Thursday, Nov. 16, 2006 | In September 2004, the San Diego City Council directed its attorneys to negotiate a settlement for the city with the Securities and Exchange Commission.
The council’s direction came with a condition: Any settlement that struck on the city’s behalf would have to include the council members, according to a closed session report that detailed the meeting.
A year later, the City Attorney Mike Aguirre abandoned that path, proposing the unusual strategy of separating the city’s negotiations from those of its officials. He said the tactic would bring about a speedier resolution of the SEC investigation into the city by freeing its fate from that of its officials – who were also under investigation.
The process, conceived by Aguirre 15 months ago, drew skepticism from the start, but concluded successfully with Tuesday’s announcement that the city struck a deal with the SEC that allowed the government to avoid fines or an admission of guilt for what the federal regulators determined to be securities fraud.
The city’s own hired legal help, securities attorney John Hartigan, doubted the strategy to pursue a settlement from the start.
Instances where governments have sorted themselves from its officials for the purpose of avoiding litigation were “few and far between,” he said during a Sept. 27, 2006 council meeting. Hartigan, a former a former assistant director with the SEC’s enforcement division, said the commission rarely considered a settlement.
Councilwoman Toni Atkins equated the idea to lay out the city’s errors to “pleading guilty before you are charged.”
On Tuesday, their tones were starkly different. Hartigan stood beside city leaders to laud the approach. The city could emerge from the clouds of this 33-month-old investigation with some relatively minor scrapes, they said.
“We applaud and thank the SEC for, in this instance, moving to accelerate … its action against the city without having to wait for any resolution it may or may not have with respect to any individuals,” he said. “I think that is in large part a recognition by what has been done by the city.”
Despite the city’s resolution of the investigation, the SEC said it would continue to pursue its ongoing investigation against unnamed officials it believes responsible for the city’s securities fraud.
Sean O’Connor, a securities law professor at the University of Washington, applauded the move to separate the city from its officials.
“It just seemed like too many of the agents who were controlling a municipality were tainted,” he said.
SEC officials acknowledged that the city’s proposal was unusual, but said the commission allowed it because the city has taken steps to remedy its problems.
“Generally we include individuals, but with all the facts and circumstances in this case, it made sense to go ahead and bring the settlement with the city,” said Kelly Bowers, an assistant regional director with the SEC.
O’Connor said the city, as a municipal corporation, is considered an individual under the law. It acts through its officials. The SEC order released Tuesday found that the city, through its officials, committed securities fraud in failing to disclose to investors the gravity of its financial problems.
Aguirre considered the settlement an “extraordinary achievement,” as did other city leaders.
Atkins agreed. “While some may see this as a bad day, I see this as a good day in our steps to move forward in restoring the faith of the citizens of San Diego,” she said.
When setting its penalty for the city, the commission acknowledged the “remedial efforts” the city has taken, such as the hiring of consultants to provide advice, enacting new financial reporting requirements, and the dismissal or resignation of key officials – such as former Mayor Dick Murphy.
But the close of the commission’s case against the city likely means the probe against city officials will heat up shortly. Bowers said the SEC is “diligently pursuing” the individuals involved.
Multiple sources close to the investigation have said that several officials have received “Wells calls,” the forerunner to any potential enforcement actions. The invitation allows a targeted individual the ability to begin settlement talks or provide legal arguments or new evidence that might clear their name.
Council members who were in office during the time the 2002 and 2003 disclosures were released – Atkins, Scott Peters, Brian Maienschein, Donna Frye and Jim Madaffer – are now fending for themselves.
Peters, Maienschein and Madaffer all voted in 2004 to include themselves in any settlement talks for the city. Atkins and Frye didn’t attend the meeting.
Attorney bills show that personal lawyers 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. Atkins’ attorney has had settlement talks with the SEC, invoices show.
Staff writer Andrew Donohue contributed to this report.