The Securities and Exchange Commission settled a civil fraud action against the city of San Diego's independent auditor, Thomas J. Saiz and his firm Calderon, Jaham & Osborn, after he agreed to pay a $15,000 penalty.
The auditor issued unqualified audit reports on five of the city's 2002 and 2003 bond offerings that raised $260 million from investors. But the SEC said the audit reports contained false and misleading information about San Diego's pension and retiree health care obligations.
Saiz participated in drafting the footnote disclosures to the city's financial statements, but the SEC said he failed to exercise the proper professional care and skepticism. The footnotes disclosed that the city was under-funding its annual pension contribution, but said the city's funding method contained a provision to ensure that the pension funds would not drop below a certain level to protect their financial integrity.
The footnotes also claimed that the pension plan's actuary believed that the pension-funding method was excellent, and that the net pension obligation was funded in a reserve. However, the SEC said these statements were false and misleading.
CJO and Saiz also drafted footnotes disclosing that the city provided health benefits to retirees at a cost of $7.2 million in 2001 and $8.9 million in 2002, and that the expenses for those benefits were recognized as they were paid. In its complaint, the SEC alleged that Saiz and CJO knew or were reckless in not knowing that this disclosure was misleading because it failed to disclose that the retiree health care expense was being paid with earnings from the pension plan and that the city would soon have to begin paying this expense out of its own budget.
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