Friday, January 06, 2006 | Federal prosecutors charged five current and former city of San Diego pension officials with fraud and conspiracy today for their roles in a 2002 pension deal at the heart of the city’s fiscal and legal crisis.

Prosecutors from the U.S. Attorney’s Office allege that the officials designed and implemented a special pension benefit for the president of the firefighters union in order to enact a funding plan that relieved the city of a lump-sum payment due to the pension fund.

The indictment alleges that the five defendants concealed the existence of the benefit and the true financial health of the fund from other pension trustees voting on the deal.

The federal grand jury returned the indictments Friday morning against firefighter union President Ron Saathoff; the city’s former human resources director, Cathy Lexin; former Assistant Auditor Terri Webster; Lori Chapin, chief pension attorney; and former retirement system Administrator Larry Grissom.

Lexin and Webster also served on the pension board. The indictment alleges that Lexin, Webster, Chapin and Grissom also personally benefited from the deal they enacted, as all general employees of the city received a pension boost.

The Justice Department has been investigating City Hall since February 2004. The probe, as well as other ongoing investigations and the city’s financial problems, have roiled City Hall.

The investigation has inspired great speculation in political circles and citywide, as many have wondered how high indictments would reach. Prosecutors wouldn’t say Friday if the investigation was ongoing or closed, but the indictments didn’t stretch as high as some had speculated. Charged were a union president, leaders of the pension system and some former members of the city management – not the City Council, former Mayor Dick Murphy or the city’s top administrators.

The charges bring to light few new revelations on City Hall’s dealings and focus solely on Manager’s Proposal 2, a deal made between the pension system and the city in 2002 that granted employees increased benefits while at the same time allowing the city to forgo what was thought to be a $25 million to $75 million lump-sum payment into the pension system. The deal has been the central focus of the city’s problems for more than two years.

“The defendants had a duty to act in the best interests of the city retirement system. They breached that duty by engaging in self-dealing, ignoring conflicts of interest, and exploiting their positions, to the detriment of the retirement system,” said U.S. Attorney Carol Lam in a statement.

Lam didn’t attend a Friday afternoon press conference announcing the indictments.

The Securities and Exchange Commission is also investigating securities violations after errors and omissions found in the city’s financial statements called into question the veracity of its financial reporting. Prosecutors have also been looking at possible criminal violations, but officials wouldn’t say Friday whether or not that investigation was continuing.

Saathoff, Webster, Lexin and three other former pension trustees have also been charged by the District Attorney’s Office with criminal conflict-of-interest violations in connection with votes they took while on the pension board. A pre-trail hearing in that case is set to resume Monday after a holiday recess.

Saathoff was a longtime member of the board of administration of the San Diego City Employees’ Retirement System. As a result of his stature in the political community, he was considered an influential member of the board. The firefighters’ endorsement was long held as a very powerful one for candidates hoping to reach elected office.

It’s his benefit from the 2002 deal that is at the heart of the federal allegations against the five pension figures. Lexin, Webster, Grissom and Chapin are accused of designing, implementing and then concealing a special benefit for Saathoff that allowed him to combine his union salary with his salary as a captain in the fire department when he calculated his final pension.

Without that special benefit, retirement fund officials would have only calculated Saathoff’s pension using his salary at the city.

The benefit increased Saathoff’s expected pension by more than $25,000 a year. That’s a benefit that over 20 years would have totaled $500,000.

The city’s pension dealings first came under scrutiny in late 2002 when pension trustee Diann Shipione began raising public concerns over the city’s ability to pay its future pension bills and possibly corrupt deals cut between the pension board and city administrators.

The pension system is now saddled with a deficit estimated to be more than $1.37 billion. The deficit threatens to consume the city’s annual operating budget for years to come and has caused a political upheaval at City Hall.

Federal investigators entered the fray in February 2004 after the city admitted to errors in its financial disclosures.

The indictments mark the second round of criminal charges that the federal government has brought against city officials since 2003. Former City Councilmen Ralph Inzunza, Michael Zucchet and Charles Lewis were indicted on corruption charges in 2003 for allegedly accepting campaign contributions in exchange for attempts to relax strip-club regulations.

Zucchet and Inzunza were convicted of corruption charges over the summer. Most of the charges against Zucchet were thrown out but the U.S. attorney can appeal the decision.

City Council President Scott Peters called the new indictments “difficult and painful for everyone in the city of San Diego,” but said they were a step toward the city’s recovery.

“I offer my full cooperation with the U.S. Attorney’s office in this process. It is my fervent wish that the proceedings are speedy and fair,” he said in a prepared statement. “We will finally have answers to the tough legal questions we have wrangled with over the past two years.”

City Councilwoman Donna Frye restored the movement to have City Attorney Mike Aguirre installed as the retirement system’s chief legal advisor. Chapin has occupied that role since former City Attorney Casey Gwinn created the position in 1998, thereby separating the position from his office’s supervision.

Chapin has put herself on administrative leave, said pension board President Peter Preovolos.

The five defendants were charged with honest services mail and wire fraud and conspiracy to commit wire and mail fraud. Prosecutors often use the honest services provision in public corruption cases when bribery isn’t explicit. The statute is based in the idea that the public is entitled to honest services from its public servants.

The press release from the federal government closes with the following paragraph:

“An indictment itself is not evidence that the defendants committed the crimes charged. The defendants are presumed innocent until the Government meets its burden in court of providing guilt beyond a reasonable doubt.”

– Sam Hodgson and Scott Lewis contributed to this report.

Please contact Andrew Donohue directly at

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