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The Recorder

JAMS Loses Bid to Avoid Trial on Resume-Padding Charges

by Scott Graham

The doo-doo is getting deeper for JAMS in a false advertising dispute with a disgruntled client.

A San Diego Superior Court judge on Friday cleared venture capitalist Kevin Kinsella’s suit against JAMS and neutral Sheila Prell Sonenshine for trial, saying neither judicial immunity nor the state’s litigation privilege bar claims that Sonenshine oversold her credentials to drum up business.

“The jury is going to love this case,” Judge John Meyer said following a spirited hearing at which he confirmed his tentative order denying summary judgment. The trial is expected to begin in late April or early May.

The case could make law on how careful alternative dispute resolution neutrals — or to hear JAMS tell it on Friday, full-fledged judges — have to be when making their biographies available to the public.

Kinsella and his attorney, Bryan Vess, allege that Sonenshine and JAMS falsely represented Sonenshine, a retired appellate justice, as a lawyer and entrepreneur who co-founded an investment bank and founded a private equity fund. There was no private equity fund, they allege, and JAMS failed to disclose that the investment bank paid $41 million to settle a shareholder class action. Kinsella, who is unhappy about Sonenshine’s handling of his marital dissolution, is seeking to recover about $100,000 in neutral fees plus $1.5 million he paid to his family law attorney and other providers.

“This proves that fraud claims can apply to these retired judges as they do to anybody else,” Vess said after the hearing.

JAMS issued a brief statement saying it has the utmost respect for the judicial process. “We look forward to participating in the next phase of the process in order to make the facts of the case clear and to bring an end to the matter,” the statement said.

Long & Levit partner Joseph McMonigle argued that Sonenshine and JAMS should be shielded by California’s judicial immunity law because Sonenshine was acting as a privately compensated temporary judge under a provision in the California Constitution. Under the logic of Kinsella’s claim, he argued, litigants unhappy about courtroom outcomes could sue superior court judges, alleging that they would have brought Rule 170.6 motions to disqualify them but for some alleged puffery supplied in their judicial biographies. “I dare say your honor would rule that that was within the judicial immunity,” McMonigle said.

Meyer seemed to hesitate for just a moment. “It’s an interesting argument you’re making,” he said. But Sonenshine’s online bio on JAMS has no connection to Kinsella’s divorce case, the judge reasoned. And he appeared to suggest that a judge could indeed be sued for claiming summa cum laude status in law school if that were provably false.

Perhaps most ominously for JAMS, Meyer ruled that the Fourth District Court of Appeal has already made law of the case on several points with its previous ruling on JAMS’ anti-SLAPP motion. The appellate court ruled that Sonenshine’s online bio is advertising that contains factual representations, not nonactionable opinion or hyperbole as JAMS had contended. “Law. Of. The. Case,” Vess repeated throughout his argument.

Kinsella is the founder of La Jolla-based Avalon Ventures. He said he agreed to have Sonenshine preside over his marital dissolution after reading her JAMS bio and being impressed with her business background. After appearing before the judge several times, Kinsella began making repeated attempts to recuse her. Sonenshine eventually withdrew after issuing a temporary spousal support order.

JAMS casts Kinsella as an implacable litigant who has waged “an unrelenting campaign” of harassment against any jurist who might rule against him. During the dissolution proceedings, he hired a private investigator to scour Sonenshine’s personal and professional background, including contacting her law school and former bank employees, JAMS says. He also forced the next judge assigned to his dissolution to recuse as well. When JAMS filed an anti-SLAPP motion that was heard by the court of appeal, he tried to disqualify the appellate judges and filed a federal civil rights suit against Fourth District Administrative Presiding Justice Judith McConnell. McConnell ended up writing the favorable opinion that Vess quoted in court Friday.

JAMS and Sonenshine argued they are entitled to judicial immunity because Sonenshine was performing a judicial function. But Meyer ruled Kinsella isn’t challenging any judicial acts. “In making the statements on the website, defendants were not exercising their judicial functions or performing dispute resolution services,” Meyer said in his tentative order.

JAMS and Sonenshine further contend they’re shielded by California’s litigation privilege, which bars lawsuits based on statements made during litigation. JAMS said its website was created “for litigation purposes,” and in any event the privilege extends beyond the courtroom to third parties such as forensic testers.

But Meyer wasn’t having that either. To qualify for the litigation privilege, he wrote, the statements have to be connected to the litigation. The statements in Sonenshine’s bio “were made to sell defendants’ services to litigants at large,” he wrote in his tentative ruling.

Kinsella said he was pleased by Friday’s ruling. “I want my rights respected and I want her false resume taken down,” he said. Conferring immunity on JAMS “would mean that every ADR neutral could bald-face lie on their resume with impunity.”

Daily Journal

JAMS says it can’t guarantee accuracy of information on its website

Daily Journal

Venture capitalist’s suit against JAMS opens


The San Diego Union-Tribune

Law firm responds to ‘fugly’ allegations

by Jeff McDonald

A law firm that represents more than 40 San Diego County school districts made a fuller defense of its practices on Wednesday, saying that it could respond to allegations now because the San Ysidro School District has lifted its attorney-client privilege by suing.

San Ysidro filed a malpractice suit against Stutz Artiano Shinoff & Holtz on Tuesday.

The district says the firm failed to communicate settlement offers that would have ended a breach-of-contract case filed by solar company EcoBusiness Alliance before it resulted in a $12 million judgment.

The district’s lawsuit spurred the county Office of Education to suspend case assignments to the Stutz law firm until the matter is resolved.

The malpractice lawsuit claims the motivation to avoid settlements was a fraudulent intention to drive up legal bills on the lawsuit, which reached $1.3 million.

The firm issued a statement to U-T Watchdog on Wednesday denying each of the allegations.

“At every stage of this matter, there were discussions with the client concerning all case aspects, including settlement,” attorney Ray Artiano said in the statement. “In addition, the EcoBusiness case was on the closed session agenda on multiple occasions for consideration by the board.”

As proof that it communicated all settlement officers, the firm released a February 2013 letter it sent to the district analyzing details of a settlement offer in the case at that time.

The 15-page lawsuit filed on Tuesday in San Diego Superior Court accused the law firm and partner Daniel Shinoff of fraudulently defending the claim from EcoBusiness Alliance, which was hired to install solar-power systems on district campuses.

According to the lawsuit, Shinoff wrongly told his clients that the company was unwilling to settle, that the district had no choice but to prepare for trial, and that the district was likely to win in court or on appeal.

The lawsuit said Shinoff knew the district’s defense was all but certain to lose, and he did little or nothing to limit his client’s exposure to the original $18.9 million claim.

After a meeting with the solar company, the lawsuit says, Shinoff allegedly said “it not only looked ugly for his client, the district, but that it looked ‘fugly.’”

The lawsuit claims that comment represented acknowledgement by Shinoff that San Ysidro was likely to lose the case.

Artiano — the Stutz Artiano Shinoff & Holtz managing partner — said in his statement Wednesday that the lawsuit was wrong on every major point, including its description of that meeting.

Artiano also said the reference to “fugly” was “pure and utter fiction” and completely mischaracterized. “What Mr. Shinoff told plaintiff’s counsel is that the ridiculous accusations which they were making were ‘ugly’,” Artiano said.

Attorney Bryan Vess, who filed the malpractice suit on behalf of the district, said several San Ysidro trustees have stated that they were unaware of specific developments in the case, such as settlement offers.

“Members of the board have already testified under oath that they were not apprised of key information,” Vess said. “The district’s gatekeepers did not do their job. They appear to have allowed their own interests to come before the district’s.”

EcoBusiness Alliance signed a contract with the district in 2008 to build solar power systems on San Ysidro campuses. The district canceled the agreement in 2011, alleging the company had not performed.

In its subsequent lawsuit, EcoBusiness Alliance accused district officials of canceling the contract because company officials would not participate in a “pay-to-play” culture in which numerous contractors paid district officials to secure work from the district.

The San Ysidro School District operates seven campuses that serve about 4,800 students mostly from lower-income families living north of the U.S.-Mexico border. District officials have struggled to balance their budget in recent years, cutting services and positions and prompting a teachers’ strike last year.

Stutz Artiano Shinoff & Holtz represents almost all of the 42 public school districts in San Diego County. The firm also represents the county Office of Education’s joint-powers authority or JPA, which administers a pooled liability program that includes legal services.

The authority has directed 70 percent of its legal work over the past three years to Stutz Artiano Shinoff & Holtz, for $4.6 million in fees. Authority executive Diane Crosier, who formerly worked for Shinoff, earlier this week suspended his firm from receiving new county cases due to the malpractice claim.

Artiano said his firm received most of the county schools’ legal work because of Shinoff’s experience and track record.

“He is an excellent and tireless advocate for his clients,” Artiano said. “This is the precise reason why the firm received most of the work for the JPA. We are proud the clients have enough confidence to place their trust in Mr. Shinoff and our firm to handle their work.

In August, a judge reduced the $12 million jury verdict in the EcoBusiness Alliance case against San Ysidro to $8.6 million in damages.

A new school board was seated after the November elections, and trustees last month announced a tentative settlement of the case. A formal agreement is being drafted and will be considered by the school board as soon as next month.

In addition to seeking unspecified general damages, the malpractice case is seeking punitive damages, recovery of fees paid to the law firm, triple the cost of wrongly billed invoices and attorney fees and related expenses.


Firm Ran Up $1.3M Bill On Case It Called ‘Fugly,’ Suit Says

By John Kennedy

Law360, New York (March 20, 2015, 6:09 PM ET) — A California school district has told a state court that its former counsel at Stutz Artiano Shinoff & Holtz took an unwinnable case over a solar power agreement to trial and ran up $1.3 million in attorneys’ fees even though a named partner told the district’s opponent that his chances of winning were “fugly.”

The San Ysidro School District claims in a complaint filed Tuesday in San Diego Superior Court that Stutz Artiano, which represented the district in a lawsuit brought by EcoBusiness Alliance LLC over an allegedly improperly terminated contract, hid settlement offers and misrepresented the district’s chances of winning while losing the district $8.5 million.

“The firm knew that the representations were not true, but nevertheless intended that the district would rely on them,” the complaint said. “The district now believes that defendants made the representations in an effort to induce it not to settle and, as a result, to pay increased fees to the defendants.”

According to the complaint, the district and EBA agreed to a solar power generation agreement that allowed the company to install solar equipment on school property. The district agreed to buy the solar power for 25 years at a cost of about $18.9 million.

About three years later, the firm, representing the district, contacted EBA, claiming the company had abandoned the project by failing to begin construction within 15 months as it had agreed, the complaint says.

EBA called a meeting with Stutz Artiano partner Daniel R. Shinoff in February 2012 and presented evidence it said showed Shinoff was incorrect — that it had started work and the contract had been improperly terminated.

At that time, EBA made a settlement offer to accept reinstatement of the wrongly terminated contract, the complaint says.

It was during this meeting that Shinoff told EBA that given the evidence they’d presented, things looked “fugly” for the district. A footnote in the complaint notes the definition of “fugly” as “very ugly; extremely unattractive.”

