Tuesday, Oct. 31, 2006 | When the City Council approved in closed session last week a settlement with the Securities and Exchange Commission, San Diego took a major step toward ending a two-and-a-half year investigation that sullied its financial reputation and garnered it national attention.
But that doesn’t mean the SEC’s done with San Diego’s municipal demise.
The possibility remains that the SEC could bring punishment against any individuals it believes are responsible for release of inaccurate financial information to potential investors.
The SEC settlement, agreed to by the City Council last weekend and now pending the approval of the commission’s five-member board, deals with only the city as an entity. City Attorney Mike Aguirre severed the individuals from the entity in settlement talks last year, saying it would help speed the resolution of the city’s problems.
Securities attorney Ed McIntyre, who isn’t involved in the case, said entities are often dealt with before individuals in securities investigations.
“Typically, if there appears to be a pattern, what you see is the entity resolves first and, if there’s individuals the SEC is concerned about, they track along,” he said.
Although many of the top city officials involved in the decision making in 2002 and 2003 have since left City Hall, a few do remain. And most of those are sitting members of the City Council.
Attorney bills obtained through a public records request show that personal attorneys for a number of the council members have held numerous meetings with the SEC – including a PowerPoint presentation at the SEC offices in Los Angeles and a formal submission regarding the council members’ roles in the financial disclosure troubles.
A $20.3 million investigation completed by private consultants in August pushed a lion’s share of the culpability for the city’s disclosure issues away from the City Council and on to eight former city staffers. Those staffers committed securities fraud by either recklessly or intentionally causing the city to release an inaccurate evaluation of its fiscal health, according to the report, which was compiled by former SEC officials.
The report opined that the five sitting City Council members – Scott Peters, Toni Atkins, Brian Maienschein, Donna Frye and Jim Madaffer – who were in office at the time of the disclosure troubles acted merely negligently. It’s an important distinction – if the SEC were to follow the consultants’ logic, council members would likely escape punishment and only the eight former staffers would likely face civil penalties.
As it has been involved in talks with the city as an entity, the SEC has also been homing in on individuals as well, although there’s no guarantee the commission will end up seeking punishment against individuals.
Sources told voiceofsandiego.org in February that the SEC had given targets of its investigation a last chance to avoid enforcement action. The notification, known as a “Wells call,” is an informal invitation to a target of the investigation to either begin settlement talks or point out legal or factual flaws in the SEC’s case.
Council members have denied being among the city officials to receive those notifications.
Attorney bills submitted by Peters, Atkins, Maienschein and Madaffer from that timeframe indicate a flurry of coordinated activity in February, March and April following a late January teleconference with the SEC. (Frye is paying for her own attorney, while the other council members use taxpayer funds and must submit their bills to the city.)
The activity included coordinated work on an “SEC submission,” according to invoices.
The potential defendant’s response to a Wells call is known as a “Wells submission.” It is not required, but if the individual does respond, that submission can itself be used as evidence in a trial.
Council members said in early February that they and their attorneys had been called in by the SEC to explain their roles in the city’s disclosure practice.
Invoices for Atkins’ and Maienschein’s attorneys show that regular meetings and teleconferences took place with “counsel for councilmembers” in the following months, throughout February, March and April. The invoices are heavily redacted and only contain snippets of the explanations for services rendered.
For instance, one of Maienschein’s attorneys billed for “emails with counsel regarding scheduling SEC meeting and facts at issue” on Feb. 7. Another attorney billed seven hours on Feb. 10 for a meeting with defense counsel and the SEC.
Days later, on Feb. 14, the attorneys began preparing a presentation to the SEC, according to invoices. The attorneys collaborated on a PowerPoint presentation for the SEC on a nearly daily basis in late February and early March.
The presentation was finalized at a meeting in the Los Angeles offices of Akin Gump Strauss Hauer & Feld LLP – the former offices of Madaffer attorney, Thomas A. Zaccaro – on March 6. Attorneys then delivered the PowerPoint presentation to SEC officials March 7, according to invoices.
In early April, attorneys for a number of the council members appear to have begun working on a formal submission, with Maienschein’s attorneys spending more than three hours on an April 4 meeting regarding the “SEC submission.”
