In a warning to local governments nationwide, federal regulators accused Irvine, Anaheim and four Orange County school agencies Tuesday of misleading investors about the risks of municipal bonds issued in the years before the county's fiscal collapse.
The securities, issued in 1993 and 1994, later became infamous as "casino bonds"--financing to provide funds to speculate with rather than for streets, sewers or classrooms.
The cities and schools failed to disclose that the $508 million in bond funds was pumped straight into Orange County's treasury in hopes of a quick profit, the Securities and Exchange Commission said.
The SEC also said bond investors were never warned of the risks taken by former county Treasurer Robert L. Citron, or of the treasury's losses as 1994 wore on.
After years of high returns, Citron's bets on low interest rates lost $1.64 billion by December 1994, plunging the county into the nation's biggest municipal bankruptcy. Bond investors eventually were repaid, but the county and 200 cities, schools and local agencies have yet to recoup their losses.
The cases are the latest in a series brought by the SEC, which said its Orange County investigation is nearly complete but could still yield additional charges.
The SEC's former regional head in Los Angeles, Elaine Cacheris, said a priority for the agency in recent years has been to hold municipalities to the same standards in issuing securities as private companies.
The SEC is seeking a cease-and-desist order barring the cities and school agencies from future securities violations. But the commission is not seeking financial penalties.
One school system, Newport-Mesa Unified School District, settled by promising to make full disclosures in the future. The district, which admitted no wrongdoing, settled to avoid a costly legal battle, Supt. Robert Barbot said.
The others in the case--Irvine Unified School District, North Orange County Community College District, Orange County Board of Education and the two cities--said they will contest the charges.
The school officials "were required to act reasonably," said James Sanders, a lawyer for the schools. "It's our position that they have acted reasonably by hiring outside people to prepare the disclosure documents."
Cacheris said hiring professional advisors "isn't necessarily enough."
"An issuer has a responsibility to review the disclosure," she said. "These issuers should have realized that the information . . . did not square with what they knew."