Wagner, Supervisor Were Partners : Finances: Accused embezzler and his boss at Newport-Mesa school district invested in several ventures, documents show. Officials say such dealings are not prohibited.

While Stephen A. Wagner was allegedly embezzling from the Newport-Mesa Unified School District, he was engaged in private business ventures with his boss, the district’s finance officer, according to interviews and public documents.

The private relationship between Wagner and Terrell J. Zimmerman raises concerns about the potential for bias or the perception of favoritism toward Wagner, some management ethics experts and a school district official said.

Zimmerman said he sees nothing wrong with a private business relationship between a boss and a subordinate. Newport-Mesa’s acting superintendent, Carol Berg, said there is no policy against such outside business dealings as long as they do not intrude into the workplace.

However, the Wagner scandal--which prosecutors believe cost the district at least $3 million--has prompted the Newport-Mesa teachers union and some parents to question how the district was managed at the time of the alleged fraud.

As director of fiscal services at the Newport-Mesa district from September, 1979, until his retirement in November, 1989, Zimmerman handled the district’s budget and paid its bills. Wagner, who became chief accountant in 1979 and assistant director of fiscal services in 1986, was Zimmerman’s chief assistant. Wagner was promoted to Zimmerman’s post when he retired.

Wagner is believed to have embezzled more than $3 million from late 1986 through April, 1992, according to law enforcement and school district officials.

While the two men worked together, they were involved in two ventures. In 1990, Wagner also was involved in a real estate deal with Zimmerman’s wife. Specifically:

* In July, 1985, Wagner bought a one-third interest in a Rancho Mirage condominium that belonged to Zimmerman and his wife, Lois. One month before Zimmerman’s retirement, Wagner and his wife, Linda, along with another Newport-Mesa employee and her husband, bought out the Zimmermans.

* In spring, 1987, Zimmerman invited Wagner to invest $50,000 in a Newport Beach limited partnership that was supposed to make money by turning soft drink cans into aluminum ingots. The partnership went broke and Zimmerman and Wagner each lost his investment.

* Eight months after her husband’s retirement, Lois Zimmerman served as Wagner’s real estate agent in his purchase of his $975,000 home in the exclusive Dover Shores area. Lois Zimmerman said her real estate agency received a $21,875 commission, of which she received $12,501.

The Zimmermans said in an interview that there is nothing unusual about a boss and employee being friends and investing together. They were as surprised as anyone, they said, to learn of the accusations against Wagner, who has pleaded not guilty to grand theft and misappropriation of public funds.

But Thomas Godley, Newport-Mesa’s assistant superintendent for budget, facilities and personnel, said it is not a good practice for supervisors and subordinates to have private business relationships.

“Public educators are under the microscope. Why give people something to be critical over? I don’t think it’s right,” Godley said. “I think business and personal things should be separated.”

The guiding principle, USC management professor and author Burt Nanus said, “has to be that whenever there is a potential conflict, the employer must come first.”

An even higher standard applies in government or institutions such as taxpayer-financed school districts, said Nanus, director of the Leadership Institute at USC’s School of Business Administration.

“In the public sector, there shouldn’t even be the appearance of impropriety,” he said. “If people are doing anything that appears improper or smacks of favoritism, then obviously they should not do that and it is not good management practice.”

There is, however, no district policy to prohibit a supervisor from investing in properties or outside business deals with a subordinate, said Berg, who is filling in while Supt. John W. Nicoll recuperates from heart bypass surgery.

“The district’s position on any kind of outside work is that it must not interfere with a person’s responsibilities and professional tasks relating to their jobs,” Berg said. “What people do outside of their regular work responsibilities is their business.”

For their part, the Zimmermans express frustration that their connections with Wagner have come under scrutiny.

“The net result is this whole damn thing taints everything,” Terrell Zimmerman said.

The couple said Wagner talked about apartment buildings, $300,000 in timberland and the $1-million sale of an airport shuttle service.

“Maybe there wasn’t a shuttle service, but who are we to question our friends?” Lois Zimmerman said.