Former pension officials say city should pay for criminal defense

by Kelly Thornton | inewsource

Six former San Diego pension officials whose criminal cases were ultimately dismissed are suing the city for more than $5 million in attorneys’ fees.

Their lawsuit says they are entitled to defense costs in the state conflict-of-interest case, in part because the City Council indemnified them in 2002. The city was forced to pay these same officials $2 million in 2007 for their lawyers’ fees in two pension-related civil actions.

“The city reneged on its promise” to defend employees against claims or lawsuits arising from their public service, the suit says. “Even when, after five years of litigation, all six employees were ultimately cleared of any wrongdoing … the city once again refused to honor its obligations.”

If the former officials win the latest case, the cost of pension-related litigation would top $10 million, making it the most expensive of all the city’s legal battles in the last decade.

The city has spent at least $5.4 million so far to provide legal representation for itself and current and former city officials who were questioned or targeted by investigators during the height of the pension crisis, according to a data analysis by the Watchdog Institute, an independent reporting center based at San Diego State University.

The city is self-insured up to $4 million; after that, insurance may kick in. The city’s share likely would come from the public liability reserve, which is a fund maintained to pay legal claims and lawsuits filed against the city.

The City Attorney’s office vowed this week to fight the civil suit.

“The city does not believe this claim is supported by the law and will vigorously defend it,” said Gina Coburn, spokeswoman for City Attorney Jan Goldsmith. “With few exceptions, the law requires the city to defend employees who are sued in civil cases arising out of their job, but not employees who face criminal prosecution.”

The pension-related legal bills stem from multiple investigations of city finances and pension underfunding that has resulted in today’s $2.1 billion deficit and thrust the city into years of financial chaos. Among the investigations: The Securities and Exchange Commission looked into potential fraud after city officials acknowledged in 2004 that they made errors and omissions in bond disclosures. As a result, some officials were civilly sanctioned.

Several officials also were criminally charged by state and federal prosecutors with conflict-of-interest and fraud in connection with the pension board’s 2002 vote to allow the city to underfund the pension system. Prosecutors contended the vote was a quid-pro-quo exchange for new labor agreements that increased pensions for all workers.

Eventually, both criminal cases were dismissed, but after years and hundreds of attorney hours.

In the current lawsuit, the ex-pension officials emphasized that they voted to allow the underfunding of the pension in the course of doing their jobs, with full knowledge and blessing of the council and city attorney.

“People want to blame us – we didn’t sue ourselves, we didn’t prosecute ourselves,” said Frank Vecchione, lawyer for former assistant city auditor Teresa Webster. “We all tried to have these cases dismissed without even being filed. Now our clients, after having their careers ruined, are stuck with horrendous attorney fee bills. I think the law’s clear. The city has to pay for their employees.”

The city has already done legal battle over pension-related attorneys’ fees. In that case, the same former pension officials sued for fees to defend themselves in two civil lawsuits filed against them over pension matters.

A Superior Court judge concluded in January 2006 that the officials were entitled to fees and costs in the civil cases because their actions “were done within the scope of their duties as members of the (San Diego City Employees Retirement System) board of trustees.”

The city appealed, lost and ended up paying $2 million for the plaintiffs’ legal fees, plus about $300,000 to fight the lawsuit., Vecchione said.

Vecchione said he is relying on the ruling in that lawsuit to bolster their position in the criminal case. The crux of the latest lawsuit is that the city signed a binding agreement to pay legal fees, if necessary, for pension officials at the time of the 2002 vote to underfund the pension. There was no distinction made in the agreement between civil or criminal cases.

Much hinges on how the court interprets the indemnification agreement and the California government code.

The lawsuit noted that former City Attorney Aguirre attempted to convince the council to repeal the resolution in 2007, saying it was “an open-ended blank check” and provided “open-ended complete indemnification” that would apply both in civil and criminal cases. The council did not follow his advice.

However, Aguirre, who is now in private practice, said he never believed that the indemnification would apply in criminal cases. But he did anticipate the pension officials would seek such indemnification, and he wanted to prevent that legal challenge.

He said he told the council in a 2007 memo they would have to revoke the indemnification because they had not followed the provisions of the California government code, which required them to make certain findings in order to chose to pay for criminal defense – that the employees acted within the scope of employment, without malice, in the best interests of the city.

“I knew this kind of trickery could be used later,” Aguirre said. “There is no basis for any indemnification of these individuals because the council never made appropriate findings.”

The defense lawyers are “misusing a warning I issued to the council,” Aguirre said. “This is more of a political filing than a legal filing.”

Coburn, Goldsmith’s spokeswoman, characterized Aguirre’s comments as “an impetuous reaction” to the award of fees in the civil cases “and not a legal opinion.”

The former defendants who are suing for attorneys’ fees are Cathy Lexin, the city’s former human resources director; John Torres, a retired San Diego Police Department fingerprint expert and former vice president of the city’s largest union; Mary Vattimo, former city treasurer; Sharon Wilkinson, a city analyst; former fire union chief Ronald Saathoff, and Webster.

Timeline:
November, 2002: The board of the San Diego City Employees Retirement System voted to allow underfunding of the pension, but only after the City Council adopted the indeminification resolution.

July 2005: The former pension board officials were charged with violating state conflict-of-interest laws in connection with that underfunding vote.

July and August 2005: The defendants asked the city to pay their legal costs in the state criminal case. The City Council denied the request.

January 2010: The state Supreme Court found all but one plaintiff had committed no crime. The charges remained against former fire union chief Ronald Saathoff, who had received a special benefit, but District Attorney Bonnie Dumanis dismissed the case against him in May.

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