The complaint claims Shinoff told EBA he would meet with the district and report back. He did neither, the district claims, and the firm proceeded as if the contract were properly ended. EBA then sued the school district.

The district says the firm responded to the lawsuit with a cross-complaint that was “ill-advised” and “eventually dismissed for lack of evidence to support it.” The district says the firm didn’t seek consent before filing the cross-complaint.

The complaint says that by 2013, “it was clear that the district’s case was not going well,” and that it had $19 million to lose and “very little to gain,” because as a single-purpose entity, EBA’s only asset was its contract with the district.

“For the district, there was no upside,” the complaint says.

When EBA moved for summary judgment on the cross-complaint, it made another attempt to settle, writing the firm and proposing two settlement options and mediation while expressing doubts that Shinoff had ever discussed the original settlement offer with the district, the complaint says.

Shinoff told EBA that he would need to bring the proposal to the district board, but that they wouldn’t meet before the proposal’s deadline. The complaint says that not only did Shinoff keep this second offer to himself, but that board was scheduled to meet two weeks before the deadline and one of its agenda items was discussion of the EBA proceedings.

A trial began in January 2014 and resulted in a jury judgment awarding EBA $12 million in damages. The trial court gave EBA the option to reduce the verdict to $7.4 million, and EBA agreed to the remittitur. An amended judgment for a total of $8.6 million, including court costs and attorneys’ fees, was made in August 2014.

Neither party could be reached for comment Friday.

San Ysidro School District is represented by Bryan C. Vess, Attorney at Law.

Counsel information for Stutz Artiano Shinoff & Holtz was unavailable.

The case is San Ysidro School District v. Stutz Artiano Shinoff & Holtz, case number 37-2015-00009253-CU-PN-CTL, in the Superior Court of the State of California, County of San Diego.

–Editing by Richard McVay and Mark Lebetkin.


The American Lawyer

Three Firms Came to San Diego to Sift Through the Rubble of the City’s Pension Crisis–and All Three Ended up as Litigation Targets | How Routine Investigation Work Turned Into Risky Business

By Ross Todd

There was a time, not so very long ago, when the city of San Diego was a perfectly good client for Orrick, Herrington & Sutcliffe. Orrick was San Diego’s bond counsel, and had been for years, billing the city $1.4 million over half a decade. Then in 2003 some questions-doubts, really-arose about the city’s disclosures in a bond offering statement. Orrick tried to address the questions, but as it did, more problems came to light.

So San Diego brought in a second law firm, Vinson & Elkins, to conduct an investigation and prepare a report on the city’s financial disclosure practices. V&E also agreed, with the endorsement of the city attorney, to represent San Diego before the Securities and Exchange Commission, which had begun its own investigation. For its work on these critical matters, V&E billed the city $6 million.

But then the city’s outside auditors complained about V&E’s dual role. So a third law firm, Willkie Farr & Gallagher, entered the picture. Willkie helped outside consultants prepare another report on San Diego’s disclosures, for which it billed $9.75 million.

All three law firms have since been sued by the city of San Diego. From Orrick and other professionals who worked on its bond offerings the city demanded $100 million; from V&E, more than $10 million; and from Willkie, $9.75 million plus treble damages.

V&E settled the city’s suit in June for $3.25 million. Orrick settled the following month for $2.8 million. Both firms’ payments are covered by insurance, and were widely considered to be less than the firms would have spent to defend themselves, a small irony for firms that are more used to sending bills than paying them. Willkie, the last firm to wade into San Diego’s bond morass and the last to be sued, has so far refused to settle.

Whether Orrick, V&E, and Willkie deserved the beating they’ve taken in San Diego is a matter of debate. There are no scandalous instances of malpractice in this story, nor even obvious mistakes committed by the firms. But the three had the very bad luck to run into a maverick of a client who made them part of his crusade. In 2004 a new city attorney was elected in San Diego, by a margin of less than 1 percent. Michael Aguirre, a former plaintiffs class action securities lawyer, billed himself as a fighter: the People’s Lawyer. During the election he vowed to get to the bottom of San Diego’s billion-dollar pension fund problem, no matter who was to blame.

The grandson of a prizefighter, Aguirre has since thrown a lot of punches. In his four years as city attorney he’s called the mayor corrupt. He’s challenged some city retirement benefits in court. He’s even questioned the legality of the city’s method of controlling the squirrel population in Balboa Park.

And it was Aguirre who spurred the city’s suits against the three firms. Aguirre says the suits, handled on contingency by private plaintiffs lawyers, have been a success, netting the city millions of dollars.

For law firms, then, this is a cautionary tale. There’s always an element of danger in representing a client in trouble, always a chance that the finger of blame will end up pointing at the lawyers. But add the vagaries of local politics-and a maverick like Aguirre-and a valued client can become a bitter adversary.

Orrick’s problems in San Diego started with an e-mail. In early September 2003, Diann Shipione, a trustee on San Diego’s pension board, sent an e-mail to city officials, bond underwriters, and others, pinpointing an error in a footnote in a draft of an upcoming wastewater bond issue. The city, Shipione wrote in follow-up e-mails, was not properly disclosing its pension obligations, which were mounting as a result of two deals that increased future retirement benefits for union members in exchange for allowing the city to delay full funding of those benefits.

The day he received Shipione’s first e-mail, Orrick partner Paul Webber, a longtime bond and disclosure lawyer for the city, called San Diego’s assistant city auditor. Webber had never met Shipione, but he respected her position as a board member. He urged the city official to investigate Shipione’s assertions fully. (Webber did not comment for this article, which is drawn from reports and interview notes prepared by V&E and Willkie Farr.)

As Webber and his team at Orrick examined San Diego’s bond disclosure and financial statements, they found more errors. A week after Shipione sent her first e-mail, Webber proposed that the city disclose a pension fund deficit of $1 billion.

Webber’s push to correct disclosure mistakes met resistance. The city treasurer, for instance, called Webber’s billion-dollar disclosure proposal “OVERKILL” in an e-mail to a colleague. City staffers regarded Shipione as a gadfly, constantly harping on the pension board’s dealings.

Still, Webber refused to sign off on the planned wastewater bond offering statement until errors in all of the city’s financial statements were rooted out. In fall 2003 the city went about the painful process of looking for inaccuracies in nearly a decade’s worth of financial statements and bond issues, some of which Orrick had previously approved.

In Webber’s view, the mistakes investigators found did not constitute a pattern of intentional concealment; rather, they seemed to be due to mental lapses and clerical errors. Webber did not consider any single disclosure lapse to be material, but he believed the volume of errors demanded disclosure.

The process hurt the relationship between Orrick and the city. According to Vinson & Elkins’s report, Webber expressed concern that the city had withheld relevant information from him. The city treasurer disagreed. On January 26, 2004, the treasurer wrote an e-mail asking, “When have we hidden anything from Orrick? . . . I think we all need a rest from each other.”

The next day, with Orrick’s help, the city filed a statement with the four SEC-recognized municipal securities information repositories. The disclosure stated that if the city did nothing to change its funding of benefits, the pension fund would face an unfunded liability of $2.4 billion by June 2011. The ratings agencies promptly downgraded San Diego’s credit rating, and, as the city was frozen out of the bond market, Orrick’s work for San Diego ceased.

In early February 2004, assistant city attorney Leslie Girard called Vinson & Elkins partner Paul Maco-who was already advising city officials on the creation of a bond investors’ Web site-and asked him to come to San Diego to look into the city’s disclosure practices. The city announced the hiring of Maco, the founding director of the SEC’s Office of Municipal Securities, in a one-paragraph press release February 12.

Within two days, San Diego learned that both the SEC and the U.S. attorney’s office had launched inquiries into its disclosure problems. The city hired Maco and V&E to represent it before the SEC, as well as continue to conduct an internal investigation.

Almost immediately, some city officials raised questions about V&E’s dual role as investigator and SEC counsel. Then-city attorney Casey Gwinn asked Maco about it in an e-mail. Maco replied in a February 16, 2004, e-mail: “We see no conflict in our serving in both the report capacity and as your SEC lawyer; rather, it is complementary and will avoid doubling up cost.” (V&E’s correspondence is cited in reports by the city attorney’s office and Willkie Farr.)

V&E promised to produce a “warts and all” report about the city’s disclosure practices. Eight months after it was hired, on September 16, 2004, the firm issued a 280-page report. It concluded that while San Diego’s disclosure system was flawed, it was “difficult to attribute [errors to] intentional misconduct on the part of individual employees.” V&E did not say directly whether Orrick took appropriate action, though the firm’s account makes it clear that Orrick pushed the city to disclose mistakes.

V&E’s study was greeted with great fanfare. Mike Aguirre, then a candidate for city attorney, lauded the firm’s work, telling The San Diego Union-Tribune that it was “the best version of the facts we’re likely to see.”

Aguirre would soon take a dramatically different position.

Aguirre’s e n in November 2004 complicated an already tense relationship among the city, Vinson & Elkins, and San Diego’s outside auditor, KPMG L.L.P. KPMG, which replaced the city’s previous accountant in April 2004, ended up at odds with V&E. The auditor wanted V&E to produce an “illegal acts” report that determined whether San Diego faced legal liability for the disclosure lapses. V&E complained that KPMG was not clear about the parameters of the investigation.

Despite the praise that greeted V&E’s September 2004 report, KPMG was not satisfied. The report, it insisted, fell short of the “illegal acts” standard. In October 2004, after complaints from KPMG, V&E partner Maco wrote a letter to assistant city attorney Les Girard, insisting that KPMG’s demands would have forced V&E to “speculate on an unbounded universe of unasserted claims.”

But KPMG said the problem was V&E. Its lead auditor in San Diego, Steven DeVetter, urged the mayor and the city manager to fire the firm. “Conducting the kind of investigation that is necessary may be in tension with V&E’s ongoing representation of the city in the pending SEC investigation,” DeVetter wrote. KPMG said it would not release the city’s audit results unless San Diego conducted an investigation it deemed adequate. And without KPMG’s audit, San Diego could not issue bonds to fund overdue road and sewer improvements.

Aguirre quickly abandoned his initial support for the V&E report. He joined a chorus of critics, including pension board member Shipione, who decried the report because it did not hold individual city employees and officials culpable. Aguirre promised to conduct his own investigation to fulfill KPMG’s needs.

Aguirre enjoys wading into a fray. Former opponents who faced him when he was in private practice describe him as fierce. “[Aguirre is] a little bit like a bulldog that grabs a hold of your pant cuff,” says former adversary Charles Dick, Jr., a partner in Baker & McKenzie’s San Diego office. “You’re not going to shake him loose.”

Aguirre released a string of what he termed interim reports on the pension deals and the disclosure errors. In the second report, released in February 2005-a little more than two months after Aguirre took office-the new city attorney concluded that “there is substantial evidence consistent with a finding that the mayor and city council engaged in civil violations of federal securities laws.”

KPMG, however, still refused to release the city’s audit. Aguirre’s report wasn’t independent, the auditor argued. KPMG told the city that it needed someone to “take ultimate responsibility for the oversight and completion of an adequate investigation.”

