NEWS ANALYSIS : As Probe Ends, SEC Critics Start In

It may have been historic, but the end of the Securities and Exchange Commission’s yearlong investigation of Orange County officials’ culpability in the bankruptcy was anything but dramatic.

The SEC levied no fines, it imposed no penalties, it recommended no criminal action.

Orange County’s supervisors, one of the county’s taxing districts and two of its top financial officials were charged “with violations of the anti-fraud provisions of federal securities laws,” but they were not obliged to admit to wrongdoing. They promised to do nothing wrong in the future.

While the SEC’s top officials hoped to send a stern and powerful message to the nation’s $1.3-trillion municipal securities market, they found themselves insisting that there wasn’t much more they could do.

“Anybody who characterizes this as just a slap on the wrist has a misapprehension of what our authority is,” snapped William R. McLucas, the SEC’s chief of enforcement. “I’m satisfied.”

Much of the reaction to the SEC’s actions Wednesday was either negative or defensive--and seldom celebratory. Some securities experts said the SEC had few alternatives, and they predicted its actions would help deter future debacles in the world of municipal finance. Others condemned the federal probe as a near-total failure.

“The SEC is not just a day late and a dollar short--they are two years late and $2 billion short,” commented Rep. Christopher Cox (R-Newport Beach).

Others said they were satisfied by the SEC effort. The biggest effect, they said, was the stigma that attaches to the bankruptcy, which would give others pause before they chose Orange County’s path.

“No one wants to go through what Orange County did,” said former SEC Commissioner Richard Roberts. “It is very embarrassing to the county to be the first government to be sanctioned by the SEC.”

The Orange County case was viewed nationwide as the harbinger of how tough the SEC will likely be in a string of pending municipal bond investigations, part of an announced crackdown on wrongdoing in the municipal market.

Many said Wednesday that the signs from the SEC aren’t encouraging to those who favor a more severe crackdown.

Fredric A. Weber, a municipal finance lawyer with the firm Fulbright and Jaworski and former president of the National Assn. of Bond Lawyers, said the SEC should have acted more boldly, demanding financial penalties and reform measures that could be backed up by a federal court order.

“This sends a possible message that for the first offense, a hand-slap is all an issuer [of municipal bonds] will need to worry about,” he said.

Weber contended that Orange County taxpayers should be required to pay for the alleged wrongdoing, since they had elected the man--longtime Treasurer-Tax Collector Robert L. Citron--who got the county into the financial mess. He pointed out that there had been public warnings of risks inherent in Citron’s investment strategy before the election, and that Orange County voters chose to walk away from the disaster rather than raise taxes or impose more substantial cuts in services.

“It’s a very bad signal for the SEC to send that it’s not willing to impose penalties that will be borne by the taxpayer,” Weber said. “That sort of signal would almost say [to municipal governments] you can act with impunity.”

Joseph Cotchett, an attorney who represents several holders of Orange County bonds, denounced the SEC action as a surrender to powerful Wall Street interests.

“This is one more example of the failure of our regulatory process to stand up and act,” Cotchett said. “There is little or no deterrent message here.”

McLucas, the SEC enforcement chief, insisted that the settlement would be seen as a serious warning to other municipal governments. Besides, he said, his agency’s responsibility is to protect investors, not penalize foolish investment strategies.

“My jurisdiction is not to punish bad political decisions by people elected by the voters of the county,” he said.

The SEC has no authority to impose criminal penalties, McLucas said. And he said any fines the SEC could have imposed would not have gone to investors who lost money, but rather into the U.S. Treasury.

McLucas said he saw little point in seeking financial penalties from Citron and Raabe, since Citron already has been convicted of criminal charges and faces possible prison time, while Raabe is under indictment and could end up behind bars if convicted.

“The wisdom of expending the resources of the SEC to pursue these guys to take money to put into the U.S. Treasury is dubious,” he said.

And McLucas said the SEC chose not to seek financial penalties against the individual supervisors because there was a substantial chance that those too would ultimately have to be paid by taxpayers.

Roberts, the former SEC commissioner, echoed McLucas’ remarks. Any fines, he said, would have just been passed along.

“Wouldn’t you just be fining the taxpayers?”