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San Diego violated securities laws with under-funded pensions: audit

[JURIST] San Diego city officials and management [city website] broke federal securities laws by failing to fulfill their fiduciary duties in administering the city's pension fund for police officers, firefighters, and other public officials, according to an independent audit presented to City Council [recorded video of Council session} on Tuesday. The Final Report [materials] of the investigation, led by former Securities and Exchange Commission (SEC) Chairman Arthur Levitt [official profile], blames city officials for deliberately under-funding city pensions, leading to a current deficit of $1.4 billion. Specifically, the audit found that City Council acted illegally in 1996 and 2002 in voting to under-fund the pensions, and that other city officials made misleading statements to the public regarding funding shortfalls, used pension assets to fund health benefits, and made false statements on financial prospectives. The audit recommended that an independent monitor supervise the San Diego pension system and report back to the SEC, and that city officials be required to personally certify the accuracy of pension reports, a requirement that the Sarbanes-Oxley Act [PDF text; SEC materials] imposed on corporations in the wake of the Enron scandal [JURIST news archive].

The report also criticized outside consultants hired by San Diego to administer the pension plan, including the law firm Vinson & Elkins [firm website], for failing to fully investigate problems with the pension system. On Tuesday, San Diego filed suit against Vinson & Elkins [law.com report], alleging breach of contract, breach of fiduciary duty and professional negligence and requesting $10 million in damages. The New York Times has more. The San Diego Union-Tribune has local coverage.

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