Five former San Diego officials charged with fraud

By Jim Christie and Lisa Lambert

SAN FRANCISCO/WASHINGTON (Reuters) - U.S. regulators filed fraud charges on Monday against five former San Diego officials who played key roles in the pension fund scandal that triggered the city's recent financial meltdown.

The U.S. Securities and Exchange Commission charged all five with failing to disclose to municipal bond buyers that funding problems with pension and retiree health care were jeopardizing the finances of California's second-largest city.

As punishment, Wall Street has locked San Diego out of the municipal debt market since 2003, shattering its image as a model of municipal governance and forcing the city to seek loans from private lenders.

Those charged included the city's former treasurer, Mary Vattimo; former City Manager Michael Uberuaga; and its former auditor and comptroller, Edward Ryan.

"Municipal officials responsible for municipal bond disclosure play a key gatekeeper role in protecting investors," Linda Chatman Thomsen, director of the SEC's division of enforcement, said in a statement. "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."

City Attorney Michael Aguirre told Reuters the charges would bolster efforts to reform how San Diego is managed. "We need now in San Diego to make a much more serious effort to reform the management of our city," he added.

According to the SEC's complaint, the officials knew the city's unfunded liability to its pension system for retired workers was projected to increase to an estimated $2 billion by 2009 from $284 million at the beginning of fiscal year 2002.

But they did not disclose that and did not disclose an estimation that San Diego's liability for retiree health care was $1.1 billion in bond offering documents or other notices, the SEC said.

In 1996, the city decided to put less money into its retirement plan while boosting spending on benefits, relying on earnings from investments. When the stock market faltered, San Diego was caught without money for its pension fund, prompting federal and local investigations and a shakeout at City Hall.

Mayor Jerry Sanders, elected in the wake of the scandal, has been sending several years of audits of city finances to credit rating agencies, who have demanded a full accounting of the city's financial management as a condition of readmitting it to the municipal debt market.

San Diego Chief Operating Officer Jay Goldstone told Reuters last week the city was close to providing the rating agencies the audits they want.

Filed in U.S. District Court in San Diego, the SEC complaint charges Vattimo with drafting "false and misleading disclosures" and charges Uberuaga with signing the closing letter for one of the bond offerings, falsely certifying that it was accurate.

According to the SEC, Ryan signed letters lying about city funds in audited financial statements, as well. Also charged were Patricia Frazier, former deputy city manager of finance, and Teresa Webster, former assistant auditor and comptroller.

Frazier, along with signing off on false disclosure statements, made untrue presentations to ratings agencies, which vet the fiscal fortitude of cities for bond buyers, according to the SEC.

Vattimo, along with Webster, also intentionally withheld information from the agencies that they knew would hurt the city's credit rating, the SEC said.