The SEC announced that 4 former San Diego officials have agreed to pay financial penalties for their roles in misleading muni bond investors about the city's fiscal problems related to its pension and retiree health care obligations - all the way back in 2002 and 2003.

While the penalties - in our opinion - don't begin to address the outrageous nature and deleterious impact of their purposeful misstatements, we credit the SEC staff.  It's the first time the Agency has secured financial penalties against city officials in a municipal bond fraud case.

    The Players.   The SEC filed charges in April 2008 against:  (i) former San Diego City Manager Michael Uberuaga, former Auditor & Comptroller Edward Ryan, former Deputy City Manager for Finance Patricia Frazier, and former City Treasurer Mary Vattimo. 

The officials allegedly knew the city had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs.  They also were aware that the city would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, benefits were reduced, or city services were cut.  However, despite this extensive knowledge, they failed to inform municipal investors about the severe funding problems in 2002 and 2003 bond disclosure documents.

    Penalties.   Without admitting or denying the allegations, 3 of the "Gang of Four" will each pay a $25K penalty;  the 4th will pay $5K.  The case against a 5th former city official - Assistant Auditor & Comptroller Teresa Webster - is still pending.   [SEC PR 10-204, 10/27]