Insider’s Knowledge Was Key to Wagner Scheme : Theft: As Newport-Mesa schools finance officer, he deposited money in an account his superiors believed had been closed. Then he wrote himself checks from it.

It was a scheme that was both daring and simple, one that relied on an insider’s knowledge and power that Stephen A. Wagner had accumulated in his rise from bookkeeper to top money man in the Newport-Mesa Unified School District.

Wagner, who pleaded guilty Tuesday to embezzling at least $3.5 million in school funds, did it by tapping a hidden account, mostly with cashier’s checks made out to himself. Later, he transferred thousands of dollars to banks in Florida and elsewhere and began writing checks on a second account to a company he co-owns.

The primary vehicle was the secret slush fund, an employee health insurance savings account that Wagner had been ordered to close at the end of 1986. Instead, according to court documents and district officials, he diverted into it money streaming into the school district from various sources.

Little by little, Wagner tapped the secret account by way of cashier’s checks made out to himself by tellers at a Wells Fargo Bank branch in Costa Mesa. Court documents show that Wagner had about 100 such checks made out to himself between November, 1986, and May, 1991. He also had cashier’s checks made out to third parties.

The genius of the scheme is that there were no returned checks, no paper trail to turn up in an account that didn’t exist as far as Wagner’s employees and bosses were concerned. He was also uniquely positioned to open mail and snap up checks before they could be deposited to their proper accounts.

Had not Wagner slipped briefly when he began using the second account in July, 1991, and had not a suspicious employee gone to the Orange County Grand Jury last March, the trusted, 21-year finance officer might never have been caught, say sources close to the investigation.

Even when he was detected, it took law enforcement investigators seven months to get concrete evidence of fraud. It would be that evidence--a check for $57,861.25 that Wagner wrote to a shoe repair business he co-owns--that would lead to his firing on Nov. 10 and arrest on criminal charges Nov. 24.

There was little activity on the secret fund in late 1990 and early 1991. For reasons not yet known, Wagner closed out the account on May 31, 1991, transferring $6,700 to the active employee health fund revolving checking account at Wells Fargo Bank. By then he was already tapping the district’s active employee health fund, with a transfer of $90,525 to the account of a gem trading firm, J. Samuels & Co., in Hollywood, Fla.

It was in mid-July, 1991, when Wagner first slipped. He tried to make a withdrawal from the active health fund and turn the proceeds into a cashier’s check as before. But a Wells Fargo bank teller questioned the transaction, and ultimately called Assistant Supt. Thomas A. Godley to ask for higher authorization.

In hindsight, Godley agrees now that it was a red flag to Wagner’s embezzlement.

At the time, however, “it just wasn’t in my mind to think that people were stealing,” Godley said. “I’m not a detective, I don’t go around looking for that.”

Godley said he told the bank clerk that Wagner did not have authorization for such a transaction. He then asked the teller to put Wagner on the phone.

Godley said Wagner told him he merely needed to move money from one account to another and that the funds would never leave the bank. Godley said he replied that it was “stupid” to put his name on a certified check, that it could result in later criticism. He told Wagner to find another way to deal with the situation.

“I barely remember the call, that’s how insignificant it was,” Godley said. “I get hundreds of calls.”

But he added that he never questioned Wagner’s explanation. “I believed him when he said it wasn’t going to leave the bank. When you work with people, you don’t say, ‘You liar.’ ”

A few days later, on July 16, 1991, Wagner allegedly went to the bank and requested “counter checks,” blank checks that were then imprinted with the district’s account number. Court documents show that Wagner wrote one of the counter checks that day for $57,861.25 to Cobbler Exp., an abbreviation for the Cobbler Express shoe repair firm he co-owns. On July 25, 1991, he wrote another check to Cobbler for $48,295.44.

Court documents show that the bank cashed both checks even though they lacked the required second signature by Godley.

Wagner wrote two more checks--one for $54,880 on Dec. 17, 1991, and another for $14,320.19 on April 10, 1992. Both carried Wagner’s signature above a facsimile of Godley’s signature, which district officials claim was forged.

It was during this latter period of Wagner’s embezzlement that a school district staffer who learned about the first check to Cobbler Express began to explore further. By March, 1992, the unidentified employee decided against going to higher-ups in the district and instead wrote a letter to the grand jury.

An investigator was assigned on March 25, and on April 13 spoke by telephone with Wagner to query him about the allegations. Wagner told the investigator there was “no problem,” and that he would be happy to provide an explanation or documentation.

Just as suddenly, there were no more checks, no more wire transfers, no more withdrawals. But it would be June, 1992, before Wagner sat down with the investigator for the district attorney’s office, and mid-October when the investigator tired of Wagner’s “stalling” and went to Wagner’s superiors to demand copies of suspicious checks.

After the first check to Cobbler Express turned up, Supt. John W. Nicoll, who had been a mentor to Wagner during their 21 years together in the district, ordered the business director suspended without pay.

Godley is hopeful that Wagner’s guilty plea Tuesday will not derail the ongoing investigation for evidence of further embezzlement.

“People have to realize, too, that all staff, including board members and district officials, are just as upset and mad and frustrated and angry as any other person out there,” Godley said. “No one is taking this lightly. We’re devastated just the same as anyone else is.”

Times staff writer Jodi Wilgoren contributed to this article.