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U.S. Securities and Exchange Commission

SEC Sanctions the City Of San Diego for Fraudulent Municipal Bond Offerings and Orders the City to Retain an Independent Consultant


Washington, D.C., Nov. 14, 2006 - The Securities and Exchange Commission today entered an order sanctioning the City of San Diego for committing securities fraud by failing to disclose to the investing public important information about its pension and retiree health care obligations in the sale of its municipal bonds in 2002 and 2003. To settle the action, the city agreed to cease and desist from future securities fraud violations and to retain an independent consultant for three years to foster compliance with its disclosure obligations under the federal securities laws.

Linda Chatman Thomsen, the Director of the SEC's Enforcement Division, said, "American investors trust municipal bonds as they do few other investments. With over $2.2 trillion in municipal securities outstanding — two-thirds of which are held by individual investors — municipal bonds are a vitally important segment of our nation's securities markets. This action signifies our resolve to hold state and local governments accountable when they commit fraud while seeking to borrow the public's money."

Randall R. Lee, the Regional Director of the SEC's Pacific Regional Office in Los Angeles, added, "San Diego's misconduct jeopardized the interests of its citizens, its current and future retirees, and those who placed their trust in the City's bonds as an investment. The appointment of an independent consultant is an important step in ensuring that the City takes seriously its obligations to the investing public."

The SEC issued an Order finding that the city's disclosures about its pension and retiree health care obligations and its ability to pay those obligations were misleading. The Order finds that the city failed to disclose that the city's unfunded liability to its pension plan was projected to dramatically increase, growing from $284 million at the beginning of fiscal year 2002 to an estimated $2 billion by 2009, and that the city's liability for retiree health care was another estimated $1.1 billion.

According to the Order, the city also failed to disclose that it had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs, and that it would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, pension and health care benefits were reduced, or city services were cut. The Order further finds that the city knew or was reckless in not knowing that its disclosures were materially misleading.

The Order finds that the city made these misleading statements through three different means. First, the city made misleading statements in the offering documents for five municipal offerings in 2002 and 2003 that raised over $260 million from investors. The offering documents containing the misleading statements included the "official statements," which were intended to disclose material information to investors, and the "preliminary official statements," which were used to gauge investors' interest in a bond issuance. Second, the city made misleading statements to the agencies that gave the city its credit rating for its municipal bonds. Finally, the city made misleading statements in its "continuing disclosure statements," which described the city's financial condition and were provided by the city to the municipal securities market with respect to prior city bond offerings.

The city's enormous pension and retiree health liabilities and its failure to disclose those liabilities placed the city in serious financial straits, according to the Order. When the city eventually disclosed its pension and retiree health care issue in fiscal year 2004, the credit rating agencies lowered the city's credit rating.

The Order requires the city to cease and desist from committing violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Order also requires the city to retain an independent consultant to review and assess its policies, procedures, and internal controls about its disclosures relating to municipal bond offerings; conduct annual reviews for a three-year period of the city's policies, procedures, and internal controls and to make recommendations with a view to assuring compliance with the city's disclosure obligations under the federal securities laws; and assess the city's compliance with its policies, procedures, and internal controls, and its adoption of the consultant's recommendations. The city agreed to adopt, implement, and employ the independent consultant's recommendations or alternatives designed to achieve the same objectives.

In deciding to accept the city's offer to settle this matter, the Commission considered various remedial measures that the city has already taken to detect and prevent future securities law violations, as well as the city's agreement to retain an independent consultant. The city consented to the issuance of the Order without admitting or denying the findings in the Order.

The Commission's investigation is ongoing as to individuals and other entities that may have violated the federal securities laws.

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For further information contact:

Randall R. Lee
Regional Director
Pacific Regional Office
(323) 965-3807

Kelly Bowers
Senior Assistant Regional Director
Pacific Regional Office
(323) 965-3924

  Additional materials: Administrative Proceeding No. 33-8751



Modified: 11/14/2006