond sales were made after Sarbanes-Oxley went into effect.
In response to statements by Murphy and some council members that Aguirre’s investigation interfered with the SEC’s, attorneys were split.
“I can see how those mentioned in Aguirre’s investigation would be upset because it’s a sort of gun-jumping,” said Bill Sullivan, a litigation partner at Paul, Hastings, Janofsky & Walker and chair of the National Securities Litigation Practice Group. “This is really just some bare-knuckle politics this city doesn’t normally see.”
Sullivan agreed the city attorney’s case carried strong allegations that were supported by the provided evidence, but that “Aguirre doesn’t have this jurisdiction.”
Others said the investigation’s release could prod KPMG to release its independent audits of fiscal years 2003 and 2004. The external auditor is withholding its audits until it gets a clearer picture of the city’s finances after its recent disclosure problems.
The lawyers agreed that it was unclear what would happen if the SEC made the same findings as Aguirre, but that there was nothing in Wednesday’s report to indicate a criminal wrongdoing.
Calls made to the SEC public affairs office were not returned.
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