That demand eventually brought Willkie Farr & Gallagher to San Diego.

on Valentine’s Day 2005, San Diego’s city council voted to hire Kroll Inc., the financial investigative agency, to evaluate the V&E and Aguirre reports and make recommendations about how to satisfy KPMG. A few weeks later, under pressure from the SEC, the city council authorized Kroll to act as San Diego’s outside audit committee-giving it the power to hire its own outside lawyers.

Kroll turned to lawyers in the New York office of Willkie Farr, in part because of their relationship with former SEC chair Arthur Levitt, Jr., a member of Kroll’s team in San Diego. Willkie’s lead lawyer on the matter was Benito Romano, a former U.S. attorney for the Southern District of New York.

When it began its work in February 2005, the Kroll team-led by Levitt and former SEC chief accountant Lynn Turner-expected to be in and out of San Diego in three months. It ended up staying a year and a half, as the investigation was beset by delays and grew in scope. Desperate for KPMG to release the fiscal year 2003 audit, the city council kept paying Kroll’s bills and waiting for it to finish its report.

The city attorney, however, went on the offensive. In May 2005 Aguirre released his fourth interim report. In it, he questioned whether New York-based Willkie lawyers who were not licensed in California should be offering advice about San Diego’s potential liabilities. He also railed against the bills that Kroll and Willkie submitted. Their invoices, he said, did not delineate tasks performed by individual lawyers and consultants.

Kroll and Willkie argued that the bills were structured to protect the integrity of the investigation and shield witnesses. Aguirre and Levitt sparred publicly at city council meetings over the bills, the cost of the car service Levitt used, and the alleged lack of cooperation by Aguirre’s office with Kroll investigators. Aguirre scorned Levitt, whom he calls The Music Man. “Instead of selling the boys and the band,” Aguirre says, “he came to San Diego selling instantaneous integrity.”

Retorts Levitt: “[Aguirre] wanted to be the salvation for the city. He regarded us as outsiders and did everything he could to impede our efforts.”

Kroll and Willkie eventually billed the city more than $20 million over the course of 18 months. Their report-265 pages, with 17 appendixes and 1,305 footnotes-was released August 8, 2006. It concluded that 35 individual city officials were culpable, either for unlawful financial disclosures or for breaching their fiduciary duty to the city’s pension board. The report, at last, satisfied KPMG. San Diego, which signed an SEC consent decree later in 2006, finally returned to the bond market this spring.

But that did not mollify Aguirre. The city attorney had been busy with a state court suit to recoup more than $600 million in pension benefits from union members, claiming that the deals that enhanced union pension benefits had been reached illegally. After six amended complaints and a monthlong trial, Aguirre lost the case on procedural grounds; the judge ruled in part that subsequent deals made it impossible for the city to roll back benefits to retirees. (Aguirre’s appeal of the trial court ruling awaits a decision from the California Court of Appeal.)

Beginning in November 2005, however, Aguirre also went after the advisers who counseled the city before and during the bond crisis. At the top of the list were three targets with sizable insurance polices: Orrick, Vinson & Elkins, and Willkie Farr.

The city council was reluctant to authorize the expense of suing its onetime advisers. Drawing on his plaintiffs bar experience, Aguirre hired two local lawyers-Dan Stanford and Bryan Vess-to take the cases on contingency. Don McGrath, Aguirre’s number two and a former Baker & McKenzie partner, would oversee the outside attorneys.

The contingency fee approach drew the ire of the Union-Tribune’s editorial board and provoked questions from Aguirre’s political rivals. But McGrath is quick to defend it. “We’re applying private law firm instincts to government,” he says. McGrath, who defended securities cases prior to signing on with the city, is an unlikely lieutenant to Aguirre. While Aguirre has framed black-and-white photos of Franklin Roosevelt and Robert Kennedy hanging in his office, McGrath’s wall features a picture of Ronald Reagan. “My concept, coming out of Baker & McKenzie, was to run [outside litigation] like a business,” says McGrath, dressed, San Diego-style, in a Hawaiian shirt, jeans, and sandals.

Orrick was the first law firm to be sued by the city. In November 2005, Vess and Stanford filed suit against Orrick and a group of bond professionals who worked for the city from 1996 to 2002. They were accused of negligence, breach of fiduciary duty, and breach of contract. “[Orrick] possessed for many years all the information one would need (certainly more than Ms. Shipione had at her home) to know that the disclosures regarding the status of the city’s pension system were false,” the complaint says. “Yet, it was only after Ms. Shipione raised the serious misstatements in the investment documents that the professionals acted.”

Was Orrick responsible for the disclosure failures? Former city employees insist that the suit was justified. San Diego, they say, lacked internal disclosure expertise and relied on outside experts. If the city made a mistake, says outgoing city council president Scott Peters, it was in trusting its advisers to do their jobs.

But other outside bond lawyers say that the ultimate responsibility for disclosure decisions lies with the issuer, in this case city officials. Moreover, retiree benefits were just beginning to hit the radar screen of municipal bond counsel at the time of San Diego’s disclosure crisis, says Blake Wade, the chairman of the public finance department at Ballard Spahr Andrews & Ingersoll. (Ballard Spahr is not involved in the San Diego litigation.)

And Orrick began pushing the city to correct its mistakes and disclose its pension deficit as soon as it received the Shipione e-mail, as documented by both the V&E and Kroll reports. “Hindsight is a wonderful thing,” says Wade. “It’s easy to say you should have anticipated this after the fact.”

Orrick’s lawyers at Munger, Tolles & Olson called Aguirre’s suit “a new chapter in the annals of blame-shifting by government officials.” It was the city, Munger said, that had created a “fiscal time bomb” by making deals that increased employees’ pension entitlements while reducing funding for them.

Nevertheless, Orrick settled with the city in July for $2.8 million. The amount was paid entirely from the firm’s insurance policy. On the day of the settlement, a spokesperson for the firm said, “We are proud of the work we performed for the city of San Diego, and we’ve consistently maintained from the beginning that Orrick acted with highest ethical standards and in the best interest of San Diego.”

Aguirre apparently forgave all, or at least nearly all: In a press release announcing the settlement, he said, “I would certainly have no objection to city management retaining Orrick for future bond counsel work. . . . We have always known that Orrick is an excellent firm and has generally served the city well for more than 30 years. I brought this lawsuit because I believed Orrick should have discovered the pension problems earlier than it did in September 2003.”

In October 2006 Vinson & Elkins became the second large law firm to be sued by San Diego. The complaint that Vess and Stanford filed accused V&E of breach of contract, breach of fiduciary duty, and professional negligence.

At the center of the city’s case against V&E was the firm’s dual representation: Should V&E have agreed to represent the city before the SEC while at the same time conducting the internal investigation? That, says Deborah Rhode, the director of Stanford Law School’s Center on Ethics, is a difficult question. “The rules [about internal investigations] are still evolving,” Rhode says. “I think that there are difficult boundary calls.”

V&E’s case for taking on both assignments was compromised by the Kroll report, which concluded that V&E partner Maco “dismissed the resulting concern” about the firm’s dual roles of investigator and counsel. Still, many city employees and lawyers involved in ongoing pension-related cases maintain that the V&E report remains the most complete version of the facts.

V&E’s defense lawyers at Quinn Emanuel Urquhart Oliver & Hedges and Kirby Noonan Lance & Hoge had three expert witnesses who were prepared to defend the firm’s conduct if the case went to trial, but V&E ultimately settled the suit in June. To resolve the city’s claims, as well as its own countersuit for $1.1 million in unpaid fees, V&E agreed to pay San Diego $3.25 million, which was covered by insurance. A V&E spokesperson called the settlement “a business decision.”

And then there was one. Aguirre first threatened Kroll and Willkie in a statement in April 2006, when he released his eighth interim report on the disclosure crisis. “Kroll and its legal partner, Willkie Farr & Gallagher, have breached their legal duties to the city of San Diego,” Aguirre said. “I am recommending to the mayor and city council that litigation be initiated to recover financial losses and terminate the existing contract with Kroll.” Responds Levitt, who was reached by phone: “His whole strategy is to sue first and think later.”

In part because of a nearly lawsuit-proof contract with the city, Aguirre has not sued Kroll. But in 2007 he told Vess to go after Kroll’s lawyers at Willkie Farr. The city’s case, filed that March, rests largely on the premise that the Willkie lawyers who conducted the Kroll investigation were not authorized to practice law in California.

But Aguirre has larger philosophical concerns about farming out government investigations to the private sector. Such work, he says, should be done by the SEC and, when appropriate, elected government attorneys. Firms that perform sweeping probes like San Diego’s have “privatized a public function, and they’ve abused it,” he says. “[It] makes government the minor leagues for the big outside firms.”

Willkie hired San Diego lawyers at Luce, Forward, Hamilton & Scripps to defend the firm. Luce partner Edward “Pat” Swan, Jr., says that Willkie deserves praise, not a lawsuit. “What did Willkie Farr do?” he says. “Their report satisfied KPMG. KPMG finally issued its audit. . . . The city got back in the capital markets. That alone is a great accomplishment.” Since Willkie was representing Kroll (the city’s outside audit committee) the city was not Willkie’s client and has no standing to sue for malpractice, Swan argues. Moreover, Willkie included an indemnification clause in its engagement letter with Kroll and the city. (As of September 30, Luce, Forward had sent the city more than $750,000 in bills, but none have been paid.)

Unlike Orrick and V&E, which had their cases transferred out of town, Willkie kept its case in San Diego. Luce, Forward is playing a waiting game, filing motions likely to keep the case tied up until well after this month’s city attorney election, in which Aguirre faces a tough reelection campaign.

The city attorney, it turns out, is quite a divisive character. His opponent in the city attorney race, Jan Goldsmith, is a clean-cut, bespectacled state court judge with exceptionally good posture. Goldsmith has been meeting with deputy city attorneys near the waterfalls in downtown San Diego, incognito so Aguirre’s allies won’t spot him. He makes reservations at restaurants under the name “Tony” in his efforts to find out how the office operates and to get to know the city’s lawyers.

Goldsmith says he has not inquired about specific cases. But when asked about the Willkie suit, he says he’ll evaluate the case if he wins office. “If there’s a claim and a legitimate case, I’ll pursue it vigorously,” he says.

But don’t expect another interim report.


Fray by the Bay

San Diego’s pension scandal began with a single e-mail. Within five years, it had exploded into a multimillion-dollar litigation.

September 2003

Orrick’s Paul Webber receives a forwarded copy of an e-mail written by San Diego pension board trustee Diann Shipione pointing out an error in a footnote in a draft of an upcoming wastewater bond issue. Follow-up e-mails point out additional errors. Webber enlists city officials in reexamining past bond issues for more errors.

