Wease. Twooooo Wease.

March 9, 2006

So, I’ve been promising an entry on the United Airlines v HSBC case ever since we got back from the AAAE conference last October, I realize. And – truthfully, I’ve tried a few times to start this, but I pick up the case’s opinions and something happens to me – the words start to dance and sway, and suddenly, it seems like an opportune time to clean the dust out of the little nooks and crannies between the keys on my keyboard. Or something.

Face it – I am bankruptcy-case-phobic. Something about that code – that code! those rules! – scares me a little. Then it occurred to me: others may feel the same way, and thus, it could be of great service to my fellow AAs to summarize the issues and explain why the case is important.

So, here it is. The United "true lease" case – right after the jump.

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Is it a coverup by a law firm of past wrongdoing? Is it a desperate effort by elected officials to shift responsibility for their own lack of oversight? Exactly who bears the responsibility for San Diego‘s bond offerings, which have been under investigation for the past few years? San Diego says it’s Orrick, Herrington & Sutcliffe and three other firms (one law firm – Webster & Anderson – and two auditing firms – Calderon, Jaham & Osborn, and accounting firm Caporicci & Larson, which merged with Calderon in 2003) it sued last Wednesday in San Diego Superior Court. The city’s suit specifies damages of $100 million. The law firm says it will vigorously defend the suit, and questions the city’s motives in bringing the suit in the first place, given the long troubled history of the city’s finances.

Some background can be found in this article from August of this year, detailing the release by City Attorney Michael Aguirre of a Vinson & Elkins report that concludes the city "fell short of acceptable [financial reporting] standards" but finds "insufficient evidence to conclude that any members of city administration had intentionally caused the city to provide materially misleading information to the public." Aguirre criticized the report as "Whitewash No. 2." From the linked article, found on the Voice of San Diego website:

The firm released a report last September with the aim of detailing the city’s finances "warts and all," although KPMG, the firm charged with auditing the city’s 2003 financial statements, said the investigation was insufficient and withheld the audits.

Among the findings included in the July 15 draft:

  • The city’s financial disclosures failed to inform the potential bond buyers of "critical facts" that posed a threat to the pension system’s financial bill of health.
  • From 1997 to 2003, the city did not accurately describe the risks associated with a  1996 agreement between the city and SDCERS [ed. note: San Diego City Employees Retirement System, the city employees’ pension plan] to underfund the retirement system in its annual financial statements and bond offering documents.
  • In 2001, the city failed to address a stipulation in the 1996 underfunding agreement to pay a lump sum into the retirement fund because the funding level was below an agreed-upon point.
  • In 2003, the city did not disclose information showing that underfunding would continue through at least 2011 unless a drastic policy change occurred.
  • City officials had an "apparent desire" to avoid notifying bond rating agencies to pension issues.
  • Former city auditor Ed Ryan and assistant auditor Terri Webster knew that the underfunding of SDCERS was risky, yet continued to provide false assurances as to the accuracy of the city’s yearly financial statements. The report suggests that the acts of Ryan and Webster appear to "constitute negligence and perhaps a higher level of culpability."
  • Former city manager Michael Uberagua, former deputy city manager Patricia Frazier and former city treasurer Mary Vattimo were also to blame for avoiding bringing the inaccuracies to light.
  • The evidence "does not indicate that any city employees, including senior officers, suspected at any time that they were engaging in conduct that might be prohibited by law."

Paul Maco, the lead Vinson & Elkins attorney reviewing the city’s books, maintains that the report is lacking some evidence the firm has sought but not received, and that the report’s conclusions are preliminary.

"It lays out some of the evidence available to the investigation, analyzes the actions under applicable law and presents its conclusions in draft form because there’s evidence not available to investigation," Maco said Tuesday. "We stand by the content of our report and note that it’s just a draft report."

Article by Evan McLoughlin; pub. 8/3/2005.

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