SEC Charges Five Former San Diego Officials with Securities Fraud

FOR IMMEDIATE RELEASE
2008-57

Washington, D.C., April 7, 2008 — The Securities and Exchange Commission today filed securities fraud charges against five former San Diego city officials who played key roles in the city’s inadequate municipal securities disclosures in 2002 and 2003. The SEC charged the former officials for failing to disclose to the investing public buying the city’s municipal bonds that there were funding problems with its pension and retiree health care obligations and those liabilities had placed the city in serious financial jeopardy.

The SEC’s complaint, filed in federal district court in San Diego, charges former City Manager Michael Uberuaga, former City Treasurer Mary Vattimo, former Auditor & Comptroller Edward Ryan, former Deputy City Manager of Finance Patricia Frazier, and former Assistant Auditor & Comptroller Teresa Webster.

“Municipal officials responsible for municipal bond disclosure play a key gatekeeper role in protecting investors,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “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.”

Rosalind Tyson, Acting Regional Director of the SEC’s Los Angeles Regional Office, added, “Despite knowing of the city’s substantial pension and retiree health care liabilities, these five former San Diego officials failed to disclose what they knew to municipal securities investors. Their actions not only jeopardized the investors, but also compromised the interests of the city’s citizens and its current and future retirees.”

According to the SEC’s complaint, the five former officials knew that the city had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs. They were aware that the city would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, pension and health care benefits were reduced, or city services were cut. They specifically knew that the city’s unfunded liability to its pension plan was projected to dramatically increase, growing from $284 million at the beginning of fiscal year 2002 to an estimated $2 billion by 2009, and that the city’s liability for retiree health care was another estimated $1.1 billion. But the officials failed to disclose these and other material facts to rating agencies or to investors in bond offering documents and continuing disclosures.

The SEC’s complaint alleges that Uberuaga signed the closing letter for one of the bond offerings, falsely certifying that it was accurate and did not contain any misleading statements. Ryan signed letters falsely representing that the city’s audited financial statements included in the securities offerings were accurate. Frazier regularly reviewed and revised the false and misleading disclosure documents, and signed the closing letter for two of the five bond offerings. She falsely certified the disclosures as accurate and did not contain any misleading statements, and she reviewed and made presentations to the rating agencies. Webster reviewed the city’s financial statements that contained some of the false and misleading disclosures, and Vattimo participated in drafting the city’s false and misleading disclosures. Additionally, Vattimo and Webster both knew that in 2003, the rating agencies had concerns about the city’s growing pension obligations and that those obligations could negatively affect the city’s credit rating. Nevertheless, they withheld material facts from the rating agencies.

The SEC previously entered an order sanctioning the City of San Diego for committing securities fraud by failing to disclose to the investing public important information about its pension and retiree health care obligations in the sale of its municipal bonds in 2002 and 2003.  To settle the action, the city agreed to cease and desist from future securities fraud violations and to retain an independent consultant for three years to foster compliance with its disclosure obligations under the federal securities laws. 

The SEC also previously filed a settled civil injunctive action for fraud against the outside auditors for the city and its pension system, Thomas J. Saiz and Calderon, Jaham & Osborn, an accountancy corporation. Saiz and Calderon, Jaham & Osborn consented to the entry of a final judgment permanently enjoining them from violating the antifraud provisions of federal securities laws. Saiz also paid a civil penalty of $15,000.

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For more information, contact:

Andrew Petillon
Associate Regional Director
SEC’s Los Angeles Regional Office
(323) 965-3214

Kelly Bowers
Senior Assistant Regional Director
SEC’s Los Angeles Regional Office
(323) 965-3924

http://www.sec.gov/news/press/2008/2008-57.htm