Saturday, January 07, 2006 | A federal grand jury returned criminal indictments against five current and former city of San Diego pension officials Friday on charges of fraud and conspiracy for their part in the 2002 pension deal at the heart of the city's fiscal and legal crisis.
Prosecutors from the U.S. Attorney's Office allege that the officials deprived city employees, retirees and city residents of honest governmental services by personally and financially benefiting from a deal that they helped create and enact.
The deal, known as Manager's Proposal 2, has been the primary focus in the city's financial crunch and political upheaval for more than two years. The deal allowed the city to restructure its pension obligations and offered city employees increased benefits at a time when the city faced having to infuse between $25 million and $75 million into its troubled pension fund.
Charged are: Ron Saathoff, firefighter union president; Cathy Lexin, the city's former human resources director; Terri Webster, former assistant auditor; Lori Chapin, chief pension attorney; and Larry Grissom, former retirement system administrator.
Saathoff, Lexin and Webster served as trustees of the San Diego City Employees' Retirement System when Manager's Proposal 2 passed.
"The citizens of America's Finest City have the right to expect that those who are paid with taxpayer dollars to provide essential services are doing so with absolute integrity and without self-dealing," said Daniel Dzwilewski, special agent in charge of the FBI's San Diego office.
The Justice Department and the Securities and Exchange Commission have been investigating City Hall and its finances since February 2004. The probes have cast a wide pall of suspicion throughout the corridors of City Hall and added a tangible suspense to local politics. FBI agents have regularly attended City Council hearings, leaving observers to wonder just how far up the power ladder indictments might reach.
Friday's charges didn't stretch as high as some observers had speculated. Charged were the president of the city's most politically powerful labor union, the top staffers at the pension system and some former top members of the city management - not the City Council, former Mayor Dick Murphy or the city's former top administrators.
Prosecutors wouldn't disclose whether the investigation had concluded with the charges. The San Diego Union-Tribune reported that the indictments were merely the first round in a probe that could reach the highest levels of city government.
It didn't appear as if the charges brought the immediate closure many had hoped they would bring.
Friday's actions brought to light few new revelations into City Hall's dealings. Instead, court filings detailed the familiar pension deal that is already the focus of a criminal case brought by the District Attorney's Office and civil lawsuits brought by the City Attorney's Office, which is trying to repeal pension benefit increases on the grounds they were granted illegally.
In 2002, strains put on the pension system by the city's neglect, increased benefits and some investment losses left the city facing a budget-busting cash payment of between $25 million to $75 million more than had been budgeted.
Instead of cutting city services, administrators enacted a plan that offered city employees increased pension benefits and allowed the city relief from its obligations. Prosecutors allege that the deal became criminal when officials offered the benefits on the condition that the pension board, populated by union representatives and city staffers, allowed the city to forgo the payment.
In their indictment, prosecutors focus heavily on one specific benefit given to Saathoff, who for two decades has overseen the city's most influential labor union.
As part of the pension deal, Saathoff was given the "presidential leave retirement benefit." The benefit allowed Saathoff to combine his union and city salaries to calculate his final retirement checks. Prosecutors said the detail allowed him to increase his pension by more than $25,000 a year. Without the benefit, Saathoff could only have used his salary as a fire captain on leave toward his pension.
Prosecutors allege that the five defendants designed and enacted the benefit and then concealed its existence from other pension trustees who were voting on the deal. They also allege that the defendants worked to conceal the worsening financial health of the fund from other pension trustees.
They also allege that Lexin, Webster, Chapin and Grissom personally benefited from the deal they enacted, as all general employees of the city received a pension boost as part of the deal. Prosecutors say they each saw their pensions increase by thousands of dollars a year.
In all, prosecutors claim the defendants created and pushed through a dangerous deal to benefit themselves.
"(Manager's Proposal 2) continued a dangerous practice of permitting the city of San Diego to avoid making its full pension contributions to the retirement system, a practice that resulted in the serious under funding of the retirement system," said Shane Harrigan, director of the U.S. attorney's criminal division.
The city's funding practices have left the pension system with a deficit estimated to be more than $1.37 billion. The city's annual payments into the pension system have risen dramatically in recent years, forced cuts citywide and threaten to dominate city budgets for years to come absent significant reform.
