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He Isn't Worth $9 an Hour

— Consultant celebrities are like Hollywood celebrities: they're hired more for show than substance. This is just one of many reasons San Diego taxpayers should cock an eyebrow at the city's hiring of two former top Securities and Exchange Commission officials to do still another study on the city's pension woes.

Arthur Levitt, former chairman of the Securities and Exchange Commission, now an author and TV commentator, will get a whopping $900 an hour -- that's an hour -- to supervise the investigative work of Lynn E. Turner, who was chief accountant of the commission under Levitt. Turner will get $750 an hour. Troy Dahlberg, managing director of Kroll, Inc., which recruited Levitt and Turner for the job, will rake in $450 an hour. Kroll is a subsidiary of New York's Marsh & McLennan, a diversified financial firm that has more governance problems than the City of San Diego (if that is possible).

Among other things, Levitt and Turner will be passing judgment on two earlier studies of the pension crisis by the law firm of Vinson & Elkins (Enron's former law firm) and by City Attorney Mike Aguirre. There are significant disagreements between the two studies. The Vincent & Elkins study concluded that no city employee was culpable for the pension fiasco, even though such a finding was outside its mandate. The accounting firm of KPMG rejected the Vinson & Elkins study, and refuses to release the 2003 and 2004 audits. That's why Aguirre did a study, which concluded that Mayor Dick Murphy and several city-council members violated securities laws by withholding negative information from bond investors and granting benefits to pension-board members who could influence their colleagues to permit underfunding to continue.

Levitt, Turner, et al. are being paid to "reconcile any discrepancies [between the reports] and make appropriate recommendations to the city council," according to City Manager Lamont Ewell. There are several problems here. First, Levitt and his crew are being hired by and paid by the city council. Consultants are notorious for telling those paying their bills exactly what they want to hear.

Also, the relationships between Levitt and the authors of the Vinson & Elkins report are troubling. The Vinson & Elkins study was co-authored by Paul Maco and Richard Sauer. Maco was the first director of the Securities and Exchange Commission's Office of Municipal Securities. That office had been created by Levitt, who hired Maco to run it in 1995. In 2000, Maco left to work for Vinson & Elkins. There was a veritable lovefest between Levitt and Maco at the time. "Paul has been an effective advocate on behalf of municipal market investors and has played a significant role in every municipal finance reform effort this commission has undertaken," enthused Levitt.

"It has been a great honor to work with chairman Levitt," gushed Maco.

In 2003, Sauer joined Vinson & Elkins from the Securities and Exchange Commission. At the time, Maco pointed out proudly that Sauer was a senior attorney for Levitt. "It's great to be joined by a former colleague from the SEC's senior ranks," effervesced Maco.

Question: will Levitt and Turner be objective in reviewing the work of their former securities agency underlings?

While they were at the agency, Levitt and Turner said all the right things about corporate wrongdoers. I have praised their rhetoric several times. But some say their deeds didn't match their words. "The city could not have picked a worse person to do this report," says University of San Diego law professor Frank Partnoy, author of two excellent books on investment scandals (F.I.A.S.C.O.: Blood in the Water on Wall Street and Infectious Greed). "Arthur Levitt is the most ridiculed SEC commissioner in history. He oversaw epic corporate frauds and did nothing to stop them or repair the damage after they had occurred. In my opinion, he isn't worth $9 an hour, much less $900."

The San Diego government should have "hired somebody involved in the community, not somebody biased or incompetent," says Partnoy. "Hiring someone whose name has been in the headlines for the wrong reasons is not a good idea. There are plenty of big names that have more credibility than [Levitt and Turner]. Madonna has a big name." Partnoy points out that the University of Texas law school did a good job reporting on the Enron scandal. His own law school could do an excellent job on the city's pension problems, he says.

Levitt and Turner will be paid "an absurd amount of money," says Carl DeMaio, president of the Performance Institute, a private nonprofit organization promoting government efficiency. "The Vinson & Elkins report was a whitewash," he says, and the city is on the hook to pay the firm $3.8 million. Kroll's initial $250,000 contract will probably grow. However, DeMaio doubts that Levitt and Turner will do another whitewash. "Their professional reputations will be on the line. If they take the city's money and kowtow, their report will be dismissed as a whitewash." That will be detrimental to their reputations on Wall Street.

Turner certainly got off on the wrong foot by drafting an entente cordiale letter early this month. By signing it, councilmembers, the mayor, and city officials would pledge to speak no ill of any other. "It was a letter asking for a gag order. It was a direct attempt to limit the city attorney's ability to speak," says councilmember Donna Frye, who, along with Aguirre, correctly refused to sign it.

Aguirre says he will cooperate with Turner and Levitt, "But I won't be muzzled." Such a gag letter will not fly with intelligent San Diegans. After all, the whole pension crisis came into the open because Diann Shipione, a member of the pension board, spoke out, incurring the wrath of her fellow members, as well as of city hall. What if she had signed a gag order? She opposes Turner's omerta order.

The gag letter is consistent with the long-embedded mentality at Marsh & McLennan, parent of Kroll. In a November 1, 2004, cover story, Business Week magazine in its headline called the company "arrogant and tight-lipped." In the first sentence of the article, Marsh & McLennan, often called "Marsh Mac," was portrayed as "notoriously secretive."

The company is notorious in other respects. In 2003, the Securities and Exchange Commission charged Marsh Mac's Putnam mutual fund complex with securities fraud. By the end of last year, assets were down to $204 billion from $370 billion at year-end 2000. In March of 2004, the commission began investigating Marsh Mac's Mercer pension-consulting arm for possible "pay to play" offenses, or allegedly taking remuneration from both sides of the street when recommending investment managers to pension funds. The San Diego pension board brought in Mercer to audit its regular advisor (Callan Associates) for conflicts of interest, "and Mercer neglected to state that it was under SEC investigation for conflicts of interest," says Shipione, who complained to the pension board and city council about it last year. Mercer claimed it had made the disclosure, but Shipione said it had not.

Early this year, Marsh Mac settled insurance-bid-rigging charges by New York attorney general Eliot Spitzer for $850 million. But the company is not out of the woods: this month the Labor Department subpoenaed its records related to employee benefit plans. Marsh Mac has had to slash employment and its dividend.

Kroll merged into Marsh Mac last year. Kroll spokesperson Jodie Rosenbloom notes that a former Kroll executive has been named chief executive of Marsh Mac "to implement reforms," including wiping away the secrecy culture. You couldn't tell it by me. She gave me phone numbers for Turner. I left two messages. He never called back. She promised to get me a number for Levitt. She didn't, and I couldn't reach him through other avenues.

There is a rumor that unless Aguirre signs the gag order, Levitt and Turner will resign their San Diego assignment. Sounds like a great idea to me. They could devote their efforts to cleaning up Marsh Mac.

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