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SEC launches inquiry into San Bernardino's finances

The federal agency says the action does not mean securities laws were broken in the bankrupt city. The city attorney vows cooperation with the probe.

October 17, 2012|By Abby Sewell and Phil Willon, Los Angeles Times
  • A welcome sign on 6th Street greets visitors in San Bernardino.
A welcome sign on 6th Street greets visitors in San Bernardino. (Irfan Khan / Los Angeles…)

The U.S. Securities and Exchange Commission has opened an inquiry into the city of San Bernardino's financial affairs as the city makes its way through a contentious bankruptcy process.

The city filed for Chapter 9 bankruptcy protection Aug. 1 after learning in July that it faced a $46-million budget shortfall, making it the third city in California to fail this year. Since then, city officials have traded blame and allegations as they work through a plan to cut costs and return the city to solvency.

The Oct. 11 letter from the commission's office of enforcement to the city said the regulatory agency had opened an "informal inquiry" and requested that the city and its joint powers financing authority not alter or destroy financial documents and a list of records relating to the city's bond issuances and financial state, including communications with underwriters, financial advisors and bond counsel.

The inquiry "should not be construed as an indication… that any violation of the federal securities laws has occurred," the SEC's attorney wrote. An SEC spokesman declined to comment on the inquiry.

City Atty. James Penman, to whom the letter was addressed, said he spoke with SEC attorneys Tuesday and assured them the city would cooperate.

Penman said he was not told what triggered the inquiry or what, specifically, the federal agency planned to look into, although he said it would probably relate to the use of city bond funds, which falls under SEC regulatory authority.

The only bonded debt listed in the city's bankruptcy filing was $46 million in pension obligation bonds issued in 2005.

"I think it's appropriate that agencies such as the SEC take a close look at the city,'' Penman said. "We are hoping there will be other inquiries by other government agencies.

"We think the public has the right to know why things happened, and to make sure these things don't happen again," he added. "There just hasn't been enough transparency in San Bernardino in the last six years.''

Penman's comment was a subtle jab at Mayor Patrick Morris, who the city attorney believes is largely responsible for the city's fiscal calamity.

The two are also political foes — Penman unsuccessfully challenged Morris in the 2006 mayor's race — and they openly spar during City Council meetings.

The city attorney also caused a stir early in the bankruptcy discussions when he asserted that city financial records had been falsified for 13 of the last 16 years.

Other city officials, including the city manager, said record-keeping had sometimes been shoddy and acknowledged that the general fund had borrowed repeatedly from restricted funds and eventually failed to pay back the debt, but said there was no indication that records had been deliberately falsified.

Mayor Morris, a former judge, said he thought the commission's letter was probably standard practice when a city with outstanding bond obligations files for bankruptcy.

"We're going through a relatively rare experience as a Chapter 9 petitioner," he said. "That tends to send up red flags everywhere."

After the city announced its plans to file for bankruptcy, the U.S. Department of Housing and Urban Development and state Department of Finance launched audits of the city's finances.

The SEC has also taken an interest in other financially troubled cities, monitoring Stockton's bankruptcy proceeding and examining the use of bond money in Victorville, another financially strapped San Bernardino County city.

abby.sewell@latimes.com

phil.willon@latimes.com

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