Feds indict 5 in pension case (San Diego pension system)

A federal grand jury indicted the former top executive of the San Diego pension system, its lawyer and three former trustees on conspiracy and fraud charges yesterday in the opening salvo in the federal government's latest corruption probe at City Hall. Law enforcement sources said the indictments are the first part of a far-reaching criminal investigation that could stretch into the highest levels of a city government already reeling from multiple scandals.

Assistant U.S. Attorney Shane Harrigan, who announced yesterday's indictments, said the actions of the defendants not only jeopardized the pension fund, but "the financial stability of the city of San Diego." Lawrence Grissom, the former administrator of the San Diego City Employees Retirement System, and Loraine Chapin, the system's general counsel, were indicted along with firefighters union president Ronald Saathoff, former city human resources director Cathy Lexin, and former acting city auditor Teresa Webster. They were charged with multiple felonies, including conspiracy, wire and mail fraud and aiding and abetting.

Some of the 20 counts carry a five-year maximum penalty; others a 20-year maximum, though it's likely that any sentences would be far less.

Assistant U.S. Attorney John Owens and Deputy District Attorney Mike Still, who is on special assignment to work on the case, said the five defendants would be arraigned at an undetermined date, perhaps next week.

The indictment said the defendants conspired to illegally obtain enhanced retirement benefits for themselves – in one case as much as 35 percent higher – in exchange for allowing the financially strapped city to underfund the pension system.

And, the indictment said, they did so in secret, concealing information from other pension board members and the public.

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

Lam did not appear at a news conference announcing the indictments because she wanted to avoid tainting a jury that is deliberating on an unrelated case she prosecuted personally.

At a late afternoon news conference at City Hall, Mayor Jerry Sanders reacted with stern words.

"I'm sick and tired of individuals appointed to serve the public trust taking advantage of that trust," Sanders said. "In this city, that has happened for way too long and our citizens are now paying too steep of a price."

He said the indictments also move the city closer to resolving some of its problems. "Today is better than yesterday in that we have more definition. We have been waiting for the U.S. attorney to come out with something for quite some time," Sanders said.

The financial implications of the underfunding have been staggering. The San Diego pension fund is underfunded by at least $1.4 billion, and likely by more than $2 billion.

The funding ratio – assets compared to obligations – was calculated most recently at 67 percent.

To settle a lawsuit over the underfunding, the city now has to make payments from the general fund that increase annually to make up for the deficit. That figure could be as high as $200 million in 2006 – about one-quarter of the general fund, which is used to pay for police, fire and other services.

The city also has millions of dollars in legal bills as a result of multiple investigations by the U.S. Attorney's Office, District Attorney's Office, the Securities and Exchange Commission, the FBI and the City Attorney's Office.

Shane Harrigan, chief of the U.S. attorney's criminal division, told reporters yesterday that the actions of the defendants not only jeopardized the pension fund, but "the financial stability of the city of San Diego."

Aside from the investigations, the city can't borrow money for capital projects because its credit rating has been cut or suspended by Wall Street's rating agencies until the city issues its overdue audits dating to 2003.

Yesterday's developments are almost as interesting for who wasn't indicted, and for what was not covered in the document, which focused narrowly on the plan to underfund the pension system.

There had been widespread speculation about whether higher-level city officials – and even elected officials – would be included in the indictment.

Dan Dzwilewski, head of the San Diego FBI office, which investigated the case, told reporters: "The matter remains an ongoing investigation, and we are limited as to the remarks we are able to make at this time."

Harrigan told reporters he could not comment on whether there would be more indictments, saying only: "We will continue to look at facts as they come to our attention."

But another federal official, who spoke on condition of anonymity because the investigation is secret, said, "We aren't done. There's a lot more to this."

At City Hall and beyond, people were wondering whether this is the beginning or the end.

"I don't think it's just contained with the individuals (charged)," Sanders said. "I believe that this is probably an ongoing investigation."

Councilman Tony Young said, "The question in everybody's mind is: Will there be more?" Young took office a year ago, well after the disputed pension decisions were made. "If there were some illegal acts made by city officials, then they should be worried."

Lawyers familiar with the pension case said yesterday that if prosecutors are looking to prove that a deal was made to shortchange the pension fund in exchange for increased benefits, they have only gone after one side of the deal – the recipients of the benefits.

Some lawyers said prosecutors could be aiming to persuade some of the defendants to cooperate against higher-ranking targets who approved the benefits.

William Sheffler, who became one of the pension board's 13 members nine months ago – long after the controversial approval of the underfunding plan known as Manager's Proposal 2 – said he was "disappointed the indictments for city employees didn't go further."

But City Attorney Michael Aguirre praised the work of the U.S. Attorney's Office, particularly in focusing on the conduct of Chapin and Grissom.

"They simplified it and they focused in on people that were the brains of the operation – the administrator and the attorney – and they figured out a brilliant strategy for attacking the problem at its core," Aguirre said.

