SAN FRANCISCO - Orrick, Herrington & Sutcliffe LLP, California's biggest bond counsel firm, has agreed to pay San Diego $2.875 million to settle a lawsuit that accused the firm of negligence for failing to discover the city's pension scandal earlier.

Orrick was counsel to the city in 2002 and 2003, when San Diego failed to disclose its growing pension liabilities to bond investors. Orrick eventually discovered the problem and reported it to the city attorney, setting in motion a series of investigations that eventually led to Securities and Exchange Commission sanctions against the city in 2006.

Orrick admitted no wrongdoing in yesterday's settlement, and San Diego city attorney Michael Aguirre agreed to add Orrick to the list of law firms that are eligible to serve as bond counsel for the city, California's second largest.

"I brought this lawsuit because I believed Orrick should have discovered the pension problems earlier than it did," Aguirre said in a statement, adding that Orrick "is an excellent firm that has generally served the city well for more than 30 year."

Aguirre and the city filed suit against Orrick in 2005. A Superior Court judge dismissed the case in 2006, but the city filed an amended complaint that was still pending.

Orrick spokesman Allan Whitescarver said the firm does not believe it did anything wrong and settled the case at the request of its insurance carrier, which will pay the claim.

"We're proud of the work that we've performed for the city and have consistently maintained from the beginning that Orrick acted with the highest ethical standards and in the best interests of San Diego," Whitescarver said. "We remain among the city of San Diego's preferred legal providers and look forward to continuing the close relationship with the city that we have enjoyed for many years."

San Diego has settled four other lawsuits against actuaries and lawyers who worked for the city during the years leading up to the pension scandal, reaping $10.5 million. In June, the city reached a settlement with Vinson & Elkins LLP.

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