Replies

Updating thread with article with specifics

SAN DIEGO – Four former top officials in San Diego's city pension system and the system's lawyer were charged with wire fraud, mail fraud and conspiracy to commit wire and mail fraud in a 20-count indictment issued by a federal grand jury Friday afternoon.

U.S. Attorney Carol Lam announced the charges against former San Diego City Employees' Retirement System Trustees Ronald Saathoff, Cathy Lexin and Teresa Webster; and the system's former Administrator Lawrence Grissom and its current General Counsel Loraine Chapin.

"The defendants had a duty to act in the best interest of the city retirement system," Lam said. "They breached that duty by engaging in self-dealing, ignoring conflicts of interest, and exploiting their positions to the detriment of the retirement system."

Federal prosecutors contend that fellow trustees were deceived by the defendants, who concealed material information about the pension plan, including the fact that Saathoff would receive an increase in his yearly retirement of more than $25,000 if the SDCERS board enacted a controversial measure known as Manager's Proposal 2.

The criminal charges are at least the initial results of the U.S. Attorney's Office yearlong investigation into San Diego's underfunded pension system, a scandal that has shaken city government and left its finances a shamble.

The federal investigation focused on Manager's Proposal 2, the 2002 deal in which pension board members allowed the city to continue underfunding SDCERS – something the city had been doing since 1996 – in exchange for granting increased benefits to employees.

The pension board approved the plan in November 2002 and the City Council approved it three days later.

The agreement enabled the city to avoid making a balloon payment of as much as $100 million – an amount that would have been a huge chunk of the city's annual general fund.

Federal prosecutors said that to encourage board members to support the proposal, Lexin, Webster, Grissom and Chapin helped design and implement the "presidential leave retirement benefit," a clause that would increase Saathoff's benefit by more than $25,000 per year. He would get the increase only if the pension board voted to adopt the proposal.

Saathoff made the motion that ultimately put the proposal into effect.

The retirement system's deficit is estimated to be at least $1.4 billion, largely because of the underfunding, benefit increases and stock-market losses from 2000 to 2002.

Lexin, Saathoff and Webster and three other pension figures already are being prosecuted on state conflict-of-interest charges by the county District Attorney's Office.

The city's finances also are the subject of continuing investigations by the Securities and Exchange Commission and the FBI.

Grissom and Chapin were identified as targets of the federal investigation last month, when the pension board approved a plan to indemnify, or compensate, the two for any legal expenses they may incur as a result of their jobs.

Grissom retired at the end of December, but still consults for the pension system until it hires a permanent replacement.

Failure to disclose
Federal investigations into city finances, allegations of securities fraud and possible public corruption began in 2004 in the wake of the city auditor's sudden resignation. The pension fund's deficit was not disclosed in documents related to bond issues until 2004.

In the county criminal case, six current and former members of the pension board are accused of violating state conflict-of-interest laws in 2002. Defense lawyers are scheduled to begin presenting their evidence in the lengthy preliminary hearing in the case when it resumes Monday.

County prosecutors contend the six defendants benefited because they received heftier retirement packages after they approved the underfunding. The deal also carved out special benefits tailored for two pension board members.

A key element of that case is whether there was a link between the underfunding and the benefit enhancements, a quid pro quo arrangement.

Defense attorneys have argued the two actions were not connected and that their clients had no financial interests at stake.

Scandal's impact
The pension crisis has been disastrous for the city's already shaky budget, accounting for millions of dollars in bills for outside legal services, internal inquiries and audits.

The accounting firm KPMG has yet to sign off on the city's 2003 financial statements, the city's credit ratings have been in a dive for almost two year and its ability to borrow money has been severely curtailed.

The pension scandal also has changed the political landscape of the city.

Just days after being branded one of the nation's worst big-city mayors in April 2005 by Time magazine, Mayor Dick Murphy announced he would resign from office, saying San Diego needed a fresh start. He resigned in July and has been replaced by Jerry Sanders, the former police chief who took office last month.

City Attorney Michael Aguirre has made investigating the fiscal scandal a central theme of his first year in office, and has released seven interim reports on the city's pension problems.