August 11, 2006

Willkie team helps complete exhaustive financial investigation on behalf of an Independent Audit Committee of the City of San Diego. 



A multidisciplinary team of Willkie litigators and corporate attorneys have helped complete an exhaustive financial investigation on behalf of an Independent Audit Committee of the City of San Diego.   After an 18-month investigation into the San Diego City Employees’ Retirement System and the City of San Diego Sewer Rate Structure, the Audit Committee issued its report finding that in recent years the City was beleaguered by pervasive financial mismanagement and intentional violations of law as City officials sought expediency and superficial solutions to mounting financial problems.  The 266-page report and extensive appendices, entitled Report of the Audit Committee of the City of San Diego, was presented to the City Council on August 8. 

In January 2004, the City first announced that many of its accounts had discrepancies and that its pension fund was contending with a $1.1 billion deficit.   Willkie and risk consulting firm Kroll Inc. were retained to assist the Audit Committee, comprising three members including Arthur Levitt, former Chairman of the Securities and Exchange Commission and Lynn Turner, former Chief Accountant of the SEC.  Willkie helped reconcile existing reports and provide answers to critical questions raised by accounting firm KPMG, which conducted the overall audit into the City’s financial affairs. 

The inquiry, which involved an intensive review of more than one million documents and records, found that some City officials violated the law in failing "to protect the financial integrity of the City's pension system."  Additionally, the report cited "reckless and wrongful mismanagement involving any number of City and pension board officials,” and concluded that   "The evidence demonstrates not mere negligence but deliberate disregard for the law, disregard for fiduciary responsibility, and disregard for the financial welfare of the City's residents."  

The investigation revealed that among the laws violated were the California Constitution, the San Diego City Charter, the San Diego Municipal Code, and the federal securities laws.   It found  that among the consequences of the years of financial mismanagement and wrong-doing, the City must now contend with an unfunded actuarial pension liability of $1.4 billion and blocked access to public financial markets. 

In addition to disclosing its investigative results, the Audit Committee report also set forth   recommendations for reform measures.  Among the recommendations are the establishment of a permanent Audit Committee, greater controls on budgeting and financial reporting, and a Monitor to oversee implementation of the recommendations.  Once these matters are settled, the City of San Diego will again be permitted to sell bonds to finance capital projects, like improving water and sewer systems. 

The financial audit of San Diego has received widespread media attention in part because it is an example of the recent trend in which cities are finding themselves subject to the same kind of scrutiny traditionally exercised in corporate boardrooms.  The Willkie team was led by Benito Romano, former U.S. Attorney for the Southern District of New York, and Michael Young, both litigation partners in the New York office.