January 2004

San Diego files a voluntary disclosure of its pension fund liability with the four nationally recognized municipal securities information repositories. Credit agencies downgrade the city’s rating.Vinson & Elkins partner Paul Maco [left] comes to San Diego to investigate the city’s disclosure practices. V&E’s engagement letter says the firm will produce a “comprehensive review . . . not an advocacy document, but an objective ‘warts and all’ report.” Days later, Maco agrees to represent the city in an investigation by the SEC. The city retains Cooley Godward partner Mike Attanasio to represent it in an investigation by the U.S. attorney’s office.

April 2004

KPMG is brought in to audit the city’s 2003 fiscal year records.

September 2004

V&E files its first report, which finds systemic errors but concludes, “[It] is difficult to attribute [them to] intentional misconduct on the part of individual employees.” City attorney candidate Mike Aguirre initially calls the report “an indictment of the city attorney’s office. . . . The best version of the facts we’re likely to see.”

October 2004

KPMG tells the city that the V&E report failed to meet the standards of an illegal acts investigation and that KPMG will not sign off on the 2003 audit.

December 2004

Newly elected as city attorney, Aguirre announces a “separate and independent investigation into issues raised” in the V&E report. By February his first two reports claim that the city violated federal securities laws and that the mayor and city council members are likely culpable.

February 2005

The city hires Kroll Inc. to review and evaluate the findings of the investigations by V&E and Aguirre. Kroll later hires a Willkie Farr team headed by partner Benito Romano as counsel.

November 2005

The city sues Orrick and other bond professionals who worked on the city’s offerings from 1996 to 2002, alleging they should have caught the disclosure errors.

July 2006

The city sues V&E, alleging breach of contract, breach of fiduciary duty, and professional negligence.

August 2006

Kroll’s report is accepted by the San Diego city council. It cost more than $20 million and took 18 months to complete.

March 2007

The city sues Willkie Farr, alleging primarily that the firm should not have accepted work on the case because its lawyers were not licensed in California. The suit is ongoing.

June 2008

Vinson & Elkins settles with the city for $3.25 million, paid for by insurance, and forgives $1.1 million in unpaid bills. The firm admits no wrongdoing as part of the settlement.

July 2008

Orrick settles with the city for $2.8 million, paid for by insurance. As a part of the settlement, Orrick admits no wrongdoing and is put back on the city’s list of potential firms for bond issues.

Union Tribune

City Settles with Law Firm that Probed Pension Crisis

By Craig Gustafson

SAN DIEGO – Vinson & Elkins, the Houston-based law firm whose two-year investigation into San Diego’s finances was criticized as a whitewash, has agreed to settle with the city for $4.35 million. The firm would be the fourth to settle lawsuits related to financial and legal troubles from the city practice of increasing employee pension benefits while cutting funding for them.

City Attorney Michael Aguirre classified the settlement as a victory for his pension-related lawsuits, even though he had sought $10 million.

Vinson & Elkins, which also represented Enron, admitted no wrongdoing but agreed to pay back $3.25 million to the city and forgive $1.1 million in outstanding bills, Aguirre said. The City Council will vote Tuesday on the settlement.

The city hired the firm in December 2003 as a consultant with a $27,000 contract.

The firm’s duties quickly expanded and it was charged with investigating the city’s pension crisis and financial disclosure practices as well as representing the city before the Securities and Exchange Commission.

Critics said the firm had a conflict – an aggressive investigation into the city’s troubles would hamper efforts to defend the city against the SEC.

Officials eventually approved $6.3 million in payments to Vinson & Elkins for two reports that found no wrongdoing. KPMG, the city’s auditing firm, and the SEC deemed the reports unacceptable because of the conflict.

As a result, the city remained stuck in fiscal limbo until catching up on audits and regaining its credit rating this year.

Aguirre sued Vinson & Elkins in 2006. He accused the firm of incompetent work in failing to uncover problems, and of trying to exploit the city by asking for more money during a vulnerable time.

At the time, Aguirre said the firm’s failures led to three years of unfinished audits and forced the city to hire a second firm, Kroll Inc., to straighten things out.

Kroll, a New York-based risk-management firm, later charged the city $20 million for its investigative report.

Mark Curriden, a spokesman for Vinson & Elkins, said the firm would not discuss the settlement until the council approves it.

Aguirre said it was an accomplishment for the city to recoup as much as it could.
“We felt it was a very fair settlement,” Aguirre said.

The city won’t see all of that money. The city hired an outside attorney for reasons of staffing and expertise. The private attorney, Bryan Vess, worked the case on a contingency basis and will receive about a third of the settlement. Aguirre said the city’s portion will go to its general fund, which provides money for city services.

The settlement increases the total Aguirre has recovered from firms tied to the pension crisis to more than $10 million.

That money, Aguirre said, far outweighs the taxpayer dollars he has spent in his numerous pension lawsuits, which he pegged at $2.5 million for outside counsel. His estimate doesn’t include the hours he and his staff have put into those cases.

Aguirre’s critics often harp at the legal bills he’s racked up over pension issues, especially those related to a lawsuit where he is seeking to overturn $900 million in employee retirement benefits he considers illegal.

The benefits were approved in 1996 and 2002 at the same time city officials chose to put less money into the pension system. Those decisions led to today’s $1.2 billion deficit.

The disclosure issues Vinson & Elkins was hired to investigate stemmed from the city’s failure to properly disclose the deficit to investors when it borrowed money for projects, such as Petco Park.

The AmLaw Daily

Orrick Settles with San Diego for $2.8 Million

By Ross Todd

For the second time in little more than a month, an Am Law 100 firm has agreed to a multimillion-dollar settlement with the city of San Diego stemming from a city pension fund scandal. San Diego city attorney Michael Aguirre announced a $2.8 million deal with Orrick, Herrington & Sutcliffe at a press conference this afternoon.

Today’s settlement comes nearly three years after San Diego filed suit against the firm, charging it with failure to disclose the extent of the city’s pension debt while the law firm served as the city’s bond and disclosure counsel. Orrick won the work representing the city in 1992. From 1996 to 2003, the city’s unfunded pension debt ballooned to an estimated $1.7 billion.

“I brought this lawsuit because I believed Orrick should have discovered the pension problems earlier than it did in September 2003, at which time Orrick advised the City that its financial statements had failed to properly disclose the scope of the shortfall of funds in the pension,” Aguirre said in a statement released today.

Shortly after the city filed its lawsuit in November 2005, Orrick partner Lanny Davis, quoted in the San Francisco Business Times, described the move as “the epitome of gall.” The San Diego City Council’s own investigative report concluded that Orrick used “dogged effort” to pressure the city to come clean with the public about its pension debt, Davis told the paper. “Now the city council that failed to oversee its own finances is scapegoating Orrick and everybody else. What’s wrong with this picture?,” Davis said.

Orrick was represented in the case by Munger Tolles & Olson partners George Garvey, Stuart Senator, and Rick Drooyan. The city of San Diego turned to Bryan Vess and Dan Stanford, who handled the case on a contingency fee basis under the supervision of executive city attorney Don McGrath II. Of the $2.875 million settlement, the city will net about $1.87 million. “I have no notice of Orrick ever paying a settlement to a municipal client lest one of this magnitude,” Vess said.

Orrick has admitted no wrongdoing as part of today’s settlement. Indeed, the city announced that Orrick has been added to the city’s list of bond counsel firms for future offerings. “We are proud of the work we performed for the city of San Diego and we’ve consistently maintained from the beginning that Orrick acted with highest ethical standards and in the best interest of San Diego,” said firm spokesperson Allan Whitescarver. Whitescarver said two independent investigations commissioned by the city council found that Orrick did nothing wrong and the court dismissed the city’s original complaint. “At the request of our insurance carrier we’ve settled this matter with the city,” said Whitescarver, adding that insurance will cover the entire settlement amount.

Today’s settlement follows the announcement in mid-June that the city reached a $4.35 million settlement with Vinson & Elkins. V&E was hired to run an independent investigation of the city’s disclosure practices and to represent the city in an SEC investigation in the wake of the pension mess.

Another related case brought by the city against Willkie, Farr & Gallagher is pending. Willkie lawyers were brought in as a part of an additional investigation after the city’s auditors at KPMG rejected V&E’s initial investigation.

Union Tribune

Aguirre Announces Settlement in Pension Fund Dispute

By Matthew T. Hall

City Attorney Michael Aguirre announced a settlement with a law firm Tuesday that will net the city nearly $1.9 million after legal fees and expenses, continuing a string of successes in court against lawyers and financial firms that advised San Diego before and during its pension crisis.

The firm, Orrick Herrington & Sutcliffe, admitted no wrongdoing in reaching a settlement. Its insurance carrier will pay to settle the lawsuit, which was filed in 2005, alleging the advisers should have brought the city’s faulty pension disclosures to light earlier than they did.

Orrick, which served as the city’s bond counsel and disclosed the scope of the pension shortfall in September 2003, will still be eligible for city work in future bond offerings.

Private attorneys Bryan Vess and Dan Stanford worked the lawsuit on a contingency basis, collecting about $1 million.

To date, Aguirre has recovered $13.35 million from five firms that his office has sued for professional negligence. After expenses and legal fees, the city netted more than $9 million.

Voice of San Diego

Aguirre Nets Another Pension-Related Settlement

By David Washburn

San Diego City Attorney Michael Aguirre has settled another of his lawsuits against firms retained by the city before and during the pension meltdown.

Orrick, Herrington & Sutcliffe, the city’s former bond counsel, has agreed to pay $2.88 million to settle a case filed by Aguirre in 2005, which alleged that the San Francisco-based firm failed the city by not discovering problems with the pension fund sooner.

The city will net $1.88 million from the settlement after paying expenses and a contingency fee to outside lawyers Bryan Vess and Dan Stanford, who assisted in the case, Aguirre said.

In settling the case, the San Francisco-based firm admitted no wrongdoing. And Aguirre said he would not object to the city hiring Orrick, Herrington & Sutcliffe for future bond counsel work.

To date, Aguirre said he has recovered a net of more than $9 million from outside lawyers, accountants and consultants somehow involved in the pension crisis.



American Express Sued Over Trademark

By Erik Larson

A rival of American Express Co.’s small business division has filed a trademark infringement lawsuit claiming the finance giant fraudulently won a mark that devastated the plaintiff’s once-thriving company.

The lawsuit, filed by Small Business Network Inc., accuses American Express of illegally withholding knowledge of the plaintiff’s corporate name when it trademarked “Open: The Small Business Network.”

Filed on Jan. 22 in federal court for California’s Southern District, the suit also accuses American Express of unfair competition under the Lanham Act and unfair business practices under California law.

American Express adopted the “nearly identical” mark without performing any search for similar marks, including a search of its own customer database that would have revealed the existence of Small Business Network, the suit claims.

The San Diego area-based plaintiff claims American Express’ mark caused widespread confusion and led to a dramatic decline in sales, revenue and new members, which peaked in 2002 at 78,000 dues-paying businesses.

Nevertheless, Small Business Network could have a difficult time proving infringement since it didn’t apply for a federal trademark of its name until after American Express had done so.

The plaintiff filed its trademark application in September 2003, seeking to use the term for membership club services. However, it was rejected by the U.S. Patent and Trademark Office, which cited American Express’ then-pending application for the similar mark-in-question.

