Wagner Accused of Grand Theft : Arrest: Investigators say the former school finance officer stole nearly $1.2 million from the Newport-Mesa district.

The former chief financial officer of the Newport-Mesa Unified School District was arrested Tuesday on charges he stole nearly $1.2 million from the school system, and investigators warned that the amount could nearly double once an audit is completed.

Stephen A. Wagner, who was fired two weeks ago, was taken into custody at his million-dollar home in Newport Beach as his wife and 4-year-old son looked on. Wagner, 40, was held on $1.2 million bail after prosecutors noted that he has overseas bank accounts and could try to flee the country.

The Orange County district attorney’s office alleges that Wagner transferred money from several school funds into an inactive Newport-Mesa bank account and then quietly siphoned that money into his personal accounts.

Sources close to the investigation told The Times that some of the missing school funds may be grants from federal agencies. They suggested that the FBI could enter the case as early as today. That could expose Wagner to federal charges in addition to the state accusations filed Tuesday.

According to an affidavit filed in Harbor Municipal Court, Wagner had tellers at Wells Fargo issue him 25 cashier’s checks from Newport-Mesa’s Health Fund savings account. The checks, totaling $920,625, were written between July 8, 1988, and May 31 of this year. Wagner allegedly made the checks payable to himself.

In addition, Wagner allegedly wrote four checks for $175,356 to a shoe repair company he co-owns, Cobbler Express Corp. in Victorville. Those checks were drawn on the Health Fund checking account.

He allegedly wired an additional $90,525 from the Health Fund checking account to a Florida gemstones company, J. Samuels & Co. Investigators claim that Wagner bought and sold precious stones, and Newport-Mesa employees have said he often received gems at school district offices through an armed courier service.

“He stole from the kids. That’s the bottom line,” said Newport-Mesa Assistant Supt. Thomas Godley. “But he also stole from parents and staff and the board and everybody else. We’re all victims.”

Parent Greg Wohl, a leader of a petition to oust Supt. John W. Nicoll, said he blames school administrators for giving Wagner free rein over district accounts.

“When you get a weasel in the henhouse, you need to take action and do something about the problem,” Wohl said. “I believe the administration shares some responsibility for this.”

Wagner was known for his extravagances--a Rolls-Royce, two Mercedeses and a wardrobe that included a mink tuxedo and a fur-lined bathrobe. While his $78,000 school salary could not support such a lifestyle, Newport-Mesa officials said Wagner had led them to believe that he had a string of successful business ventures that had made him a wealthy man.

But on July 28, Wagner filed for Chapter 11 bankruptcy protection from creditors after the Internal Revenue Service issued nearly $2.4 million in liens against his estate. His bankruptcy filing listed six properties in Southern California and one in Texas. Besides rental payments from a couple of those homes, Wagner didn’t mention any other sources of income.

Paul S. Meyer, Wagner’s attorney, declined to say how Wagner would plead to the charge of grand theft and misappropriation of public funds at his arraignment Monday. Wagner faces up to six years in jail if convicted.

“I don’t want to elaborate any further until the district attorney has had a chance to look at all the facts,” Meyer said.

Wagner, a 21-year employee, was fired by the Newport-Mesa Board of Trustees on Nov. 10 after they learned of the checks written to Cobbler Express.

But officials had begun investigating Wagner months earlier. A Wells Fargo employee alerted district officials that Wagner had asked for a cashier’s check drawn from school funds, and a suspicious Newport-Mesa employee relayed the information to the Orange County Grand Jury in March.

The Cobbler Express checks, the wire transfer and 25 cashier’s checks total $1,186,507, but investigators expect to revise that total because they are still auditing Newport-Mesa’s books. The losses “likely may approach” $2.2 million, according to the affidavit.

“We are looking back further now. . . . That is the figure we can document right now,” Deputy Dist. Atty. Carlton P. Biggs said. “There is the possibility of additional losses, but we can’t document them until we get further information from the banks.”

However, sources involved in the investigation told The Times that cashier’s checks made payable to Wagner that have been discovered so far actually total about $3 million. Investigators are still tracing what happened to the money and whether some was returned.

A review of Newport-Mesa audits shows that school officials were aware of irregularities in the Health Fund accounts as far back as 1987.

The Newport Beach office of Peat Marwick Main & Co. reported in its fiscal 1987 audit that “the district accounting office did not prepare proper reconciliations of their records to the bank statements for their Health Plan account. The listing of outstanding checks was neither complete nor accurate.”

Though the district said it had installed a computer to reconcile the Health Fund account in 1987, further problems developed in fiscal 1990.

That year, the accounting firm of Lemke & McDade said “interest earned and service charges on the two Health Plan revolving fund accounts have not been recorded. These errors would not have occurred if the Health Plan revolving bank accounts were reconciled on a monthly basis.”

District officials responded in the fiscal 1990 audit report that “due to numerous staff positions being vacant, the proper controls were not maintained. The district intends to implement the auditors’ recommendation.”

“If anyone had followed up on the audit reports, they would have found it,” said one Newport-Mesa staff member.

By using cashier’s checks, Wagner evidently foiled auditors. The original cashier’s checks and extra copies would have been retained by either Wells Fargo or Wagner himself. They did not make their way into school district files.

