SEC, Lawyer Who Advised O.C. on Bonds Settle Over ’94 Collapse

Regulators on Wednesday charged a former bond lawyer for Orange County with failing to alert bond buyers to the investment risks the county was taking in 1994, as it skidded toward a $1.6-billion loss and bankruptcy.

The lawyer, Jean Costanza, immediately settled those and related charges by the Securities and Exchange Commission without admitting or denying them. She agreed to a cease-and-desist order, pledging not to violate federal securities fraud laws in the future.

The charges were filed under a negligence statute, and no fine was levied. That puts Costanza in the least severe category of defendants in various SEC cases stemming from the bankruptcy, along with several school districts and cities that issued bonds.

In some other cases, the SEC either filed more serious charges of intentional fraud or levied a fine.

Kelly Bowers, an SEC lawyer on the case, said the commission agreed to the lesser penalty in part to avoid the uncertainties of going to trial. “The commission believed this was an appropriate settlement,” Bowers said.

The SEC leveled more serious charges of intentional fraud or reckless conduct against Robert L. Citron, the former county treasurer, who settled with the SEC by agreeing not to violate securities laws. Citron also pleaded guilty separately to six felonies.

Costanza was a partner in the law firm LeBoeuf, Lamb, Greene & MacRae in July and August 1994, when she advised the county, its flood-control district and a school district on eight municipal bond offerings that raised $1.42 billion.

Her involvement in the process of issuing the bonds was substantial, the SEC pointed out. She rendered opinions on the legality and tax status of bonds, helped produce official statements describing them to investors, and took part in discussions between bond rating agencies and county officials.

She either knew or should have known that serious omissions were made in the official statements for the bonds and some of her opinions, the SEC said.

Among the omissions listed by the SEC were the risks of Citron’s bets on low interest rates and the high degree to which the bond issuers relied on the treasury to repay their debts.

Costanza’s lawyer, Gary M. Cohen of San Francisco, said she still believes the language of the bond documents “met all legal and ethical standards.”

He said Costanza, who recently left LeBoeuf, Lamb to concentrate on criminal defense work, settled because she “wants to put it behind her and go on with her life and her career.”

The settlement is the latest in a series resulting from the SEC’s investigation of the Orange County debacle. The highest-profile SEC case involved a $2-million payment by Merrill Lynch & Co., Citron’s chief brokerage, which like Costanza settled charges of negligence without acknowledging wrongdoing.

The commission, which polices the nation’s stock and bond markets, concentrated on the effects of the Orange County debacle on investors who purchased municipal bonds.

An SEC lawsuit involving more serious fraud charges against the brokerage Dain Rauscher Inc. and two of its former executives is pending in federal court in Santa Ana. Dain Rauscher has denied withholding pertinent information from investors when it served as underwriter or advisor on bond deals from Orange County. It could be fined and face a permanent injunction if the SEC prevails.

The cities of Irvine and Anaheim, the Irvine Unified School District, the North Orange County Community College District and the Orange County Board of Education are contesting charges that they were negligent in disclosing bond risks. But the Newport-Mesa Unified School District settled with the SEC without admitting wrongdoing.

The issue of whether the county’s former brokerages, law firms, accountants and other advisors should share blame for the fiasco has been fought out in civil lawsuits filed by Orange County and other plaintiffs.

So far, the county has recovered about $800 million in settlements, including more than $400 million from Merrill Lynch and $45 million from LeBoeuf, Lamb.

One of the remaining lawsuits is against the bond rating firm Standard & Poor’s, which gave top ratings to the county bonds.

S&P; has denied any wrongdoing in failing to warn the county and bondholders of risks, vowing to fight the accusations. Costanza is expected to be a witness if that case goes to trial.