Undeterred, Small Business Network filed a petition to cancel American Express’ mark one year later with the USPTO’s Trademark Trial and Appeal Board, arguing the mark was likely to cause confusion.

In the petition, Small Business Network claimed American Express isn’t entitled to the mark because the smaller company had started using the term earlier and because the registration was obtained by fraud.

In its complaint, Small Business Network said American Express’ actions “have all but destroyed Small Business Network’s business and the value of its trademark,” but doesn’t mention a valid trademark for the allegedly infringed term.

The plaintiff’s attorney, Bryan C. Vess, declined to comment on what kind of strategy his client would use to prove rights to the trademark. An American Express spokesperson also declined to comment on the lawsuit, but confirmed the company was no longer using the trademark because it wasn’t received well by customers.

According to the suit, discovery in the USPTO action recently concluded and Small Business Network’s main brief has been filed, beginning the trial process. As a result of the ongoing action, the civil suit seeks only damages and an injunction, while cancellation of the mark will be sought from the trademark’s issuer.

American Express discontinued use of its mark in June 2005, but Small Business Network claims the company is still paying for a sponsored link for the term with Internet search giant Google Inc., ensuring Web searches for the term lead to American Express.

Small Business Network claims its previously successful telemarketing campaigns began to falter after American Express launched its competing unit, because potential customers thought the company was trying to pass itself off as its much larger rival and was therefore not a legitimate business.

The plaintiff has been using the term “small business network” in connection with business membership services since as early as March 1988, according to the suit, which claims the company became successful in 1996. Small Business Network, based in Coronado, Calif., was started by entrepreneur Dennis Walker in 1988 to offer discounted goods and services to small businesses with “varying success.”

Small Business Network is a unit of American Express Travel Related Services Company Inc. It offers business with fewer than 100 employees a range of tools and services, including access to capital and credit information, according to American Express.

The American Express unit’s Web site doesn’t use the entire mark on its homepage, focusing instead on the slogan “Open for Business.” The mark in question is also missing from the Web page dedicated to its trademarks. The “OPEN Network,” as American Express now calls the unit, has about three million customers.

The Small Business Network is represented in the matter by Bryan C. Vess APC.

The case is Small Business Network Inc. v. American Express Company, case number 3:07-cv-00185, in the U.S. District Court for the Southern District of California.



How Much Did Callan Cost Its Pension Clients?

By John F. Wasik

Sept. 26 (Bloomberg) — If your pension-plan consultant was recommending awful money managers, wouldn’t you smell something rotten?

Something sure stunk in San Diego, where Callan Associates Inc., one of the oldest and largest U.S. pension-consulting firms, allegedly monitored and approved money-losing managers for the city’s underfunded pension plan.

What 19,000 current and former city employees didn’t know is how much Callan, a San Francisco-based firm with revenues of about $42 million last year, received in side payments from money managers for various services.

The conflicts were described in recent court documents from a lawsuit that the city of San Diego filed against Callan.

“The evidence reflected in these filings shows several shocking breaches of duty by Callan,” said Bryan Vess, a San Diego-based attorney hired to represent the city.

Callan spokeswoman Ann DeLuce said in an e-mailed statement that “we remain confident that there is no merit in the claims made against our company. Many allegations are brought up during the process of a lawsuit; it doesn’t mean the allegations are true or have merit.”

Callan is among the biggest in an industry of more than 1,700 firms that are key gatekeepers between top money managers and trustees representing more than $7 trillion invested in pension funds.


In addition to providing advice to pension funds by suggesting advisers and monitoring performance, Callan also receives fees from more than 200 investment managers “managing approximately 74 percent of total U.S. industry assets” with 30 percent of its income coming from investment manager clients, the firm states on its Web site.

A separate suit filed by the city attorney against Callan and two other companies alleges Callan recommended that the city “employ investment managers from whom Callan received under-the- table fees that were not disclosed to the city.”

In these arrangements, sometimes known as pay-to-play, managers allegedly were recommended for pension-fund management by Callan if they spend from $16,000 to $50,000 to attend “colleges” or “institutes” or buy marketing services offered by the firm.

“The average, or middle-of-the-road manager, outperformed the (Callan-recommended) manager in 11 of 12 quarters, resulting in an opportunity loss of approximately $8 million,” the suit claimed of one underperforming manager cited in the complaint.

Disclosure of Fees

While the suit doesn’t provide a total tally of how much money managers paid the firm while the consultant was working with the San Diego fund, “Callan’s referrals to the San Diego fund of large-cap growth managers consisted entirely of candidates who had purchased services from Callan,” the city attorney’s suit claims.

Lax disclosure of the poor returns and the fees that managers paid Callan were cited in an independent report prepared by Kroll Inc. and overseen by former Securities and Exchange Commission Chairman Arthur Levitt Jr. Levitt is a board member of Bloomberg LP, parent of Bloomberg News.

Many of the companies managing the San Diego assets “had been or were engaged in business dealings with Callan, though the specific dollar value and precise nature of the business dealings were withheld,” the Kroll report stated.

Former Callan Executive Vice President Don Trone, now chief executive officer of the Foundation for Fiduciary Studies in Sewickley, Pennsylvania, testified in an Aug. 10 deposition about the time he worked for the company from 1992 to 1998.

‘Shut Down’

When asked if pension-fund clients were ever told of how much money managers were paying Callan, Trone responded: “No. If they did, the whole activity of pay-to-play would be shut down immediately.”

The company stated on its Web site that it considers itself a fiduciary for pension funds, which means it is legally responsible for its investment advice and “discloses all business activities and relationships according to a well-defined longstanding policy.”

Callan Chief Executive Officer Ronald Peyton was deposed on Aug. 18 in the San Diego suit and said that before this year the firm had never disclosed to pension-fund clients figures on how much it was receiving from money managers, only as a percentage of total revenue. The reason: “because we’re a private company,” according to the transcript.

SEC Letter

The SEC, the main regulator of registered investment advisers such as Callan, has been probing pension-fund consulting for more than three years. The agency sent a letter to Callan last April. The company blocked the entry of the letter into the public record and it never was released.

In May 2005, the agency released a report that examined 24 of the largest U.S. pension consultants, finding several conflicts in 13 firms concerning pay-for-play arrangements involving brokerage and other services.

The commission didn’t take any enforcement action after the report was issued, nor did it name any of the firms surveyed.

In the meantime, you can ask your employer or pension trustee how much consultants are being compensated by middlemen. Are you getting your money’s worth in terms of above-average returns?

You have a right to know and won’t be barking up the wrong tree if it turns out your retirement funds are being clipped due to costly, undisclosed conflicts.

(John F. Wasik, author of “The Merchant of Power,” is a Bloomberg News columnist. The opinions expressed are his own.)

Voice of San Diego

More From Attorney Land

By Scott Lewis yesterday ran a column about one of the most interesting little lawsuits the city of San Diego is involved in right now.

The implications of this case are huge.

The deal is simple: Callan Associates Inc. was one of the investment advisors to the city pension system. But Callan allegedly earned money not only from its contracts with trusts like the city’s, but also from managers of investment firms.

In other words, the city is claiming in court documents that Callan may have recommended investments to the city not because of their overall merit but because the managers of these investments were either clients of Callan or potential clients.

Callan has asked the judge to dismiss the case and there’s a hearing Oct. 6.

Columnist John Wasik from Bloomberg said “something sure stunk” with Callan’s deals with San Diego.

Pension whistleblower Diann Shipione has been saying that for years.

While the suit doesn’t provide a total tally of how much money managers paid the firm while the consultant was working with the San Diego fund, “Callan’s referrals to the San Diego fund of large-cap growth managers consisted entirely of candidates who had purchased services from Callan,” the city attorney’s suit claims.

If City Attorney Mike Aguirre and the city’s hired counsel, Bryan Vess, are successful on this claim, it would have repercussions for a great many of Callan’s other clients, who may not have fared as well as San Diego did on its investments.

Union Tribune

S.F.-based Callan to pay $4.5 million

By Matthew T. Hall

San Francisco-based Callan Associates, a prominent pension consultant that has advised San Diego’s retirement system since 1982, will pay San Diego $4.5 million under a legal settlement the City Council approved yesterday.

City Attorney Michael Aguirre had sought more than $50 million in damages in an August 2005 lawsuit accusing the firm of faulty investment advice. After court costs and outside attorney fees, the city will net about $3 million.

Callan Associates, which will continue advising the pension system, settled the case to avoid the cost, time and negative publicity of a legal fight, according to the settlement released yesterday.

The firm continues to deny all of the city’s allegations, including claims that Callan Associates recommended that San Diego’s underfunded retirement system hire investment managers who did business with the firm – and who underperformed for the pension system when compared with other managers.

Under the settlement, the city agreed that “it found no proof that Callan engaged in ‘pay to play’ practices or any other unfair business practices in connection with the hiring of money managers, nor proof that Callan engaged in unfair business practices in connection with the hiring of money managers” within the scope of the state Business and Professions Code.

The settlement lists one point the firm used to defend itself against city allegations: that the pension system’s return on investment “over the years has placed it within the top 10 percent of all public retirement funds.”

The pension system’s deficit is now at least $1.43 billion after a period of underfunding by previous councils that also granted retiree benefit increases. The system’s funding ratio, a measure of assets to liabilities, was listed at just 65 percent a year ago, well below the level that analysts deem adequate.

The settlement says, “Callan has concluded that it is in its best interest . . . to avoid the substantial financial costs and loss of time of its personnel which would be necessary to defend against these claims.” It goes on to say the firm sought “to eliminate the uncertainty and negative impact that the litigation has had and could continue to have on its business.”

The settlement calls for Callan Associates or its insurance carrier to pay San Diego $4.5 million by Dec. 18.

Dan Stanford and Bryan Vess, two private attorneys working on a contingency basis for the city, will both be paid $750,000. The city paid additional court costs of about $100,000, an Aguirre spokeswoman said.

The council voted 7-0 in closed session to approve the settlement, with Councilman Brian Maienschein absent.

The city initially filed a faulty-advice lawsuit against Callan Associates and former pension system actuary Gabriel, Roeder, Smith & Co. The challenge against the actuary continues in San Diego Superior Court.

The settlement says, “Callan has concluded that it is in its best interest . . . to avoid the substantial financial costs and loss of time of its personnel which would be necessary to defend against these claims.” It goes on to say the firm sought “to eliminate the uncertainty and negative impact that the litigation has had and could continue to have on its business.”

The settlement calls for Callan Associates or its insurance carrier to pay San Diego $4.5 million by Dec. 18.

Dan Stanford and Bryan Vess, two private attorneys working on a contingency basis for the city, will both be paid $750,000. The city paid additional court costs of about $100,000, an Aguirre spokeswoman said.

The council voted 7-0 in closed session to approve the settlement, with Councilman Brian Maienschein absent.

The city initially filed a faulty-advice lawsuit against Callan Associates and former pension system actuary Gabriel, Roeder, Smith & Co. The challenge against the actuary continues in San Diego Superior Court.


