SEC Investigating Possible Broker Kickbacks in O.C. : Bankruptcy: Relationship of brokers to officials is under scrutiny, source says. Supervisors deny wrongdoing. Securities are auctioned for $483 million.

The Securities and Exchange Commission has launched a broad investigation of possible influence peddling in the top reaches of Orange County government, looking specifically to determine whether brokers paid kickbacks to elected officials, a high-ranking source close to the investigation said Thursday.

The probe has focused on “campaign contributions and kickbacks, things of that nature, and the relationship of broker-dealers to those officials,” the source said. “When someone is making a lot of money on you, is there a quid pro quo? It’s happened in the area of municipal securities before.”

Two weeks ago, the county’s investment pool--driven by high-risk reverse repurchase agreements and structured notes--suffered a $2.02-billion collapse. The loss led to the resignation of 24-year Treasurer-Tax Collector Robert L. Citron, and prompted county officials to file the largest municipal bankruptcy in history.

It is unclear whether any evidence of wrongdoing has surfaced in the SEC investigation. The Times reported Thursday that the SEC had issued subpoenas to members of the Board of Supervisors and Citron demanding that they turn over a huge array of documents--including their federal and state tax returns, personal diaries and calendars, checking and savings account statements and records of any gifts or loans from investment brokers.

The investigation focuses primarily on brokerages--particularly Merrill Lynch, Wall Street’s biggest investment house, which has handled millions of dollars worth of bond transactions for the county’s investment pool.

On Thursday in Los Angeles, SEC Chairman Arthur Levitt Jr. suggested that Orange County voters oust the elected officials who allowed the debacle to occur.

“If your supervisors are so lax that they allow . . . that kind of speculation, I think the voters of that community should throw the whole bunch of (them) out of office,” Levitt said.

Merrill Lynch spokesman Richard Silverman said Thursday that the firm would “cooperate fully” with the SEC. He declined to discuss the subpoenas, except to reaffirm that the brokerage acted “professionally and properly” in all its dealings with the county.

Orange County supervisors, stunned by the unprecedented demand for records from the SEC, pledged to comply with the subpoenas but reacted angrily to any suggestion that the board may have been too close to Wall Street investment bankers.

“I feel absolutely confident that, as far as I’m concerned, I can sleep very comfortably,” said Board of Supervisors Chairman Thomas F. Riley.

In other developments Thursday:

* Administrators of nonprofit agencies that contract with the county said they were becoming increasingly alarmed about delays in payment for services such as child abuse treatment and refugee vocational training. Some began to make emergency plans and held staff meetings to discuss layoffs, furloughs and even closure.

“We’re trying to pare down everything we can until the county finds its feet--and its head--and finds the resources to keep us going,” said Hank Paris, executive director of the Fullerton-based Child Guidance Center.

* Leaders of PTAs and educational foundations said the county’s fiscal crisis could mean that thousands of dollars they raise each year for extras such as computers, music and art might go instead to pay for basic items and day-to-day operations.

* The county auctioned $483 million worth of securities from its investment pool, the first step toward liquidating the fund, which has dropped $2.02 billion--about 27%--in value this year. Officials of Salomon Bros., the county’s financial adviser, expressed satisfaction with demand for the bonds on Wall Street, but they fetched less than the average value Salomon had attributed to the fund’s less risky holdings.

* Officials unveiled an interim plan to divide the pool’s revenues as the fund is liquidated, a process that could take from one week to six months. The 187 cities, school districts and other agencies that invested in the pool--along with youngsters whose damages from private lawsuits were deposited in the fund--initially would receive 30% of the money they put in, a total of $2.24 billion. The government agencies could then use the money to pay salaries and other bills.

* Talk of recalls mounted. Eileen Padberg, a prominent political consultant, said she expects to see recall movements against County Supervisors Roger R. Stanton and Gaddi H. Vasquez. Lake Forest resident Dianna Baumann said she has formed a group to gather signatures to prompt a recall of the board.

“We’re encouraging people to send empty wallets to county supervisors,” Baumann said. “We want them to know that they shouldn’t come knocking on our doors, we have no more money.”

* Assemblyman and longtime Speaker Willie Brown said he would support lending state money to Orange County, if necessary, to gas up police cars and keep schools open. But the Democratic leader of the lower house said he gleefully awaits begging by some Orange County legislators who refused to help out other areas in need--including his hometown of San Francisco after the 1989 earthquake.

* Gov. Pete Wilson directed state transportation officials to expedite a $15-million advance to the Orange County Transportation Authority, which has more than $1 billion tied up in the county’s fund. The money is for road improvements, including the massive Santa Ana Freeway widening project.

Repercussions Spread

The financial crisis was apparent on the streets of Orange County and in the corridors of financial institutions.

About 40 members of Teamsters Local 952 marched through the first floor of Merrill Lynch’s Santa Ana office, accusing the investment firm of profiting from the county’s financial ruin. Protesters demanded the brokerage return profits made from underwriting risky investments with tax money. The union represents 15,000 workers in Orange County .

