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Tuesday, September 27, 2005 | The group of consultants investigating allegations of wrongdoing at City Hall told the City Council during its monthly update Monday that pension officials were withholding eight documents potentially important to the completion of their investigation.

The private consultants, known as the audit committee, also said their investigation into financial reporting and politics in the pension system and wastewater departments will require them to search the e-mail archives of 30 to 40 current and former council members and their top staff.

The law firm originally hired to perform many of the audit committee’s current jobs, Vinson & Elkins, didn’t execute such a search. The firm exited the San Diego scene last month after its two reports were dismissed by investigators at the Securities and Exchange Commission and outside auditors for their lack of independence.

The council began in August holding monthly public updates from its most high-profile consultants, as investigations now entering their 20th month continued to drag on and public concern over mounting legal and consultant bills grew.

Talk of the eight withheld documents highlighted the Monday hearing, although several sharp exchanges between the city attorney and a number of other city officials underscored the tension in a city that hasn’t issued a certified financial statement since 2002, is the focus of a raft of local and federal investigations, and has paid more than $15 million to attorneys and consultants as part of its financial and political woes.

Last month, the pension board voted to hand over reams of documents to the audit committee after being asked by the committee and the City Council for months to do so – and after a federal judge ordered them to do the same for investigators from the U.S. Attorney’s Office.

Without the documents and the completion of an independent investigation, outside auditor KPMG has said they won’t bless the city’s 2003 financial statements – an act necessary for the city to regain financial credibility and reenter public finance markets.

Benito Romano, an attorney for the audit committee, said the simple fact that pension officials are balking at turning over the eight documents make them interesting to the investigators.

However, he said, it is too early to determine whether or not the documents are germane to the investigations. The audit committee officials said they plan to determine the importance of the documents by the next monthly update.

Troy Dahlberg, an accountant on the audit committee, said all of the withheld documents appear to be communications with the San Diego City Employees’ Retirement System’s outside law firm, Seltzer Caplan McMahon Vitek.

One of the documents is a January 2005 opinion letter from the firm. The remaining documents are correspondence or contracts between the firm and pension officials.

Larry Grissom, retirement administrator, said the documents not being turned over were mistakenly placed on the privilege log – a catalogue that briefly outlines the contents of thousands of documents sought by investigators but labeled “private” by the pension system.

The documents are related to the system’s ongoing suit that seeks to stop City Attorney Mike Aguirre’s attempt to reinstate the city attorney as the pension system’s chief legal counsel, he said. Former City Attorney Casey Gwinn created a separate legal office for the pension system in 1998.

“The eight documents have nothing to do with the disclosure but were included on the log as a mistake,” Grissom said.

The revelation highlights the fact that despite the pension board’s decision to give over some documents to the audit committee last month, it likely won’t be the last time it will be asked to cooperate further with the ongoing probes.

“The turning over of SDCERS privileged information should be seen as the beginning of cooperation between the city and SDCERS and the audit committee,” Dahlberg said.

It is likely that the documents will lead to the need for further searches, he said. Other requests for information may follow, prompting further deliberation on the part of the pension board.

“This will be a fight from here on out. It’s been a fight from the beginning,” said Bill Sheffler, a pension board member who has pushed for a full waiver since a new board took control of the system in April.

Additionally, the pension system recently hired its own audit committee to undertake many of the same duties as the pension system. The pension system’s audit committee, also staffed by a private consulting group, just began its investigation and it remains to be seen if it will be considered independent and transparent, Dahlberg said.

The audit committee also discovered this month that it will need to review 57,000 additional documents overlooked by Vinson & Elkins, a figure that totals one-third of the investigatory paper trail.

Despite these setbacks, audit committee officials have stuck to their December deadline for their final report, which will include an investigation into City Hall and a remediation plan.

The City Council also heard on Monday an update from KPMG, the outside auditor hired in April 2004 to certify the city’s 2003 financial statements after questions arose surrounding the veracity of the city’s pension accounting and other statements on the 2002 report.

Bill Morris, the firm’s managing partner for the Western division, said the firm was waiting for the audit committee to complete its investigation and for the city to bring its 2003 statements in compliance with general accounting procedures.

The firm could potentially certify the audit within 30 days of those two occurrences, he said.

Last month, Morris reported that the city’s 2002 report overstated its net assets by at least $642 million – or 9.3 percent of its total assets. The preparation of the 2003 statement is ongoing.

He expressed confidence in the independence of the audit committee’s investigation, something the firm lacked regarding the city’s previous investigator, Vinson & Elkins.

“We think you’re on the right course, but that we can’t give you an opinion until we get there,” Morris said of the completion of the investigation.

Aguirre peppered Morris with a series of questions focused on KPMG’s recent settlement with the Justice Department over the sale of reportedly $1.2 billion in illegal tax shelters. The firm settled, paying a $450 million fine and avoiding a punishment that could have put the firm out business.

He hinted that the firm could be hesitant about issuing an opinion and exposing itself to litigation at a vulnerable time.

Morris said that the firm is not afraid to issue an opinion and is committed to finishing the San Diego job.

Councilman Jim Madaffer, who took over chairing the committee after Deputy Mayor Toni Atkins became ill, attempted numerous times to cut short Aguirre’s questioning. He said Monday’s hearing was simply an update and suggested that Aguirre conduct his inquisition on his own time.

Aguirre said that the purpose of the hearing was to provide the public with information.

Atkins, who remained at the hearing, and Councilman Brian Maienschein rubbed their heads wearily during the exchange.

Councilman Scott Peters apologized to the KPMG officials and suggested that the council bar Aguirre from such hearings in the future.

The city attorney said he believes that KPMG officials are endorsing the work of the audit committee as a favor to members of the audit committee, who publicly supported the firm’s audit business in the Wall Street Journal when the settlement was announced last month.

The city attorney warned KPMG officials to watch their conduct. He also questioned the qualifications of the leader of the audit committee, Arthur Levitt, who was chairman of the SEC. Aguirre asked Morris if he knew that Levitt was neither an attorney nor an accountant.

Levitt’s body of work “stands on its own,” Morris said. “He’s one of the most respected people in this country.”

Aguirre questioned the audit committee’s independence because it is paid by the city. He also questioned its billing statements, which he said were scarce on details.

Dahlberg and City Manager Lamont Ewell defended the bills, saying that additional material could be made available to the manager’s office if questions arise. Dahlberg said the bills submitted were typical of those in his field.

Peters dismissed Aguirre’s theories and stressed the need to continue with the current contracts.

“We’ve embarked on this procedure to finish the investigation that everyone except the city attorney views as independent,” he said.

Atkins said she saw no other choice but to continue.

“Given that the SEC has said we are on the right path, I don’t know what the alternative is,” she said.

The SEC, FBI and U.S. Attorney’s Office have been investigating City Hall finances and politics since February 2004. The District Attorney’s Office has charged six current and former pension board members with felony conflict-of-interest charges for votes on a pension deal in 2002.

The deal is central to a number of the ongoing investigations and one of the causes of a pension deficit that’s estimated to be more than $1.37 billion. Investigations have also recently spread beyond the pension system and into the wastewater department.

Please contact Andrew Donohue directly at

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