San Diego 'Take me out to the bawl game?" At the same time city officials and Padres majority owner John Moores grinningly lapped up hurrahs at last week's Petco Park opening, they were getting a big Bronx cheer in official government filings.
According to those recent filings, both the city and Moores's former company, Peregrine Systems, were throwing wildly errant curveballs to investors.
The city's filing was its own. In late March, once again, the city filed a report with an obscure federal body confessing past financial sins, just as it had done January 27. This time, the city admitted it has hired another outside auditor to audit the figures for its current outside auditor, as well as the city's own auditors, for the 2003 financial report. This recheck could cost half a million bucks.
Perhaps most tellingly, the city admitted in the late-March filings that it has been letting large commercial and industrial sewer users get off easy on their bills, while residential customers get stiffed as a result. This defies state and federal laws, and hence the city could lose $266 million in government grants and loans, the city confessed.
On game day last Thursday, Moody's Investor Service, a bond-rating agency, put the city on its watch list for possible downgrading. Moody's cited "heightened uncertainty" about the city's financial condition. It flayed the city for not addressing the problems in the current fiscal year and said there are "daunting challenges" in trying to patch up things next year.
Only three days before the Petco Park celebration, shareholders of Peregrine Systems filed an amended complaint in federal court, showing that Peregrine's board knew full well that the company was in bad shape while it was telling the public and Wall Street otherwise. Moores was chairman of that board -- and massively unloading his stock -- for most of the period. This information came from written materials that the company provided to the Securities and Exchange Commission and the Department of Justice in their investigations of the huge Peregrine fraud, which has already led to admissions of criminal complicity.
Also, the day before the Petco hoopla, a judge in a different Peregrine case in state court denied a motion by Moores and other board members to dismiss a suit charging them with fraud, breach of fiduciary duty, and exercising control of the deceit-ridden company.
The city has been hurling both deliberate curveballs and knuckle(head)balls. After the city admitted that it had cooked its books since 1996 and not informed its bond investors, the Federal Bureau of Investigation and Securities and Exchange Commission seized documents, and they are probing the matter. The filing late last month revealed that the city has hired one of the major accounting firms, KPMG, to audit its sloppy/slippery books for the year 2003. "The city currently expects to have these audited financial statements ready for publication in June 2004," said the filing to the Municipal Securities Rulemaking Board, "although no assurance can be given" that the city will make the deadline.
Ironically, Peregrine hired KPMG two years ago to audit its books. KPMG smelled big trouble. Peregrine fired KPMG, which then alerted federal authorities to phony deals and possible fraud -- which subsequently proved true.
The city in its filing went on to correct some statements it had made in previous official filings -- including the January 27 mea culpa -- and then confessed details of a backroom ruckus that had been going on for a couple of years.
That ethically disquieting dispute regards sewer bills going to big businesses and to residences. The latter have been getting the shaft while the former have enjoyed big breaks, the city admitted, albeit in obfuscated legalese.
As the filing described, the city must have a sewer user charge system that conforms to the Clean Water Act. This is a requirement to receive federal and state clean water grants and loans. The State Water Resources Board has written the city two letters in the past six months demanding evidence that it is in compliance with state and federal laws.
But the city council has yet to approve a billing system that would put the city in compliance. If the city can't get its act together, "the Wastewater System could be required to repay at least $266 million" in grants and loans, says the filing. Hey -- $266 million could fix a lot of fire trucks and police vehicles and help plug the monstrous pension gap. And city residents could sure use the average $133 a year they are paying to subsidize big businesses in the current sewer-billing system.
In the punchline, the city admits that the argument can be made that sewer service charges are "disproportionately better for certain commercial and industrial customers of the Waste System that discharge large volumes of organic material and disproportionately worse for other customers that do not." Hmmm.
The city finally confessed to this practice after councilmember Donna Frye wrote a memo February 13 saying that the potential loss of $266 million should be put in bond prospectuses.
The city did a cost-of-service study on the matter but for at least two years tried to keep it quiet, according to Frye. In November of 2002 she wrote a letter to city attorney Casey Gwinn, stating that the sewer matter should not be discussed in closed session. It had been dealt with in secret for almost a year before that. She finally had to get a copy of the study through a public records request.
"The decision to withhold it was deliberate, because they didn't want the public to find out about the disproportionality," says Frye. In one meeting, Murphy and a city bureaucrat "were lying to me, saying there was no sewer cost-of-service study. I knew the documents existed. When you are doing the right things, they make you feel as if you're being disloyal to the city bureaucracy."
As usual, the city did not return my request for comment.
"We're now receiving sequential disclosures from the city regarding its financial condition and previous errors," says Diann Shipione, the board member of the pension system who first told the public of the massive pension underfunding. "Hopefully at some point, the city can reenter the capital markets [sell bonds again], and the pension system can have a better understanding of the city's ability to pay its colossal obligations."
Another question is the potential financial obligations of John Moores. He is being sued by two different groups of Peregrine shareholders and by a liquidation trust, formed by the bankruptcy court, utilizing internal Peregrine documents. One suit is in federal court, and two are in superior court.
Last December, the judge in the federal suit dismissed most -- but not all -- the charges against Moores and other board members. But the judge said the plaintiffs could refile the suit. In doing so, the plaintiffs for the first time had access to the information that Peregrine had provided the Securities and Exchange Commission and Department of Justice in its investigations.
Those written reports indicate that the board knew the company was in trouble, "and that contradicted the public stance" of a company moving forward swiftly and confidently, says Gwendolyn R. Giblin, attorney for a San Francisco firm handling the suit. "There were definite red flags of accounting irregularities. The only way the company could be making its numbers was through accounting shenanigans."
Moores's Los Angeles- based lawyer, John Quinn, insists there are "simply no facts to support" the charges in the revised filing. After the revelations of fraud surfaced in spring of 2002, Moores returned as chairman, and the company paid law firm Latham & Watkins to do an internal probe. That firm had earlier been used by the Padres in one of its lawsuits. The study exonerated the board, notes Quinn. At the time of the Latham & Watkins study, creditors in the bankruptcy hooted that the study was just a self-serving whitewash that was depleting scarce assets. "Latham & Watkins is not in the pocket of [former] directors," bristles Quinn.
The day before last week's big ballgame, a superior court judge tentatively ruled that the fraud case against Moores and other board members could go forward, although Quinn says, "We have a chance to discuss it with the court. We hope the court will change some of the things said there."
"Normally, these things aren't even arguable; many times, there isn't even a motion to dismiss," says attorney Michael Aguirre, whose partner, Patricia A. Meyer, has been handling the case. But in cases involving "people with a lot of power, such as Ken Lay of Enron and Moores, it's a contest to see whether the legal system can treat people the same way." The judge's move is a preliminary decision, he says, but he feels the case will go forward to trial.