San Diego Settles With SEC Over Securities Fraud Claims

San Diego settled claims by the Securities and Exchange Commission that the city committed fraud when it failed to disclose to bond investors a shortfall in its pension fund.

Under the settlement, the SEC faulted the city for misleading investors in municipal bond documents about the health of its pension plan when it issued $260 million of debt in 2002 and 2003. San Diego, without admitting or denying the findings, agreed to hire an independent consultant for three years to make sure its financial disclosure complies with regulations. It was not fined under the settlement.

San Diego officials are trying to restore the city's fiscal credibility after lapses prompted federal investigations and delayed the sale of bonds for necessary sewer and water projects. The city said a probe of its financial reporting found 51 mistakes that caused it to overstate assets by about $500 million.

"This action signifies our resolve to hold state and local governments accountable when they commit fraud while seeking to borrow the public's money," said Linda Chatman Thomsen, director of the SEC's enforcement division.

The SEC, after an investigation of San Diego's financial reporting that lasted more than two years, said the city failed to tell investors that its unfunded liability to its pension plan was projected to increase to an estimated $2 billion in 2009 from $284 million in 2002. San Diego also didn't disclose that it was liable for retiree health-care costs estimated at $1.1 billion.

The settlement says that the city intentionally underfunded its pension system so that it could increase retiree benefits while deferring the costs, and that the city should have told investors it would face severe difficulty funding future pension and health-care expenses.

The pension shortfall has roiled the city's government, leading to investigations by the SEC and the U.S. attorney's office, and the resignation last year of Dick Murphy as the city's mayor. Four former members of the retirement board and the lawyer for the pension fund were indicted on fraud charges over benefit increases.

City voters on Nov. 7 approved a ballot measure requiring any increase in the pension benefits of city workers to be approved in a referendum, instead of by the city council.