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Wednesday, Jan. 17, 2007 | The San Diego City Council hired a Boston-area securities attorney Tuesday to serve as the independent monitor mandated by the Securities and Exchange Commission in its November settlement.
Stanley Keller, a partner with Edwards Angell Palmer & Dodge, will oversee the city of San Diego’s financial disclosure practices for the next three years, a move prompted by the SEC’s settlement with the city over its past misstatements to financial markets. The council agreed to pay up to $4 million for the firm’s services, a low figure compared to bids submitted by other candidates for the job, an aide to Mayor Jerry Sanders said.
“I’m excited about this role because the city has an opportunity — not just to put its house in order — but to become a model of fiscal responsibility,” Keller said.
Some council members were skeptical of the hire because of problems with past outside consultants whose contracts gradually swelled in size by millions of dollars as deadlines passed. “I want to learn from past lessons and the way we’ve done things,” Councilwoman Toni Atkins said. But after nearly three hours of debate, the council unanimously approved of Keller’s contract.
He will be charged with assessing and making recommendations about the city’s financial policies and internal controls. Within 120 days, Keller will have to provide the city with his initial observations of the city’s financial reporting systems. In addition, Keller will be required to publish annual reviews of his findings and to assure the city’s compliance with federal securities laws.
The cost of hiring Keller is the city’s latest hefty expenditure arising from its past misreporting. By downplaying the size of its pension and retiree healthcare obligations to its bond investors in 2002 and 2003, the city drew probes by the SEC and the Justice Department, with the city picking up the tab for the outside attorneys that represented the city and its employees.
Similarly, outside auditors have withheld their certification of the government’s financial statements dating back to the 2003 fiscal year. The delays have resulted in costly bills from the auditors and the consultants they have required the city to hire, such as Kroll Inc., which charged $20.3 million for its 18-month investigation after initially being brought on with a $250,000 contract.
Hiring a consultant was one of the tradeoffs the City Council made when it settled its case with the SEC last fall. In order to avoid fines, the council agreed the city would cease the financial practices that were called into question and would hire a consultant at its own expense. The SEC determined that the city, through unnamed officials, committed securities fraud. At the time, it said investigations into individuals were ongoing.
The contract with Keller will also assign his firm the duties of the independent oversight monitor that Kroll spelled out in its suggestions last August. While Sanders said he thought the monitor position — which would oversee the city’s implementation of Kroll’s long list of recommendations — was “no less important” than the SEC requirements, several council members were skeptical of that strategy, saying they preferred that Keller focus on the SEC aspects of the job and not the Kroll measures.
“At the end of the day, our first allegiance is to the SEC,” Councilman Jim Madaffer said.
Sanders has embraced the Kroll suggestions, which, on the whole, would provide the mayor with increased authority over handling of the city’s finances. But council members have balked at some of the proposed measures, including the formation of an Audit Committee to serve as a watchdog over the financial operation conducted by the mayor. In particular, council members objected to the proposal’s call for the mayor to appoint a majority of the committee members.
Sanders temporarily conceded the point, and three council members will sit on the Audit Committee panel.
Councilwoman Donna Frye pressed for assurances that the Kroll work would not interfere with Keller’s duties under the SEC agreement.
“I am in no way trying to thwart the SEC part,” she said. Frye continued, “Given the city’s financial condition, were trying to be very cautious and to make sure that the city’s money is being spent wisely,” invoking the $87 million funding gap that Sanders has estimated for next year’s day-to-day budget.
City Attorney Mike Aguirre noted that Keller is required to assemble a work plan and budget within the next 45 days to make sure the consultant is on task, but said that total control of the firm’s work was inappropriate because the consultant requires a degree of independence from the city it is overseeing. The contract requires that Keller’s firm bill the city on a monthly basis and appear at public council meetings at least four times a year.
Keller noted that he would be taking his marching orders primarily from the SEC, but said he hoped to avoid the disputes that were so common during the Kroll investigation by keeping officials informed about his firm’s work as if the city were the client.
“I guarantee there will be no surprises,” Keller said.
Keller will be earning $700 per hour for his work with the city, and three other top attorneys will be earning between $565 and $620 per hour. Other lawyers working on the assignment will earn between $180 and $460 per hour. Keller is also permitted to hire outside firms for help as long as the costs don’t exceed the $4 million budget.
While Keller has experience working with the SEC, this is the first time that he has served as an independent oversight consultant, which are often forced upon entities that are sanctioned for securities fraud.
Sanders reported that 15 candidates were contacted for the position, and that four were granted personal interviews. The mayor said Keller won the contract because he was “a perfect match for this role.” Specifically, Sanders noted Keller’s role as chairman of the American Bar Association’s Committee of Federal Regulation of Securities from 2000 to 2003, when Congress’ crafted the Sarbanes-Oxley Act — the landmark law that stepped up disclosure requirements for public companies.
“By choosing Stan Keller to lead this work we are sending a strong message to the national public finance community that we take our obligations seriously and will fulfill these obligations in an open, honest and independently verifiable fashion,” Sanders said.
Sanders also noted that the SEC blessed the city’s decision to hire Keller.
“It has to be person that is not unacceptable to us, and we have said he is not unacceptable to us,” Kelly Bowers, an assistant regional director for the SEC’s Los Angeles office, said in an interview.
While the SEC’s probe of the city government concluded with the November settlement, the investigation into individual city officials is ongoing, Bowers said.
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