Wagner is portrayed in court documents as a sophisticated international investor with financial interests stretching from Toronto and Hollywood, Fla., to points unknown in the Caribbean. The affidavit said Wagner “may have all or a significant portion of the monies taken from the school district invested in accounts outside of the United States.”

Wagner, the affidavit added, has a passport and has traveled to Canada, the Caribbean and England within the past two years. He invested in gemstones through a company known as Harth Group International in Toronto, according to the affidavit.

After his Oct. 23 suspension from Newport-Mesa, Wagner closed five local bank accounts that he and wife Linda had, according to the affidavit.

Wagner was arrested before the conclusion of the district attorney’s investigation because officials were concerned he might flee the country and take assets with him.

The alleged thefts come at a time of shrinking budgets at Newport-Mesa, which serves Newport Beach and Costa Mesa. Last spring the district laid off about 200 employees because they faced a $2.7-million deficit.

After allegations were made against Wagner, parents already upset about teacher layoffs and overcrowded classrooms organized a petition drive calling for the removal of Nicoll. Nicoll recently underwent heart surgery and is in guarded condition at Hoag Hospital in Newport Beach. He was not contacted for comment regarding Wagner’s arrest.

Nicoll and other school officials have argued that the alleged thefts had no effect on the classroom because the health funds are not used for school operations. They blamed the budget woes on a drop in property tax collections.

But Biggs on Tuesday said Wagner’s alleged actions may explain a recent $1-million budget shortfall that district officials had previously attributed to a “bookkeeping error.”

“This may be part of that bookkeeping error,” Biggs said.

Biggs said the school district was not to blame.

“When a person is of a mind to steal, it is hard to prevent that. It’s hard to fault the school district in this, but I assume now that they will be putting into place some additional precautions,” he said.

Nicoll regarded Wagner as a protege and helped him rise through the ranks to become the chief fiscal officer in charge of a $91-million budget. Others in the district also held a high opinion of Wagner.

“I’m beyond shock. The seriousness of this thing and the magnitude of it has me unable to respond,” acting Supt. Carol Berg said. “This is a former employee who was trusted and who has violated that trust in the form of embezzlement, fraud (and) deceit.”

Berg said $1.2 million would pay the salaries of about 20 teachers.

Municipal Judge Susanne S. Shaw ordered that he be transferred from Newport Beach City Jail to Orange County jail.

Shaw referred to the scandals that have hit Newport Beach this year, including the embezzlement of nearly $2 million in city funds by utility director Robert J. Dixon and allegations of sexual harassment and rape against the police chief and another officer.

“Under the circumstances, with the total amount of money involved and everything that Newport Beach has seen with Dixon and all of that, I feel that he should not be given any special treatment” by being allowed to remain in Newport Beach’s jail, Shaw said.

PARENTS ANGRY: More than 150 parents attend a meeting to demand ouster of Supt. John W. Nicoll. A20

The Case Against Wagner

Stephen A. Wagner, former chief financial officer for Newport-Mesa schools, is charged with stealing about $1.2 million in school funds.

How the Alleged Fraud Worked:

Investigators say Wagner channeled money from several school funds into an inactive district bank account, called the Health Plan savings account.

From the Health Plan savings account, he had Wells Fargo Bank give him 25 cashier’s checks, totaling $920,625, between July 8, 1988, and May 31 of this year. He put the money into personal accounts.

From the Health Fund checking account, he wrote four checks, totaling $175,356, between July 16, 1991, and April 10 of this year. These checks went to a business he co-owned known as Cobbler Express.

He also wired $90,525 from that checking account to a Florida gemstones company.

Wagner Properties

Stephen A. Wagner and his wife, Linda, own seven houses and condos in Southern California and Texas. Four of the properties (in bold (+) type) are for sale.

Property Market value Mortgage Galaxy Drive, Newport Beach $850,000 $539,355 Victoria Drive, Santa Ana 700,000 453,387 + Porter Avenue, Fullerton ** 185,000 82,985 + Baker Avenue, Fullerton 179,000 147,260 + Sunrise, Rancho Mirage 152,000 87,769 Cerritos Avenue, Stanton *** 135,000 75,740 + Pepperwood St., Flower Mound, Tex. * 78,000 72,393

** Held in Linda Wagner’s name

*** Held jointly by Stephen Wagner, his mother and stepfather

* Held in Stephen Wagner’s name

Source: U.S. Bankruptcy Court and county recorder

Key Dates in the Wagner Case

March: A Newport-Mesa Unified School District employee contacts the Orange County Grand Jury about suspicious financial activity involving Stephen A. Wagner.

July 21: Internal Revenue Service files nearly $2.4 million in liens against Wagner and his wife, Linda.

July 28: Wagners file for Chapter 11 bankruptcy protection from creditors because of liens.

Oct. 13: Orange County district attorney’s office informs school officials of its investigation into Wagner’s possible misappropriation of funds.

Oct. 23: Newport-Mesa officials suspend Wagner without pay.

Nov. 10: Wagner is fired.

Nov. 24: Wagner is arrested on felony charges that he misappropriated about $1.2 million in public funds.