Saturday, Oct. 21, 2006 | Agenda documents released Friday indicate that the San Diego City Council will vote Tuesday on a final settlement with the Securities and Exchange Commission and sources say the agreement does not include any final resolution of the fates of individual city officials.
Multiple sources within City Hall, who asked not to be named because of the confidential nature of the talks between the city and the SEC, confirmed that a vote would likely take place. But if approved, the deal would only settle the SEC’s concerns about the city as an entity, they said. Evidence exists of a continuing probe into the actions of the individual city officials who approved and handled misleading financial disclosures.
A proposal listed on the docket for Tuesday’s closed session meeting asks the council to approve an agreement with the SEC that requires the city to “cease and desist” from the faulty financial practices that triggered the regulatory agency’s investigation of the city government two-and-a-half years ago.
The SEC started investigating the city’s books in February 2004 after errors and omissions were discovered on the financial disclosure statements accompanying the municipal government’s bond offerings.
City officials were silent on the question Friday afternoon after the meeting’s schedule was posted online. But multiple sources close to the investigation said the impending approval of a settlement Tuesday would focus solely on remedies for the city, not for the officials who approved the defective documents.
One source, speaking on the condition of anonymity, said that the city would be assigned a monitor for three years, but other sources would not confirm that. The monitor would be hired at the city’s expense to supervise the government’s efforts to improve its fiscal policies and internal controls and to regularly update the SEC and the public on the progress being made.
Any settlement the council approves in closed session would also have to be authorized by the SEC’s five-member board. The council holds closed-door meetings when it discusses labor negotiations, litigation and real estate transactions, and City Attorney Mike Aguirre said the SEC talks qualify for similar privacy.
“I want to respect the confidentiality of the negotiations,” Councilman Tony Young said Friday.
The settlement would solely be on the city of San Diego’s behalf, the sources said, and would not include penalties for city officials who were involved in 2002 and 2003, instead leaving them to deal with the SEC themselves.
Individuals close to the investigation have said that some city officials have received invitations to settle their cases – a process known as a “Wells call.” This step of an investigation allows targets of a probe to either point out any errors in the legal theories or holes in the evidence the SEC may be using to build a case.
Also, legal invoices obtained by voiceofsandeiego.org show that at least one elected official, Councilwoman Toni Atkins, has engaged the SEC in settlement talks.
The errors and omissions found in those disclosures have also delayed the certification of the city’s financial audits dating back to the 2003 fiscal year. The audit delays have resulted in the downgrading or suspension of the city’s credit ratings, which has essentially barred City Hall from borrowing on the public bond markets for much-needed capital improvement and infrastructure projects. Mayor Jerry Sanders expects the city to have its 2003 audits certified by next Friday and predicts the remaining obstacles will fall in accordance to a timeline that permits the city to begin borrowing again by June.
Aguirre, who has been representing the city government along with an outside attorney in the SEC case, refused to comment Friday.
Aguirre began negotiating on the city’s behalf last year, a move that rankled some city officials, including council members, who thought the city should be considered by the SEC as a single entity.
Now that they have hired their own attorneys and have faced scrutiny as individuals separate from the city, five of the council members who held office when the alleged wrongdoing occurred said they are concerned whether the effect of the pending settlement on their own cases creates a conflict of interest for them.
When Aguirre opined earlier this month that there wasn’t enough evidence to determine whether a conflict existed that would prevent them from voting on a settlement, many council members became irate.
Aguirre said the five affected officials – Council President Scott Peters and Councilmembers Toni Atkins, Brian Maienschein, Donna Frye and Jim Madaffer – could voluntarily recuse themselves at an Oct. 5 meeting.
Frye and Atkins left the private meeting, saying they wanted to exercise caution in the matter, but others said they were angry that they did not receive a definitive legal answer.
A report by private consultants at Kroll Inc. found that council members acted negligently in permitting the release of disclosures that included incorrect information regarding the city’s financial health to be released to investors. The report, which was released in August after an 18-month probe, stopped short of assigning a higher, more severe level of securities fraud to council members.
It found that eight former administrators acted intentionally or recklessly, levels of securities fraud that would likely spur enforcement action if the SEC concurs with the consultants.
Aguirre, on the other hand, maintains that the council members committed securities fraud and should be individually punished by the SEC.