Responsibility Issue Not Fully Addressed : SEC Probe of Bankruptcy Tackles Important Questions

Much has been said about the risky investment practices that led to the collapse of Orange County’s investment pool late last year. Yet with all the attention, there has been something less than a complete accounting.

Former Treasurer-Tax Collector Robert L. Citron has pleaded guilty to six felonies, including misappropriating public funds. Former Assistant Treasurer Matthew Raabe has been indicted by the Orange County Grand Jury on similar charges and has yet to stand trial. But the question of how far responsibility extends lingers and is being addressed by the Securities and Exchange Commission. The SEC investigation has focused on a number of parties that include county officials, bond lawyers and executives of several investment firms. This investigation exists alongside separate inquiries being conducted by the Orange County district attorney and the U.S. attorney’s office.

The SEC began its investigation shortly after the county declared bankruptcy last Dec. 6. It has subpoenaed thousands of county documents including records from the five members of the Board of Supervisors, and supervisors have testified before the SEC. Others who testified were Auditor-Controller Steve E. Lewis, former County Administrative Officer Ernie Schneider and Eileen Walsh, the county’s former finance director. At the heart of the investigation is the question of whether there was a failure to disclose accurate information to investors about the riskiness of bonds and the purpose of bond sales.

Sources have indicated that a number of past and present supervisors have been warned that civil charges might be filed against them in federal court, which would constitute the first legal action to assign blame for the bankruptcy on elected leaders.

The contention of elected leaders has been that they were misled by staff and financial firms that made a great deal of money. Whatever the merits of findings in individual instances, the results of the SEC investigation promise to shed further light on the unfolding bankruptcy, and to that extent help clarify the roles of public officials. For example, part of the investigation is said to center on as many as 10 bond transactions by local agencies solely for the purpose of investing in the pool. Notes were issued by several Orange County school districts and cities, and investigators have focused on a controversial $600-million taxable note sold in June of that year, and $320 million in pension bonds the following September.

The public has heard all the denials over time, but the SEC probe is a reminder that the acceptance of responsibility for the bankruptcy has been elusive. Of particular interest is the question of whether supervisors gave proper approval to the issuance of more than $1 billion in municipal debt last year. A great deal of borrowing occurred even after the election, a race in which candidate John M.W. Moorlach challenged the investment practices of Citron, and at the very end of the campaign warned of trouble ahead. All the county’s borrowing between June and September of 1994 was approved without board debate or discussion, and appeared on the board’s consent calendar with other routine items.

Violations of federal securities laws can mean various penalties, from fines and permanent injunctions to promises not to violate the laws again. The county recently has agreed on a recovery package. But recognition of responsibility is an important part of getting the county back on its feet. For the county, the SEC investigation is an important part of that process.