Friday, September 09, 2005 | Investigators paid by the city of San Diego to compile a key investigative report into its pension system and financial disclosure practices failed to properly review 57,000 of the 160,000 electronic documents deemed relevant to the probe because of a database glitch, city officials announced Thursday.
The omission means substantial work done at significant cost to the city by the now-departed law firm Vinson & Elkins will have to be redone by the outside audit committee.
It also portends a possible delay into a number of related tasks: the completion of the city’s third attempt at an independent investigation into allegations of wrongdoing, the audits of its long-stalled 2003 and 2004 financial statements, and the release of documents to investigators at the Securities and Exchange Commission and the U.S. Attorney’s Office that were requested as long ago as February 2004.
City Manager Lamont Ewell said he was withholding the final $1 million payment owed to Vinson & Elkins pending resolution of the issue. The firm received nearly $6 million during its 18 months on the job.
“This error has cost the City money. This is clearly unacceptable,” Ewell wrote Thursday in a memo to the City Council.
The error was discovered as officials from the audit committee spot-tested the Vinson & Elkins report for reliability. It was discovered that more than one-third of the 160,000 electronic documents that had been identified for review were not, in fact, reviewed properly.
Ewell said attachments in the 57,000 e-mails weren’t scanned for relevant search terms identified by auditor KPMG as part of the investigation into alleged wrongdoing.
The original 160,000 documents were plucked from the hard drives of approximately 30 city officials. Ewell said it was unknown what terms were omitted and if the e-mails were from the mailboxes of specific city officials.
City Attorney Mike Aguirre is suspicious of Ewell’s claims that computer glitches caused the delay, accusing Ewell and the firm staffing the audit committee, Kroll, Inc., of working to delay the investigation in order to boost the audit committee’s paycheck.
The audit committee, led by former SEC chairman Arthur Levitt, is currently charging the city $800,000 a month for its investigation.
“I don’t buy it,” Aguirre said. “I don’t think what you’re seeing here is reality.”
He then offered a warning to Kroll and other consultants working in San Diego’s fiscal crisis that he would sue for fees and damages if he found their work to be deceptive or unacceptable.
“We are entering into the land of the absurd,” Aguirre said.
The city has paid more than $15 million to consultants and attorneys in connection with the ongoing investigations and financial crisis.
When Vinson & Elkins undertook its second investigation in November, 160,000 e-mails were identified to be searched. Using specific search terms, the e-mails were identified by NTI Breakwater, a forensic data firm, from tapes on file at the San Diego Data Processing Corp. – the city’s data processing arm.
NTI Breakwater then forwarded the identified e-mails to Lexis/Nexis Applied Discovery, which created an online, searchable database for the relevant documents. However, Applied Discovery apparently searched the main electronic documents for the keywords again, but didn’t search the attachments to those e-mails. This miscue led to 57,000 documents being discarded, according to memos authored by Ewell on Thursday.
Applied Discovery is a subcontractor that bills the city through Vinson & Elkins. Its contract was approved by Ewell.
The SEC, which is conducting its own investigation into city finances, uses the same database for its access to documents.
The error was apparently caught while Vinson & Elkins was preparing its investigation; officials thought it was remedied. However, two weeks ago the audit committee discovered the document gap while conducting a routine audit of the Vinson & Elkins report.
Aguirre said he would launch an investigation into the matter. Ewell said he didn’t know which firm was at fault for the error, but he has withheld payment to both Applied Discovery and Vinson & Elkins.
Thursday’s revelation threw further doubt onto the work of Vinson & Elkins. Its two investigative reports were dismissed by KPMG and the SEC for a lack of independence. Partner Paul Maco didn’t return calls for this story, but he has defended the firm’s work in the past.
Critics have dismissed the reports as whitewashes because they failed to assign culpability for errors and omissions found in financial statements.
The firm was asked to both represent the city as defense counsel and compile independent investigative reports, competing charges that ended up compromising the firm’s work in its 18 months in San Diego.
The firm officially relinquished its duties last week after announcing in August that it was stepping down as the city’s legal counsel. Vinson & Elkins was slated to be done with the investigatory part of its work last September, but concerns regarding its accuracy and independence dragged the work out until last month.
The audit committee was hired to complete the firm’s investigatory work, while a separate law firm was hired last week to represent the city before the SEC and, if necessary, the U.S. Attorney’s Office.
The city’s credit rating will remain suspended until KPMG receives a report it deems independent. Until then, the city remains essentially locked out from public finance markets and cannot raise cash to complete infrastructure and construction projects.
The Securities and Exchange Commission is investigating the city’s financial disclosure practices, while the U.S. Attorney’s Office is probing possible political corruption. The District Attorney’s Office is also conducting its own investigation, which has resulted in conflict-of-interest charges against six current and former pension board members.
Aguirre said Thursday’s news could also delay the district attorney’s case because of its ongoing document searches.
The pension system, which carries a deficit that’s estimated to be at least $1.37 billion, is a key focus in all of the ongoing investigations.
Please contact Andrew Donohue at