SEC Assails O.C. Officials for Role in Sale of Securities

In an action unprecedented in the agency’s history, the U.S. Securities and Exchange Commission Wednesday issued scathing reports accusing the Orange County Board of Supervisors and the county’s former treasurer and assistant treasurer of repeatedly misleading and defrauding buyers of more than $2.1 billion in municipal securities.

Former Treasurer Robert L. Citron, former Assistant Treasurer Matthew R. Raabe and the five supervisors in office at the time of the county’s December 1994 bankruptcy neither admitted nor denied guilt in settlements with the agency, but agreed not to violate securities laws in the future.

As part of the deal, the supervisors also agreed to allow a harshly worded critique of their conduct to be filed as a permanent public notice to investors by the SEC.

At a news conference at the agency’s Los Angeles office, William R. McLucas, the SEC’s enforcement chief, said the investigation--one of the largest in the agency’s history--is continuing.

“We are not done,” he said. “This is the first chapter.”

The SEC plans to turn its attention to the financial and legal firms that sold the county’s massive notes and bond issues, and advised county supervisors about disclosures required to be made to investors, according to a source close to the investigation.

The SEC’s uncontested accusations were another blow to former and current county officials who continue to deal with the fallout from the nation’s worst municipal bankruptcy.

Board Chairman Roger R. Stanton, Supervisor William G. Steiner and county Auditor-Controller Steve Lewis are defending themselves in state court against accusations of willful misconduct for failing in their duties to oversee Citron’s actions. If the accusations are found to be true, they face removal from office.

Raabe is fighting six felony charges of fraud and misappropriation of public funds. Citron has pleaded guilty to those same charges and is awaiting sentencing. Both men face a maximum punishment of 14 years in prison and $10 million in fines.

Former Budget Director Ronald Rubino is under a criminal grand jury indictment charging him with aiding and abetting Citron in the misappropriation of public money.

Neither Rubino nor Lewis were accused of wrongdoing by the SEC.

McLucas said the agency’s action constituted a warning to other municipalities that it will aggressively pursue public officials who disregard securities laws.

“We think this is the most significant and direct procedure against a municipal government and officials of a municipal government in the 60-some-odd years of the commission’s existence,” McLucas said. The actions represent the agency’s first actions aimed at a county.

He defended his agency’s decision not to impose fines or recommend federal criminal charges against the officials--the two most serious actions the agency could have taken.

“You read the report [naming the supervisors] and decide if this a badge of honor, or slap on the wrist to the public officials,” McLucas said.

The SEC charged the officials with “violations of the anti-fraud provisions of federal securities laws.” The agency did not impose fines, he said, because the penalty would likely “fall on the shoulders of taxpayers, residents and investors” in bankrupt Orange County.

Furthermore, SEC officials said, the county has recently taken steps to reform the way it approves municipal financings, and three of the five supervisors involved in the financial debacle are out of office.

Attorney Gerald E. Boltz, who represented the five supervisors and negotiated the settlement with the SEC, characterized the action against his clients as “appropriate.” He said the supervisors were “prisoners of a process that was flawed.”

The supervisors accused of wrongdoing by the SEC are Stanton, Steiner and former Supervisors Gaddi H. Vasquez, Harriett M. Wieder and Thomas F. Riley.

Boltz said the SEC was using the case as an example for other municipalities on how they should conduct financial business. He added that the SEC findings are “going to be quoted and read a lot in the future and provide guidance for public officials for some time to come.” Previous SEC enforcement actions have generally involved small special districts.

Steiner said the SEC’s “harsh criticism should extend to the entire municipal securities industry. The brokers, financial advisors and lawyers have gotten lazy and have shuffled papers and charged high fees under the assumption that governments would never default. . . The SEC’s action should put those folks on notice.”

Stanton said he was pleased that the SEC matter had been settled.

“Now we [can] give full attention to the ongoing financial recovery of the county,” he said in a prepared statement, “and pursue its claims against the professional firms on whom we thought we could rely and who regrettably failed us and, most of all, the people of Orange County.”

SEC officials said that based on what they have concluded so far in their 13-month investigation, the individual board members let the taxpayers down by not doing their jobs.

According to the SEC, the supervisors knew the county was relying on risky investments to boost the county’s interest income so they could balance the county’s budget. Despite their knowledge of the county’s finances, the supervisors continued to approve borrowings and did not adequately disclose those risks to investors, SEC officials said.

“These supervisors did not even read the official statements [related to each of the bond issues], nor did they ask any questions regarding the disclosures” that were required by law, said Elaine Cacheris, director of the SEC’s Pacific Regional Office.

In documents, SEC officials charge: “The supervisors were aware of material information [that] called into question the county’s ability to repay its securities. Nevertheless, the supervisors failed to take appropriate steps to assure disclosure of these facts.”

The agency also accused Citron, Raabe and the board of failing to disclose to investors the risks associated with $2.1 billion of county borrowings in 1993 and 1994--eight borrowings by Orange County, one by the county’s Flood Control District and two by the Placentia-Yorba Linda School District.

“Disclosure in the official statements for every one of these offerings was false or misleading,” Cacheris said.

She said the county never told investors about the high degree in which funds in the county’s investment pool were leveraged or the pool’s vulnerability to interest rate increases.

“A rise in interest rates would have a devastating effect on the pools, impacting the issuer’s ability to repay the securities,” Cacheris said. “Which is precisely what happened.”

Raabe also was accused of lying to the national agencies that rate the soundness of investment offerings about how much of the county’s portfolio was devoted to risky securities. In addition, Raabe failed to tell investors that much of the money in the county’s $142-million “Economic Uncertainty Fund” was not available to repay bond debts as claimed, but had been illegally skimmed from other public agencies investing in the county’s pool, SEC officials said.

The commission filed civil complaints Wednesday against Raabe and Citron in U.S. District Court in Santa Ana. A separate SEC administrative proceeding was entered against Orange County, the Board of Supervisors and the flood control district.