SEC’s Action Serves Important Purpose : Within Its Limited Scope, It Rebuked County Officials

The aura of having a federal prosecution conducted by the Securities and Exchange Commission into the Orange County bankruptcy produced some high expectations. These no doubt were fueled by the high-profile remarks about the bankruptcy made early on by Arthur Levitt, the agency’s chairman. Then, late last year, the anticipation level was raised when supervisors were served with notifications by the SEC, which made it clear that the agency was preparing to charge them with violating securities laws.

When the boom was lowered last month, there was some question among observers whether it was a bang or a soft landing. No fines were levied, nor were any penalties exacted, nor was any recommendation made for criminal action. The supervisors in office at the time of the bankruptcy, former Treasurer-Tax Collector Robert L. Citron and former Assistant Treasurer Matthew Raabe were accused of repeatedly misleading and defrauding buyers of municipal securities. Those accused did not admit guilt in settlements, but instead agreed not to violate securities laws in the future.

To some, that seemed much more like a slap on the wrist than just punishment. For example, Rep. Christopher Cox (R-Newport Beach) declared, “The SEC is not just a day late and a dollar short--they are two years late and $2 billion short.” Another critic argued that the finding essentially had let the county off the hook financially.

If the SEC investigation were the only one, the conclusions would seem very unsatisfying, given the magnitude of the bankruptcy and the fallout from it. But in fact, there are inquiries beyond the SEC’s, and the jury is still very much out on the final cost to taxpayers.

The SEC report, an unprecedented condemnation of county performance with respect to securities laws, really was an indication of the limited scope of the commission’s jurisdiction. William R. McLucas, the agency’s enforcement chief, notes the commission’s province is restricted to the antifraud provisions of the securities laws, and that the SEC is “not in the business of merit evaluation of strategy.”

The SEC makes a compelling case that financial penalties would not have been returned to investors anyway. They would go only to the U.S. Treasury, and do nothing by way of financial restitution. A bankrupt county doesn’t need to be paying penalties to people who are not owed. The SEC also noted that the county since had reformed the way it approved municipal financings, and that three of five supervisors involved in the problems were gone.

Nothing will erase completely the perception of leniency, but several principals in the bankruptcy have been charged with felonies, and two sitting supervisors have been charged by the Orange County Grand Jury with willful misconduct. The district attorney is continuing a criminal investigation.

The SEC results won’t satisfy many who wanted tougher action, but if there were few cheers, the SEC did make an unprecedented statement within the parameters of its jurisdiction. If nothing else, political leaders around the nation now may be more aware of the standards they must meet in an area where they previously may not have had expertise. Regarding the SEC, they also should be more aware of the limits of that agency’s jurisdiction.