The Securities and Exchange Commission today sanctioned the city of San Diego on securities fraud violations for failing in 2002 and 2003 to disclose important information to investors regarding its looming pension and retiree health care obligations.

In a settlement, reached by City Attorney Mike Aguirre and approved by the City Council, the city agreed to cease and desist its past practices and be monitored by an outside consultant for three years “to foster compliance with its disclosure obligations under federal securities laws,” according to an SEC statement.

The announcement draws to a close one facet of the SEC’s two-and-a-half year investigation into the veracity of City Hall’s financial reporting. However, in its statement, the SEC indicated that its investigation into San Diego’s municipal meltdown is continuing.

“The Commission’s investigation is ongoing as to individuals and other entities that may have violated the federal securities laws,” the statement reads.

The order issued by the SEC found that the city failed to disclose that its pension deficit was projected to increase dramatically to $2 billion by 2009 and that its retiree health care liability was projected at $1.1 million. The SEC found that the city also failed to disclose that it had been intentionally underfunding its pension system “so that it could increase pension benefits but defer the costs” and that it “would face severe difficulty funding its future … obligations unless new revenues were obtained, pension and health care benefits were reduced, or city services were cut.”

The order found the city, through its officials, committed securities fraud by knowingly or recklessly allowing the release of materially misleading information.

City officials have scheduled a press conference this morning to address the settlement.

“San Diego’s misconduct jeopardized the interests of its citizens, its current and future retirees, and those who placed their trust in the City’s bonds as an investment,” said Randall R. Lee, the SEC’s regional director.

Read the SEC order here. Check back soon for an expanded version of this story and continual updates.

ANDREW DONOHUE

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