City Agrees to Settle SEC Case

Wednesday, Oct. 25, 2006 | A source close to the city of San Diego’s negotiations with the Securities and Exchange Commission said the City Council agreed to settle with the federal regulators Tuesday that would not include fines for the embattled municipality.

City officials wouldn’t comment publicly on whether an actual vote took place during the council’s closed-door meeting, saying they didn’t want to jeopardize the agreement they had with the SEC by making public statements about the investigation.

“Personally, I don’t see the sensitivity to it, but for some reason the SEC has taken a strong position on us remaining mum,” Councilman Ben Hueso said.

But a source who requested anonymity because of the confidentiality of the talks confirmed that the council agreed to the tentative settlement that City Attorney Mike Aguirre and an outside lawyer reached on the city’s behalf.

The agreement, pending approval by the SEC board, would require the city to hire – at its own expense – an expert to supervise the city’s bookkeeping practices for three years, the source said. The city would also not be fined under the terms of the pending agreement, according to the source.

The agenda accompanying Tuesday’s closed-session meeting stated that the council would hear “discussion by the City Attorney and Council related to resolution of the matter and consideration and approval of the cease and desist order.” Aguirre’s office invited council members to view the settlement documents on Friday, according to an e-mail obtained by voiceofsandiego.org.

The settlement would remove the municipal government from the long-standing investigation into the city’s past financial practices. In 2002 and 2003, the city issued financial statements to potential investors that downplayed potential liabilities in the pension system, which now has an estimated deficit of $1.4 billion.

The city’s disclosure troubles and pension dealings have also attracted the interest of state and federal criminal investigators. A number of investigations are ongoing, and criminal charges have been brought against city and pension officials.

The SEC’s five-member board of commissioners in Washington is expected to weigh the settlement, which the commission’s staff negotiated, soon – possibly within the next two weeks, the source said.

In addition to the focus on the pension system, the SEC has also subpoenaed information relating to the City Council’s decision in 2002 to withhold from the public a study that illustrated how city residents’ sewer bills subsidized wastewater costs for large industrial users. The unbalanced sewer rate structure jeopardized about $265 million in state bonds, and financial statements that the city released did not make clear that risk.

Besides the probes by the SEC and the Justice Department, the faulty disclosures also caused problems for the city on Wall Street. Outside auditors have withheld the city’s annual financial statements, dating back to the 2003 fiscal year, which has led financial clearinghouses to downgrade or suspend the city’s credit ratings. Mayor Jerry Sanders hopes to be borrowing on the public markets again by June. That process will begin with KPMG’s blessing of the 2003 audit, which the mayor predicts to be completed by the end of the week.

Aguirre and John Hartigan, the city’s hired attorney, began negotiating on behalf of the city government last September.

The council at the time approved the approach, which separated the city from the officials whose decisions prompted the investigation. But they scorned the city attorney for forcing them and other officials to fend for themselves with separate lawyers. The city attorney said the city could wrap up its issues quicker if individuals were dealt with separately.

Multiple sources close to the investigation have said that several officials have received “Wells calls,” the SEC’s precursor to potential enforcement actions. The invitation allows a targeted individual the ability to begin settlement talks or provide legal arguments or new evidence that might prove exonerating.

Legal bills obtained by voiceofsandiego.org show that legal counsel for at least one elected official, Councilwoman Toni Atkins, has met with the SEC about possibly settling her case.

It’s unclear when a settlement for the city will be finalized and made public, as the SEC does not have to disclose when it meets in private, when cases are typically weighed by the board.

“Enforcement actions are generally exempt from open-meeting requirements,” SEC spokesman John Heine said.

The SEC’s board meets, on average, a little more than once a week, logging 60 meetings in 2005, Heine said.

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