Embattled Newport-Mesa Battens Down Internal Security : Scandal: The district changes computer codes and safe combinations as the D.A. investigates an administrator who allegedly diverted employee health funds to his own company.

The local school chief said Wednesday that officials have changed computer security codes and locks on office safes and are scrutinizing finance procedures following revelations that a top administrator allegedly diverted funds to a company he co-owns.

John W. Nicoll, superintendent of the Newport-Mesa Unified School District, said auditors for the school district are poring over accounts for the last two years with investigators from the district attorney’s office, who are conducting a criminal probe involving chief finance officer Stephen A. Wagner and possible embezzlement of school funds.

Wagner, 40, who was widely know for his expensive cars, homes and lucrative outside businesses, has been suspended without pay over a check he issued for $57,861. The district’s board of trustees took steps Tuesday to fire him over the matter.

Nicoll said he also has asked Orange County Department of Education fiscal experts to help determine where the 17,500-student district needs to tighten procedures for handling money.

“When something like this happens you always change the combination on the safe, put a different access code on the computer,” Nicoll said. “We’re also getting some help . . . to look at every aspect of our cash flow and check flow. If we can improve things we will do so.”

The check, dated July 16, 1991, was drawn on the district’s employee health fund account and made out to Cobbler Express, a Victorville-based shoe-repair business co-owned by Wagner which school officials say has never done business with the district. The check bore Wagner’s handwritten signature, but lacked the required second signature of Thomas Godley, the district’s assistant superintendent for business and personnel.

Nicoll said the first hint of trouble in the school district’s finance office surfaced last April or May, when an unidentified district employee contacted the Orange County Grand Jury about a questionable district check that had only one official district signature.

It was not clear when the grand jury turned the matter over to the district attorney’s office, which handles investigations for the jury. But Nicoll said he first learned about the questionable check on Oct. 13, the day an investigator for the district attorney’s office contacted Deputy Supt. Carol Berg.

Since last summer, Nicoll said, the investigator had been trying unsuccessfully to get a copy of the check from Wagner and finally turned to Berg for help. On Oct. 15, the superintendent got a facsimile of the canceled check from the Wells Fargo Bank branch in Costa Mesa, which handles the employee health fund account, and gave the check to the district attorney’s office.

Eight days later, a notice of suspension was delivered to Wagner’s $975,000 home on Galaxy Drive, where he had been on sick leave after a vacation.

Nicoll, who had repeatedly promoted Wagner from the ranks of bookkeeper to one of his top cabinet officials over two decades, was stunned when he saw the check, handled in violation of all district procedures.

“I simply couldn’t believe that Mr. Wagner was capable of a violation of rules and regulations of this nature . . . because I trusted him,” Nicoll said.

But the superintendent also blames Wells Fargo Bank for cashing the check without the requisite two signatures.

“It should not have been honored,” he said. “It was at that point that this check became a serious problem for this district. It is that that is the basis of (Wagner’s) suspension and the notice of intent to dismiss. That is the check that has started the audit and re-audit of our books and has me right in the middle of all this.”

Wagner has not been charged, but Deputy Dist. Atty. Carl Biggs said Wednesday that an investigation is continuing. School officials said several investigators were closeted with auditors at the Costa Mesa district headquarters Wednesday.

Biggs said his office acted almost immediately to investigate the initial complaint to the grand jury, but he said the information provided to them “was very minimal.”

“The grand jury and district attorney’s office receives literally hundreds of complaints of this nature. We sort through them . . . and a few turn out to be the kind of situation we may have here in this case,” Biggs said. “When we finally got information that a crime might have occurred, we acted on it with all the strength we have.”

Neither Wagner nor his 37-year-old wife, Linda, could be reached for comment Wednesday. Linda Wagner’s mother, reached by telephone at her home in Fullerton, declined to comment on the case.

“The kids’ attorneys have told us to say nothing,” she said. “When the attorneys are ready to make a statement they’ll contact (the media).”

The Wagners, who have a 4-year-old son, filed for bankruptcy last July, only two days after the Internal Revenue Service filed tax liens totaling $2.39 million against them. Since then, the couple have put four of their seven properties up for sale, including condominiums in Rancho Mirage and Stanton, and two homes in Fullerton.

They are leasing their former home in an upscale Santa Ana neighborhood to Jo Ellen Allen, a Republican who is battling Assemblyman Tom Umberg (D-Garden Grove) for his central Orange County legislative seat.

Allen, who ran unsuccessfully for the Newport-Mesa school board a few years ago, said she had never met the Wagners before leasing their home in the 2100 block of Victoria Street last February in order to move into Umberg’s district.

Allen described them as “pleasant landlords,” but she said she knew little of them beyond sending them a rent check each month. She expressed concern that the Umberg camp or his supporters would try to link her to the embattled school district official.

“We really don’t know them one way or the other,” she said. “We have nothing to do with his personal affairs and he has nothing to do with ours. I don’t want to be involved with his problems.”

Nicoll, meanwhile, expressed confidence that the financially troubled school district would weather this latest storm, as it had the recent layoffs of more than 130 employees and a $5-million budget shortfall that he said was unrelated to the Wagner investigation.

He noted that he already had moved to hire a budget analyst even before the Wagner investigation surfaced. “There is no connection between the two events; it was just fortuitous that we decided to hire him at this time,” Nicoll said of Michael Fine, who will begin work in mid-November.

Nor will the district’s required budget summary for the 1993-94 school year be late for its November deadline, the superintendent said.

“It will be prepared on time,” he said. “We have got a great staff over there--people who used to work directly for (Wagner). They are a bunch of fine people and we’re going to be fine.”

Staff writers Jodi Wilgoren and Leslie Berkman contributed to this article.