County Use of Malibu Sewer Fund Challenged : Bonds: Residents accuse the county of illegally using money earmarked for sewer construction to fight the city’s incorporation.

Contending that county officials may have violated Securities and Exchange Commission regulations by using sewer bond money to pay for other things, including efforts to stop Malibu’s cityhood drive, two Malibu residents have launched a campaign to force Los Angeles County to refund money to the 2,000 homeowners living in the new city’s sewer assessment district.

Leon Cooper and attorney David Kagon sent a letter Thursday to county public works officials protesting “the diversion and improper use of money taken from assessments levied upon property owners in (the Malibu sewer district).” The letter demands an immediate refund of the improperly spent funds.

“SEC regulations regarding the use of bond monies are very specific,” Cooper said. “Bonds are issued with legal documents laying out the specific purposes for which the money is to be used. If the county uses it for other purposes, then it has committed fraud.”

The June, 1989, bond documents say only that the money will pay for construction of the $43-million Malibu sewer project, which the County Board of Supervisors approved the previous January. The bonds are to be repaid over the years by property taxes on homes within the sewer assessment district.

Accounting records show, however, that in September, 1990, the county started using bond proceeds to pay private attorneys to delay or block Malibu’s incorporation. Residents of the community, galvanized by their opposition to the sewer, had overwhelmingly voted in favor of cityhood in June, 1990. Through a series of legal maneuvers, however, the county managed to delay incorporation for nine months as it attempted--unsuccessfully--to start building the sewer.

In a report to the Malibu citizens sewer committee last month, Deputy Director of Public Works Harry Stone acknowledged using $650,000 in bond proceeds to pay two law firms to contest lawsuits filed by Malibu civic groups and by the California Coastal Commission seeking to force the county to remove obstacles to cityhood.

The county hired Jones, Day, Reavis & Pogue and O’Melveny & Myers to litigate suits brought by the Malibu Township Council, the Malibu Country Estates Homeowners Assn., and the Malibu Committee for Incorporation.

The county counsel’s office used an additional $178,000 of the bond money to fight the lawsuits, and $60,000 went to lobbyists hired by the county to get regulatory agencies to approve the sewer. County Counsel Bill Pellman told The Times last month that bond proceeds will also be used to reimburse cityhood proponents the $33,000 in legal fees awarded them in February by a Superior Court judge.

Rosalind Tyson, assistant administrator of regulations in the SEC’s Los Angeles office, said the federal agency does not directly regulate issuers of municipal bonds. “Nonetheless, they are still subject to anti-fraud regulations,” she said. “If an issuer makes false statements or important omissions in the bond offering about how the money is to be used, we would look into that.”

Cooper and Kagon’s letter to Stone demands reimbursement to Malibu homeowners of all bond monies used for “improper expenditures.” According to Cooper, this means “all the money used to pay lobbyists, to pay lawyers to defeat cityhood,” and to pay expenses incurred by an earlier sewer project, known as the Montgomery project, that was never built.

Accounting records also show that as soon as bonds were sold, the county began using proceeds to pay for costs incurred six years ago on the $96-million Montgomery sewer project.

“Using 1989 bond proceeds on the Montgomery project is clearly illegal,” said John Murdock, attorney for the Malibu Township Council, a civic group to which Kagon and Cooper belong.

The Montgomery project, named for the engineering firm that designed it, was permanently put on hold by the Board of Supervisors in October, 1987, after a meeting in which 1,000 Malibu residents showed up to denounce it. The board did not actually kill the project but referred the Malibu sewer question to a citizens committee for further study. Cooper and Kagon both serve on the committee, which devised the existing $43-million sewer plan.

Stone, the county’s deputy public works director, said Thursday that he had not yet seen the letter from Cooper and Kagon, but denied that revenue raised by assessment district taxes had been improperly used.

“Environmental data from the Montgomery study went into our plan for the current project,” he said. “And no lobbyists were hired specifically as lobbyists. We hire people with expertise in community relations.”

Stone would not comment on the use of bond money for anti-cityhood legal work. “You’d have to ask county counsel about that,” he said.

Cooper could not estimate the dollar amount of the refund sought on behalf of the 2,000 homeowners in the district. “That’s been the problem,” he said. “The citizens sewer committee tried for over a year to get a financial report out of Public Works detailing expenditures. We plan to hire our own auditor and find out under the freedom of information laws exactly how much has been spent and on what.”

Malibu homeowners have been assessed $13,000 per residential lot to repay the bond debt, which they may pay as a lump sum or spread out over 20 years, with interest, as part of their property taxes. But Stone predicted that homeowners will be taxed further because “project delays have put the project well over budget.”

Asked what steps he and Kagon plan to take if the county does not issue the refund, Cooper said: “Then we’ll refer this to qualified attorneys.”

Pellman could not be reached for comment on the letter.