Report Accuses O.C. Leaders of Misleading Investors

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, SEC officials stressed that the actions were simply the end of “Chapter 1,” and that their investigation into the bankruptcy is continuing.

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.

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

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.

He noted that the settlements, which charge the officials with violating the anti-fraud provisions of federal securities laws, represent the agency’s first actions aimed at a county. Previous enforcement actions have generally involved small special districts.

The SEC 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.”

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 that the county might not be able to repay 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.

The SEC’s report states that the supervisors “failed to take appropriate steps” to ensure that proper disclosures were made to investors.

In particular, the agency 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, and the county’s ability to repay them.

At issue were 11 borrowings approved by the board: eight 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.

SEC officials singled out Raabe as “principally responsible” for the “fraudulent offer and sale” of $150 million in securities by the school district.

Raabe also was accused of lying to the national ratings agencies about how much of the county’s portfolio was invested in risky securities, and failing to tell them that much of the money in the county’s $150 million “Economic Uncertainty Fund” was not available to repay bond indebtedness as claimed, but had been illegally skimmed from other public agencies investing in the county’s pool.

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.

SEC Chairman Arthur Levitt issued a statement from Washington saying that the agency is trying to protect investors and preserve the integrity of nation’s municipal bond market.

“The case boils down to problems with statements made to sell securities--in other words with disclosure,” Levitt said. “Investors depend on the information provided in public offerings of securities. The law requires that the accuracy and completeness of that information be held sacrosanct.”