SEC Suit on O.C. Bond Sales Rejected
A former employee of the Dain Rauscher Inc. brokerage won dismissal Wednesday of regulators’ charges that he withheld critical information from investors who bought nearly $1 billion in municipal bonds before Orange County’s historic 1994 bankruptcy.
Ruling that Ken Ough followed standard industry procedures, U.S. District Judge Gary L. Taylor tossed out a lawsuit by the U.S. Securities and Exchange Commission. Valerie Caproni, head of the SEC’s Los Angeles office, said the agency disagreed with the ruling and was studying an appeal.
Ough, one of the last few defendants remaining from the debacle that cost the county treasury more than $1.6 billion, now works for Sutter Securities in San Francisco. He reacted with jubilation to Taylor’s ruling, telling the Reuters news service he felt vindicated. “After five years of this hanging over me, it’s great news,” he said.
The SEC, which polices the nation’s stock and bond markets, filed fraud charges a year ago against Minneapolis-based Dain Rauscher, Ough and another investment banker at the firm, Virginia Horler.
Addressing Taylor on Wednesday, SEC attorney Michael Wilner indicated that the agency expects to settle the charges against Horler and Dain Rauscher within a month.
Defendants previously settling SEC charges stemming from Orange County’s collapse range from professional firms such as Wall Street’s Merrill Lynch & Co., which paid $2 million, to the cities of Irvine and Anaheim, the Irvine school district and the Orange County Board of Education. The schools and cities promised to fully disclose risks in future municipal bond offerings.
The SEC contended that Ough, Horler and Dain Rauscher had a duty to warn bond buyers that proceeds from 13 municipal offerings in 1993 and 1994 would not go for improvements by the issuing cities and schools, but instead would be poured back into the county treasury in hopes of turning a quick profit. The brokerage was either the underwriter or the financial advisor for the bond offerings.
Rauscher Pierce Refsnes, a Dallas brokerage that formed Dain Rauscher by merging with Minneapolis-based Dain Bosworth in 1998, was the underwriter on nine note offerings and the financial advisor on a 10th.
Fueled by heavy bets on low interest rates by then-county Treasurer Robert L. Citron, the treasury outperformed other public investment funds in the early 1990s. But when the Federal Reserve raised rates sharply in 1994 to ward off inflation, Citron’s bets came up losers and the county toppled into bankruptcy.
Citron and his assistant, Matthew Raabe, were both later found guilty of criminal fraud. They had assured the 200 cities, schools and local agencies with money in the treasury that their funds were safe, and national bond-rating firms had maintained sterling ratings on the county’s ability to repay its debts. Ough and other defendants cited those factors as a reason that they weren’t to blame for failing to disclose risks.
The county sued a host of financial, legal and accounting firms after the bankruptcy, winning settlements that now total $865 million with interest. The recoveries, including more than $400 million from Merrill Lynch, Citron’s main brokerage, were so successful that the county’s lawyers are now seeking to have the federal courts award them an extra $48 million on top of $26 million they already have been paid in hourly billings.
The county is opposing the request for extra payment.
