O.C. Bankruptcy Case Settled by First Boston
Ending the only federal case against a brokerage linked to Orange County’s bankruptcy, a Wall Street firm and two employees agreed Thursday to pay $870,000 to settle charges they failed to disclose the risks of investing in county bonds.
The Securities and Exchange Commission had accused C.S. First Boston Corp. of intentional fraud and reckless conduct in helping the county sell $110 million in pensions bonds just before it declared bankruptcy in December 1994.
In settling the case Thursday, the accusations were downgraded to an administrative charge of negligence. Parent company Credit Suisse First Boston, which had a 1996 pretax profit of more than $1.5 billion, paid $800,000 and two former municipal bond experts for the firm paid $35,000 each. None admitted guilt in the case.
There are no other criminal or regulatory charges pending in the bankruptcy, which became the largest financial collapse ever by a local government. The SEC previously settled similar charges against Orange County and several of its officials, including former Treasurer-Tax Collector Robert L. Citron, whose losing bets on low interest rates caused a $1.6-billion loss.
In addition, the county settled a criminal investigation of Merrill Lynch & Co., Citron’s chief investment firm, by accepting a $30-million payment. Citron pleaded guilty to six felonies and served time in a county jail work program while his former top deputy, Assistant Treasurer Matthew R. Raabe, later was convicted on the same charges and was sentenced to three years in prison. He remains free on appeal.
Criminal charges against other county officials were thrown out or bargained down to misdemeanors.
However, the main financial battle is still being fought. The county government and various agencies have civil lawsuits pending against 28 defendant groups--including Merrill Lynch--seeking billions of dollars.
Elaine Cacheris, the SEC’s regional director in Los Angeles, said Thursday that additional charges may yet be brought against other defendants she declined to identify.
Notices of possible SEC charges have previously gone out to former Orange County bond lawyers, financial advisors and investment bankers, including Merrill Lynch. Another of the county’s investment bankers, Rauscher Pierce Refsnes Inc., has said it is negotiating a settlement with the SEC although they have not been charged.
Also put on notice previously by the SEC were the cities of Anaheim and Irvine and four Orange County school agencies, all of whom sold bonds to investors in 1993 and 1994 for the purpose of reinvesting the proceeds back in the county treasury.
In settling the case Thursday, First Boston and its former investment bankers Douglas S. Montague and Jerry L. Nowlin agreed not to commit similar violations of failing to disclose information important to investors.
The settlement avoided potentially far heavier penalties, including public censure by the SEC. Possible penalties that could have been sought included six-figure fines and multiyear suspensions from the bond business for Montague and Nowlin.
But sources said that after the evidence-gathering phase of the case ended last month, the SEC reopened periodic settlement talks, agreeing to substitute the administrative case for the lawsuit. It also dropped demands for public censure or suspensions, several sources said.
In brief statements, the defendants said they were happy to put behind them the “distraction” of the SEC civil case.
The county’s bankruptcy shocked Wall Street because of threats that municipal bondholders, traditionally secure in their investments, might not be repaid by one of the nation’s wealthiest counties.
In September 1994, First Boston had helped the county sell $320 million in bonds to cover pension obligations. On $110 million worth, the county treasury was obliged to buy back the bonds from investors who wanted to cash out and couldn’t find buyers elsewhere.
After the bankruptcy, the county treasury was unable to do so and the bonds went into default, although bondholders were later repaid as part of the county’s financial restructuring.
Several sources involved in litigation over the bankruptcy said the case against First Boston was easier than others the SEC could take on because there was virtually no disclosure about the risks of Citron’s investments in the documents describing the bonds.
The SEC, which has sought to tighten up municipal finance practices nationally, initially accused First Boston of intentionally misrepresenting to investors the safety of the county’s investments.
But the defendants maintained that they, like others including the SEC itself, had been lied to by Citron and other county officials about the riskiness of his investments.
In the end, the SEC charged that they had failed to adequately investigate the representations of Citron and others at the county.
“I am pleased that an acceptable disposition has been reached,” said Montague, who now runs his own Pasadena-based advisory firm for issuers of municipal bonds.
Nowlin, who now works in municipal finance for a bank in Utah, “looks forward to putting [the case] behind him,” said his lawyer, Jan Lawrence Handzlik.
“We are pleased that the settlement puts the SEC case to rest and eliminates any further associated expense or distraction,” First Boston said in a statement.
Times staff writer James S. Granelli contributed to this report.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Bankruptcy Lawsuit Update
County Government Cases
The county filed 15 civil lawsuits against 28 defendant groups. All of the cases are pending including a $50-million settlement with bond counsel LeBoeuf Lamb Greene & MacRae. The other pending cases are against:
* Merrill Lynch & Co.
* McGraw-Hill Cos./Standard & Poor’s Corp.
