The Morning Report
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Friday, Aug. 11, 2006 | The Kroll report has been published and devoured. City Council members and others have split town or left City Hall for the legislative recess. And City Attorney Mike Aguirre has continued his rampage against both parties.
Aguirre maintained his assertion at a press conference Thursday that current and former elected officials violated more severe levels of securities laws than described in the $20.3 million investigative report released earlier this week by the private consultants from Kroll Inc.
The report found that San Diego’s elected officials – including former Mayor Dick Murphy and five sitting council members – acted negligently in allowing the release of false financial information to investors, but stopped short of analyzing whether that negligence violated any federal securities laws. Attorneys for the consultants said there was no need to analyze the law any further once it was determined that their actions were merely negligent and didn’t rise to the more serious levels of reckless or intentional.
Aguirre, who in two reports last year found the council committed securities fraud in acting recklessly, repeated his arguments Thursday – and said he would continue doing so on an important document that accompanies the city’s financial disclosures to investors. The document, known as a representation letter, outlines potential liabilities the city could incur after the release of the financial information.
Also Thursday, a Kroll representative said it was considering a request from Aguirre and Mayor Jerry Sanders to release the transcripts from the interviews it conducted with 68 officials – including elected officials – for its report.
The transcripts are not included in the 25 boxes of backup documents Kroll – also known as the audit committee – provided to the city. Each footnote of the voluminous report is backed-up by numbered documents arranged neatly in 25 boxes kept in the City Clerk’s Office. However, footnotes denoting each interview – including those with public officials – contain only single sheets of paper with the following phrase: AUDIT COMMITTEE INTERVIEW.
“We’re inclined to release them,” said Kroll spokeswoman Jodie Rosenbloom. She said the transcripts originally weren’t released because they were considered the “work product” of the consultants. Rosenbloom said she didn’t know when a final decision would be made.
Aguirre maintained the withholding of the interview transcripts and the findings on the council members’ culpability were evidence of a cover-up. He said he is considering filing suit against Kroll for a number of reasons, including withholding the transcripts and failing to follow the city’s billing procedure.
He also referred to the audit committee’s leader, former SEC Chairman Arthur Levitt, as a “flim-flam man,” a colorful way of calling him a con artist.
Earlier this week, Levitt had said that Aguirre had made himself “largely irrelevant” with his questioning during Kroll’s presentation.
The city attorney stood beside his earlier findings that Murphy and other current and former council members recklessly violated securities laws, stating that the council members were told about financial problems in the pension system and the wastewater department, yet approved bond disclosures containing misleading information related to the city’s finances.
The audit committee says in its report that council members “were negligent in fulfillment of their bond offering disclosure responsibilities.”
The distinction between the two findings is important. The SEC, which has been investigating the city for two and a half years, likely won’t proceed with charges against council members if it agrees with the Kroll findings.
In saying that eight top former city officials intentionally withheld negative financial information about the city, Kroll explicitly stated that it believed a violation of section 10(b) of the Securities Exchange Act of 1934 occurred. However, with regards to the council members, it only vaguely stated a finding of negligence without examining an applicable statute.
The consultants found that council members’ actions didn’t rise above negligence because they weren’t actively involved in the preparation of the financial statements and were only asked to approve them.
Aguirre said Thursday that the report was incomplete without a full analysis of the law, specifically whether the council committed fraud in their negligence – something that’s possible under section 17(a) of the Securities Exchange Act of 1933.
“Kroll and Mr. Levitt did not even answer the question,” Aguirre said. “The $20 million question was not answered.”
Attorneys for the audit committee said that for the purpose of the report, an analysis of the law was unnecessary once it was determined that council members acted only negligently.
Benito Romano, an audit committee attorney, said in an interview Tuesday that the evidence would support a violation of the law by council members.
“We didn’t find it necessary to say they violated it,” Romano said. “We didn’t come to an ultimate conclusion.”
In a letter dated Thursday to the audit committee, Aguirre wrote that it is “imperative therefore that you answer the question of whether Council members violated the federal securities laws for the City to properly certify the KPMG audit.
Moreover, it is required that you explain how you determined that the Council members did not act recklessly or knowingly in violation of the federal securities laws. Your failure to meet these responsibilities represents a fundamental breach of your contract with the City of San Diego.”
Ed McIntyre, a securities attorney with Solomon Ward who is not involved in the case, said the case is largely circumstantial because of the lack of a smoking gun, making it conceivable that different conclusions be drawn.
“Reasonable fact-finders could disagree,” he said.
Kroll named the following officials as having acted negligently: Murphy; current Council members Scott Peters, Toni Atkins, Brian Maieschein, Donna Frye and Jim Madaffer; and former Councilmen Ralph Inzunza, George Stevens and Byron Wear.
The report was commissioned upon the request of KPMG, the city’s outside auditor. KPMG demanded an independent investigation into allegations of wrongdoing connected with the city’s pension system, wastewater department and financial disclosure process.
KMPG’s audit of the city’s fiscal year 2003 has been on hold for more than two years, essentially freezing the city financially. It is stuck with a suspended credit rating and no access to Wall Street to borrow money for basic municipal projects for which cities exist.
Surprisingly, KPMG issued only tepid endorsement of the Kroll report after years of requesting such an investigation. Its officials said they would need to see the city’s reaction to the 54 recommendations in the report before issuing its audit. Additionally, the city is still working on a number of bookkeeping issues it needs to resolve before KPMG will bless its financial statements.