SEC Warns Bond Firms of Possible Charges : Bankruptcy: First Boston, Rauscher Pierce Refsnes and former O.C. treasurer have been notified of pending civil action, sources say.


Federal regulators investigating Orange County's bankruptcy have notified at least two major Wall Street bond firms and former county Treasurer-Tax Collector Robert L. Citron that they may have violated securities laws, sources said Monday.

As part of its 10-month investigation, the U.S. Securities and Exchange Commission has warned C.S. First Boston Corp. and Rauscher Pierce Refsnes Inc. of Dallas that it intends to file civil charges against them for their roles in the county's financial collapse, according to sources.

A spokeswoman at Rauscher would neither confirm nor deny receiving the notice; a spokesman at C.S. First Boston declined to comment.

First Boston sold a complicated $110-million pension bond issue for Orange County in 1994 that is now in default. Rauscher was financial adviser for a $299-million bond sale on behalf of 27 Orange County school districts, which then put the money into Citron's high-risk investment pool.

Citron, who has been at the center of the controversy because of his role managing the county's investments, also received a notice from the SEC that he may be subject to enforcement action, sources confirmed.

The most likely charges, sources said, would be violations of an SEC rule about misleading investors or omitting "material facts" from bond documents.

The SEC last week began handing out a first wave of so-called "Wells notices" and another round is expected soon against those who did business with the county, sources said. The SEC could seek injunctions and civil penalties that could run into millions of dollars.

Under the Wells notices, targets are given warnings of impending charges and typically have about two weeks to argue against such action either in a 40-page document or 12-minute video.

"The notices are going out in phases, and these individuals are part of the initial phase of notification," one source said, adding that more financial firms would be notified next. "I think you can expect to see this happen very, very soon."

A spokesman for Merrill Lynch & Co., which sold the county many volatile investments for its pool and underwrote a $600-million taxable bond deal, would not comment on whether it had received a notice. A source said the firm would eventually get one.

The targets that have already received Wells notices in the Orange County debacle have until Oct. 15 to reply to the SEC. Many have complained that they don't have enough time to prepare their arguments, sources said.

Since Orange County declared bankruptcy Dec. 6 after its investment pool lost nearly $1.7 billion, regulators have questioned whether the county's financial condition was adequately disclosed in bond documents offered to investors.

Elaine Cacheris, executive director of the SEC in Los Angeles, declined to comment on the investigation, which is the biggest and most high-profile case ever handled by the SEC's office in Los Angeles.

In Washington, SEC enforcement chief William McLucas also declined to comment.

"In a Wells notice, an individual is urged to argue why, as a matter of law or policy, why enforcement proceedings shouldn't be used against them" under federal securities laws, said Sam Gruenbaum, an attorney with Cox, Castle & Nicholson in Los Angeles and a former SEC enforcement officer.

Clearly, sources said, the SEC is focusing on taxable bond deals sold by four Orange County school districts and other taxable bond deals sold by the county, including a $600-million note sold to reap returns in the county's investment pool.

The type of punishment for violating disclosure laws can vary greatly, officials said. A violator can be barred from the securities industry completely or the SEC can force them to pay back any money they gained from the violation and pay punishments. In Orange County's case, this could range into the millions of dollars.

Although sources said Citron has been served with a Wells notice, Citron's attorney, David Wiechert, declined comment, saying it was his policy not to comment on pending investigations.

One Orange County law firm reportedly received a Wells call from the SEC, although it declined to comment.

"We have a policy not to comment," said Jeffrey M. Oderman, managing partner with Rutan & Tucker, a Newport Beach law firm that provided legal work on several tax and revenue anticipation notes sold by several Orange County school districts and the Orange County Department of Education just to invest in Citron's pool.

Leifer Capital Inc. of Santa Monica, financial adviser to Orange County on the $600-million taxable note issue sold in 1994, and LeBoeuf, Lamb, Greene & MacRae, the New York law firm that provided legal counsel on the county's bond sales, have both said they have not received the notices.


Times staff writers Matt Lait and Michael G. Wagner contributed to this report.


Put on Notice

Signaling that it is close to concluding a massive investigation into Orange County's bankruptcy filing, the U.S. Securities and Exchange Commission is moving against officials, investment firms and lawyers who helped the county sell bonds to investors. The SEC has sent them "Wells notices," one of the final steps before federal authorities file civil charges.

HISTORY: In 1972, the SEC's advisory committee on enforcement policies and practices, headed by John A. Wells, recommended that individuals and firms targeted in SEC investigations be given a chance to argue against the action. So, in almost all investigations (except ongoing scams that need to be immediately stopped), the SEC adopted policies that said firms or individuals being targeted would get a Wells notice.

HOW IT WORKS: Once the SEC investigators have enough information to file charges, the commission calls or writes the target of the enforcement action, letting them know generally the type of charges that will be levied. Then the firm or individual has a chance to argue against such action with SEC commissioners.

WHAT'S NEXT: Typically, after receiving a Wells notice, the targeted firm or individual gets about two weeks to submit a 40-page statement or 12-minute video explaining why they shouldn't be charged. That response, along with a recommendation by SEC investigators, is sent to SEC commissioners, who then decide whether to continue with charges.

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