Former San Diego Officials to Pay Penalties in SEC Municipal Bond Fraud Case

Four former San Diego officials have agreed to pay financial penalties to settle SEC charges accusing them of misleading municipal bond investors about the city’s fiscal problems.

(October 29, 2010) — Four former San Diego city officials have agreed to pay $80,000 to settle a Securities and Exchange Commission (SEC) fraud suit that alleged they misled investors in municipal bond offerings about the city’s pension and retiree health care obligations.

It’s the first time that the SEC has secured financial penalties against city officials in a municipal bond fraud case as it seeks to crack down on perceived abuses.

The suit has accused the city’s officials of failing to disclose the size of the San Diego City Employees’ Retirement System’s (SDCERA) unfunded pension liability when the city sold bonds. Without admitting or denying the allegations, former City Manager Michael Uberuaga, former Auditor Edward Ryan, and former Deputy City Manager for Finance Patricia Frazier each agreed to pay $25,000, according to the SEC, while former City Treasurer Mary Vattimo will pay a $5,000 penalty.

“These former San Diego officials are paying a price for their actions that jeopardized the interests of investors and put the city’s current and future retirees at risk,” Rosalind Tyson, director of the SEC’s Los Angeles regional office, said in a statement. “Municipal officials have a personal obligation to ensure that investors are provided with complete and accurate information about the issuer’s financial condition. These former San Diego officials are paying a price for their actions that jeopardized the interests of investors and put the city’s current and future retirees at risk.”

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According to the statement by the US regulator, the SEC filed the charges against the city officials in April 2008, alleging that they were aware that San Diego had been intentionally underfunding its pension obligations to increase benefits while deferring the costs. The SEC claimed the officials were aware that the city would face difficulty funding its future retirement obligations without new revenues or cuts to employee benefits or city services. But, “despite this extensive knowledge, they failed to inform municipal investors about the severe funding problems in 2002 and 2003 bond disclosure documents,” the SEC’s statement said.

Similarly, in August, the State of New Jersey settled claims that it fraudulently misled municipal bond investors while underfunding the state’s two biggest pensions covering teachers and other state employees in the first SEC case against a state.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Glas Securities has said that Ireland's National Pensions Reserve Fund (NPRF), created in 2001 to pay for future pension liabilities, should consider using its state pension fund to hedge against the impact of a planned budget squeeze.

(October 28, 2010) — Analysts at Glas Securities have said the Irish government should consider using the country’s pension reserves to complete a US-style economic stimulus package.

According to the Dublin-based fixed-income specialists, in order to counter the impact of a planned budget crisis, Ireland should consider tapping its $33 billion state pension for a “US style stimulus.” The National Pensions Reserve Fund (NPRF) already allocates €6.8bn of its assets in a ‘directed portfolio’ comprised of preference shares and ordinary shares in Bank of Ireland and Allied Irish Banks.

“One must question the wisdom of maintaining funds in a ‘deposit account’ when one is finding it difficult to pay ‘the mortgage,’” analysts including Fergal O’Leary at Glas said in a release. “It might be better to re-inject these funds into the economy over the next two years.” The firm added that because of the size of Ireland’s deficit, it is “not well placed” to consider extending the 2014 target agreed with the European Commission. This week, Ireland’s government revealed plans to lower its deficit by seeking $21 billion in spending cuts and tax hikes through 2014, aiming to reduce the deficit to 3% of gross domestic product that year from about 12% this year. Analysts at Glass said a €16bn adjustment is necessary due to the fact that growth will be slower than predicted by the government.

“We question whether the state should reconsider its National Pension Reserve Fund assets and contemplate whether it is best leaving this reserve on deposit for the longer term when there are such question marks over the economy’s ability to deliver in the short-term,” analysts at Glas stated. “We could consider that the remaining €14bn of funds presently invested in the NPRF may be considered variously to aid the economy.”

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Separately, Ireland’s finance minister has been encouraged by some senior advisers to allow the country’s state pension to buy Irish government bonds, Reuters is reporting. An Irish senior official told the news service that no decision to take such action has been made. “That’s an asset that the government has which they can choose to use — it’s there,” the official told Reuters, adding that the power of the $33 billion state pension could encourage other investors to purchase Ireland’s debt.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742