SEC Seeks Action Against Brokerage That Issued Bonds

Federal regulators charged brokerage Dain Rauscher Inc. and two of its former executives with fraud Monday for allegedly withholding critical information from investors who bought nearly $1 billion in municipal bonds issued before Orange County’s 1994 bankruptcy.

In its civil complaint, the Securities and Exchange Commission is seeking permanent injunctions against the firm and its former employees, plus unspecified fines. The injunctions would prevent them from breaking securities laws in the future and would make it easier to prosecute them if they did.

The complaint is the latest in a string of federal enforcement actions stemming from the county’s loss of $1.64 billion to bad investments in December 1994.

At the time of its collapse, the county’s investment pool held money for about 200 school districts, cities and special districts. The county has recovered about $800 million.

The SEC complaint alleges that Rauscher Pierce Refsnes Inc., which merged into Dain Rauscher in January, and investment bankers Kenneth D. Ough and Virginia Horler were required as underwriters or financial advisors for 13 Orange County bond offerings in 1993 and 1994 to disclose how the money was to be invested and the risks involved.

The firm and its employees failed to disclose that the $980 million being raised would not be used to fund improvements by the cities and schools but was being reinvested in efforts to make a profit, the complaint said.

Required disclosure documents also failed to outline the risks associated with investing in the county fund, which at the time was highly leveraged in risky derivative securities that plunged in value with a rise in interest rates, the complaint said.

“The disclosure was virtually nil,” said Elaine M. Cacheris, regional director of the SEC in Los Angeles.

Officials at Dain Rauscher’s headquarters in Minneapolis couldn’t be reached for comment Monday. Last year, spokeswoman Jennifer Driscoll said the company hoped to reach a settlement with the SEC and avoid the filing of a complaint.

“We believe that we acted properly, and we respectfully disagree with the SEC’s position,” Driscoll said.

Twelve of the bond offerings were sold on behalf of Irvine and Anaheim, the Newport-Mesa School District, North Orange County Community College District, Irvine Unified School District and the Orange County Board of Education.

The final sale was a combined offering of $300 million in tax-exempt notes issued by Orange County on behalf of 27 school and college districts in June 1994. That money also was invested in the county fund.

The SEC complaint alleges the company and Ough and Horler knew, or were reckless in not knowing, of “significant negative information that was misrepresented and/or omitted.”

For example, beginning in February 1994, the county pool suffered significant losses and collateral calls due to rising interest rates, but the disclosure documents failed to include that information.

The defendants also failed to disclose to investors in the tax-exempt bond offering that 17 of the 27 school districts had passed resolutions restricting the very actions by which their money was to be invested, the complaint alleges.

Neither Ough nor Horler still work for Dain Rauscher, Cacheris said.

Ough, affiliated with Sutter Securities in San Francisco, said he did nothing wrong in connection with the Orange County bond offerings.

“I consider [the complaint] totally frivolous,” said Ough, who was principal investment banker for nine of the offerings. “They’re trying to find someone to blame this on, and they’re looking at the wrong people.”

He pointed out that attorneys reviewed the disclosure documents for Dain Rauscher, and they weren’t charged in the SEC complaint.

Horler, who is no longer employed in the securities industry, couldn’t be reached for comment.

The SEC investigation into the county bankruptcy--one of the largest in the regulator’s history--is continuing and could result in additional legal action, said Sandra Harris, the SEC’s associate regional director of enforcement.

The inquiry already has resulted in several actions against those involved in the county’s bad investments, including former Treasurer Robert L. Citron, who managed the county pool and resigned Dec. 4, 1994. He later pleaded guilty and served a year in jail for illegally diverting interest income from other pool participants to the county general fund.

In January, Credit Suisse First Boston and two former investment bankers there agreed to pay fines totaling $870,000 to settle SEC charges that they failed to disclose risks in Orange County bonds.

The county sued two dozen investment participants in a series of lawsuits after the bankruptcy, including Merrill Lynch & Co., which sold the county most of its riskiest securities. In June, Merrill Lynch agreed to pay the county $420 million to settle the county’s claims against it.

Lawsuits against 17 other defendants, including Dain Rauscher, are pending. Dain Rauscher’s predecessor, Rauscher Pierce Refsnes, is accused by county attorneys of breach of contract and negligence in the 1993 and 1994 bond offerings.