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Friday, April 22, 2005 | The city of San Diego’s long struggle to finish a self-investigation and release its fiscal year 2003 and 2004 audits appears headed toward a new phase – one with more outside legal counsel.
The consultants brought in to usher the city out of its financial and political storm have alerted city officials they will likely ask to bring in their own legal counsel because of concerns over the independence of the city’s chosen law firm, said Troy Dahlberg. He is one of three accountants – the other two are former high-ranking officials at the Securities and Exchange Commission – tasked with untangling the city’s cluster of investigations, accusations and audits.
The switch could mean further delays in the attempt to close the investigations and return the city to the financial markets.
Officials from auditor KPMG and the investigators from the SEC have voiced concerns over the independence of the firm currently conducting the city’s investigation into possible criminal acts in connection with the city’s $1.37 billion pension deficit. Critics and experts have questioned whether the firm, Vinson & Elkins, which is also representing the city before the SEC, can be independent enough to conduct a sufficient investigation.
“Normally your attorney is your advocate for the city. It’s hard to say you’re an advocate and be independent at the same time,” Dahlberg said.
The firm released a self-investigation in September that city officials hoped would reconcile the SEC’s concerns over errors and omissions found in financial statements given to potential investors. The errors failed to fully account for the city’s pension debt, among other things.
While that investigation was being conducted for the SEC, auditor KPMG became involved and warned city officials in a series of letters in the summer and fall that the investigation by the law firm likely wouldn’t be sufficient to satisfy their worries that wrongdoing had been committed by city officials. Already on the hook for the V&E report, officials pushed ahead with the hope it would suffice for KPMG as well.
It turns out the report didn’t satisfy anyone.
Neither Mayor Dick Murphy nor City Manager Lamont Ewell returned calls for comment. In a previous interview, Ewell said the city was aware of concerns from the start about the firm’s independence, but stuck with them because of their experience.
The firm has been paid more than $4 million since being hired in early 2004. It is one of a slew of outside consultants and firms brought in to assist the city. Dahlberg and his colleagues are paid between $750 and $900 per hour.
Dahlberg said his audit committee, which consists of former SEC chairman Arthur Levitt, will likely need independent counsel that has no connection to the city in order to analyze laws governing political wrongdoing and financial disclosures. The only connection they will have to the city, he said, is through billing.
“I think there’s enough attorneys,” Councilwoman Donna Frye said.
The municipal world has been watching and waiting for the completion of V&E’s investigation since October as a sign of the city’s recuperation.
Lynn Turner, former chief accountant at the SEC and Dahlberg’s colleague, said V&E will turn over its work to his committee. The committee will then combine it with work done by City Attorney Mike Aguirre in his three investigations. All the data and documents will be combined and turned in to KPMG and the SEC. It is unclear what V&E’s role will be after turning over the work.
Turner and Dahlberg said the auditor and investigators will be comfortable with their level of independence. They are in the process of scheduling meetings with new pension board members to convince them of the importance of turning over documents sought by investigators.
“Once federal officials come in and look at questionable conduct, you are more than willing to do anything to cooperate with them, and I don’t think anybody has explained that to them,” Dahlberg said.
The board voted last week to maintain its attorney-client privilege in communications between former board members and attorneys. Federal investigators at the SEC and the U.S. Attorney’s Office – which is investigating criminal wrongdoing – are seeking documents related to a controversial deal made between the city and pension board in 2002. The deal allowed the city to continue its historic underfunding of the pension system in exchange for increased benefits for employee unions.
The refusal to turn over the documents is another factor in the delays.
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