Wednesday, November 16, 2005 | Several attorneys close to the Justice Department’s investigation into San Diego City Hall said they expect at least the first round of indictments to come by January.
The term of the federal grand jury hearing the prosecutors’ case expires in January, the attorneys said, meaning that the U.S. Attorney’s Office would have to either bring charges by the end of the term or seek a one-time, six-month extension to the grand jury’s 18-month stint. It is unknown if the prosecutors have already used this extension.
An attorney with knowledge of the proceedings said the government planned to bring charges by January.
“My understanding is that they’ve got to get it done by January,” said another attorney close to the probe.
Federal investigators have been probing City Hall since February 2004. Officials from the Securities and Exchange Commission are investigating errors and omissions in the city’s financial disclosures. At the same time, the FBI and U.S. Attorney’s Office have launched probes into possible political corruption. The criminal probes center on deals made in the city’s troubled pension system, union influence at City Hall and the handling of the city’s wastewater department.
Federal grand juries typically serve 18-month terms during which they determine whether prosecutors have presented sufficient evidence to justify criminal charges.
Piecing together information provided by attorneys, officials interviewed by investigators and the numerous subpoenas served on City Hall, FBI investigators appear focused on the 2002 deal known as Manager’s Proposal 2 in which pension board members allowed the city to continue its history of underfunding the pension system in exchange for granting increased benefits for employees.
Many of the pension board members, as union members, benefited personally in the form of increased pension benefits as a result of their votes to lessen the city’s annual contribution to the pension system. Some pension trustees who voted on the deal also negotiated the benefit increases.
The pension deficit is now estimated to be more than $1.37 billion and is also a primary focus of the SEC’s civil investigation, as well as the city’s fiscal woes. An attorney close to the probe said the U.S. Attorney’s Office is also working on an investigation into criminal securities fraud in relation to the city’s faulty financial disclosures. Subpoenas indicate the securities fraud investigation relates to how city officials reported liabilities in the pension and wastewater systems.
Multiple attorneys interviewed for this story said they expect mid-level officials tied to the pension system to be indicted. Some predicted more than one round of indictments.
“They don’t spend this kind of time and money not to indict people,” one attorney said.
Sources said the FBI was looking into unions’ broader influence at City Hall. A number of sources said investigators were especially interested in firefighter union president Ron Saathoff and his influence in City Hall and with politicians. Saathoff was also a trustee on the pension board until earlier this year and received a special benefit as union president that was above and beyond what standard employees received in the deal.
“There’s no doubt the focus is on Ron (Saathoff),” said one person who’d been interviewed by the FBI on multiple occasions.
All sources interviewed for this story did so with the understanding they would not be quoted by name because of the ongoing federal investigation. Officials with the FBI and the U.S. Attorney’s Office have consistently declined to comment on the investigations while they are ongoing.
Saathoff’s attorney, Jerry Coughlan, declined to comment, saying he didn’t speak on cases that were still under investigation.
Subpoenas delivered to City Hall this summer indicate that federal investigators’ interest has widened beyond pension and union dealings to include activities in the wastewater system.
An August subpoena issued by the U.S. Attorney’s Office shows that the government is looking at the City Council’s decisions related to the way in which the city charged residential and commercial users of its sewer system.
The investigation appears to focus on the possibility of criminal securities fraud. City Attorney Mike Aguirre released a report in September that found it likely city officials committed civil securities fraud for failing to disclose to the public hundreds of millions of dollars in potential liabilities tied to the way in which the city charged for its sewer usage.
For years, the report stated, the city knowingly overcharged the residential users of the sewer system while undercharging the system’s largest industrial users, who were also politically active.
City officials knowingly hid the fact that this rate structure jeopardized as much as $300 million in federal and state loans and grants received by the city, according to the report. The rate structure has also spurred a lawsuit from a consumer activist seeking as much as $200 million in compensation for city residents.
The subpoenas issued to date in the lengthy investigation also help forecast what kind of cases the U.S. Attorney’s Office, the prosecutorial wing of the Justice Department, are contemplating in the City Hall case.
Virtually all political corruption cases include charges that the accused deprived the public of its intangible right to “honest services.” Except for those cases in which there is a clear quid pro quo – Latin for “something for something” – the honest services statute is invoked. It is a statute that casts a wide web and falls under the umbrella of the mail and wire fraud laws.
Charges of honest services wire fraud were used in the so-called “Strippergate” case brought in 2003 against three former city councilmen and strip club officials, among other charges such as extortion.
To that end, the U.S. Attorney’s Office in September subpoenaed “all documents and communications concerning interstate commercial carriers” such as Federal Express and UPS, signs that prosecutors would be looking for evidence that a fraud was committed across state lines, which would be a crime.
The deprivation of “honest services” doesn’t simply apply to politicians.
“Anybody who works for the city or state or county you could get under that ‘honest and loyal services,’” one attorney said.
The U.S. Attorney’s Office has also subpoenaed handwriting samples for four officials in the pension system, as well as the pay information for a number of city officials connected to the pension system. The request for pay and benefit information extends to the employees’ spouses as well.
To date, subpoenas made public by the City Attorney’s Office show that the federal government has requested the personal pay and benefit information of the following city officials and their spouses: Bruce Herring, former deputy city manager who was a principle player in the creation and negotiation of the November 2002 pension deal; Cathy Lexin, former pension board member and human resources director who was involved in labor negotiations; Ed Ryan, former auditor; Terri Webster, former assistant auditor and former pension board member; and Saathoff, the firefighters union president.
All of the officials, or their offices, were involved in the November 2002 pension deal in some manner.
The government has also requested the pay and benefit information for James Chapin, a former deputy city attorney married to Lori Chapin, the chief legal adviser to the San Diego City Employees’ Retirement System.
City and pension officials have consistently declined to comment in connection with the probes.