ORANGE COUNTY IN BANKRUPTCY : Broker Handled 3 Other Failed Bond Deals

The broker who persuaded Orange County schools and cities to borrow millions to funnel into risky investments also played a key role in at least three other bond deals in California that collapsed, one of which is being investigated by the Securities and Exchange Commission.

Investment banker Kenneth D. Ough, 42, has handled hundreds of routine deals for schools and cities up and down the state that have met with success. But public records and interviews show that on occasion, Ough has exhibited a knack for finding new financial approaches and testing the untried. And while he and the firms he has worked for have earned six-figure fees, he has encouraged some schools and municipalities to assume high risks. For example:

* In 1990, Ough negotiated a $30-million bond issued by five public entities in the San Joaquin Valley. Two years later, two of the five failed to meet the financial terms of the deal, prompting an SEC investigation into whether investors received adequate disclosure of potential risk.

* Four years before that, Lassen Community College District became the first community college district in the nation to declare bankruptcy after it was unable to meet the obligations of a $7.1-million bond deal handled by Ough. The value of the bond exceeded that of the one-school district’s annual budget.

* The city of Arvin faces a declaration of bankruptcy and unincorporation after the city’s finances crumbled in part because of the weight of an $8-million bond put together by Ough. Proceeds from the bond were to have gone toward the construction of a golf course, but the low-income farm town has been unable to attract enough golfers to pay day-to-day expenses of the course, let alone the debt service on the bond.

“All I know is, I asked Kenneth Ough repeatedly if any of the things that eventually happened could happen, and I got repeated assurances that they couldn’t,” said one source involved in the San Joaquin Valley transaction who requested anonymity.

None of the Orange County school districts and cities that Ough directed into the investment pool have accused him of committing any wrongdoing. In addition, Ough has a clean record with the SEC and the National Assn. of Securities Dealers.

Many officials from agencies Ough has worked with, including several in Orange County, speak highly of his work.

“We were with Ken for 10 years, since his days at Merrill Lynch,” said Terry Bradley, an administrator with Clovis schools near Fresno. “He did a good job for us. . . .

“We told Ken what we wanted him to do. It was never Ken telling us what he wanted us to do.”

A senior vice president at his current firm, Rauscher Pierce Refsnes, Ough did not return numerous telephone messages seeking comment.

“Ken has been an investment banker in Southern California for the past 17 years,” said Rauscher Pierce Executive Vice President Leslie Lynch. “He has a very, very large client following. . . . Ken’s history speaks for itself.”

Firm Subpoenaed

Rauscher Pierce is one of two Wall Street investment houses that have been served with subpoenas by the SEC in the wake of the stunning drainage of Orange County’s $7.5-billion investment pool. Lynch said he has been told that the firm is not the target of the investigation.

While working for three investment firms over 15 years, Ough has maintained a long business rapport with recently resigned Orange County Treasurer-Tax Collector Robert L. Citron.

Since 1990, 133 of the 420 new issues by Orange County agencies in Citron’s investment pool have been handled, at least in part, by brokerages at which Ough was working at the time, according to Securities Data Co., a New Jersey-based firm that compiles information on municipal bonds.

“Ken was sort of a young up-and-coming guy, and I think Citron liked him. They had similar personalities. They hit it off,” said one investment banker who has known Ough for years and spoke on the condition of anonymity.

Through the years, fondness has translated into hundreds of thousands of dollars in fees for Ough and his firms, and billions of dollars for Citron to use as collateral to carry out his sometimes exotic investments known as reverse repurchase agreements.

It is unclear how much money Ough has made in any of his broker arrangements. A Los Angeles native, he and his wife, Marilyn, live in a four-bedroom, three-bathroom house valued at $600,000 in Canyon Country near Santa Clarita. He majored in political science at Cal State Northridge and received a master’s degree in public policy and administration from Cal State Long Beach in 1978.

