Charges Loom in O.C. Probe, SEC Tells 2 Firms : Bankruptcy: Ex-treasurer Citron also is alerted, sources say, and more notices are expected. Parties get about two weeks to respond.
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 probable 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 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 already have received Wells notices in the Orange County debacle have until Oct. 15 to reply to the SEC. Many have complained that they do not have enough time to prepare their arguments, sources said.
Since Orange County declared bankruptcy on 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 high-profile case 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 invest in the county’s 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 the Orange County case, this could range into the millions of dollars.
Times staff writers Matt Lait and Michael G. Wagner contributed to this story.
