Effect of Newport-Mesa School Fraud Detailed : Theft: Class sizes grew, dozens of teachers were laid off because of Stephen Wagner’s crime, grand jury says.

Class sizes were increased and dozens of teachers and other employees were laid off as a result of the budget shortfall caused by school official Stephen Wagner’s embezzlement of $4 million from the Newport-Mesa Unified School District, according to an Orange County Grand Jury report released Wednesday.

According to the report, the school district was forced to reduce the number of classroom aides by 50% and lay off 59 teachers and 150 other employees as a result of the embezzlement. School board member Jim deBoom said physical education programs were also eliminated at some elementary schools.

“As a result of Wagner’s illegal conduct, the district, its staff and students have suffered significant damages. By way of example, the district was forced to increase its class size from 28.5 students per teacher to 31 students per teacher,” the report noted.

The grand jury report marks the first time that authorities have comprehensively described how the $4-million theft affected the school district.

Wagner, 41, rose from bookkeeper to director of business support services for the school district, a position that allowed him total access to and control of funds. He admitted stealing about $4 million from the school district from 1986 to 1992, using the money to finance a lavish lifestyle that included a house by the Back Bay, luxury cars, a gold-plated grand piano and a tuxedo with diamond studs.

In December, 1992, Wagner pleaded guilty to embezzlement and tax-evasion charges in Orange County Superior Court and was sentenced to six years in state prison. Last month, a U.S. District Court judge sentenced him to 57 months in federal prison after Wagner pleaded guilty to federal charges of mail and wire fraud.

Under terms of a plea bargain between Wagner and federal prosecutors, his federal sentence will run concurrently with the state sentence. Both the state and federal judges who sentenced Wagner ordered him to pay restitution to the school district.

Wagner’s assets were seized after his arrest and liquidated by a bankruptcy judge. The school district received about $1.7 million from the sales, leaving about $2.3 million that Wagner still has to pay the district.

“We have attempted to recover as much of the stolen funds as possible. We have also worked with the budget in such a way that we have been able to restore funding in some areas that were slashed. This has forced us to become very careful budget planners,” said Supt. Mac Bernd, who took over last July.

Paul S. Meyer, Wagner’s attorney, said Wednesday that Wagner was tempted to steal because of a “deep-seated psychological deficit that required him to be seen as a successful person.”

Bernd took issue with the report’s conclusion that the layoffs and increased class sizes were entirely due to the embezzlement and the $281,557 spent by the district for audits and legal costs to pursue the matter, as mentioned in the grand jury report.

While those costs contributed significantly to the problem, he said, “not all of the layoffs were related to the embezzlement.”

The grand jury report lauded the school district for the steps it took after Wagner’s arrest to discourage future thefts. In addition to instituting a more thorough auditing system, the district formed a citizens’ oversight committee.

However, grand jury spokesman Jim Cooper also criticized district officials for not exercising “more vigilance in the first place to prevent the theft of funds.”

“The controls were in place then, but they were never used,” Cooper said.

Meyer, who said that Wagner is remorseful over the thefts, also wondered how “a district populated by some of the most sophisticated people in the county could allow these losses to mount year after year without some kind of audit.”

Bernd said the new safeguards instituted by the district will prevent others from stealing large sums without being caught.

“The district has made a remarkable effort to get some of the problems addressed that were cited by the grand jury. I don’t think we can ever build a perfect system, but we’ve made a great effort,” Bernd said.

The grand jury report detailed the manner in which Wagner was able to steal with impunity over the years. He was finally caught after another district employee wrote a letter to the grand jury in February, 1992, asking it to look into Wagner’s possible criminal activity.

According to the grand jury report, Wagner stole from district savings and checking accounts, diverting funds to his personal accounts. Wagner was able to do that, school board member deBoom said, because “he was the guy writing the checks, signing the checks and balancing the checkbook.”

Some board members still believe that Wagner was able to hide some stolen money in an offshore bank. But Meyer disputed that theory.

“His overriding concern from the first time I met with him was to minimize the loss to the district. He ordered me to cooperate with officials and seek as much restitution as possible,” said Meyer.

According to Meyer, Wagner insists that some expensive gems that he purchased with the stolen money are still stored in Canadian vaults.

“Even right now he believes there are accounts in Canada that contain gems that could contribute substantial restitution. . . . He’s baffled by the authorities’ reluctance to locate those gems, and, frankly, so am I,” said Meyer.

Wagner worked for the district for 21 years, and fellow employees were amazed that he could afford the lifestyle he flaunted so openly on his $79,848 salary.

“A lot of us wondered about that. The response from him was that he had outside investments in precious stones and metals and was a wizard in investments,” deBoom said.