SEC’s 1994 Bankruptcy Inquiry Comes Back to Haunt

A Securities and Exchange Commission inquiry into Orange County’s investments in 1994 is coming back to haunt the agency as it tries to hold Wall Street firms accountable for the county’s $1.64-billion investment debacle.

The agency is resisting attempts by the investment banker CS First Boston to release information on the SEC’s own review of the county’s portfolio--a review that showed no wrongdoing by the county.

The fight is part of the early legal maneuvering in the agency’s lawsuit accusing First Boston and two of its investment bankers of misrepresenting or omitting crucial information about the county’s shaky financial condition when it sold $110 million in county bonds. The company and the bankers deny any wrongdoing.

Watching the fight closely are lawyers for Merrill Lynch & Co. and Rauscher Pierce Refsnes, two major securities firms targeted by the SEC in its ongoing investigation into the investment collapse that led to the nation’s largest municipal bankruptcy. Orange County emerged from bankruptcy last spring.

The SEC had provided a summary of its inquiry, which relied in part on interviews with then-county Treasurer Robert L. Citron. The summary stated that the county’s investment strategy was high-risk but in compliance with state law.

But First Boston wants all the documents so it can learn exactly what the SEC investigators saw, what they considered and what they were told. First Boston argues in court papers that Citron misled it about Orange County’s finances just as he misled the SEC during its inquiry.

The SEC had argued that its 1994 review, conducted only months before First Boston did its research for the bond issue, is irrelevant to its case against the investment banker. It also had asserted that, were it relevant, the investigation is otherwise privileged information that can’t be released.

But the agency has lost two court rulings on the issues and now must turn over the documents, though it still can assert privileged status for each specific document.

First Boston contends that if the SEC’s investigation was professional and thorough, it still failed to uncover any fraud. Yet the agency is still trying to hold First Boston accountable for uncovering fraud in a similar investigation.

Wall Street firms also wonder if the investigation could show that the SEC overlooked something critical or found something that the agency decided not to disclose.

Neither the SEC nor First Boston would comment beyond the court file.

The issue, however, is not believed to affect Orange County’s $2.5-billion lawsuit against Merrill Lynch and other Wall Street firms because that action is based on different allegations.

Bloomberg News contributed to this report.