If you haven’t yet, check out the SEC’s cease and desist order issued today to the city of San Diego.

This, first of all, is exactly what City Attorney Mike Aguirre planned for and executed. It settles things on the city’s behalf, but leaves individual city officials still in the crosshairs of the SEC.

And yes, there are some serious accusations coming against them. Check out page 19.

The SEC announced that it, in no uncertain terms, believes that certain city officials knowingly or recklessly committed securities fraud. The Kroll report, months ago, anticipated this.

And now we have confirmation from the SEC:

The City, through its officials, acted with scienter. City officials who participated in drafting the misleading disclosure were well aware of the City’s pension and retiree health care issues and the magnitude of the City’s future liabilities. … In light of the City’s officials’ detailed knowledge of the magnitude of the City’s pension and retiree health care liabilities and of the rating agencies’ interest in those liabilities, the City officials acted recklessly in failing to disclose material information regarding those liabilities.

Here’s a quick definition for you:

SCIENTER – Knowingly. Having the requisite knowledge of the wrongness/illegality of an act or conduct; guilty knowledge; knowing the impropriety/illegality associated with doing certain acts. This is often an element of liability or guilt that must be proven before a judgment or conviction can be obtained.

Now, Kroll said that the City Council wasn’t guilty of this, just the staffers who worked in city management.

Will that be the course the SEC takes as it continues to investigate individual city officials?

The SEC gave us some indication that it doesn’t necessarily give elected city leaders – the former mayor and City Council – the kind of slack Kroll gave them.

How can you tell? Because the SEC says in its report that it is giving the city credit for trying to fix the situation.

And then it lists the things the city has so far done to make amends.

No. 1 on the list: The city fired staffers in the city manager’s and auditor’s offices.

What’s No. 2 on the list?

2. The Mayor resigned and has been replaced by a former City police chief. In January 2006, pursuant to a public referendum, the City changed from a strong city manager form of government to a strong mayor form of government.

If the mayor resigning was a chief way for the city to make up for committing securities fraud, doesn’t that mean that the SEC considers the mayor responsible – culpable enough to have needed to resign? If that’s the case, doesn’t that mean the SEC might think the City Council members, who had as much power as the mayor did, have the same culpability?


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