Council Tried to Settle with SEC in 2004

Wednesday, December 14, 2005 | The City Council directed its attorneys to negotiate a settlement for themselves and the city with the Securities and Exchange Commission during a closed hearing in September 2004.

City Attorney Mike Aguirre and outside attorneys have been negotiating with the SEC over possible securities fraud violations since October of this year. The negotiations only deal with the city and do not include any City Council members or other individual city officials. Some council members originally objected to the idea of the city settling with the SEC when Aguirre first suggested it in August.

But on Sept. 21, 2004, the City Council voted 6-0 to authorize a team to negotiate with the SEC “for best deal possible, with caveat that City Council be included in deal with City and not be left to deal with separately,” according to a report on the closed session meeting obtained by the Voice of San Diego.

Councilwomen Toni Atkins and Donna Frye were absent from the meeting. Councilmen Scott Peters, Michael Zucchet, Brian Maienschein, Jim Madaffer and Ralph Inzunza, and former Mayor Dick Murphy voted in favor of the resolution.

Murphy, Zucchet and Inzunza have all since resigned. Current City Councilman Tony Young was not on the council at the time – his District 4 seat was vacant.

The negotiations were sparked by the release of a city-sanctioned investigative report by law firm Vinson & Elkins days earlier. The report stated that the city’s financial disclosure process was woefully inadequate, but it didn’t place individual blame for the errors and omissions in the city’s annual financial disclosures to investors and the general public.

The report was eventually rejected by the SEC for its lack of independence and decried by detractors as a whitewash. The firm was criticized for serving as both an investigator and a defense attorney for the city.

“What this shows is that there was plenty of interest in settling with the SEC when it was to the individual advantage of the council members,” Aguirre said.

The city attorney has in essence left the City Council and other city officials to fend for themselves in the SEC’s investigation into possible securities fraud. He has sought to sever individuals from the city and negotiate a deal to end the investigation of the city as an entity by admitting that it offered material misstatements and omissions in its financial statements.

The City Council authorized Aguirre to proceed with the negotiations in September of this year, although a few did so begrudgingly.

Nothing came of the council’s negotiations with the SEC. Peters said he didn’t remember what happened with the council’s desire to settle in 2004. However, he said he is wary of settlement talks this time around because the city attorney is conflicted because he has opined that some members of the City Council committed securities fraud.

“The SEC has told us they don’t think Mike Aguirre is independent,” Peters said.

He said the council fully supports a settlement.

“The City Council’s always wanted to settle with the SEC. If you’ve heard otherwise, it hasn’t been from the City Council. We would love to get the investigations behind us,” Peters said.

Frye said she didn’t know her colleagues had authorized negotiations in 2004.

She said she didn’t attend the hearing because she didn’t feel comfortable going into closed session meetings on anything related to Vinson & Elkins. Closed session document shows that its two lead attorneys were present at the time of the City Council’s September 2004 vote.

“They were supposed to be preparing an independent report and fully cooperating and disclosing everything, so it seemed odd that we would be meeting in closed session at the same time we were supposed to be open,” Frye said.

Vinson & Elkins eventually left San Diego in August after completing two investigations that were rejected by the SEC and the city’s outside auditor, KPMG, for their lack of independence.

The firm has billed $7 million for its work, which began in February 2004. Without the completion of an independent investigation, the city’s credit rating, access to Wall Street, and fiscal year 2003 audit remain on hold.

The SEC often uses an entity’s level of cooperation as one factor in determining its fines. The completion of an independent investigation is an important measure of cooperation.

The city brought in an audit committee headed by former SEC Chairman Arthur Levitt to reconcile investigations conducted by Vinson & Elkins and Aguirre. The audit committee’s investigation has also been beset by delays and budget problems.

Audit committee officials estimate their investigation will now stretch into May and cost an additional $9 million to $11 million to complete. To date, they have billed the city at least $6 million.

The U.S. attorney and SEC have been investigating city finances and politics since February 2004.

Please contact Andrew Donohue directly at