He is described by colleagues as industrious to a fault.

“I never knew Ken Ough to be anything but a hard-working professional,” said former co-worker Chriss Street of Newport Beach. “He was a head-down, 14-hours-a-day guy.”

At the same time, Ough has emerged from the shards of the shattered Orange County investment scheme as the architect of the high-risk deals through which two cities and four school districts have borrowed roughly $750 million over the past two years and invested it, hoping to reap better-than-average returns.

No one seems to track such milestones. But Ough is believed to have been among the first to get schools and cities to issue the so-called taxable notes--a financial instrument that allows municipalities and agencies to issue more debt than they are allowed under regulations involving tax-exempt notes.

Rauscher Pierce’s Lynch defended the deals: “They were issued strictly in accordance with the state law, opined on by bond counsels, approved by the superintendent of schools for the county, and the proceeds of the issue were administered by the county treasurer, as provided by law.”

Reputation as Standout

In a room full of blue suits pitching their financial wares, Ough is said to have stood out from the rest.

As he made his presentations to school and city officials throughout the state--a Wall Street Johnny Appleseed of sorts--Ough had an ability to make complicated financial transactions sound simple.

At times, the premise he pushed was this: To make money in these tough times, you have to borrow money. And no place will pay more interest on your borrowed money than Orange County.

“He was just extremely confident in what he was doing and what he was selling,” said Ronald Moore, superintendent of Chowchilla Unified School District, which invested $2.5 million in Orange County’s pool.

In an interview in 1993, Ough credited Citron’s business acumen and said borrowing to invest for public entities probably would not be advisable anywhere else: “It’s very limited. . . . It would not work in another county.”

During the same interview, Ough said his unique investment plan simply afforded an opportunity for cash-short public agencies to make money. “There’s little or no risk,” Ough said.

It was not the first time he had offered such assurances, some of his clients said, nor was it the only time he had been wrong.

College Bankruptcy

In 1982, Ough developed the underwriting of a deal that led to the first Chapter 9 filing ever by a community college.

While working for Merrill Lynch, Ough helped tiny Lassen College, 250 miles northeast of San Francisco, borrow $7.1 million--more than the school’s $5.5-million annual budget at the time--to build a garbage-burning, heat-generating plant on its Susanville campus.

Several banks rejected the project, but college President Warren Sorenson said in an interview this week that Ough was eager to help.

With Ough’s help, the college issued $7.15 million worth of certificates of participation in November, 1982. Despite a BBB- rating from Standard & Poor’s, the $5,000 notes sold out in five days.

By March, 1986--two years after the plant had opened--Lassen College was being sued by First Interstate Bank for not making its loan payments. Profits from the plant were intended to pay off the loan, so when the plant suffered technical problems, the school faced closure if it did not seek bankruptcy protection, officials said.

“Why would Merrill Lynch do it? I don’t know,” said Stephen Pezullo, an accountant who was elected to the college board in 1985 and now serves as its president. “The only ones that won on (the deal) were the attorneys and the brokers that sold the bonds.”

Ough is among the defendants in First Interstate’s lawsuit against the college.

Merrill Lynch spokesman Timothy Gilles said the brokerage was not to blame.

“The problem was with the design, construction and operation of the plant itself,” Gilles said. “Merrill Lynch just did the financing, and the financing was not the problem.”

Small Town’s Default

Not long after taking a new post with Seidler-Fitzgerald Public Finance in March, 1986, Ough financed a bond issue to help Arvin--a farm town of 10,000 people 15 miles from Bakersfield--build a golf course.

With an annual operating budget of $1.4 million, Arvin borrowed $7.89 million to issue certificates of participation in 1988, with Ough and Seidler-Fitzgerald acting as the underwriter. The city set aside $3.5 million in proceeds to pay off its loan and used the rest to build the 18-hole course, complete with pro shop, bar and grill and a 230-seat banquet room.

