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Tuesday, February 06, 2007 | City Attorney Mike Aguirre traced the roots of the City of San Diego’s Wall Street deceit all the way up to its highest branches Tuesday, accusing Mayor Dick Murphy and several former and current City Council members of civil securities fraud for allegedly failing to articulate the true depth of the city’s financial problems in disclosures to prospective investors.
By authorizing bond offerings that contained information they allegedly knew to be false concerning the true status of the city’s troubled pension plan and its effect on city finances, Murphy and the council members failed to take “steps to prevent the dissemination of materially false or misleading information” to the bond market, according to the 118-page report released late in the evening.
Aguirre, a securities fraud litigator by trade, didn’t speak to reporters after the release of the report, titled “Interim Report No. 2 Regarding Possible Abuse, Illegal Acts or Fraud by City of San Diego Officials.”
“Mr. Aguirre’s allegations are untrue, irresponsible and defamatory… The City Council and I properly relied on the advice of the securities law experts,” said Mayor Dick Murphy at a news conference. Murphy spoke from a prepared draft and didn’t take questions from reporters.
The report uses documents collected largely during the last two weeks since the mayor and City Council waived their attorney-client privilege, upon the City Attorney Office’s advice, in order to aid ongoing investigations by the Securities and Exchange Commission into errors and omissions in city bond disclosures and a Justice Department investigation into possible public corruption.
The documents show that Murphy and the council were made aware by city staff of the growing fiscal worries surrounding the pension plan as early as March 2002.
The report focuses on the now-controversial November 2002 action by City Council in which employee unions were offered a handsome set of benefits as long as the San Diego City Employees’ Retirement System board, populated largely by union representatives and city staff, allowed the city to forgo a required $159 million payment into the troubled system. The move essentially exacerbated the pension’s growing deficit, adding more debt to the system while paying less than was advised. The pension plan’s deficit was most recently measured at $1.37 billion.
The report then lists seven bond disclosures approved by the council between April 2002 and June 2003 in which they “failed to take reasonable steps to ensure proper disclosure.” The disclosures, according to the report and an earlier investigation commissioned by the city, contained out-dated and sunnier pension details.
Because the mayor and council members were aware of the problems, the report alleges, they were ultimately responsible for insuring the authenticity of all bond documents. The disclosures are prepared by the City Auditor’s Office.
Specifically, Aguirre finds Murphy and City Councilman Scott Peters especially at fault because of their economics and law degrees. He lists Council members Brian Maienschein, Jim Madaffer, Ralph Inzunza and Toni Atkins as involved in the fraud, as well as former Councilmen Byron Wear and George Stevens.
Absolved of guilt in the report are Councilman Tony Young because he took office in January, Councilman Michael Zucchet because he took office late in 2002 and Councilwoman Donna Frye because she voted against the benefit increase and the bond release to complete Petco Park.
As would be expected, the rebukes to Aguirre’s accusations were strong. However, few, if any, council members were made available for questions from the press. Many pointed out that Aguirre isn’t the SEC and shouldn’t be interfering with its ongoing investigation.
“The bond offering documents were each hundreds of pages long and filled with thousands of pieces of information,” Peters said in a press release. “We properly sought out and relied on experts.”
Madaffer said in a press release that it was imperative for the city attorney and the council to work together to cooperate with investigators and KPMG. The firm is handling the city’s delayed 2003 and 2004 fiscal year audits, which have been postponed because of the disclosure problems and ongoing investigations.
“Mr. Aguirre would better serve the people of San Diego by leaving investigations to the professionals – the SEC and the U.S. Attorney’s Office – and concentrating on the clearly defined responsibilities of the office of the City Attorney,” the statement said.
The report states that it was compiled to comply with KPMG requests that the city independently investigate the possibility of illegal acts by city officials through the bond disclosure process.
A report from the city’s law firm, Vinson & Elkins, detailing how the pension and disclosure problems came about didn’t satisfy KPMG, and the firm has since balked at releasing the overdue 2003 and 2004 audits. Finishing the audits is considered the first step in restoring the city’s finances.
Civil securities fraud cannot alone result in a prison sentence, however, such accusations can lead to criminal charges.
View the Aguirre Report .
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