Friday, April 6, 2007 | Council President Scott Peters said this week that he believes he and other council members will not be charged by the Securities and Exchange Commission, pointing to a decline in their legal bills as evidence that the probe will not touch the elected officials.
“I have every reason to believe we are done with all that,” Peters said.
If Peters is correct, the cloud of scrutiny over the council president and four other council members since the SEC opened its probe into the city three years ago has dissolved, despite City Attorney Mike Aguirre’s assertions that the elected officials will bear responsibility for the city’s past bookkeeping mistakes.
Just a SEC
The SEC’s treatment of Peters and other council members has hogged much of the intrigue surrounding the investigation. Sanctions against elected officials would prove politically damaging for the council members and mark a rarity for securities enforcement, which seldom reaches that high up the ladder of a government organization.
The city’s strategy for resolving its disclosure problems with the agency, pushed by Aguirre, has involved separating the city government from its officials. The city government settled with the SEC last November after an investigation into the downplaying of the city’s looming pension and retiree health care deficits to its lenders in 2002 and 2003.
A year ago, sources close the investigation said the SEC offered targets of the investigation a last chance to clear the record or negotiate a settlement before bringing charges. The invitation is known as a “Wells call.” An official in the SEC’s regional office said Thursday the investigation is ongoing, but the commission has not charged or settled with any individual official since the government’s settlement.
Consultants at Kroll Inc. predicted last year that bureaucrats, such as finance and accounting officials, are more likely to receive sanctions than elected officials, which is typically the case in the SEC’s enforcement against government agencies.
Peters’ declaration, which his attorney Pamela Naughton endorsed, demonstrates his confidence that the three-year-old probe will not touch the elected officials. The council president and his attorney said the agency’s requests for information on the events have slowed to a virtual halt since the Nov. 14 settlement, which was initially proposed by Aguirre.
“It seems like we’re done. I don’t know what there is to talk about,” Peters said when asked about the status of the investigation.
Legal bills show a marked decrease in legal expenses for the council members since then, an indicator that activity has dropped off to near silence. Past months’ bills show the council members’ attorneys crafting a strategy among themselves and their clients, as well as sharing a “white paper” and even engaging in settlement talks with the SEC.
Councilwoman Donna Frye, the only other council member to return calls for this story, said she has also not received requests for information from the SEC recently. “I haven’t talked to them. Zero is happening. Nothing,” Frye said.
One attorney close to the case, who asked not to be identified, said it’s likely that the council would not receive official word that they are not being charged until the entire probe into the city of San Diego is complete. “You would generally receive a termination letter only when the entire investigation is closed,” the attorney said.
Kelly Bowers, an assistant regional director with the SEC, would not comment on the scope or stage of the agency’s probe into the city controversy. But if the SEC declined to pursue the council members, its decision would contrast with the findings of Aguirre.
Kroll, led by former SEC Chairman Arthur Levitt, deemed five current council members — Peters, Frye Toni Atkins, Brian Maienschein, and Jim Madaffer — negligent in a report last August. The consultants alleged that the officials were responsible for the disclosure inaccuracies. Those council members, excluding Frye, were also found to have deliberately concealed the fact that the city’s sewer rates violated the Clean Water Act.
Naughton said the Kroll report, which the council members’ attorneys met to discuss before and after its public release Aug. 8, had “gross inaccuracies,” and that she thought the SEC had come to the same conclusion.
“Frankly I think they have come to a different conclusion or disregarded it,” Naughton said.
If shared by the SEC, the label of negligence would likely have not been sufficient to inspire individual sanctions. It would likely take a finding that the council members acted recklessly or intentionally — allegations that Kroll reserved only for eight former officials — to warrant charges of securities fraud.
Aguirre alleged the higher level of wrongdoing by the council. He argued in a report in February 2005 that the council acted recklessly. The city attorney, however, said that the culpability for breaking federal securities laws fell into a spectrum, with less educated council members bearing less responsibility than those who were trained in law or finance before coming to the council. Those with legal and financial background, Aguirre claimed, assumed a greater level of culpability.
Peters and Naughton shrugged off both sets of allegations. Peters claimed that he had never been a target of the SEC’s investigation despite the city attorney’s suggestions. “It seems to me that Aguirre is getting a lot of mileage out of that,” he said.
Bowers said the agency would not release which San Diego officials were targets. Kevin Christensen, a investigator for Aguirre, said, “Every indication we have points to the investigation being ongoing.” The City Attorney’s Office did not offer further comment.
Under the city’s settlement with the SEC, the municipality agreed to cease and desist from fraudulent accounting practices, and no fine was imposed on the city. The city was forced, however, to be monitored by an independent consultant for three years. Boston-area lawyer Stanley Keller was hired as the consultant in January for $4 million. Since taking the job, Keller has worked with the government on its overdue outside audits and the organization of its in-house audit functions.
The disclosure errors have also resulted in the city’s exile from Wall Street’s public bond markets, where borrowing is cheaper, as outside auditors have been squeamish to certify the city’s annual financial statements for several years (the 2003 annual audit was released just last month, for instance).
The city has spent $2.3 million on attorney’s fees for Peters, Atkins, Maienschein, Madaffer, Murphy and former Councilmen Ralph Inzunza and Michael Zucchet during the various investigations that the SEC, Kroll, Justice Department and District Attorney’s Office have conducted in recent years. Frye has not requested city funds for her legal defense.
Aguirre refused to defend the council members when he took office in December 2004, claiming that a conflict of interest could have arisen if he were to represent both the city and its officials. Peters has been critical of that decision.
“A lot of effort, a lot of time and obviously a lot of money has been spent digging up a history of 2002 and 2003 for work that should have been done by the city attorney,” Peters said.