Wednesday, August 17, 2005 | City Attorney Mike Aguirre released a 15-point plan Tuesday to resolve San Diego’s myriad legal and political issues. The proposal begins with one key admission to federal investigators: that the city as an entity made material misstatements and omitted necessary facts in its financial statements to prospective investors.
If it were to be accepted by the Securities and Exchange Commission, the deal – known as a consent decree – would represent an important resolution to one of the central issues that has dogged city finances and politics for a year-and-a-half, securities attorneys said.
The consent decree, essentially an admission of guilt on behalf of the entity, would shift the investigatory focus of the SEC from the city as an entity to individuals who may have participated in the production of erroneous financial statements. The city would also then agree to institute structural changes sought by the commission to ensure such actions aren’t repeated.
“It’s my judgment that the city of San Diego will not make it through the budget cycle in 2006” unless a reform plan is implemented, Aguirre said. He said bankruptcy would be inevitable if steps weren’t taken to immediately resolve the city’s legal and financial worries.
The city attorney said he is preparing a draft report of the consent decree to be delivered to the SEC this week. Deputy Mayor Toni Atkins called on Aguirre to instead work cooperatively with the City Council in resolving the city’s issues and said that any admission to the SEC would be premature because its investigation is ongoing.
Such a decree, Atkins said, is “the same as pleading guilty before you are charged.”
The rest of the city attorney’s plan relies on a mix of old and new suggestions, from the immediate cessation of the payment of a decade’s worth of pension benefits to ballot measures that would change the structure of the pension board and require voters to approve any increase in pension benefits for municipal employees.
The plan includes:
– Directing the auditor to stop recognizing a collection of pension benefit increases granted by the City Council since 1996 that Aguirre has declared illegal. The city auditor has refused Aguirre’s request previously, though two lawsuits against the pension system and pension officials were filed last month by the city attorney and supported by the City Council seeking similar ends.
– Removing the City Council’s seven nominees from the pension board and replacing them with new representatives who will agree to replace retirement administrator Larry Grissom, stop paying the post-1996 benefits and restore the city attorney as the pension system’s lead counsel. Grissom announced his retirement last month and plans to work through the end of the year.
– Pursuing lawsuits against third parties involved in the creation of the at least $1.37 billion pension deficit, which sits at the heart of the ongoing local and federal investigations into City Hall politics and finances. To that end, Assistant Executive City Attorney Don McGrath filed suit this week seeking damages against two pension advisors, Gabriel, Roeder, Smith & Company and Callan Associates, Inc., for malpractice. More suits are expected.
– Placing an assortment of tax increases before voters in June 2006 to pay for all legal pension benefits. Additional initiatives would restructure the shape of the pension board and how pension benefits are approved.
Additionally, Aguirre said, the best thing that City Manager Lamont Ewell could do for the city of San Diego is resign immediately.
To that, the vacationing Ewell responded in a prepared statement: “Mr. Aguirre has got to go. I am so committed to the best interests of this city that if he agrees to resign today, I will resign as well.”
Aguirre’s move to negotiate directly with the SEC comes in the wake of the recent resignation of law firm Vinson & Elkins, which had been hired by the city last year to both defend the city in talks with the SEC and conduct an investigation of the city’s financial disclosure practices.
The council is seeking new representation; Aguirre wants to represent the city himself.
Allegations of errors and omissions in the city’s disclosures to prospective investors surfaced in late 2003 and subsequent reports by the law firm found the city’s reporting practices to be faulty, but failed to assign blame to any specific officials. Aguirre has released six investigative reports related to pension and disclosure issues and found it likely that current and former City Council members violated federal securities laws in authorizing faulty statements.
An audit committee of outside legal and accounting experts is currently reconciling the two reports and plans to reach its own conclusions. Aguirre’s plan would allow them to continue their work, but move along a separate path with the SEC.
Ed McIntyre, a local securities attorney with Solomon Ward, called Aguirre’s move “ingenious.”
“It’s clearly a way that the city can without more hassle – if the SEC would accept it – resolve its issues with the SEC and get that behind it,” McIntyre said. “My guess is that the reaction of the bond market would be hugely favorable.”
However, questions remained whether Aguirre has the authority to unilaterally negotiate with the SEC without the consent of the City Council and whether the SEC was far enough along in its investigation to accept such a deal.
Bill Sullivan, national chairman of firm Paul Hasting’s securities litigation practice, said SEC officials sometimes like to resolve issues with entities so they can pursue actions against specific individuals.
“As far as something that would bring about resolution for the city, [a consent decree] would be great,” Sullivan said. “Because this has got to stop for the city.”
SEC officials don’t comment on ongoing investigations. However, city officials have been scolded by investigators and securities experts for failing to fully cooperate with the investigation – at least in the beginning stages.
Cooperation with an SEC investigation is critical to the specific punishment levied against an entity. The commission often levies large fines and penalties against organizations for failing to fully assist during an investigation.
McIntyre said the city as an entity could still face penalties as a result of a consent decree, but the move would allow the city to preempt the SEC’s filing of a civil complaint.
Atkins said the city is fully cooperating with the regulatory body. “We have indications from the SEC that we are on the right path,” she said.
The SEC, like the credit rating firms that have been consistently lowering the city’s credit rating, are hoping to see city officials working in unison to solve its issues, Atkins said.
“One of the messages that we did get from the SEC that I will share with you is that they want one point of contact, they want us to be working cooperatively together,” Atkins said.
She continued: “I think some of our budget issues are directly related to the political problem that we have, not the financial problem.” Atkins took over as acting mayor last month following the resignation of former Mayor Dick Murphy and conviction of Deputy Mayor Michael Zucchet on federal corruption charges.
One of the three major credit rating firms suspended the city’s credit rating nearly a year ago after Vinson & Elkins first report into the city’s disclosure practices. The city has remained locked out from public bond markets since then, as auditors have been working to certify its 2003 and 2004 annual financial statements.
However, the certification of the audits has remained delayed for a number of reasons, the most high-profile of which is the pension board’s refusal to turn over documents sought by investigators and auditors.
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