SEC Reported Ready to Act on O.C. Violations

Federal authorities are notifying Orange County officials, bond lawyers and executives of several bond firms that action may be taken against them for possible violations of federal anti-fraud laws in the county’s $1.7-billion bankruptcy, sources said Sunday.

In an action signaling that the Securities and Exchange Commission is wrapping up its massive investigation, SEC officials began making telephone calls to the individuals last week, inviting them to respond why they should not be charged, the sources said.

This overture, known as a Wells procedure, is invoked when SEC officials have largely completed their investigation and believe they have enough evidence to file civil enforcement action in federal court.

The sources, who asked not to be identified, said that between 10 and 100 such phone calls were being made, but declined to give a more precise figure.

The targets reportedly include former Treasurer-Tax Collector Robert L. Citron, who managed the county’s ill-fated investment pool that lost $1.7 billion through last December, plunging the county into the nation’s largest municipal bankruptcy.

Also targeted are other county officials who had responsibility for the investment pool, some officials of local governments and agencies that issued notes raising money for investment in the pool, executives with the firms that underwrote the investments, and law firms that gave advice on the deals, the sources said.

The charges vary, according to sources, but would all center on one main type of violation: failure to disclose accurate information to investors about the riskiness of the bonds and the purpose for the bond sales.

Reached Sunday night, three county supervisors--William Steiner, Roger Stanton and Marian Bergeson--and former Supervisor Thomas Riley said they had not received any communication from the SEC and that they were not aware of telephone calls being made.

However, a top county official, who spoke on the condition of anonymity, said, “We know they’re on their way.”

Sources said Merrill Lynch Inc., which sold the county billions of dollars in securities, is among the firms expected to receive notification from the SEC, as is Leifer Capital, a Santa Monica firm that advised the county on major borrowing.

As part of its investigation, the SEC focused on as many as 10 bond transactions by local agencies solely for the purpose of investing in the ill-fated Orange County investment pool, sources said. These notes were issued by several Orange County school districts and cities. The list of issuers includes the Newport-Mesa Unified School District and the Orange County Department of Education, and the cities of Irvine and Anaheim. The county itself issued $600 million of taxable notes in summer 1994.

The county’s highly leveraged investment pool had made impressive earnings for many years, benefiting the county and local schools and other municipalities. But the earnings depended on interest rates remaining low. When rates rose sharply last year, the county’s investments suffered heavy losses, leading to bankruptcy.

Some of the other professionals involved in issuing the notes worked for Rauscher Pierce Refsnes Inc. and bond counsel firms LeBoeuf, Lamb, Greene & MacRae in New York and Rutan & Tucker in Los Angeles.

A Merrill Lynch spokesman had no comment Sunday. Jeffrey Leifer, who owns the Santa Monica company that bears his name, did not respond to a message left on his home answering machine Sunday evening.

Taylor Briggs, managing partner of LeBoeuf, Lamb, the New York law firm that served as bond counsel to Citron and the county, said his law firm had not received a Wells notice. “We did not get any such notice, and I don’t know of any reason why we should,” Briggs said.

John B. Orenstein, deputy general counsel of Inter-Regional Financial Group, parent of Rauscher Pierce Inc. of Dallas, declined to say if his firm had received one of the SEC phone calls. As a matter of policy, “We don’t say anything one way or another about SEC investigations,” Orenstein said.

Under the Wells procedure, the SEC, which regulates stock and bond brokers and the securities industry as a whole, tells the targets of investigations that they have two weeks to make a response, if they desire.

However, sources said that because the Orange County case is complex and involves dozens of potential defendants, the agency is likely to allow a longer period for a response.

The SEC launched its massive investigation into Orange County’s securities transactions shortly after county officials declared bankruptcy on Dec. 6, 1994.

As part of their investigation, SEC officials subpoenaed thousands of county documents, including detailed records from the five-member Board of Supervisors. Apart from submitting records, county supervisors were summoned to testify before the SEC.

Top county officials, including Auditor-Controller Steven E. Lewis, former County Administrative Officer Ernie Schneider and Eileen Walsh, the county’s former finance director, were also made to testify before the agency in closed-door sessions.

When asked if he had received a Wells notice, Schneider said Sunday night he had no comment. Lewis did not return a call for comment.

Sources have previously told The Times that county officials who appeared before the SEC were asked about their relationships with numerous underwriters and brokers, such as Michael Stamenson of Merrill Lynch, one of Citron’s chief brokers.

Investigators also were curious about Leifer, Citron’s longtime financial adviser, who earned more than $2 million arranging the county’s annual borrowing.

The SEC’s investigation is one of three probes into the county’s bankruptcy, which was precipitated by the collapse of the county’s $7.4-billion investment pool.

Citron, who oversaw the pool, pleaded guilty in Orange County Superior Court to six felonies including misappropriating public funds. He faces a maximum 14 years in state prison and a $10-million fine. But he is expected to be a key witness in the county’s $2.4-billion lawsuit against Merrill Lynch.

Maharaj reported from Orange County and Paltrow from New York.