"I think what's significant is it's clear some board members must have felt they were misled. For the first time, you have board members pointing the finger at other board members, and that's a development that can evolve into a full-fledged, much broader investigation and prosecution," Aguirre said.

Three of the defendants in the federal case – Saathoff, Lexin and Webster – are also facing conflict-of-interest charges in state court related to the pension debacle.

The federal case is more complex, examining a broader conspiracy and a breach of fiduciary duties, and it's far more serious in terms of potential penalties.

State prosecutors have said the defendants in their case face up to three years in prison if convicted. Defense lawyers are scheduled to begin presenting their evidence when a preliminary hearing resumes Monday.

Like the federal case, a key element of the state 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.

Lawyers for Webster and Lexin said yesterday the federal case appeared to duplicate the state case and predicted their clients will be exonerated.

"Terri Webster put in over 20 years of honest service to the city of San Diego and its citizens," said her attorney, Frank Vecchione. "This is extremely disappointing and we can only wait for our day in court . . . In the final analysis, it will be very evident that Terri Webster has done nothing illegal."

Vecchione said "the heart of the indictment" has already been disproven in the Superior Court preliminary hearing, which hasn't concluded. He wouldn't get into specifics.

Nick Hanna, who represents Lexin, echoed Vecchione's contention that the federal charges essentially mirror those brought by the District Attorney's Office. "There doesn't appear to be anything new in the indictment."

He said Lexin is "absolutely not guilty . . . Every action Cathy Lexin took was at the direction and full knowledge of the mayor, the council and the City Attorney's Office." Dick Murphy was mayor at that time.

Chapin's lawyer, Steven Madison, said his client "is confident that when all the facts come to light, as they will now, that she'll be exonerated completely." He also called her "an icon of ethics and integrity."

Legal experts said the federal charges do not amount to double jeopardy – being tried twice for the same crime – because there are different crimes charged by different agencies.

The indictments come less than a month after Chapin and Grissom were identified as targets in the U.S. Attorney Office's investigation at a pension board meeting.

After hearing that legal bills could top $1 million to defend each individual, the board voted Dec. 16 to indemnify, or compensate, Grissom and Chapin for expenses they may incur as a result of actions taken as part of their jobs.

At the time, officials said that if an indictment was issued or criminal charges filed, the board would decide whether to continue paying the legal costs.

Board members also hired Grissom, who retired Dec. 31 after 18 years as administrator, to a 90-day consulting contract as they search for his replacement.

The contract is on an on-call basis, allowing the system to request his services as needed for up to 90 days in a fiscal year.

Sanders and Aguirre had criticized the contract, approved a week after Grissom invoked his Fifth Amendment right against self-incrimination in the state case.

Yesterday, Peter Preovolos, the pension board president, said he allowed Chapin to be placed on voluntary administrative leave with pay, though the full pension board will be asked at its next meeting to approve the decision. He appointed Roxanne Parks, the system's assistant general counsel, to assume Chapin's duties.

Preovolos said he may call a special board meeting to address issues related to the case, including whether the system should continue paying the legal bills for Chapin and Grissom.

Like their state counterparts, federal prosecutors are expected to rely heavily on e-mail communications between the defendants and other city officials. The 29-page indictment said the defendants concealed information from other pension board members and the public, and focused on three key deceptions:

Other pension board members were never told that when voting to approve the underfunding proposal, they were also voting in favor of a significant increase to Saathoff's annual pension – a perk related to his union presidency that would increase his annual pension by $25,000 a year, a 35 percent increase. In return, Saathoff used his influence to get the underfunding proposal passed by the board, the indictment said.

At a board meeting in July 2002, Grissom, Saathoff and Lexin deceived other board members by pretending that Saathoff came up with an off-the-cuff solution when board members balked at the underfunding. It was actually a premeditated plan – even pre-approved by the City Council in closed session a few days before – as a contingency plan in case the first proposal was in trouble. Saathoff's amended version, which on its face seemed more palatable to the board, was eventually adopted as Manager's Proposal 2.

The defendants misled the public and Wall Street in bond documents that omitted facts about the deteriorating state of the city's pension system. The indictment cites a series of e-mails from Webster with warnings such as "EEK!" and "OH BOY!" to Lexin, Grissom and others that the funding ratio for the pension system was falling.

In a March 7, 2002, e-mail message from Grissom to Webster, Grissom said a reporter had inquired about the underfunding of the pension system, and asked Webster, "Is there any party line for me to communicate?"

On July 2, 2002, Webster reviewed a draft memo by Lexin and advised her to eliminate references to ratings agencies. Webster wrote: "My biggest suggestion to her is to eliminate any reference to (Wall Street rating agencies). This letter will be seen by press, and the city does not need to telegraph its pension problems to the rating agencies who don't research the topic to any great level now."

This is great news -- I don't care what party they're from.

If mis-management of retirement public retirement plans is really a crime, the feds could lock up people from almost every state, country, town, township, school district, and other government entity in the country.

Public retirement plans are just a swamp of mis-management. While the task is enormous, it's great to see an investigation with real teeth in at least one city.

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