Union Tribune

Brown Field Group Awarded $5.9 million | High Court Rules Firm Can Reclaim Part of Lost Funds

By Tanya Sierra

Fallout from the failed struggle to turn Brown Field into a private air cargo facility is officially over after the California Supreme Court ruled the development company was entitled to reclaim a portion of the funding it lost.

Brown Field Aviation Park, a group of developers and investors that tried to convert the air field in Otay Mesa into a major cargo hub, received a $5.9 million check last week from Parsons Brinckerhoff, the engineering firm that was hired to prepare an environmental impact report for the project.

The report erroneously said air traffic would be flying in and out of Brown Field from the east instead of the west. Brown Field Aviation Park sued Parsons Brinckerhoff, and in 2003 a jury found negligence and a breach of contract. The Brown Field group was awarded $7.7 million.

Parsons Brinckerhoff, whose spokeswoman declined to comment, appealed the jury decision in 2003, and the California Court of Appeal rejected the firm’s request. Parsons Brinckerhoff then appealed to the California Supreme Court, which refused to hear the case, in October.

Attorney Bryan Vess, who represents Brown Field Aviation Park, said the company spent more than $20 million on the five-year effort to get the project done.

“This was the last great chance for Brown Field to have been a truly valuable asset to the city and county.” he said. “This consulting firm ruined that chance.”

In another case filed against the city of San Diego in 2003, the Brown Field group was awarded $1.5 million. The company accused the city of acting in bad faith when the City Council refused to extend an exclusive negotiating agreement in 2001.

The original plan for the air field was to create a cargo port that would bring $750 million a year into the region and provide 11,500 permanent jobs.

Intense opposition from Otay Mesa residents helped defeat the project, which the City Council officially killed in late 2001.

The Press-Enterprise

Divorce Led Felon’s Wife to New Grief

By Sharon McNary

Marietta Mays got sucked into San Bernardino County’s corruption scandal not because of her marriage to former county chief Harry Mays, who is in prison or bribery, but because of their divorce.

San Bernardino County sued her, alleging the August 2000 divorce was meant to shield millions of dollars from the county if it wins its civil lawsuit against Mays. The county also sued Mays’ daughter, Krista Henkels, who is handling Harry Mays’ finances until he gets out of prison.

In her first public interview, Marietta Mays,59, said her divorce was no sham. She was fed up with her husband and his legal troubles and wanted out.

A Ventura County Superior Court judge will decide Sept. 3 whether to grant Marietta Mays and her daughter’s request to be dismissed from the lawsuit.

Marietta Mays recalled her life went haywire on Jan. 13, 1999, when she returned from a walk to find FBI agents searching her Carlsbad condominium. “All I could think of, ‘Was Harry trying to sell the condo? Who are all these folks? Realtors?'”.

By late 1999, Harry Mays had pleaded guilty to bribery. He went to prison in April 2001 and could be out by late September, said attorney Bryan Vess , who represents the daughter and former wife.

The turmoil killed their 36-year marriage, Marietta Mays said. “This scandal and all of this lawsuit was probably just the straw that broke the camel’s back as far as our marriage was concerned,” she said with tears in her eyes. “I told him I couldn’t stand any more of it.”

The stupidest thing

Harry Mays, 62, has lost about 65 pounds at the federal prison at Nellis Air Force Base in Nevada, Henkels said. “He’s admitted, ‘This is the biggest, stupidest thing I’ve ever done in my life,'” Henkels said. “I think everybody gets some big screw-up in their lives and this is his.”

Part of his punishment,she said, is having to explain his crime to Henkels’ 6-year-old daughter as soon as she can read “prison” on the sign where she visits her grandfather.

Mays got a five-day furlough in April. He stayed at Henkels’ San Diego home and visited with Marietta, his business partner and close friend Scott Beard, and other friends. “He got a long taste of what he’s missing,” Henkels said.

Marietta Mays said she could not explain why her then-husband got into trouble.

T”He wasn’t easily pushed around,” she said. “He would try to reason with them, and then just tell them ‘no.’ ” Nor was he driven by greed. “Money’s never been a huge issue for us,” she said. “If you have enough that you are not hurting and can pay your bills, you might as well enjoy family, friends and the people around you.”

Promoted quickly

Marietta and Harry Mays met at San Bernardino Valley College in the early 1960s. She was an 18-year-old nursing student and he was 22, a Colton city school bus driver. They married in 1964, and Krista was born in 1967.

Harry Mays got a county job as a counselor at a boys home and was promoted quickly. From probation officer in 1969, he advanced to purchasing director in 1979, chief of personnel in 1982 and county administrative officer in 1986, the top job.

As his county rank increased, he spent less time on his hobby of fixing and renting old houses and more time with friends and co-workers at bars, up to three nights each workweek, Marietta Mays said. His daughter called him a “heavy social drinker.”

He also spent more time boating and planning. “He had always wanted to retire early, to have that career behind him and try something else, to be a private entrepreneur,” Marietta Mays said. Mays’ troubles began after his 1994 retirement.

He went immediately to work for Norcal Waste Systems Inc. to negotiate contracts to operate county landfills. By 2000, the contracts added up to more than $200 million.

Mays admitted giving 40 percent of his $4.2 million commission to Norcal General Manager Kenneth James Walsh, county attorneys said. Mays and Walsh admitted paying bribes to James Hlawek, who succeeded Mays as county chief. All three were convicted of bribery.

“Why he shared the money with (Walsh) I don’t know. He was fairly open that he would share the money with him,” Marietta Mays said. “I’m not into business at all. Harry wouldn’t consult with me on that.”

The county’s lawsuit seeks Mays’ commission.

When she was named as a defendant in the county lawsuit, Marietta Mays said, she ignored it, figuring she wasn’t seriously involved. But the stress kicked in after a deposition in which she was questioned about whether she or Harry had money in offshore bank accounts. Marietta Mays, who paints for relaxation, said her usual tranquil, pastel style turned vivid and angry, with bold colors.

Vess, her attorney, said she and Henkels should be dropped from the lawsuit because the Mays’ community property was divided evenly, and because Harry Mays has had to forfeit much of his wealth to his partners in compliance with county settlements.

When the couple divorced, Harry Mays got $1.5 million in assets including their Laughlin house, bank accounts worth $27,000 and his companies, Bio-Reclamation Technologies, which co-owned two buildings leased to the county, and Payson Bowl in Payson, Ariz., according to court papers.

Marietta Mays got $1.1 million in assets including their house (which has since been sold) and condominium in Carlsbad, bank accounts and cash worth $360,000, and a 1972 Corvette. They will share his pension, she said, but live apart.

San Bernardino County Sun

Mays’ Ex-Wife, Daughter Settle 2 Agree to Pay County $450,000 in Exchange for Dropping Lawsuit

By Alan Schnepf

Thursday, January 13, 2005 – VENTURA – The ex-wife and daughter of a former San Bernardino County chief executive agreed Thursday to pay $450,000 to the county in exchange for its dropping a multimillion-dollar lawsuit against them in connection with a 1990s corruption scandal.

The suit against Marrieta Mays and daughter Krista Henkels alleged that the older woman and former husband Harry Mays, one-time chief administrative officer, divorced in a ploy to allow him to protect his assets.

In return, the county is dropping its lawsuit that sought to make more than $2 million worth of Marietta Mays’ and Henkels’ assets subject to seizure to pay for a civil judgment against Harry Mays.

The Mayses divorced in September 2000 after 36 years of marriage. Just three months earlier, San Bernardino County had sued Harry Mays, the county’s top appointed official from 1986 to 1994. The suit accused him of bribing his successor, James Hlawek, to push through a $250 million trash contract for Mays’ new employer.

After the divorce, the county quickly filed another lawsuit, alleging the split was a scam to allow Mays to transfer assets to his ex-wife and daughter in case he lost the corruption lawsuit.

Mays lost the suit last month when Ventura Superior Court Judge Vincent O’Neill finalized a $3.8 million judgment against him. That triggered another trial to examine the divorce.

Marietta Mays and her daughter were never accused of playing any part in corruption. The county simply wanted their assets as part of the judgment against Harry Mays.

The $450,000 will be credited toward the $3.8 million judgment, said Leonard Gumport, a Los Angeles attorney working for the county.

The $3.8 million figure could grow, however, as attorneys argue over the next few days over punitive damages against Harry Mays.

Attorneys were scheduled to begin a jury trial for the suit over the divorce Thursday morning. Instead they presented the Ventura court with the settlement.

Marietta Mays’ attorney, Bryan C. Vess, brought a $100,000 cashier’s check to court for the county Thursday. The settlement requires Marietta Mays to pay the remaining $350,000 within 90 days or the county can take possession of a Carlsbad home she owns.

Another part of the settlement requires Marietta Mays and Henkels to give up their partial ownership of Harry Mays’ Laughlin, Nev., home and make him the sole owner. That will allow the county to try to seize the home.

The county also agreed not to chase after a portion of Harry Mays’ retirement benefits that were granted to his ex-wife as part of the divorce. Despite pleading guilty to federal bribery charges, Harry Mays still receives about $7,500 monthly as part of his county retirement package.

The county made no promise that it will not pursue Harry Mays’ retirement benefit, however.

Gumport said in court that the settlement would not have happened if the county had not pushed the matter to the brink of trial.

Outside court, Vess disagreed, saying he had been sending similar settlement offers to the county for years.

Vess said Marietta Mays faced the possibility of losing everything she owns if the county’s lawsuit had proceeded to trial.

“It doesn’t mean paying anything is the right thing,” Vess said. “You just really have to guard your risk.”


Union Tribune

La Jolla Resident Sued Architect After Dream House Turned Into Nightmare

By David Washburn

Situated atop a hill in La Jolla with views of the San Diego coastline, the house was, to Debbie Ford, a couple of new bedrooms and an expanded kitchen away from being perfect.

So, in January 2002, Ford bought it. And she hired her friend Victor Chang to do the remodeling. He told her it would be an easy one – in fact, she said he promised to do the design and oversee the construction himself..

Six months later, the $1.2 million home on Cottontail Lane had been reduced to a concrete slab. And Ford, a best-selling author of self-help books, was going broke.

Vicki Williams, an investigator with the California Contractors State License Board, told Ford that in terms of the condition of the site, it was the “worst case” she’d ever seen.

Chang, to whom Ford had paid more than $100,000, was no longer returning her phone calls.

This was not the Victor Chang that Ford had known for nearly seven years. Not the man whose family she had shared many a dinner with, and who had a reputation in La Jolla as a sought-after architect.

“There was no reason at all to believe he was anything than what he appeared to be,” Ford said.

The record, as Ford has since learned, shows otherwise.

The California Architects Board has no record of Chang as a licensed architect. And the company name he has used on his letterhead, “VC Design Associates, LLC,” has never existed, according to the California Secretary of State Office.

In April 2003, Ford became the seventh plaintiff since 1989 to sue Chang in San Diego Superior Court for breach of contract, fraud, negligence or misrepresentation.

“In short, Chang is a scam artist who systematically misrepresents his lack of qualifications to perform architectural and builder services,” Ford said in her lawsuit.