For its role, Seidler-Fitzgerald received about $800,000 in fees, city officials said.

In the official statement that accompanies such transactions, the deal was described as having “a high degree of investment risk,” and investors were warned that the developer had never built a golf course.

After five years, the $3.5-million reserve had been used up and the city had yet to earn a nickel in profits from the golf course. Shallow city coffers were empty, so Arvin defaulted in September, 1993, and the trustee of the notes took the matter to court.

Arthur Sherwood, an attorney representing Seidler-Fitzgerald, said he didn’t know enough details of the transaction and declined comment.

While the issue has yet to be resolved, City Manager Thomas Payne said bankruptcy is all but inevitable.

“The city was not financially stable and they bought into this proposal, which was supposed to put millions of dollars into the general fund each year,” said Payne, who took over as city manager in 1992. “Instead, it has drained us to the point where we’re not sure we’ll remain an incorporated city. It’s given us a tremendous black eye.”

Payne, who was hired to steer the city through its financial troubles, said in hindsight the whole idea seems ridiculous.

“My God, Arvin with a golf course? That’s like Arvin with a Disneyland!”

SEC Investigation

While still at Seidler-Fitzgerald, Ough in 1990 was at the center of a so-called Marks-Roos bond project in Fresno County that has drawn SEC scrutiny.

Under the terms of the complicated deal, five public entities--the Chowchilla Memorial Hospital District, the city of Mendota, Sierra Kings Hospital District, the city of Orange Cove and the city of San Joaquin--formed the Central San Joaquin Financing Authority and issued nearly $30 million of unrated revenue bonds.

The proceeds were to have been used to underwrite other bonds or pay off other obligations of the five agencies in the authority.

But in 1992, one of the five, Chowchilla Memorial Hospital District, defaulted on nearly $5 million of revenue bonds issued by the authority.

The same year, another authority member, Mendota, defaulted on a $2-million bond.

While the SEC investigates the structure of the arrangement and whether investors received full disclosure, the authority is in disarray and some of the three partners that have met their fiscal obligations under the arrangement are concerned about potential exposure.

Sherwood, from Seidler-Fitzgerald, said the SEC investigation is not focusing on the firm or on Ough, and that neither has done anything wrong.

“If Kenneth Ough had told me there was a one-in-a-million chance this could happen,” said one source in the deal who didn’t want to be identified, “I wouldn’t have done it.”

Officials Cite Trust

Similar sentiments were expressed by officials whose agencies Ough brought into the Orange County investment pool from outside.

“He never informed us of any risk,” said Sally Frazier, superintendent of Madera County schools, which has $3 million in Orange County’s pool. “He portrayed it as a safe treasury.”

When Ough first pitched the aggressive, borrow-to-invest scheme to Orange County schools and cities in early 1993, some officials said they opted to try it, in part, because they knew Ough and trusted him.

“Ken brought that idea to the city. . . . To the best of my knowledge, it was a unique transaction,” said George Ferrone, Anaheim’s finance director, who has worked with Ough for a decade. “This was an opportunity that he brought to us that made sense at the time, and until two weeks ago seemed like a real winner.”

Ferrone noted that the city earned $7.4 million in interest from the taxable note deals in 1993. Anaheim has $169 million in the now-frozen pool.

Although everyone from municipal bond experts to state Controller Gray Davis have inveighed against the borrow-to-invest scheme since the collapse of the pool, only a few raised red flags beforehand.

One was former co-worker Street, who recalled that he was stunned in 1993 to learn that Ough had masterminded the borrowing of $200 million by four Orange County school districts solely to pump into the pool. Street said: “I called him up and said, ‘What the (expletive) are you doing?’ ”

Times staff writers J. Michael Kennedy in Los Angeles and Mark Landsbaum in Orange County contributed to this story.

* BANKRUPTCY COVERAGE: Related Orange County stories inside. A28-A32, D1-D2