SAN FRANCISCO - A federal judge is pushing the Securities and Exchange Commission to settle its case against five former San Diego officials accused of securities fraud for failing to disclose growing unfunded pension liabilities to municipal bond investors.
Earlier this month, U.S. District Court Magistrate Judge Anthony J. Battaglia held a settlement conference with lawyers for the SEC and the five defendants, and he told the lawyers he wants to talk to SEC officials in Washington about a settlement.
"Settlement could not be reached in the case," Battaglia said in a post-conference order. "The final defense position will be considered by plaintiff [the SEC], and arrangements were made for the court to talk to the key decision maker in Washington concerning settlement."
The SEC charged five former officials with securities fraud in April 2008. The case stems from the city's failure to disclose an unfunded pension liability that has grown to $2 billion as of June 30, 2009, from just $69 million in 2000.
California's second-biggest city endured six years without access to the public muni bond market while it audited its financial statements, set up new internal controls, and instituted new disclosure processes. The SEC officially sanctioned the city in November 2006.
In April, District Court Judge Dana M. Sabraw dismissed SEC charges that the five individual defendants engaged in a "scheme to defraud investors."
He said in the ruling that the agency failed to show the defendants conspired to commit fraud and dismissed the charges with prejudice, meaning the commission cannot re-file the claim.
"Despite its extensive pre-filing investigation, the commission is unable to allege a scheme to defraud encompassing deceptive acts beyond misrepresentations," Sabraw wrote in the ruling. "Because false and misleading statements alone are insufficient to support scheme to defraud liability, any further amendment would be futile."
The judge allowed the government to go ahead with charges that five former top city officials negligently made "material misrepresentations and omissions" in the offering documents and disclosure for five bond issues sold in 2002 and 2003.
The five defendants are former city manager Michael Uberuaga, auditor Ed Ryan, assistant auditor Terri Webster, treasurer Mary Vattimo, and deputy city manager for finance Patricia Frazier.
The settlement negotiations were first reported Monday by the San Diego Union-Tribune. Lawyers for the SEC and the five defendants told the paper they could not comment on the content of settlement negotiations.
"The court is certainly active in trying to see if settlement of this matter can be reached, so we will continue to discuss that," David J. Van Havermaat, an SEC lawyer in Los Angeles, said in an interview yesterday. "Whether that happens, time will tell."
He said the SEC continues to seek injunctions and civil penalties against the five defendants on the remaining fraud charges.
Havermaat said the next step in the litigation is discovery, which will be followed by a trial that is scheduled to begin in February.