Court Dismisses Federal Criminal Charges Against San Diego Pension Trustees

Potentially bringing to an end one of the most protracted criminal prosecutions of public pension trustees, a federal court in California has dismissed all charges against five trustees of San Diego’s troubled pension fund. The trustees were charged with the violation of Section 1346 of Title 18 of the United States Code, which forbids entering into a “scheme or artifice to defraud another of the intangible right of honest services.”

The trustees moved to dismiss the charges, arguing that the language of the statute was so vague that it could not be constitutionally applied to them. The Court agreed, reasoning as follows:

“The federal crime charged against these defendants is a model of vagueness. That public officials are to perform their public services honestly, is a reasonable, if not obvious, legal requirement. But without more precision and definition, the commandment that public officials refrain from depriving another of honest services is undeniably vague. So much so that courts constantly struggle to define what constitutes ‘dishonest services.’ But statutes should not be written so as to be understood by judges, legislators, lawyers, and law professors, but for the citizens against whom they may one day be applied. Thus, the question here is whether a reasonable person in the position of these defendants would have known that by doing what he was being asked to do would violate the federal honest services statute?

“The defendants are City government employees. Three are City employees who were also members of the City’s pension fund board of directors. The other two defendants held positions as administrator and general counsel for the City pension fund. The defendants, along with other board members, approved a proposal dreamed up by the City Council of the City of San Diego. The proposal came to be known as ‘MP2’ or ‘Manager’s Proposal 2.’ The City manager’s office fashioned the scheme because with the value of the pension fund sinking, the City would have to pay millions of dollars into the pension fund while struggling under an already cash-strapped City budget. So, the City looked for a way to avoid immediately replenishing the pension fund. It decided to do what it had done before. ‘Manager’s Proposal 1’ had been used in 1996 to lower the trigger point for replenishing the pension fund. MP2 proposed to lower the trigger point further. A lower trigger point would give the City much needed time in the hopes that future years would bring healthier budgets. Of course, a lower trigger point would also mean a higher risk of pension fund insolvency.

“To make MP2 more attractive to the pension fund board, the City also offered an increase in future pension benefits for City employees. The pension benefit increases were conditioned upon the pension fund board approval of MP2. The whole package was then pitched to the pension fund board. In hindsight, it was a bad fiscal idea. Although the indictment alleges MP2 was the defendants’ idea, if it was a bad idea, it was the City’s bad idea first.

“Here, while the effect of a bad decision might be the impetus for prosecuting, it is the manner of making the bad decision that federal prosecutors find criminal. In this case, the defendants are accused of scheming to deliver dishonest municipal government services, by failing to disclose conflicts of interest while voting as pension fund board members on MP2. In other words, it is not the voting which prosecutors find criminal. Nor is it the substance of the proposal which prosecutors find criminal. It is the failure to disclose some alleged conflict of interest which prosecutors find criminal.

“To be clear, when our public officials misuse their positions for pure self-enrichment or to flout the law, they deserve to be prosecuted. However, these defendants are not being charged with accepting a secret bribe, or taking an under-the-table kickback, or extortion, or directing a City contract to a family-run business. Nothing of that sort. The allegedly dishonest services have to do with voting to approve a City proposal which would lead to enhanced retirement benefits for City employees. The retirement benefit enhancements would, in turn, also improve the defendants’ own City retirement benefits, since the defendants are City employees (i.e., the conflict of interest).

“Failing to disclose a material conflict of interest has been held to be a violation of the honest services statute. Here, the conflict of interest was hardly undisclosed. Other members of the pension fund board knew it. The City Council knew it, and therefore, the public knew it. Worse, the alleged conflict of interest, such as it is, was thrust upon these defendants by virtue of their positions on the City payroll and the City Charter which controlled the makeup of the board. The actual text of the honest services fraud statute, which defendants are accused of violating, mentions nothing about disclosures of conflicts, what qualifies as a conflict, or how to be sure a conflict is properly disclosed.

“From reviewing the indictment and holding hearings over the past three years, it is clear that the vagueness of the federal statute has failed to give these defendants fair warning that their conduct could violate the federal mail and wire fraud statutes. Even assuming for the moment that the defendants did have a conflict of interest under federal law, it is not simply having the conflict that is unlawful. Instead, it is having a conflict and failing to disclose the conflict that is illegal. Here, even a casual observer can see the conflict inherent in asking a City employee to vote on a proposal tied to improving future City retirement benefits. So, what is the conflict for these defendants to disclose? Surely, other members of the board at SDCERS already knew which members were City employees and would benefit from an increase in City retirement benefits. Did the defendants have to disclose the fact that they were City employees wearing board member hats? Did they have to make the same disclosure at every meeting of the board? Is it sufficient that a public official note the conflict at the time of the vote? In advance? Must the conflict be well publicized, or will a notation in an obscure public record suffice? It is not evident from the statute or the indictment where the defendants crossed over the federal line into criminal conduct.”

U.S. v. Saathoff, 2010 WL 1406327 (S.D. Cal. 2010).

This article appears in the July 2010 issue