Since I’m on the topic of Arthur Levitt, today’s fatwa goes out against government officials—particularly city attorneys and local prosecutors—who bring cases before the courts that they are guaranteed to lose. I don’t mean hopeless cases against violent criminals where there probably isn’t enough evidence to convict. I mean politically motivated lawsuits against someone where court precedent or other laws are clearly against the position being taken. In these cases, the point isn’t to win, but for the official to make a political statement for or against something, regardless of what the law actually says. Hey, I’m fine with all that. But in this case, you are using my tax money to make this statement, and I’m definitely not fine with that.
What is sticking in my craw today is news that San Diego City Attorney Michael Aguirre plans to sue San Diego’s audit committee, including former SEC chairman Arthur Levitt and the security firm Kroll, Inc. As has been reported in a number of places, what has Aguirre’s beef is that Levitt, former SEC chief accountant Lynn Turner, and Kroll, after extensive review, have drafted a report about who’s to blame in the San Diego pension crisis that differed with his own report. And what’s more, the Levitt/Turner/Kroll report dares to state that Aguirre’s own investigation and legal analysis was "…results-oriented and bereft of intrinsic credibility". Ouch. That has to hurt.
The audit report clearly states what went wrong. Former San Diego Mayor Dick Murphy and members of the San Diego City Council failed to disclose the extent of the city’s problems to bond investors—a major federal securities law no-no—so as not to scare them away from giving the city money to build a new ballpark for the San Diego Padres. (Bond investors tend to get nervous when your bond rating drops from AAA to BBB+, which is what Standard and Poor’s did after all this news hit the fan.) The report tops it off, Enron-style, by saying that city officials ignored warnings from a whistle-blower (former pension-board member Diann Shipione).
Other juicy parts of the report state:
- Among the consequences, the City now faces an unfunded actuarial pension liability of $1.4 billion and an inability to gain access to public financial markets.
- ... (T)he City's pension board and the City acted illegally and improperly and thereby allowed the City, with full knowledge and acquiescence of numerous participants in the approval process, to avoid financial obligations imposed by state and local law.
- ... (T)he City also deliberately failed to comply with federal and state legal mandates with regard to its municipal wastewater system....In so doing, the City not only unlawfully took money from San Diego homeowners; it breached arrangements with the state of California and thereby rendered itself liable for the return of $265 million in state funds.
- Under the pressure of short-term needs, City officials gave expedience a higher priority than fiscal responsibility and came to the view the law as an impediment to be circumvented through artful manipulation.
- The evidence also demonstrates that the City's derelictions as to both its pension and wastewater treatment systems resulted in numerous violations of the federal securities laws as the City has repeatedly obtained money from public investors through financial statements and related disclosures that were false.
- It appears to us that no one within City government viewed himself or herself as accountable for the accuracy of City financial disclosures.
But, for Aguirre, this report is clearly wrong. First, Levitt’s report says Aguirre’s own investigation was incompetent. Second, it doesn’t pin enough blame on those individuals who Aguirre has already determined were to blame for this mess. Third, “We may be a small town, but I’ll be damned if we need some big-shot East Coast so-called experts to come in here and tell us how to run our investigation.”
OK, he never really said that last part, but his character will when the movie version comes out.
So, since the combined fee for the investigation is about $20 million (including fees for two separate law firms involved, Willkie Farr and Vinson & Elkins), and since it is illegal for a city contractor to charge the city for work it never did, Aguirre figures he should sue them all since they clearly never did any work when putting together such a wrong-headed report.
Given Aguirre’s penchant for results-oriented legal analyses bereft of intrinsic credibility, I seriously doubt Willkie Farr, V&E, Kroll, Levitt or Turner are quaking in their boots over this threat. But San Diego citizens should be, since they will end up footing the bill for the legal fees.
One last thing: Levitt’s verbal smack-down of Aguirre during yesterday’s City Council meeting—
“We're not here to subject ourselves to your petty criticism….We're not here to subject ourselves to your playing to the press…You are continuing to demagogue a process, to embarrass your colleagues, to embarrass yourself in a way that I think is demeaning"
—definitely will be in the movie. And that quote I didn’t make up.
Other news on this sordid tale include this from the Associated Press and this from the San Diego Union-Tribune.
A copy of the Levitt/Turner/Kroll report can be found here.
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