SEC Files Charges Against Five Former City of San Diego Officials for Securities Fraud Violations
The present action is unusual because it charges individual city officers, in their personal capacities, with securities fraud violations. The officials named in the present complaint are the former City Manager, the former Deputy City Manager for Finance, the former Assistant City Auditor and Comptroller and the former City Treasurer. The complaint alleges that during 2002 and 2003, the officials knew that San Diego faced severe difficulty funding its pension obligations and retiree health care obligations unless new revenues were obtained, benefits were reduced, or city services were cut, and that the officials acted recklessly in failing to disclose these and other material facts to investors and rating agencies. The complaint seeks a permanent injunction against further violations and unspecified civil penalties against each of the officials.
The complaint alleges, among other things, that the city’s bond offering documents, continuing disclosure filings and rating agency presentations omitted material information and were false and misleading. Specifically, the complaint alleges that San Diego failed to disclose that it had been intentionally underfunding its pension; that since 1980 it had used pension fund assets to pay for additional pension, non-pension and retiree health care benefits; and that the city’s pension liability was expected to dramatically increase from $720 million in fiscal year 2003 to an estimated $2 billion in fiscal year 2009. The complaint further alleges that San Diego failed to disclose that the estimated present value of the city’s retiree health care liability was $1.0 billion; that the retiree health care expense was being paid with surplus earnings from the pension plan; and that this surplus was running out and San Diego would have to begin paying this substantial expense out of its own budget.
This recent action personally against San Diego city officials confirms that, consistent with its increased enforcement activity in the municipal arena, the SEC will hold government employees personally accountable for their employer’s securities disclosures. Indeed, the SEC’s Enforcement Director noted in connection with this action that “[m]unicipal officials responsible for municipal bond disclosure play a key gatekeeper role in protecting investors.” Andrew Ackerman, SEC Files Securities Fraud Charges Against Five Former San Diego Officials, The Bond Buyer (April 8, 2008). “It is therefore imperative that they honor the public’s trust by ensuring that investors are provided with accurate material information about the issuer’s fiscal health.” Id. Although the San Diego action may be unusual, government officials responsible for drafting, reviewing and approving securities disclosure documents must be especially vigilant to be sure that all material information is adequately disclosed.
A copy of the complaint can be accessed by clicking here.