Posted on 12/20/2004 10:08:59 AM PST by NormsRevenge
The Securities and Exchange Commission has subpoenaed several San Diego city officials to testify under oath as part of an ongoing securities-fraud investigation of city finances and the troubled pension system.
The demand for sworn testimony, along with a separate subpoena seeking a sweeping array of city financial records, was issued late last week and will be discussed at a special City Council hearing tomorrow.
"I can't say I was terribly surprised," Mayor Dick Murphy said yesterday.
The SEC, spurred by revelations of irregularities in the city's financial disclosures, has been investigating city finances for the better part of a year along with the FBI and U.S. Attorney's Office. The SEC probe focuses on the city's failure to fully disclose the pension system's $1.2 billion deficit in bond sale documents.
"Neither the mayor nor the City Council has been subpoenaed," Murphy said, adding that the subpoenas are being handled by City Attorney Michael Aguirre. "Mike and I agreed that since he got the subpoenas, he ought to be the one who describes it. I don't know the names of all the people who got subpoenaed."
Aguirre declined to identify the subpoenaed officials.
Murphy said, "I can't tell you what (the SEC's) thinking is, but I am told that this is a common practice of the SEC to do this" as part of an investigation. A former Superior Court judge, Murphy cautioned that he is not an expert on the SEC.
Aguirre said the subpoenas might signal a broadening of the SEC's investigation.
"We have got to start preparing ourselves for the contingency that the SEC will be taking legal action against the city and city officials," said Aguirre, who was elected Nov. 2 and sworn in two weeks ago today.
"That's why it's imperative for us to identify whatever problems we have, to candidly admit them and to take the remedial actions necessary to ensure that they never happen again."
Tomorrow, the City Council, called back from holiday recess by Murphy for a special hearing, will discuss spending up to $150,000 on outside lawyers for the subpoenaed officials. Other pension-related matters also will be on the agenda.
The SEC's latest move comes three months after Vinson & Elkins, a law firm hired to represent the city in talks with the SEC, issued a 268-page report that found widespread irregularities in city finances, but chalked them up to inattentiveness and poor management.
So far, the City Council has authorized payments of $2.6 million to Vinson & Elkins.
Report author Paul S. Maco, former head of the SEC's Office of Municipal Securities, said the subpoenas should not be taken as a signal that the agency rejects his report's conclusions or is broadening its investigation.
"Absolutely not," he said yesterday from his home in Washington, D.C.
Earlier subpoenas, sent April 22 by the SEC's Office of Enforcement, indicated that the SEC had issued a formal order of investigation of the city's finances, based on provisions of federal law allowing for investigations when commissioners believe securities laws "have been or are about to be violated."
The April 22 subpoenas sought documents dating to 1996, when the city started to intentionally underfund the San Diego City Employees Retirement System. They also sought documents related to City Council votes in 2002 to continue underfunding the pension system while boosting benefits, and all documents detailing possible conflicts of interest by pension trustees and by city officials who approve bond sale documents.
"Once there's a formal order," Maco said of the SEC's moves, "it's a routine practice to take testimony and should not be considered to be a signal of any direction. . . . Frankly, I'm surprised that they've held off this long."
Taking a different view, Aguirre said: "I think that no one can say for certain, but it appears to me that the SEC is conducting a factual investigation that goes beyond the Maco report and that this is the first stage of that investigation. It appears it will be a very thorough investigation."
The SEC first began looking into city finances shortly after city officials made their first admissions, on Jan. 27, of errors and omissions in financial statements used by potential investors in San Diego's bonds to assess the city's fiscal strength.
Among the omissions: the full story of the deficit in the city retirement system, now estimated at $1.2 billion. The pension system's troubles are expected to place a massive burden on city finances for years, likely to force deep cuts in services and increases in fees and taxes.
The intentional underfunding of the pension system while boosting benefits is a leading cause of the deficit at the San Diego City Employees Retirement System.
The pension troubles and the ensuing investigations have led to numerous downgrades of the city's credit ratings. In addition to the SEC's investigation, the FBI is conducting two criminal investigations of City Hall, one focused on finances, the other on possible public corruption.
In September, one major Wall Street credit-rating agency, Standard & Poor's Ratings Services, suspended the city's credit entirely, citing uncertainty generated by the lack of annual audits for fiscal years 2003 and 2004.
The city is unable to issue bonds for major projects, such as sewer upgrades, and has had to turn to special financing to meet its day-to-day cash needs.
In October, the city's outside auditor, financial services giant KPMG, privately expressed concerns to city officials that they had failed to fully explore whether possible illegal conduct had occurred.
Tomorrow's City Council meeting was initially called by Murphy to discuss KPMG-related issues. The mayor said Aguirre recommended placing the matter of attorney fees for subpoenaed officials on the docket.
Aguirre said he urged that the matter of attorney fees for the subpoenaed officials be discussed publicly and not in closed session.
The docket will include a vote on whether to authorize KPMG employees to sit in on interviews to be conducted by Vinson & Elkins. The council also will be asked to authorize Vinson & Elkins to share with federal investigators and KPMG memos of past and future interviews of city employees.
busted ! ! !
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