CA: Pension debacle heads to courtroom (San Diego - Six pension board trustees on trial)

San Diego Union - Tribune ^ | 11/28/05 | Greg Moran

[NormsRevenge]

After months of accusations, investigations, reports, legal bills and news conferences, the scandal surrounding San Diego's debt-ridden retirement system moves to a courtroom today for the beginning of what may be a revealing hearing.

For the first time, prosecutors with the District Attorney's Office will begin to publicly lay out their case against six former board members of the San Diego City Employees' Retirement System.

The six are charged with violating state conflict-of-interest laws when they voted in 2002 for a deal that let the city pay less into the retirement system than was required. At the same time, the city was granting enhanced pension benefits to city workers – including the board members. Prosecutors say there was a link between the underfunding and the benefit boost. Proving a connection will be the crucial part of the hearing, said attorney Michael Conger, whose successful civil suits against the pension system in 2003 ended the underfunding practice. Those lawsuits also made similar conflict-of-interest allegations.

"The key is going to be, is there a tie-in between the underfunding and the enhanced benefits," said Conger, who is not involved in the criminal case. "And in my opinion there is a substantial amount of evidence that says yes, there is."

Over the coming weeks, a parade of high-ranking City Hall bureaucrats who played key roles in the 2002 deal may be called to testify.

Last week, prosecutors filed a list of potential witnesses that reads like a who's who of San Diego's three-year-old pension scandal.

Among the three dozen names on the list are outgoing City Manager Lamont Ewell, his predecessor, Michael Uberuaga, and a former deputy city manager, Bruce Herring.

Former auditor Ed Ryan is on the list, as are several current and former members of the City Attorney's Office.

The chief administrator of the San Diego City Employees' Retirement System, Lawrence Grissom, and the board's lawyer, Loraine Chapin, are potential witnesses.

Others who may be called are Robert Blum and Constance Hiatt, lawyers who were the system's fiduciary counsel, and the board's former president, Frederick Pierce.

Former board member Diann Shipione, the whistle-blower who first warned against the underfunding deal, also may be called to testify.

The hearing, at which prosecutors only have to convince a judge that there is enough evidence to try someone, is estimated to take at least three weeks – an unusually long time for such a proceeding. Pretrial hearings, even on the most serious crimes, typically last a few hours, or a day or two at most.

The pension hearing will take longer than usual because prosecutors are expected to lay out a lengthy and complex chain of events.

They will rely on hundreds of exhibits, including a virtual library of e-mails, memos and reports, and the testimony of key city players – or some of them.

Because of continuing investigations by the U.S. Attorney's Office, the Securities and Exchange Commission and the FBI, some witnesses might invoke their right to not incriminate themselves and decline to answer questions, legal experts said.

Another reason for the lengthy time frame is that defense lawyers, who have been eager to present their side of the case since charges were filed in June, are expected to mount a vigorous defense.

"All the defendants are looking forward to having all the facts aired, and contested, in an open courtroom, rather than at press conferences," said Frank Vecchione, the lawyer for former acting auditor Terri Webster.

Webster has pleaded not guilty to the charges, as have her co-defendants. They are Cathy Lexin, former human resources director; Mary Vattimo, former city treasurer; John Torres, a former Police Department employee and vice president of the city's largest labor union; Ron Saathoff, president of the city firefighters union; and Sharon Wilkinson, a city analyst.

Vecchione did not want to comment further on the case, and other defense lawyers did not respond to inquiries seeking comment. Prosecutor Steve Robinson also declined to comment on the case.

At the hearing, defense lawyers said, they may call witnesses of their own. That, too, would be an unusual step for a preliminary hearing. Defense attorneys usually decline to present evidence or witnesses at such an early stag.

The case against the six defendants focuses on a series of events between May and November 2002 that are at the heart of the city's pension crisis.

In essence, prosecutors contend that the six broke the law when as board members they approved a now-infamous city proposal – known as Manager's Proposal 2 – that allowed the city to continue to contribute less to the pension system than was needed.

Prosecutors say the package of enhanced retirement benefits for city workers – including the defendants – was contingent on the pension board's approval of the manager's proposal. This was also referred to as a "contribution agreement" between the city and the retirement system.

Prosecutors contend that such an arrangement would violate the conflict-of-interest law, which generally prohibits public officials from voting on contracts in which they have a financial interest.

Conger and others said the evidence of a link is strong. Indeed, in 2004, lawyers retained by the board who reviewed the history of the transaction concluded the same thing.

In a memo kept confidential by the pension board until recently, a lawyer for the firm Seltzer Caplan McMahon Vitek wrote the "evidence was clear" that the benefits were contingent on approving the manager's proposal.

"The evidence is likewise clear," lawyer Michael A. Leone wrote, "that the linkage between enhanced retirement benefits for city employees and adoption of a new 'contribution agreement' was repeatedly emphasized in communications between City labor negotiators and SDCERS Board members."

Still, legal experts said, defense lawyers will attack the case on several fronts. One of those will be an argument that pension benefits are akin to salary and thus can't be prosecuted under the conflict-of-interest law.

The law exempts public officials from violations in certain cases where they have a financial interest in a contract, such as when voting on their own pay raises. Whether a pension is salary and therefore covered by the law's exemptions will be a key issue in the hearing.

Even if the judge agrees with the defense that a pension is the equivalent of a salary, Conger said, prosecutors still have a strong case.

In order to be covered by the exemption, officials are required by law to disclose what their financial interest is, and to have the disclosures recorded in official records.

"The problem here for the board members," Conger said, "is that there was no disclosure, by Saathoff, Webster or any of the others, that if they voted they would get a benefit."

Robinson has made similar arguments in previous court filings.

Defense lawyers also may attack the theory that there was any link between what board members voted on and enhanced benefits, contending that the manager's proposal dealt only with city contributions to the pension fund.

The enhanced pension benefits themselves were granted by the City Council when it approved new labor agreements – a completely separate action by a different body, defense lawyers have argued.

It will be up to prosecutors to make the link, said one local prosecutor who has followed the case and who did not want to be identified. Likewise, he said, defense lawyers "will try to drive a wedge between the vote and the benefit enhancements."