Additionally, the SEC probe and questions surrounding the validity of the city's financial reporting have left it sidelined from public finance markets and unable to raise important infrastructure funding since 2004. Errors and omissions were found in the city's financial statements and it hasn't released an audit since 2002.
The SEC investigation is ongoing and it is unclear if criminal securities charges will be brought.
The 20-count indictment filed Friday charges the defendants with wire fraud, mail fraud, and conspiracy to commit wire and mail fraud. The counts each carry a maximum of between five and 20 years in prison and fines of up to $250,000. Prosecutors said the defendants have not been taken into custody and a court arraignment on the charges wouldn't be held until later this month.
Attorneys for a number of the defendants didn't return calls for comment Friday.
Jerry Coughlan, Saathoff's attorney, said his client has done nothing wrong.
"The U.S. attorney has misinterpreted the federal statute and is trying to criminalize the normal actions of a local public official. It's the same statute they misinterpreted in the case against Michael Zucchet," he said.
In sum, the indictments mark U.S. Attorney Carol Lam's third high-profile political corruption case in as many years.
In 2003, the U.S. Attorney's Office indicted Zucchet and two other sitting San Diego city councilmen, Ralph Inzunza and Charles Lewis, on charges that they accepted clandestine campaign contributions in exchange for efforts to relax strip-club regulations. Lewis died before the case went to trial.
Inzunza and Zucchet were found guilty this summer, but a judge later threw out Zucchet's convictions. Inzunza was sentenced to 21 months in prison but is free pending appeal. Prosecutors may appeal the judge's ruling on Zucchet's charges.
Coughlan represented Zucchet in the case, which is unrelated to the pension probe.
Lam also won a major victory in November when former U.S. Rep. Randy "Duke" Cunningham pleaded guilty to accepting $2.4 million in bribes connected to defense contracts.
But some former federal prosecutors who are now defense attorneys questioned this prosecution, which is based on charges that the defendants deprived citizens of their right to receive "honest services" from public officials. Prosecutors often use the honest services provision in public corruption cases when bribery isn't explicit.
"The statute is so broad that the category of what's legal and what's illegal is really hard to ascertain," said William Braniff, former U.S. attorney for San Diego from 1988 to 1993. "… I think it's absurd for both the federal and state governments to get involved in this - to prosecute over what is really a political issue."
U.S. Attorney Carol Lam didn't make any public statements Friday, nor did she attend the press conference, as she has in the previous high-profile corruption cases.
The five charged officials played roles around City Hall ranging from kingmaker to otherwise obscure roustabouts.
In charging Saathoff, prosecutors have gone after one of the most influential individuals in San Diego politics in the past two decades. It was often said that no one in City Hall knew the nooks and crannies of city finances better than Saathoff.
The endorsement and financial support of his union has long been sought after in mayoral, city attorney and City Council races. In recent elections, the firefighters' support has helped propel politicians such as former Mayor Dick Murphy to victory in tight races.
Lexin was a force behind the scenes in the city's pension picture and served as the city's human resources director until she stepped down the day before the District Attorney's Office brought charges in its case.
Webster, the former assistant auditor, kept tabs on the pension system's funding and also played a role in the city's financial reporting, a position that has brought her under additional scrutiny in the securities investigations. She resigned in May with Lexin.
Grissom and Chapin were the top staff members at the pension system. Grissom retired this month, but was hired on as a consultant by the pension board to aid the transition to a new administrator. Pension board President Peter Preovolos said Grissom wouldn't appear in the building unless there was a "compelling need."
Chapin placed herself on administrative leave Friday morning and Preovolos said a search is on for her replacement.
Justice Department officials said the indictments are not indicative of all of City Hall.
"The citizens of San Diego unfortunately have suffered at the hands of a few with less than honorable intentions. These few do not represent the majority who do carry out their public service responsibilities on a daily basis with honor, dignity and professionalism," Dzwilewski said.
Preovolos was less optimistic.
"It's a sad day for the city. It's a sad day for the system. What else can I tell you?" he said.
- Will Carless, Evan McLaughlin and Sam Hodgson contributed to this report.
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