Pamela Naughton, Peters’ attorney, said the submission referenced in the bills “was absolutely not a Wells submission. If somebody put a ‘submission’ on the bill, it was ‘submission’ with a small ‘s.’”
Council members’ attorneys gave another presentation at the SEC’s offices in Los Angeles on April 12, invoices state.
“The SEC is always eager to have information from people who have information. Our clients all cooperated fully and provided the information,” Naughton said. “It was simply convenient to have everyone go rather than to hear from each individual lawyer.”
She added: “We have been supplying the SEC with information continuously through this process.”
The invoices for other council members’ attorneys are more discreet than those of Maienschein and Atkins, who are both represented by attorneys from Morrison Foerster. Where their attorneys disclose the attendance of the SEC meeting on April 12, Peters’ attorneys blacked out much of their description on that day, leaving notations that say “Traveled to and from Los Angeles” and “Prepared for, traveled to, attended, and returned from [redacted].”
Madaffer’s attorney invoice from April 12 reads: “Prepare [redacted] meet with [redacted].”
The invoices for Maienschein’s attorney don’t directly state who the client is, instead only referring the engagement as “Project San Diego.” The Mayor’s Office confirmed that the invoices are for Maienschein’s attorneys.
Kimberly Greer, who represents both Atkins and Maienschein, declined to comment on the meetings and her representation of the council members.
Eric Acker, an attorney for Atkins, also declined to comment for this article. “I can’t really comment on the substance of the work we’ve done in this regard,” he said. “Given … the ongoing nature of it, I just can’t comment.”
Previous invoices have shown that Atkins’ attorneys discussed possible settlement parameters with the SEC in January following a teleconference with the regulators.
Through a spokeswoman, Peters declined to comment, citing the SEC’s desire to keep details of its investigation secret. The invoices for his attorneys from February and March have yet to be turned in to the city.
Madaffer also declined to comment through a spokeswoman. Atkins and Maienschein didn’t return calls for comment. Frye declined to talk about the specifics of the investigation, but said her attorney works alone and not in concert with those of other council members.
The SEC has refused to comment on the investigation.
Legal bills show that the focus of council members’ attorneys on the SEC drops off sharply after April. McIntyre, the securities attorney, said that it wouldn’t be out of the ordinary for the commission to wait for the city government to settle before resuming its case against individuals.
Enforcement actions brought by the SEC against individuals run the gamut, as officials can be asked to cease their previous behavior, be banned from serving in similar positions, fined or even imprisoned in the most serious cases.
Naughton said she doesn’t believe the case warrants individual punishment against the council. She noted that the city has continued to make good on its repayments to investors throughout the disclosure issues. “Nobody lost a dime, there’s no missing money,” she said.
McIntyre said the city’s reported settlement, if approved by the SEC, would be seen as a success for the entity.
“Typically, what has occurred is that entities agree to pay fines and penalties, and to the extent that the city does not have to face that, somebody did a good job for the city,” he said.
Under the settlement pending the commission’s approval, the city would admit to having committed securities fraud and escape without any fines and agree to be overseen by a monitor for a period of three years, sources said.
City officials have been relatively tight-lipped as the city’s settlement has formalized.
McIntyre said the SEC staff is generally scornful of public leaks about its cases because the commission’s staff could be embarrassed if the commissioners learn about it from the newspaper and not straight from its field staff. Shining light onto such information before the commissioners approve a deal could jeopardize it, he said.
“It would appear that, based on lack of comment – whether by the city or the SEC itself – that premature comment could kill the deal,” he said. “If you come out saying that this is a done deal, the commission could say, ‘Hell no.’”
The city’s settlement reportedly only speaks of city officials in broad terms and doesn’t specifically identify individuals.
The private investigation completed by consultants from Kroll Inc. alleges that eight former city officials – all of whom have since left the city – recklessly or intentionally allowed the city to issue false reports regarding its true fiscal health.
They are: former Deputy City Manager Patricia Frazier, former City Treasurer Mary Vattimo, former Auditor and Comptroller Ed Ryan, former Assistant Auditor and Comptroller Terri Webster, former retirement Administrator Larry Grissom, former Utilities Finance Administrator Dennis Kahlie, former wastewater Deputy Director William Hanley and former Deputy City Attorney Kelly Salt.