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It’s sort of a cross between “cold” and “roll.” Like what a sailor would be warned of before being given liberty from a ship docked in Anchorage, Alaska. Kinda gives you a chill (If they’d change their name to “Big Happy Beach Party” we’d probably pay them forever).

But, I like the firm. And, I understand the firm. I used to work in a big firm, I know how they think.

These guys were “perfect” in the minds of some to do a job for San Diego that the local politicians and our local newspaper really wanted done. These were the guys that were going to come in to do a quickie report (you remember the original council authorization was for $250,000 – that obviously wasn’t going to buy much probing, and not a whole lot of pages in the report either.) And, for no more money, we were going to get big “juice” with the regulators.

After all, there weren’t any real problems here; just a lot hand wringing and “political posturing” by a few alarmists that had stumbled over a couple billion dollars of surprise debts. Hey, that’s nothing.

Some (me) thought the city should consider a financial adjustment proceeding in federal court. Nah. The politicians and local newspaper preferred to avoid the “collateral damage” of that kind of stuff. After all, how hard can it be to explain away the missing billions if you have the “right people” doing the ‘splaining? Why, we’d be back in the bond markets floating our “paper” in no time. We wanted it all, and these were the guys that were going to let us do it “our way.”

And, for just $250,000.What a deal!

Well, apparently the law of unintended consequences has not yet been repealed. We are years later and tens of millions spent on the “our way” approach. Now our politicians and local newspapers are dusting off their “be careful what you wish for” files to see if there might have been something they overlooked. There was.

Long ago, in a kingdom far away, there was a big energy trading company. They had a few “minor” financial irregularities they preferred not get too much attention, and they pressed their outside “financial folks” to “take it easy” on them. Don’t be like “Chicken Little” and tell everybody the “sky is falling.” Nobody was going to get hurt, and the big company would certainly be “very grateful” if the financial guys would be “collaborative” and “constructive” in they way they described what was going on.

So, while possibly not specifically doing anything really seriously wrong, the financial guys “smoothed out” the rough edges, just a bit. No alarm bells went off.

One day the sky fell in on the big company. Had to. The books were way screwy, and there was a boat load of previously secret debt it had no ability to explain, much less pay.

And, what was the reward to the helpful, “collaborative” and “constructive” outside financial folks? The end of their company, and financial ruin.

See, I’ll bet anything Kroll has read this story, just like we have.

There is a big difference between addressing massive financial irregularities outside of federal proceedings rather than in one, and it’s this: in a federal proceeding you get to re-set your financial condition in a process approved by a federal court. You need to voluntarily disclose all your troubles, but if your plan is approved, there is a lot of protection for the folks that assisted you in getting it done.

Outside a federal court plan, you don’t have to voluntarily disclose all your troubles, but there is no legal protection for the folks dealing with the financial stuff if it’s not all there. Same if people really don’t understand the gravity of your audit disclosures, warnings, etc.

Now, Kroll is not stupid. They probably know that our “plan” is to try to borrow our way out of the surprise billions of debt. That means we are planning to sell a boatload of paper, which will rest largely on the assurances and thoroughness of Kroll’s, KPMG’s (and others) audits and reports. They will be at risk for it all. Won’t matter about their disclaimers, if this doesn’t work out, San Diego won’t be the one receiving the incoming spears. For Kroll, this is a high, high wire act with no net. So, you can understand why they might get a bit concerned about the hurry up part of this, and touchy about being pressed, since any lack of disclosure, much less remediation, could look like “constructive” and “collaborative” behavior. We know how things turn out for the “constructive” and “collaborative” financial guys.

We are at $20 million-plus for Kroll, $7 million for V&E, I don’t know how much for KPMG, and who knows what for all the other lawyers and “others” helping us do it “our way.” So, we’re maybe $50 million plus dollars and four years into this exercise and we are still at step one.

While there could certainly be “collateral damage” from a bankruptcy, apparently there is as well from avoiding it when circumstances would suggest otherwise. The frustration and expense in doing this “our way” is just part of what we get for the decisions we have made. And, we are still at the beginning.

None of this is Kroll’s fault. They did not invade San Diego. They were sought out and invited here to do what they are doing. They were given Sarbanes-Oxley type review powers probably because they insisted on it. They did that because, absent federal court protections like the ones described above which are not available while we do it “our way,” they would be collectively insane to take on this assignment without the broadest scope of inquiry. The risk to that firm would preclude their participation. And, while I suspect they care a lot about San Diego’s financial health, they care about their own just as much.

Did anybody really think Kroll was gong to take on the risk exposure for several billion dollars of future San Diego paper by issuing a “drive by” report for $250,000?

I could be wrong. Maybe they’ll come out with the hoped for “Big Happy Beach Party Report.” But, somehow I don’t think so.

After that, how this will all turn out is still a mystery.

PAT SHEA

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