[JURIST] The US Securities and Exchange Commission (SEC) sued five former San Diego city officials in federal court Monday, alleging they committed securities fraud by failing to disclose funding shortfalls in the city's pension and health care plans to potential buyers and sellers of San Diego's municipal bonds. The SEC press release [text] explains the basis for the charges:
...the five former officials knew that the city had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs. They were aware that the city would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, pension and health care benefits were reduced, or city services were cut. They specifically knew that the city's unfunded liability to its pension plan was projected to dramatically increase, growing from $284 million at the beginning of fiscal year 2002 to an estimated $2 billion by 2009, and that the city's liability for retiree health care was another estimated $1.1 billion. But the officials failed to disclose these and other material facts to rating agencies or to investors in bond offering documents and continuing disclosures.An independent audit conducted in 2006 uncovered numerous securities law violations [JURIST report] and recommended that an independent monitor supervise the San Diego pension system and report back to the SEC, and that city officials be required to personally certify the accuracy of pension reports, a requirement that the Sarbanes-Oxley Act [PDF text; SEC materials] imposed on corporations in the wake of the Enron scandal [JURIST news archive].
The report also criticized outside consultants hired by San Diego to administer the pension plan, including the law firm Vinson & Elkins, for failing to fully investigate problems with the pension system. San Diego subsequently sued Vinson & Elkins [Law.com report] for breach of contract, breach of fiduciary duty and professional negligence in connection with advice provided regarding San Diego's pension issues. AP has more.