Council Pays Own Legal Bills

Wednesday, June 21, 2006 | The San Diego City Council greeted fiscal year 2007 much the way it spent many days in fiscal year 2006: approving increased legal bills for the bevy of pending investigations and lawsuits tied to the city’s financial meltdown.

This time the added expenditures were for the council members themselves, as they approved Tuesday an additional $1.3 million for the attorneys they’ve hired in connection with the U.S. attorney’s criminal probe, the Securities and Exchange Commission’s securities fraud investigation and civil lawsuits related to the pension crisis.

The group of current and former council members – including former Mayor Dick Murphy – has now sought a total of $3.1 million in taxpayer funds for attorney fees.

“I just hope this is all behind us very soon. None of us certainly like having to sit up here and do this,” Councilman Jim Madaffer said.

Council members last increased their legal funds at the end of March, forecasting then how much would be needed to cover their bills for fiscal year 2006. Those estimates proved to be low.

In total, the current and former politicians asked for an additional $433,000 to cover their legal costs in this fiscal year, which ends June 30. The rest of the $1.3 million allocation approved Tuesday is slated to come from the fiscal year 2007 budget, which was finalized this month and takes effect July 1.

A breakdown of invoices submitted by council members’ attorneys shows increased activity beginning in February after a number of slow months, indicating that attorneys became more active at that time. In February, sources told voiceofsandiego.org that the SEC had given targets of its investigation of the city a last chance to avoid enforcement action by submitting evidence that would quell suspicions that they committed securities fraud.

Council members denied having received such notification, known as a “Wells call,” at the time. They did confirm attending a meeting with their attorneys and SEC officials.

For example, attorneys for Councilwoman Toni Atkins submitted annual invoices for between about $14,000 and $33,000 a month from May 2005 until October 2005. Bills for November and December never topped $4,400, but jumped up to $61,590 for February, $89,737 for March and $99,928 for April – the last month for which records are available.

On Tuesday, Council President Scott Peters requested an additional $190,000, bringing his total authorized legal fund to $484,332. An additional request for $203,000 brought Councilwoman Toni Atkins’ total legal costs to $568,697. Councilman Brian Maienschein’s legal bills jumped up to a total of $605,643 after he asked for another $260,000. And Councilman Jim Madaffer’s request for another $250,000 brought his total to $577,231.

Former Mayor Dick Murphy, who has remained out of the public eye since stepping down in July, also asked for an increase of $200,000. His total legal costs are now $570,069.

Additionally, former Councilman Michael Zucchet and Ralph Inzunza each received an additional $50,000. They stepped down last year after being convicted of corruption in a scheme to overturn strip-club regulations. (A judge later threw out seven of Zucchet’s convictions and the remaining two could be headed for retrial.) Zucchet’s total legal costs in connection with the pension crisis are now $103,000; Inzunza’s are $72,340.

Council members have said their legal representation wouldn’t be such a burden on city finances if the City Attorney’s Office provided the representation; City Attorney Mike Aguirre decided in early 2005 that his office wouldn’t represent council members in the investigations.

“I felt as soon as I was elected that council members should have their own attorneys to go to bat for them,” Aguirre said. He said the serious nature of the probes required council members to have their own personal lawyers.

“This was the proper procedure,” Aguirre added.

Councilwoman Donna Frye has paid her own legal bills in connection with the probes, and has said her costs total less than $5,000.

The Justice Department and SEC began parallel probes of city politics and finances in early 2004. The FBI and U.S. Attorney’s Office have focused much of their efforts on the city’s pension dealings, bringing corruption charges against five former pension officials in January for their alleged roles in a 2002 pension deal. Since those charges were filed, there have been sporadic signs that the investigation continues.

SEC investigators are determining if federal securities laws were broken in the preparation of the city’s financial reports to investors. Subpoenas show the regulators are looking at how the city reported its pension deficit and hundreds of millions of dollars in other liabilities it departments such as wastewater.

Prosecutors have also subpoenaed information related to the city’s financial reporting, raising the specter that criminal securities charges could be filed. The SEC can bring civil enforcement actions, resulting in fines or banishment from serving on corporate boards. If the level of the securities fraud is judged to rise to criminal, then the U.S. Attorney’s Office brings criminal charges in conjunction with the SEC.

Some council members have also employed their attorneys as they have received requests for depositions by Aguirre in a lawsuit brought against the pension system. The suits seek to prove that pension deals in 1996 and 2002 were illegal and, therefore, the hundreds of millions of dollars in benefits created in those deals are null and void.

The pension deficit is estimated to be at least $1.4 billion.

Attorneys for the council members have blacked out sizable portions of the legal invoices detailing what actions the attorneys took on behalf of their clients.

The $870,000 in legal bills approved for the coming fiscal year will be taken from the city’s public liability fund, the account used to cover unplanned legal and other costs. The public liability fund has a budget of $10 million for the upcoming 2007 fiscal year.

Unforeseen bills for lawyers, accountants and consultants working to untangle the city’s financial mess forced the city to burn through its public liability fund quickly last year. After that fund was exhausted, the city turned to its emergency reserves to cover $15.5 million in associated legal costs, draining them to what city officials called “dangerously low” levels by the end of the fiscal year.

The city has since begun to replenish the fund with $7.5 million from its 2007 budget and $11.1 million in unforeseen tax revenue from 2006.

The $433,000 in council legal bills to be paid from the 2006 budget will be covered by tax revenue that came in above budget at the end of the year.

The allocation for each council member had to be handled as a separate item so that each council member could recuse themselves from the specific vote, leaving council chambers to avoid any conflicts of interest. Peters, Madaffer, Atkins and Maienschein each read a statement declaring that they had a personal financial interest in the payment of the legal bills.

Each authorization was passed unanimously.

Current City Councilmen Tony Young, Kevin Faulconer and Ben Hueso weren’t on the council at the time that the decisions in question were made.

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