San Diego — Despite all you read, San Diego is not eating humble pie. It's swilling korn likker. Last week, shortly after the Securities and Exchange Commission slapped the City with one of the most biting sanctions ever given a municipality, Mayor Jerry Sanders was proclaiming that San Diego had already turned the corner toward virtue. It must look ahead, not behind, quoth he. Typical head-in-sand. If San Diego is to win back Wall Street's favor, return to the bond market, and honestly prosecute the U.S. attorney's and district attorney's cases against bureaucrats, local investigators must dig much more into the past.

There are still loose strings out there. The securities agency talked of sins of omission and commission by "officials." Who are they? What did they do or not do?

Last week, the agency concluded that the City, "through its officials, acted with scienter." What's scienter? It's your knowledge that you are committing a fraud. City officials "were well aware" of the City's pension and health-care deficits and "the magnitude of the City's future liabilities," declared the agency. Yet, deliberately, these officials kept this information out of the official statements that accompanied City bond offerings. Investors were cheated. So were San Diego taxpayers.

The City agreed to a cease-and-desist order. There are more shoes to drop; the securities agency will now go after the unnamed individuals, presumably including elected ones. The Securities and Exchange Commission is a civil agency that doesn't have criminal authority. But it has clout. Individual investors may use its finding to sue the City because of those deceitful bond offerings.

If former mayor Dick Murphy reads between the lines of the agency's report, he won't be sleeping too well. Ditto for some councilmembers.

Clearly, the mayor and council had inside knowledge of pension woes and knew they should be confessed to investors. For example, in February 2003, the City hired a pension advisory firm to give answers to a question: Are things really this bad? On April 16 of that year, the firm reported back: Yeah, things are pretty grim. San Diego's unfunded pension liability would continue to grow rapidly, warned the consultant. The City's contribution to the pension fund would grow from 19 percent of payroll in 2004 to 41 percent in 2009. This would cause the City "significant credit and legal challenges."

Bond investors should be told about such things in official statements. But San Diego kept it quiet. The city council's ignoring the consultant's advice "was a turning point," says City Attorney Mike Aguirre.

Today, optimists are talking about refinancing the high-interest ballpark bonds of February 2002. The Securities and Exchange Commission, for reasons it wouldn't tell me, ignored those bonds in its report.

But the issue is critical, says Aguirre. This year's report by Kroll, Inc., mentioned that Mayor Murphy's Blue Ribbon Committee on City Finances held up a report critical of pension finances until those ballpark bonds went out. The report was to be aired in late 2001. A council committee heard the report in February 2002, but the full council didn't get it until April. In March, council was hearing closed-door reports on how bad the pension mess was. "There is substantial evidence the blue ribbon report was deliberately held up to assist in the selling of Petco Park bonds," says Mike Conger, an attorney who successfully sued the City over pension issues.

One reason the securities agency may not have focused on the ballpark bonds is that they were not offered to the public, although they were originally supposed to be. The City prepared an official statement as if the public would be invited to buy. Suddenly, the City decided that only a handful of well-heeled investors would get them. Ultimately, the underwriter, Merrill Lynch, held on to all of them -- never selling them to its customers, as bond brokers are supposed to do. The bonds were AAA, insured issues, yet paid interest at a stunning 7.66 percent -- 2 to 3 percentage points above the market rate for comparable bonds. The public has never learned about the backroom maneuvers that led to those bonds going from a public offering to a private one. "Looking back at it, it may have been the right rate, given the actual risk profile," chuckles attorney Pat Shea, former mayoral candidate. In short, San Diego was a mess, but few knew it, other than some bureaucrats and elected officials. Merrill Lynch has insisted all along that it didn't know of San Diego's pension problems; the high rates were necessary because of other factors.

Aguirre questions that. He thinks that the 7.66 percent rate might have reflected underwriters' knowledge of the problem. He adds that even though the ballpark bonds were a private offering, under securities laws there should have been honest disclosure. But as with other bonds of the period, there was not. "With the ballpark bonds, there was a massive diversion of funds to the ballpark. These funds were critical to the City's finances; they could have been put into the pension fund."

Who would have known about the blue ribbon report's criticism of pension financing? And who could have arranged for the delay of the report until those ballpark bonds went to market? Murphy? An aide? "Murphy wanted to pull out all the stops, including political stops, to get the ballpark built," says Stan Zubel, who has represented Harvey Furgatch in ballpark-related suits. "That meant exerting whatever influence he had over the legislative branch, the judicial and the executive branches."

The Securities and Exchange Commission notes that the City has taken several remediation steps. One is that "the Mayor [Murphy] resigned and has been replaced."

Says Zubel, "Those words were not randomly chosen."

Adds Shea, "What you're reading in governmentese are words of support for the municipality moving away from the people who created the problem in the first place."

Says Conger, "If the SEC didn't think Mayor Murphy had anything to do with this, why would anyone remediate to get rid of him? Dick Murphy with his excellent academic credentials is a detail-oriented person who reads everything. We have long suspected that he knew precisely that the pension debt was being concealed. He knew and allowed it to continue. We spent a year trying to get the City to acknowledge the pension debt. In retrospect, it was time well spent."

Peter Q. Davis, who ran against Murphy for mayor in 2000 and 2004, later tried to get him to sell those ballpark bonds for a much lower interest rate, only to be told to get lost. "Murphy was well-educated, but he did seem like a zombie. When financial discussions were being held, he would just claim 'Staff says' or 'The city attorney says' this is what we have to do. Perhaps he realized the City's financial problems and, with no solution, took the politically wise action to hide the bad news." He adds, "It's now even clearer individuals broke the law. Do you think a new round of indictments of elected and former elected officials will now follow?"

If that doesn't happen, San Diego will be taking a step backward. Into the corrupt past it now disavows.