She goes on to say that he is “a litigation deadbeat, who has in the last several years had numerous judgments entered against him which have gone unsatisfied.”

Ford was awarded a $581,000 judgment in March, the third against Chang since 1997. All three, which total more than $750,000, were default judgments, meaning that Chang didn’t show up to contest the cases against him. He has yet to pay a dime to any of the plaintiffs.

In March, the San Diego County district attorney, after reviewing Ford’s case, charged Chang with grand theft and diversion of construction funds.

Chang refused comment, as did his criminal lawyer, Thomas Warwick. Craig Miller, Chang’s civil lawyer, said he is a well-respected designer with a master’s degree in architecture from Tulane University.

“Victor is doing it the right and legal way,” Miller said. “When it all comes out, he will be exonerated.”

Multiple lawsuits

Tulane alumni records show that the 47-year-old Chang received a bachelor’s degree in architecture in 1980. However, to become a licensed architect one has to work for at least three years under an experienced architect and pass both national and state exams, said Douglas McCauley, executive officer of the architects board.

“All the degree shows is that you graduated,” McCauley said.”

Despite all his legal troubles, Chang has managed over the years to maintain a substantial reputation, as well as a lifestyle that included luxury cars and prestigious La Jolla addresses.

Last summer Better Homes and Gardens featured Chang in its Kitchen and Bath Ideas magazine, saying the “homeowner and architect” turned his La Jolla kitchen into a “compact, yet bright and elegant cooking area.”

In December he was voted the “best architect” in La Jolla by readers of the La Jolla Light newspaper.

Rebecca Porter, a friend of Chang’s, said he oversaw a remodel of her La Jolla home that she said turned out “fabulous.”

Court records, however, show that others who have dealt with Chang have been less satisfied.

In 1989, Chang was sued by TARIAM Corp., a San Diego development company that is now out of business. The company accused Chang of misrepresenting himself as an architect and producing substandard “architect’s development plans” in connection with a project in La Jolla. Records show that Chang and his partners settled the case for $77,000.

In 1995, Jaime Radulovich alleged breach of contract and fraud on a deal with Chang involving a property on Thomas Avenue in San Diego. The case was settled for an undisclosed amount.

In 1997, Scripps Bank won a $124,000 judgment against Chang after he defaulted on a line of credit. Scripps alleged in 1999 that Chang had “fraudulently” transferred assets to his extended family to avoid paying the judgment.

In 1998, James and Cynthia Maida won a $46,000 judgment after suing Chang for fraud, negligence and breach of contract involving a remodel on their Del Cerro home.

‘I was impressed’

Ford, 48, said she met Chang during the mid-1990s when she and her then-husband lived on Costebelle Drive in La Jolla, which was around the corner from Chang’s residence on Moonridge Drive.

She said Chang and his wife, Marta, were good neighbors, and the families had dinner together regularly. He was remodeling the Moonridge house at the time.

“I watched him build his house, and I was impressed,” Ford said.

Ford divorced and left the neighborhood in 1995, but stayed in loose contact. She and her young son would get together with the Chang family once or twice a year through 2001, she said.

Those were good years for Ford. In 1995, she began teaching at the Chopra Center, owned by self-help guru Deepak Chopra. Two years later she published her first self-help book, and would go on to publish three more.

Her “The Dark Side of the Light Chasers,” reached No. 1 on the New York Times How To and Miscellaneous best-seller list in November 2000. By early 2002, she had published two more books and could afford the house on Cottontail Lane.

“It was my dream house; I just wanted to do a little remodel,” said Ford, who approached Chang to do the work.

Chang readily agreed to take on the job, and he had Ford sign contracts for architectural services and general contracting services, according to her complaint.

Roy Moreau, a civil engineer who looked at Chang’s preliminary plans for the house, said he remembers the job as “minor.”

“It was not a major remodel by any stretch of the imagination,” said Moreau, who had nothing to do with the project beyond examining the preliminary plans.

In addition to not being a licensed architect, Chang also has no contractors license, according to state records. The law allows “owner-builders” to design and supervise the construction of a home as long as a civil engineer signs off on the plans, and proper permits are obtained, said McCauley of the architects board.

In this case, however, Moreau said he was never given final plans for the project. And records show Chang never received permits from the city of San Diego.

‘House stripped’

He began work in February 2002. Over the next several months he proceeded to “demolish” Ford’s home, according to Ford’s complaint.

Chang hired workmen to tear out many of the outer walls of the home, to remove all electrical work and a large amount of the plumbing, and to remove most of the inner walls, said Williams of the Contractors State License Board in her declaration of support of the DA’s arrest warrant for Chang.

Chang told Williams that Ford was in charge of the project and that he was the “architect for the job and only oversaw the construction work,” according to Williams’ declaration.

Ford, who spent much of the first half of 2002 traveling on a book tour, said in her complaint that Chang was in charge of the project from the beginning.

“I remember coming back and seeing the house stripped, stripped of drywall, stripped of the electrical, stripped of everything,” Ford said.

She said she realized by May that she was in big trouble. The city had been sending her stop-work orders, the California Coastal Commission was after her and Chang was becoming harder and harder to reach.

She hit bottom a month later when she received a call from Edith Gutierrez, an officer from the San Diego Department of Development Services, who told her that the plans were a mess.

“You might as well throw them out,” Ford remembers Gutierrez telling her.

Ford was running out of money. She knew at this point that she would have to rebuild from scratch, and the ordeal had already cost her several hundred thousand dollars.

In addition to the more than $100,000 she had paid Chang, she was spending thousands more trying to fix the damage. Plus, she had to carry a mortgage on the property while paying rent elsewhere.

“If it wasn’t for the fact that the lot is in such a good location, I would be bankrupt,” Ford said.

Cat-and-mouse game

She contacted San Diego lawyer Bryan Vess in September 2002.

To Vess, Chang’s expertise was not in architecture, but in staying one step ahead of his troubles. He seemed very adept at stringing his clients along, and then hiding assets when they went after him.

The Chang family has lived in million-dollar La Jolla homes for most of the last decade. But records show that Victor Chang has never been the registered owner.

The properties have been transferred among a trust bearing his wife Marta’s name; his mother, Ofelia Yu-Lee, who lives in Puerto Rico; and Marta’s parents Juan and Maria Vila, who live in Spain.

The Vilas are listed as owners of the Moonridge Drive house. And Yu-Lee was listed as the owner of another Chang residence on 2117 Murcia Court. Records show that Yu-Lee sold the Murcia home for $1.6 million in August 2002, a month before Ford filed her suit.

In December of last year, Yu-Lee purchased a lot on Starlight Drive in La Jolla.

“(The properties are) practically mine,” Yu-Lee said in a recent interview. “I give him (Victor) the commissions.”

Despite the well-documented real estate wealth within his family, Chang was able to spend a year in bankruptcy court while Scripps Bank and James Maida were seeking their judgments. The bankruptcy case was eventually dismissed.

Maida said this cat-and-mouse game infuriated him. In 1997, he said, he had bought his Del Cerro home based largely on assurances from Chang that he could expand his garage and add a couple of rooms.

The cost of the remodel turned out to be far higher than Chang had promised, and Maida couldn’t afford it. But he had already paid Chang more than $10,000, money he would not get back.

Maida, who attended Chang’s bankruptcy hearings, said he was appalled at how Chang was able to string things along. He would show up to a hearing with half his records and get an extension, Maida said, and money shown in accounts held by him or his wife at one point would disappear months later.

“Delay after delay after delay,” he said of Chang’s tactics in bankruptcy court. “It was a travesty.”

Chang’s goal, Maida said, was to wear the creditors out. And it worked. Maida, no longer able to afford a lawyer, gave up after Chang got his bankruptcy case dismissed.

“I knew he would defraud someone after me,” Maida said. “But the court system gives him the ability to skirt.”

Vess said he and Ford are aware of what they are up against.

“We’re not going to quit just because he transferred his assets,” Vess said. “We’re going to pursue this whether there is a pot at the end of the rainbow or not.”


San Diego Daily Transcript

Parsons Brinckerhoff Found Negligent at Brown Field Air Cargo Redevelopment

By Kevin Christensen

SAN DIEGO – A San Diego Superior court jury has found one of the largest engineering companies in the world negligent in studies of Brown Field, and awarded damages of more than $7 million.

The jury found Parsons Brinckerhoff Aviation Inc. (PB Aviation) guilty of negligent performance of professional consulting services for a proposal to redevelop the Brown Field Municipal Airport into a multi-modal air cargo facility, and ordered them to pay $7,686,945.08 in damages to Brown Field Aviation Park LLC (BFAP).

“We’re very very pleased with the decision with the verdict,” said Samuel J. Kohn, managing director of the BFAP. “In essence, this consultant had the planes coming in from the wrong direction in the design and that pretty much mucked up our environmental documents.”

PB Aviation has submitted an appeal but no dates have been set yet for the case, said Kevin Curran, general counsel of PB Aviation. When asked when a date will be set, Curran replied, “If not by the end of the week, then certainly by next week.”

The BFAP’s lawsuit originated from a proposal to lease the city-owned airfield on Otay Mesa in order to build the San Diego Air Commerce Center at Brown Field, or Sandacc, an expansion to air cargo facilities.

According to the developer’s concept, the Sandacc facility would have hosted up to 24 air cargo flights per day by the year 2016 and needed to meet the air cargo requirements of the region.

An analysis of the project prepared by the San Diego Taxpayers Associated released in January 2001 found it could be expected to generate some $370 million for the region.

PB Aviation was hired by the developers in early 1997 to provide project management and consultant services including the preparation of an Airport Master Plan, a combination Environmental Assessment/Environmental Impact Report and an updated Comprehensive Land Use Plan.

The jury found that PB Aviation breached its contract with BFAP by failing to exercise the standard of care required of professional consulting firms. The jury also found that PB Aviation had been negligent in its professional performance.

The City Council terminated further negotiations with the investors (BFAP) after an October 2001 meeting that exposed errors in the project’s environmental documents.

The flawed documents were cited as reasons for abandoning the negotiations. “As a result, the body politic particularly in District 8 lost a lot of faith and we lost a lot of credibility,” Kohn said.

The following April, the BFAP filed a $120 million claim with the city, stating that the developers pumped $20 million into the plan and the council illegally cut off negotiations before a complete version was presented. The developers also alleged they had lost $100 million in profits.

The city later settled out of court for $1.5 million. The city denied the charges but settled because court costs would have been too expensive, according to the city attorney’s office.

Kohn claimed that the high profile nature of the project made the council’s decision to scrap the project cause repercussions nationwide.

“This was a very public project that my name was associated with from the beginning; as a result of the negligence, my ability to process large scale projects in San Diego and airport jobs nationwide was compromised,” he said.

Kohn referred to the decisions in the cases involving the city of San Diego and Parsons “vindication.”

Mark Mazzarella and Bryan Vess of the San Diego-based firm Mazzarella, Dunwoody & Caldarelli LLP represented BFAP.

PB Aviation was represented by the Los Angeles law firm of Thelen, Reid & Priest LLP; co-counsel during trial were John B. Clark and Timothy L. Pierce.

