The SEC settled with four of five former City of San
Diego officials in its action centered on fraud in connection with the sale of
municipal bonds. SEC v. Uberuaga, Civil Action No. 08 CV 0621 (S.D. Cal.
April 7 2008) (previously
discussed here). The settlements are the first to impose a civil penalty
against a City official. They may also reflect a new trend.
In 2002 and 2003, the City of San Diego raised over $260
million in municipal securities offerings. The five defendants participated in
the offerings and presentations. Those settling are former San Diego City
Manager Michael Uberuaga, former Auditor and Comptroller Edward Ryan, the
former Deputy City Manager for Finance Patricia Frazier and the former City
Treasurer Mary Vattimo. Former Deputy City Manager for Finance, Teresa Webster
did not settle.
The false and misleading statements were made regarding
the continuing bond offerings and to rating agencies. According to the
Commission's complaint, the defendants knew the City had intentionally
under-funded its pension obligations to increase benefits and defer costs. The
SEC also claimed that the defendants knew the City faced severe difficulty
funding its future pension and health care obligations unless new revenues were
obtained or cuts were made in pension and health benefits or services. The
complaint alleged violations of Securities Act Section 17(a) and Exchange Act
To settle with the four defendants, the Commission dropped
its Section 17(a) and 10(b) claims. Rather, each settling defendant consented
to the entry of a permanent injunction prohibiting future violations of
Securities Act Section 17(a)(2). In addition, each settling defendant agreed to
pay a civil penalty: Messrs. Uberuaga and Ryan and Ms. Frazier each agreed to
pay $25,000 while Ms. Vattimo will pay $5,000.
Previously, the Commission brought an administrative
proceeding against the City and a civil action against its auditors based on
essentially the same conduct. The City resolved proceeding against it in 2006
by agreeing to implement a series of detailed undertakings keyed to the
underlying conduct. The City also consented to the entry of an order requiring
it to cease and desist from committing or causing any violations and any future
violations of Securities Act Section 17(a) and Exchange Act Section 10(b). In
the Matter of City of San Diego, California, Adm. Proc. File No.
3-12478 (Filed Nov. 14, 2006).
Outside auditor Thomas Saiz and his firm, Calderon, Jaham &
Osborn, also settled in 2007. Mr. Saiz and the firm consented to the entry
of a permanent injunction prohibiting future violations of Securities Act
Section 17(a) and Exchange Act Section 10(b). Mr. Saiz also agreed to pay a civil
penalty of $15,000. SEC v. Saiz, Civil Action No. 07 CV 2308 (S.D. Cal.
Filed Dec. 10, 2007).
The settlements with the four former City officials
contrast sharply with the allegations in the complaint and the earlier
settlements. Each settlement with a former City official dropped the
scienter-based fraud charges in favor of a claim centered on negligence. In
contrast, the settlements with the City and the independent auditors are
predicated on scienter-based fraud charges.
The settlements in Uberuaga are, however, similar
to the Commission's recent settled action against the State of New Jersey. In
the Matter of State of New Jersey, Adm. Proc. File No. 3-14009 (Aug. 18,
That case is based on alleged false statements made in connection with 79
municipal bond offerings. Like the settlements in Uberuaga, the consent
injunction is based on negligence rather than scienter-based fraud. Like the
settlements in Uberuaga, New Jersey is a "first" - the former are
the first settlements imposing a civil penalty on City officials, while the
latter was the first action brought against a State. In New Jersey,
however, Section 17(a) and Section 10(b) charges were not dropped, they were
Uberuaga is not the first
financial fraud case based on years old conduct where scienter based fraud
charges were dropped in favor of Section 17(a)(2) & (3) claims. SEC v.
Fisher, Case No. 07-cv-4483 (N.D. Ill. Filed Aug. 9, 2007) also centered on
a financial fraud which alleged to have occurred from 1999 through 2002. In
settling with the former CEO in July 2010 (here) the
Commission dropped Section 17(a) and 10(b) claims and a demand for a penalty in
favor of an injunction based on Sections 17(a)(2) & (3) and the payment of
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