O.C. School Officials Balk at SEC Actions

Four Orange County school agencies have served notice that they will battle any federal allegations stemming from their decision to pour funds into the county’s ill-fated investment pool.

School officials are balking at notices from the Securities and Exchange Commission that they violated securities laws when they sold nearly $500 million in bonds and invested the proceeds in the county pool, sources said.

Orange County’s government leaders settled with the SEC in January, signing orders agreeing not to violate securities laws in the future. But officials at the school agencies have decided to stand firm.

“There is no precedent for this,” said Robert Doty, a financial advisor to some Northern California governments that are also feuding with the SEC, the federal agency that enforces securities laws.

“The SEC is used to people just giving in. But these public bodies strongly believe they did not commit fraud. Now they are standing up to the SEC,” Doty said.

The Irvine Unified School District, the Newport-Mesa Unified School District, the North Orange County Community College District and the Orange County Department of Education have filed lengthy responses to so-called “Wells notices” that they received from the SEC last November.

The notices are a signal that the school agencies may be charged with fraud for selling nearly $500 million of taxable bonds to reap returns in the investment pool operated by then-County Treasurer Robert L. Citron. The pool suffered $1.64 billion in losses in 1994, prompting an SEC investigation.

In its notices, the SEC has warned the school agencies and some of their financial officials that they failed to disclose sufficient information to investors, especially about how the bond funds were to be invested and the condition of the county’s investment pool.

But school officials have vigorously argued in separate responses to the SEC that they did not have information to disclose because they relied on bond lawyers and bankers that the agencies had hired to do their bond deals.

“We completely relied on the professionals,” one school official said. “But the SEC is going after me individually and that hurts me. If I were to consent to what they want I would carry it with me to any other job. And I didn’t do anything wrong.”

“The SEC seems to be saying that these school officials were supposed to disclose risks with the county’s pool they couldn’t know anything about,” said one source. “They asked questions but were told by the bond experts they hired and experts at rating agencies that there was not a problem.”

John Nelson, assistant superintendent for business services at the Orange County Department of Education, said he and other officials could not comment on ongoing negotiations with the SEC. SEC officials also would not comment Tuesday.

In January, Orange County’s Board of Supervisors signed SEC orders agreeing not to violate securities laws. But school officials said they don’t want to sign such a “cease-and-desist order”--a formal court document in which officials do not admit to wrongdoing but promise not to do anything wrong in the future.

Signing such an order, which will single out not only the districts but particular individuals at each district, would increase borrowing costs and hurt individuals’ reputations, sources said.

Two Orange County cities, Irvine and Anaheim, have also received Wells notices and are reportedly filing responses. City Atty. Jack L. White has said Anaheim received an SEC notice for the city’s 1993 and 1994 taxable bond deals that were sold to invest in the Orange County pool. The city of Irvine received notice for similar bond deals.

SEC enforcement actions against the local governments could range from formal complaints filed in U.S. District Court, which could result in hefty fines, to administrative proceedings aimed at getting cease-and-desist orders.

More than 11 local entities in California are under investigation.