A Westminster resident, Nancy Schwartz, was shaken when an American Savings Bank branch initially refused to cash a county-issued child-support check. After a flurry of calls verified that funds in the county’s child-support account were not frozen, the branch agreed to accept the $200 deposit.

“It’s a hell of a scare,” Schwartz said.

The people who run nonprofit organizations were nervous, too, about when they would be paid.

“We don’t think about anything else,” said Paris, whose children’s center contracts with the county to provide child-abuse counseling and other mental-health services.

He said the county owes his group $200,000--much of it money the county simply administers for the state and federal governments. Paris said the center would be forced to close if the money didn’t arrive by Feb. 15. “The statement that the checks are in the mail could never be more beautiful,” he said.

Paris said he gave notice to his staff at a meeting Thursday that the organization will have to close its doors if the money doesn’t come. The agency employs 55 people.

Paris and the other nonprofit administrators said their predicament is all the more frustrating because the money they are waiting for is not among funds that the county was handling for other government agencies.

“The fact that we feel this threat and this possible loss and this confusion--it seems like we hardly deserve it,” said Marianne Blank, executive director of the St. Anselm Cross-Cultural Community Center in Garden Grove, which provides language and vocational services to Vietnamese refugees.

Blank said she met with her staff Thursday to tell them an emergency board meeting was called for next week. She said she only has enough money left to meet two more payrolls. “They looked stricken,” she said, “but before the meeting was over they were trying to make me feel better.”

Overshadowing Thursday’s developments was the SEC investigation.

Sources said that SEC officials met with Citron in April to discuss his use of high-risk investments such as reverse repurchase agreements and structured notes. Those loans and instruments helped the county’s investment fund earn enviable returns while interest rates were falling. But as rates rose over the past year, they helped drive the fund and the county into bankruptcy--and Citron out of office.

Citron assured investigators that authorizations for such transactions came “at every level,” one source said. “Now we’re finding out that maybe this wasn’t the case.”

County Counsel Terry A. Andrus said that after discussing the matter with SEC investigators, the scope of the agency request for documents has been “narrowed somewhat,” but he refused to elaborate. County officials say the precise amount of information to be turned over by the supervisors is still being negotiated.

“At this point, I have no reason to believe that the Board of Supervisors is the subject of that investigation,” Andrus said.

Andrus quoted from the SEC’s letter to the supervisors, which said the inquiry “should not be construed as an indication . . . that any violations of law have occurred.”

A former federal agent said the SEC’s broad-brush approach to the Orange County case was not unusual.

“To some degree it’s a fishing expedition; they are looking for what’s there,” said Sam Gruenbaum, an attorney with Cox Castle & Nicholson in Los Angeles and a former high-ranking SEC enforcement officer. “They will be looking at whether the relationships that existed were purely for underwriting or if there was more to the relationship that wasn’t disclosed.”

If there were financial ties between the supervisors and Wall Street firms that were not disclosed--either to other board members or to those who invested in the county pool at the time of the county’s bond deals--that could point to possible violations of securities laws, Gruenbaum and others said.

“If they find improper links, that could be the basis for serious non-disclosure issues,” said Gruenbaum. “How much disclosure should there have been about the county’s investment policy is very complicated.”

Citron’s attorney, David Weichert, declined to comment on the SEC investigation or the request for records from his client. But Weichert said the SEC action was not unexpected.

“We are not surprised at all that the SEC would take an interest in the circumstances surrounding the county’s loss,” he said. “Furthermore, we believe that when all facts come to light, Mr. Citron will be totally exonerated from the reckless charges and innuendo that has appeared regularly in the press.”

Investors Gather

While the SEC investigation continued, a group of officials representing cities, schools and other public entities said they would need $117 million of their money from the county fund by week’s end.

Many of the officials emerged tight-lipped from the closed-door briefing in Santa Ana by Salomon Bros., part of the county’s new financial team.

“They’re doing a scheduled, logical liquidation of their assets,” said Villa Park City Manager Fred Maley. “I think they’ve got some of the best people working on the problem.”

But others said the meeting’s atmosphere was edgy and that many of the investors’ substantive questions about how and when money will be disbursed from the fund remained unanswered.

“They’re blowing sunshine at you,” said one attorney who represents a water district as he emerged from the meeting. “We have payrolls that have to be committed to next week.”

Echoing criticism from Wall Street, officials of some of the agencies that invested in the pool questioned whether the entire fund should be sold off now; specifically, they urged Salomon Bros. to keep holdings with a maturity of four years rather than rushing to sell them.

And the jostling for priority among the fund’s creditors continued, with some agency officials indicating they thought the county should be last in line--behind the cities, schools and other investors--for withdrawing money from the pool.

Also up in the air is how property tax collections due for distribution on Tuesday will be doled out, said Joel S. Miliband, an attorney whose firm represents the cities of Newport Beach, Laguna Hills and Fountain Valley, along with several water districts.

