Tuesday, March 14, 2006 | A new federal subpoena delivered to City Hall last week signals a marked turn in the federal criminal investigations into San Diego city officials, providing the first bit of hard evidence that the two-year-old probe continues beyond the indictments against five former pension officials in January.
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With the release of the subpoena last week by city officials, it appears the U.S. Attorney’s Office has shifted its attention more intensely to the city’s controversial handling of its wastewater system. The subpoena is the first delivered to City Hall since prosecutors brought corruption charges against the former pension officials in January, at which time many wondered whether or not the two-year-old criminal probe into city finances and politics had drawn to a close and if current and former council members had avoided prosecution.
Many in San Diego’s political circles had hoped that the January indictments of the pension officials would remove one of the many clouds that had long been hanging over City Hall and draw to a close the federal criminal investigations. However, the release of the subpoena last week signals that the investigatory pall that has spread over city government will remain for the time being.
“The situation is not only getting cloudier, but if any more scandals hit there’s going to be zero visibility,” said John Dadian, a lobbyist and Republican strategist.
The subpoena, faxed to the City Attorney’s Office on March 7, seeks all documents and communications related to the City Council’s closed session meeting of Jan. 29, 2002. It is during that meeting that the City Council, by a vote of 6-to-2, decided to essentially shelve a report that recommended the city alter the manner in which it charged users of its wastewater system, according a report from the closed session.
The report advised the council to adopt a more “fair and equitable” user-rate system, as it found that the city’s rate structure subsidized large industrial users of the sewer system at the cost of residential users. The report found that the rate structure didn’t properly charge based on the amount of waste produced by large industrial users.
The subsidized rate structure opened the city up to more than $300 million in potential liabilities, as it jeopardized a number of state and federal loans the city had received to upgrade its sewer system. The council eventually voted to change the rate structure in 2004 under the threat of forfeiting the $300 million in state and federal loans.
City Attorney Mike Aguirre has opined that unnamed city officials and politicians violated federal securities laws in concealing the existence of the report, as the potential liability went undisclosed to the public and investors who purchased bonds based on inaccurate reports of the city’s financial health.
The issue has also grabbed the attention of the Securities and Exchange Commission, which began investigating the veracity of the city’s financial disclosures in early 2004 and focused in on the wastewater issue last summer. The U.S. Attorney’s Office also subpoenaed information related to the wastewater user-rate structure last August.
The new subpoena makes it likely that the U.S. Attorney’s Office is considering criminal securities fraud violations by city officials. The SEC handles civil securities fraud.
Former Mayor Dick Murphy and former and current council members Byron Wear, Toni Atkins, Brian Maienschein, Jim Madaffer and Ralph Inzunza voted to keep the report private. Former Councilman George Stevens and current Councilwoman Donna Frye voted against keeping the study private and now-Council President Scott Peters was absent from the meeting.
Officials have said they relied on expert advice from attorneys and consultants when approving the city’s financial disclosure reports. Atkins, Maienschein, Madaffer, Frye and Peters still serve on the council.
Aguirre estimated in his report, released last September, that the rate structure caused the city to overcharge San Diego residents at a rate of $20 million a year from 1998 to 2004. In addition to jeopardizing the state and federal loans, the rate structure also put the city at risk of litigation. A consumer advocate has sued the city over the issue and is seeking as much as $200 million in compensation for city residents.
The SEC’s investigation has also ramped up in recent weeks. Voice of San Diego reported last month that the commission had given targets of its investigation a last chance to avoid enforcement action by allowing their attorneys to contest legal theories or evidence that would be used in actions brought against them.
The new subpoena makes it likely that a new grand jury has been called to hear evidence in the new phase of the case. Attorneys close to the investigation have said it is likely that the previous grand jury’s term expired in January when the first round of charges was brought. A grand jury hears evidence from prosecutors, but not defense attorneys, in a case under investigation over an 18-month period and decides whether the government’s case is strong enough to bring criminal charges. A grand jury’s term can be extended once for a six-month period.
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