Los Angeles Daily Journal

Breach of Contract | Professional Negligence

VERDICT: $7.6 million (gross); $6.1 million (net).

CASE/NUMBER: Brown Field Aviation Park LLC v. Parsons Brinckerhoff Inc., et al. / GIC786471.

COURT/DATE: San Diego Superior / Aug. 5, 2003.

JUDGE: Hon. E. Mac Amos, Dept. 70.

ATTORNEYS: Plaintiff – Mark C. Mazzarella, Bryan C. Vess (Mazzarella, Dunwoody & Caldarelli, LLP, San Diego). Defendant – John Clark, Timothy L. Pierce (Thelen, Reid & Priest, LLP, Los Angeles).

FACTS: The lawsuit originated from Brown Field Aviation Park’s (BFAP) proposal to lease the city-owned airfield on Otay Mesa to build the San Diego Air Commerce Center at Brown Field or SANDACC. PB Aviation was hired by BFAP in early 1997 to provide consulting services for the preparation of an Airport Master Plan, a combined Environmental Assessment/Environmental Impact Report and an updated Comprehensive Land Use Plan.

BFAP sued Parsons Brinckerhoff, Parsons Brinckerhoff Quade & Douglas and PB Aviation, alleging damages in excess of $120 million plus punitive damages.

JURY TRIAL: Length, four weeks: deliberation, one day.

SETTLEMENT DISCUSSIONS: The defendants offered $1 million to settle the case prior to trial.

OTHER INFORMATION: The jury found that PB Aviation was negligent and it breached its contract with BFAP by failing to exercise the standard of care.

According to the defendant: PB Aviation’s motion for judgment notwithstanding the verdict and motion for a new trial are pending.

The defendants’ motion for nonsuit was granted in part, and Parsons Brinckerhoff and Parsons Brinckerhoff Quade & Douglas were dismissed from the litigation.

The defendants’ motion for nonsuit also eliminated other intentional torts, including fraud, leaving the jury to consider BFAP’ claims for negligence and breach of contract.

Union Tribune

Backers of Brown Field Plan File Claim | Air Cargo Group Seeks $121 million from San Diego

By Jennifer Vigil

The developers behind a controversial Otay Mesa cargo airport project have launched a legal offensive, including a $121 million claim against the city of San Diego, to try to recoup losses from their failed proposal.

According to the claim, the city was contractually bound to allow Brown Field Aviation Park LLC, as the development partnership was known, to complete planning of the cargo airport before voting on the project in October.

In a separate action, filed yesterday, the developers are suing engineering firm Parsons Brinckerhoff, a consultant on the airport project, and the group behind the south Route 125 extension, accusing both of breach of contract.

The San Diego City Council voted 8-0 on Oct. 1 to end its five- year exclusive negotiating agreement with the developers, who had sought to transform Brown Field, an Otay Mesa municipal airport, into a specialized cargo airport.

In the claim, the developers accuse the city of failing to give them enough time to address council concerns. The claim also says the city improperly allowed Councilman Ralph Inzunza Jr., who resides near Brown Field, to vote on the project.

The developers argue that the councilman, who owns a home beneath the flight path outlined in the project, stood to lose property value if the airport were approved and should have been barred from voting on its future.

“(The) concept of good faith and fair dealing seems to have been overlooked (or worse, ignored altogether) by the city in its dealings with Brown Field Aviation Park,” according to the claim, filed with the city March 29.

Inzunza, a vocal opponent of the development, said council members discussed the matter thoroughly with City Attorney Casey Gwinn and received clearance before their decision to end the association with the Brown Field developers.

Inzunza said he checked the conflict-of-interest issue with Gwinn as well.

Attorney Bryan Vess, who represents the development group in both matters, said: “We think that this very beneficial project was derailed for political and personal reasons of some of the politicians. “With that, I have Ralph Inzunza in mind.”

Inzunza, however, said the claim has no validity.

“I think it’s sour grapes,” Inzunza said. “In the end it will be seen as much ado about nothing.”

The developers are seeking at least $100 million in damages and $21 million to recoup their investment in the project.

In litigation against government agencies, a claim must be submitted before a lawsuit can be filed. The city’s risk- management department is reviewing the claim and has 45 days to respond.

The move to file it came as no surprise.

A former representative of the development group warned the city months before the City Council’s decision that the airport backers could sue if they were not allowed time to complete their proposal.

The developers argued that the council should have allowed them at least one more year of planning to address questions not covered in their original agreement with the city, known as a memorandum of understanding.

John Mullen, a deputy city attorney who has worked on the Brown Field issue in the past, called that argument “far-fetched.”

“They had a period of exclusive negotiation and that’s what they got,” he said. “At the end of the day, the city had a right to reject the proposal.”

The backers — which included two financial firms, Lehman Bros. and Farallon Capital Management — had hoped to invest more than $500 million in Brown Field, an aging former military airport near the border.

They said the project would produce thousands of jobs, generate hundreds of millions in revenue for the region and capture a portion of the freight market lost to Los Angeles-area airports.

They struggled amid a storm of political opposition for two years, however, as elected officials joined angry South Bay residents in questioning the developers’ financial estimates and the project’s potential effect on the growing area.

Noise and traffic estimates and financial data generated by Parsons Brinckerhoff in 1998 lie at the heart of the developers’ lawsuit against the engineering firm. That suit names several affiliates backed by the company, including California Transportation Ventures, a group working to extend state Route 125 south to the border.

Correcting mistakes made by Parsons Brinckerhoff cost the developers $17.5 million more than the original $2.5 million they thought it would take to plan the project, according to the suit.

“The consultant made what can be characterized only as one bungling mistake after another,” according to the document, filed in San Diego Superior Court. The lawsuit alleges that those mistakes helped feed the furor against the cargo airport proposal.

Ted Ono, vice president of Parsons Brinckerhoff Quade and Douglas, said he has not reviewed the suit and could not comment.

The city has faced — and lost — some other major cases involving Otay Mesa. Land owner Roque de la Fuente won a $94 million judgment last year after accusing the city of ruining his business by reneging on a development agreement. The city is appealing that decision.

Union Tribune

Cargo Airport Developers to Settle Suit Against City | Council Says It saves in $1.5 Million Agreement

By Jennifer Vigil

Developers of the defunct proposal to build a border-area cargo airport agreed yesterday to settle their multimillion-dollar lawsuit against the city of San Diego.

The city will pay Brown Field Aviation Park — a partnership owned by the prominent Lehman Bros. financial firm and second financier, Farallon Capital Management — $1.5 million to end the suit, filed last year.

Most of that money, $1.25 million, will come from a fund set aside for the city’s municipal airports, not the general fund, which covers basic services such as public safety and libraries. The developers will receive an additional $250,000 from a city insurance policy.

Attorneys for the developers had argued that the City Council acted improperly two years ago when it failed to extend a negotiating agreement with their clients. The developers believed that if they had been allowed more time they would have been able to address several questions that had arisen about the project.

The development group had sought to turn Brown Field, an Otay Mesa municipal airport, into a $500 million facility that would have included a cargo airport and a manufacturing and distribution center.

Deputy city attorney John Mullen said the city saved money by settling, because the costs of taking the suit to court would have “greatly exceeded” the $1.5 million figure in the settlement agreement.

The offer, he said, amounts to a refund on money the developers paid the city as part of the project, and is compensation for environmental documents they submitted that can be used to evaluate other plans for Otay Mesa.

The settlement also protects the city from any further litigation that might arise from the failed proposal.

Attorneys negotiated for two months to arrange the settlement, Mullen said, and participated in mediation sessions. The City Council heard updates in several closed sessions before members agreed to the terms on March 4.

The council will announce the settlement on Monday at its regular meeting.

Bryan Vess, an attorney for the developers, confirmed the details of the settlement, but would not comment further because his clients are pursuing another suit to recoup the rest of the $20 million they say they invested in the project.

In that case, due back in court on April 25, the developers accuse an engineering firm, Parsons Brinckerhoff, a consultant they hired, of negligence in its handling of environmental documents, failures that, according to court papers, cost them $17 million.

The airport proposal unleashed a torrent of opposition, in part because of those documents. Pardee Homes, which has developed residential communities east of the airport, objected, as did residents who began moving into the area in 1998.

The newcomers organized and helped inspire longtime Otay Mesa residents west of the airport, who were not known for their civic activism, to join in the protest.

Though the project attracted wide political support in 1996 when the developers and the city first came to an agreement, elected officials later began to question whether the airport’s air-traffic projections and revenue estimates were viable. Residents feared living under flight paths would eat away at their property values and their peace of mind.

The City Council finally scuttled the plan in October 2001, before a cheering crowd of more than 1,000 people in San Ysidro.

Brown Field remains a municipal airport and the city is proceeding with plans to raze aging buildings on the site

Union Tribune

Rescue Mission’s Relocation Plan Blocked | Judge Says Council Rushed Its Approval

By John Wilkens

The San Diego Rescue Mission’s relocation from East Village to a former hospital uptown has been upended by a court decision that the city failed to adequately review the environmental impacts of the project.

The ruling means the 48-year-old program that aids the homeless could itself be homeless by November, forcing hundreds of people onto the street as the holidays beckon, mission officials said.

“It is a civic scandal,” Jim Jackson, the mission’s president, said in a statement.

Last November, the Rescue Mission won unanimous City Council approval to move its facilities to the old Harborview Medical building, a six-story structure at 120 Elm St., near Little Italy and Banker’s Hill.

The mission then sold its properties in East Village, near the new ballpark, and is spending an estimated $16 million to buy and rehabilitate the old hospital. It planned to begin operating there by early November, eventually offering temporary housing for about 400 people, emergency shelter for 60 and a community breakfast for up to 250.

City approval of the relocation came despite fierce opposition in the area. Opponents raised concerns about safety, noise, trash and other potential problems.

Several of those neighbors, led by a group of parents whose children attend nearby Washington Elementary School, filed a lawsuit a month later, alleging the city had rushed its approval of the project and failed to do an adequate environmental-impact review.

Earlier this month, San Diego Superior Court Judge Wayne Peterson agreed with the neighbors and ordered the city to do a full review. That process generally takes at least six months.

Peterson also ruled the project violates a city rule aimed at dispersing homeless services.

Bryan Vess, an attorney who represented the neighbors, said Friday the judge’s decision “reflects the proper concern about the legal process.

“He added: “It has never been our intention to run these guys out of the neighborhood. They provide important services. But our primary concern has always been the conglomeration of services.

“Jenny Chenoweth, an attorney for the Rescue Mission, said the ruling will be appealed.

“It’s always hard to lose a case, but it’s especially hard when you have a client like the Rescue Mission,” she said. “We could have people who are midway through a rehabilitation program and they will have nowhere to go now.

“She said the private, nonprofit mission has to be out of East Village by Nov. 1.

“There is no going back,” Jackson, the mission’s president, said in his statement. “The San Diego Rescue Mission itself will be homeless by the end of the year if we do not appeal to reason, fairness and ecompassion.”