Miliband said the creditors need to sit down to work out “which agencies need cash and for what purposes and how much. . . . The question is, ‘Who has emergency cash needs in the next 10 days, intermediate needs in the next 30 days?’ When everybody thinks about what needs to happen, they’ll see that there has to be cooperation.”

Securities Auctioned

Salomon Bros. sold $483 million of the county’s remaining $7.96 billion of securities in a wide-open auction Thursday, the first step in making funds available to the pool’s investors.

Although the face value of the bonds sold was $483 million, they were sold for prices ranging from 89.5 cents to 94.5 cents on the dollar. So the county’s actual cash intake from the sale will be between $432 million and $456 million.

The rush to unload them came as county officials tried to ward off a slew of new economic announcements that they believed could cause another hike in interest rates.

The bonds attracted offers from a substantial number of investors, drawing $7.5 billion in bids, according to Salomon.

“We were very pleased with demand,” a Salomon executive said. The sale got a boost from a drop in shorter-term market interest rates, as more investors began to bet that the Federal Reserve Board will defer any additional rate hikes until 1995. The Fed meets next week.

But Wall Street analysts said the bonds sold Thursday were conventional issues maturing in two to four years--the kind of holdings that should be the easiest to sell among the county pool’s remaining securities. Salomon’s much bigger challenge will be to auction or restructure the complex “derivatives” that comprise 60% of the remaining portfolio.

On Monday, Salomon had estimated that the overall portfolio was worth about 92 cents on the dollar. If sold for less than that, the 27% loss now expected by fund investors from their original deposits to the fund will grow.

Salomon said it will auction another $566 million of the county fund’s bonds today.

Thomas W. Hayes, the former state treasurer who is now the county’s chief financial adviser, said he was pleased by Thursday’s sale.

“We got good prices consistent with what we thought we would get,” he said.

Times staff writers Mark Landsbaum, Mark I. Pinsky, Jodi Wilgoren, Debora Vrana, Eric Lichtblau, Greg Hernandez, Martin Miller and Rebecca Trounson in Orange County, Tom Petruno in Los Angeles and Eric Bailey in Sacramento contributed to this story.

Contributing to today’s coverage of Orange County’s continuing financial crisis were: Times staff writers Eric Bailey, Michael Granberry, Greg Hernandez, Greg Johnson, Sheila Kern, Matt Lait, Mark Landsbaum, Don Lee, Eric Lichtblau, Susan Marquez Owen, Martin Miller, J.R. Moehringer, John O’Dell, Tom Petruno, Mark Pinsky, Mark Platte, Lee Romney, Rebecca Trounson, Debora Vrana, Tracy Weber, Jodi Wilgoren and Chris Woodyard.

Also contributing were staff photographers K.C. Alfred, Don Bartletti, David Fitzgerald, Alexander Gallardo and Kari Rene Hall, and correspondents Jeff Bean, Bill Billiter, Debra Cano, Leslie Earnest, Bert Eljera, Alan Eyerly, Lynn Franey, Shelby Grad, Mimi Ko, Russ Loar, Frank Messina, Jon Nalick, Tom Ragan and Holly J. Wagner.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Investigating the O.C. Bond Crisis

These regulatory and law enforcement agencies are looking into the investment practices that led to Orange County’s financial crisis:

SECURITIES AND EXCHANGE COMMISSION

What it does: Created in 1934 after the stock market crash of the Great Depression, the federal agency regulates stock and bond brokers and the securities industry as a whole.

Role in the bond crisis: The SEC has subpoenaed extensive records from the five-member Board of Supervisors and at least three financial advisers who helped the county issue bonds, the proceeds of which found their way into the troubled county investment pool.

NATIONAL ASSN. OF SECURITIES DEALERS

What it does: An industry self-regulatory organization that oversees stock and bond brokers and their employers.

Role in the bond crisis: The NASD is investigating $3,000 in contributions from three Merrill Lynch employees to former County Treasurer-Tax Collector Robert L. Citron during his reelection campaign earlier this year.

COMMODITY FUTURES TRADING COMMISSION

What it does: A federal watchdog agency that monitors the activity on the various commodity market exchanges. It does for commodity futures trading what the SEC does for stock and bond trading.

Role in the bond crisis: The CFTC is reviewing documents to determine whether the county investment portfolio held any futures commodities and, if so, whether federal regulations were followed.

ORANGE COUNTY DISTRICT ATTORNEY’S OFFICE

What it does: The county office that prosecutes criminal violations of state and local law. It also represents the government in civil suits to collect taxes or take property for public use.

Role in the bond crisis: Probing bond controversy, including possibly checking allegation that Citron accepted improper gifts from investment firms.

U.S. ATTORNEY’S OFFICE

What it does: Acting as an arm of the U.S. Department of Justice, the office prosecutes criminal and civil violations of federal law.

Role in the bond crisis: Conducting an inquiry to determine if the U.S. mail or telephone wires were used to defraud investors in the now-collapsed county investment pool.