O.C. District’s Assets Seen at Risk of Theft

A joint task force investigating the Santa Margarita Water District has obtained notes prepared by an outside auditor that suggest the water agency’s $150-million investment portfolio was highly susceptible to “theft or fraud” and that there were “possible broker kickbacks” going to unnamed individuals.

Law enforcement authorities with the FBI-Orange County district attorney task force investigating the water district said Friday that they intend to question next week the author of the “risk assessment form,” Carl Schoonover, a certified public accountant in San Juan Capistrano.

In the course of his 1992 annual audit, Schoonover wrote some notes to himself indicating that the water district’s books contained “difficult-to-audit transactions” and that theft might be occurring through “wire transfers.”

The two-page assessment, which was obtained by The Times, did not mention names, nor did it point to any specific transactions that aroused Schoonover’s suspicions--suspicions that were not repeated in the formal audit report presented to the district’s board and made public three weeks later.

Reached at his office recently, Schoonover declined to discuss the documents.

In a later letter to The Times, he complained that the documents “were stolen from our files,” and said that a newspaper article about them would lack “all the facts” and “lead to inaccurate and unfair conclusions.” But he said he could not “respond to (The Times’) questions at this time.”

“In other words, you do not have all of the information,” the letter said. “Unfortunately, within the confines of the accountant-client relationship, I am restricted in my ability to disclose that information.”

The Orange County district attorney’s office which, along with the FBI, is investigating the water district, confirmed that it too has the Schoonover memo and intends to question him about it next week.

“Clearly, any piece of evidence in which (an auditor) is expressing the possibility of illegal activity is something we would want to follow up on,” Assistant Dist. Atty. Wallace Wade said.

The water district’s investment portfolio has been overseen for more than a decade by Assistant General Manager Michael P. Lord.

But Lord and General Manager Walter W. (Bill) Knitz were recently suspended with pay after disclosures by The Times that they had accepted thousands of dollars in gifts from contractors in excess of state limits and spent district funds on extravagances such as limousine rides and theater tickets.

Gary Pohlson, Lord’s attorney, said that his client “has never done anything illegal with these accounts nor has he participated with anyone else in doing anything illegal.”

Pohlson noted that Schoonover’s public audits have always given the district’s portfolio a clean bill of health.

Until last month, the water district relied on Merrill Lynch Government Securities in San Francisco and a San Diego County stockbroker to execute all of its financial transactions, including stock trades.

Officials with Merrill Lynch on Friday said the securities firm has not been served with any subpoena for any information regarding the water district.

“It is our policy to cooperate fully with all government investigations,” said Fred Yager, a spokesman for Merrill Lynch.

The water district is still relying on Merrill Lynch for financial advice and transactions.

However, on April 19, finance director James W. Clark closed the district’s account with Vann Thomas Wesson, a La Jolla stockbroker and a registered representative for Titan Value Equities Group in Tustin.

Wesson said last month in an interview that he has done nothing wrong and strongly denied paying anyone “kickbacks.”

“That’s illegal in about four different ways,” Wesson said.

John Heine, deputy director of public affairs at the U.S. Securities and Exchange Commission, said the Investment Advisers Act of 1940 requires that clients be informed of all commissions.

“Arrangements where commissions are split have to be disclosed fully to the client,” Heine said.

Though district officials claim they thought the account with Titan was a non-commission one, records show that the district paid $159,045.05 in commissions in fiscal 1991.

Since the late 1980s, the district’s investment portfolio has been handled in part by Wesson even though he changed firms three different times. Wesson said Lord and he have a “friendship.”

Titan President Frank King said Friday that his firm has begun its own internal investigation regarding the water district’s stock trades after it was made aware of the Schoonover memo.

“They are a customer of Titan and to my knowledge they’ve been treated like every other customer,” King said. “If there are any kickbacks, we certainly don’t know about them.”

Nevertheless, King said he had instructed his staff to review “every ticket and every trade” involving the water district.

“I don’t believe we are going to find anything wrong,” King said.

He said one of the things his staff is looking for is confirmation that Titan sought numerous bids for each stock transaction, thereby assuring the water district the lowest market price possible.

The district’s investment policy requires that at least two bids are sought for every transaction, records show.

Auditors interviewed by The Times differed when asked about the significance of Schoonover’s memorandum.

“I would not think that would be normal,” said Walton Conn, a practice fellow at the American Institute of CPAs. “I think a logical person would assume since those things were written down there, the auditor had some questions that normally would not be questions.”

But a UC Irvine auditor said Schoonover’s concerns are pretty routine.

“That is not uncommon,” he said, requesting anonymity. “You might make a comment like this in your work papers, pursue it, and not find anything.”

Santa Margarita Water District board Chairman Don Schone said recently that he was not disturbed by Schoonover’s notations.

“I am actually very pleased that Schoonover is marking down areas like this he wants to look into,” Schone said. “I would be disappointed if he didn’t have a checklist like this.”