Thursday, July 27, 2006 | Setting the stage for another in a line of lawsuits against the outside professionals tied to the city’s financial meltdown, City Attorney Mike Aguirre released the latest installment in his series of interim reports Wednesday, claiming that law firm Vinson & Elkins failed to properly investigate allegations of wrongdoing at City Hall.

The report contains internal e-mails showing the early concerns of some city officials regarding the firm’s ability to be independent from the city officials it was supposed to investigate. But in the e-mails, both Vinson & Elkins partner Paul Maco and then-City Attorney Casey Gwinn expressed no reason for concern.

The firm’s two investigative reports, which cost the city $6.3 million, were eventually rejected by investigators from the Securities and Exchange Commission and the city’s outside auditor for a lack of independence.

In total, the 24-page report alleges that the law firm, hired to investigate errors and omissions found in the city’s financial disclosures to investors, compromised its independence and failed to complete a proper investigation under accounting standards.

A lawsuit against the firm is expected to be filed Thursday. Aguirre has scheduled a 9:30 a.m. press conference to announce the legal action.

In the February 16, 2004 e-mail, from Gwinn to Maco, the former city attorney wrote that former Deputy City Manager Pat Frazier and former Auditor Ed Ryan “also raised questions about your representation of the City since you were already assisting City staff on these issues. I don’t see the legal issues, but Pat made the point that they were going to have you do an internal review and now you are ‘investigating’ the staff you have been working with.”

Maco, the former head of municipal securities at the SEC, replied: “We see no conflict in our serving in both the report capacity and as your SEC lawyer, rather it is complimentary and will avoid doubling up cost.”

The e-mails turned out to be prescient, as Maco’s reports were clouded by questions surrounding his relationships with the city officials he was supposed to be investigating. He had previously worked with city officials on another contract.

Likewise, securities experts say Vinson & Elkins was conflicted in serving as both the investigator and the city’s defense counsel in front of the SEC. Any investigation performed by a defense attorney would appear to be an advocacy document, not the work of an independent investigator.

“The fact of matter is that they gave a cursory look at the issue without a through investigation,” Councilwoman Donna Frye said.

The city was later forced to hire a separate batch of investigators – who have billed the city $20.3 million for a yet-to-be completed report – and a separate law firm to represent it before the SEC.

Nearly two and a half years later, still without an investigative report acceptable to the needs of auditors and the SEC, the city remains with a suspended credit rating. Until its auditors receive the independent investigation, they will not sign off on a four-year backlog of financial statements.

Without those financial statements, the city cannot return to Wall Street. Since 2004, the city has been unable to borrow money in order to complete mandated water and sewer system upgrades, build fire stations and repair streets.

Maco was reached for comment, but said he was on vacation, where it was 3 a.m. Attempts to reach his partner, Richard Sauer, were unsuccessful.

Earlier this week, the city reaped a $1.1 million settlement from a lawsuit against two former auditors connected to the financial disclosure issues. It has also sued the pension system’s former actuary, investment advisors and former bond counsel. Aguirre hinted on Wednesday that he was contemplating a suit against Maco’s replacement, consulting firm Kroll, Inc.

“This is just one series of lawsuits that we will and have been bringing against professionals who breached their fiduciary duties to the city to provide proper services,” Aguirre said.

The city hired the firm in February 2004 to prepare a “warts and all” investigation into allegations of impropriety at the city’s pension system and questions surrounding the veracity of the city’s financial disclosures to investors. Months later, the city’s outside auditor, KPMG, also requested an investigation into alleged illegal acts.

KPMG and Vinson & Elkins repeatedly clashed during the law firm’s engagement, as the auditors demanded a more thorough investigation and the law firm suggested its work was satisfactory. KPMG officials went as far as to suggest in an October 2004 memo that former Mayor Dick Murphy retain a new law firm if the city “is prepared to proceed with an appropriate investigation.”

However, city officials were able to persuade the auditors to continue with Vinson & Elkins at the helm. The firm left quietly from City Hall a year ago as consultants Kroll Inc. picked up the investigation.

In his report, Aguirre claims the law firm:

  • Failed to analyze a number of issues necessary for a complete reporting, including the computer hard drives of city council members and Murphy and a special pension benefit given to the presidents of certain employee unions.
  • Breached its independence by working under Kroll Inc. once it was hired.
  • Failed to conduct an objective investigation that would meet professional auditing standards.
  • Charged for unnecessary legal work.

Vinson & Elkins has also been sued by Enron shareholders for its part in the energy giant’s downfall. The company’s investors sued the law firm for securities fraud, claiming it provided Enron with false legal opinions, misled the SEC and helped insiders pull off transactions that appeared independent.

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