* KPMG Peat Marwick and accounting partners Margaret J. McBride, Howard Bland and Jon Madonna
* Student Loan Marketing Assn.
* Rauscher Pierce Refsnes Inc.
* Morgan Stanley Group Inc.
* Fuji Securities Inc.
* Bear Stearns & Co. Inc., Bear Stearns Securities Corp, Cantor Fitzgerald Securities Corp., Citibank, Citicorp Securities Inc., Daiwa Securities America Inc., Dean Witter Reynolds Inc., Donaldson Lufkin & Jenrette Securities Corp., DLJ Mortgage Capital Inc., CS First Boston Corp., First Boston Corp., CS First Boston Mortgage Capital Corp., First Boston Mortgage Capital Corp., Credit Suisse Financial Products, Kidder Peabody & Co., Lehman Brothers International, Lehman Capital Corp., Lehman Commercial Paper Inc., Lehman Brothers Inc., Nomura Securities International Inc., PaineWebber Inc., Prudential Securities Inc., Sanwa Securities (USA) Co. LP, SBC Capital markets Inc., Smith Barney Inc.
* Federal National Mortgage Assn.
* Federal Home Loan Bank of Boston
* Federal Farm Credit Banks (AgAmerica Farm Credit Bank, AgFirst Farm Credit Bank, Farm Credit Bank of Texas, Farm Credit Bank of Wichita, St. Paul Bank, Western Farm Credit Bank)
* Brown & Wood and law partner Paul C. Pringle
* Paribas Corp.
* BA Securities
Securities and Exchange Commission Cases
* Action: The SEC settled actions with the county’s former treasurer, Robert L. Citron, and his former top aide, Matthew R. Raabe, who agreed not to violate securities laws again. The SEC also issued a harshly worded report accusing the county’s five supervisors, Citron and Raabe of repeatedly misleading and defrauding securities buyers.
Status: The agency has yet to take action against Merrill Lynch and others.
* Action: Sued CS First Boston Corp. and two partners
Status: Settled for $800,000 from the investment banker and $35,000 each from two partners.
* Action: A dozen cities and local agencies that refused to join in the county’s lawsuit sued Merrill Lynch & Co. Inc., four affiliates and bond salesman Michael G. Stamenson in state and federal court.
Status: State case was dismissed and the federal case was stayed. Plaintiffs are appealing both.
The plaintiffs: Atascadero, Buena Park and its Community Redevelopment Agency, Claremont, Milpitas, Montebello and its Community Redevelopment Agency, Mountain View, Santa Barbara and its Redevelopment Agency, Yorba Linda and its Redevelopment Agency, Santiago County Water District and Yorba Linda Water District
Irvine Ranch Water District
* Action: Filed suit against Merrill Lynch & Co. Inc.
Individual Investors’ Lawsuits
A 1994 class action, Leetate Smith et al v. Merrill Lynch & Co. Inc. et al, has been settled in Orange County Superior Court, and a companion federal case was dismissed. Defendants settled in two groups for total of $7.55 million. First group of defendants, all brokerages, settled December 1996 for $4,382,500. They are:
* Smith Barney
* Lehman Bros.
* Kidder Peabody
* Rauscher Pierce Refsnes Inc.
* Stone & Youngberg
* O’Brien Partners
* CGMS Inc.
* Donaldson Lufkin & Jenrette
Settlement with second group of defendants for $3.17 million goes before the court Feb. 6 for final approval. Defendants are:
* Merrill Lynch & Co. Inc.
* CSFirst Boston
* KPMG Peat Marwick
* Leifer Capital Inc.
* Fieldman, Rolapp & Associates Inc.
* North Orange County Community College District has a suit pending against LeBoeuf Lamb Greene & MacRae
* Action: Orange County Transportation Authority has
filed separate suits against KPMG Peat Marwick and
Goldman Sachs & Co.
Goldman Sachs countersuit
* Action: The New York investment banker countersued OCTA naming as counterdefendants in addition: Orange County, Leifer Capital Inc. and principal Jeffrey Leifer, and Sperry Capital Inc. and principal James Martling
Orange County Supervisors
* Action: Roger R. Stanton and William G. Steiner faced civil charges by the Orange County district attorney of willful misconduct for failing to oversee investment activities
Outcome: State Court of Appeal dismissed the charges
* Merrill Lynch & Co. Inc. paid $30 million to halt the criminal investigation against it
* Robert L. Citron, former county treasurer-tax collector, pleaded guilty to six felony counts. Sentenced to one year in jail
* Matthew R. Raabe, former assistant treasurer, convicted on five felony counts; sentenced to three years in prison
* Ronald S. Rubino, former county budget director, pleaded no contest to one felony; put on probation for a year
* Charges dropped against Steve E. Lewis, auditor-controller
Source: Times reports
Researched by JAMES S. GRANELLI, E. SCOTT RECKARD and LOIS HOOKER / Los Angeles Times