Cities and Schools Get Off Hook With SEC

The cities of Anaheim and Irvine as well as two school agencies settled federal charges that they failed to disclose risky investments funneled through the county’s treasury in the years before Orange County’s historic 1994 bankruptcy.

The Securities and Exchange Commission charged that the two cities, the Irvine Unified School District and the Orange County Board of Education were negligent and misled municipal bond investors in 1993 and 1994. The agencies pumped more than $400 million into the county’s volatile investment pool, which relied on risky strategies and eventually collapsed.

The settlement, announced by the SEC on Thursday, requires the cities and school boards to refrain from similar securities violations in the future.

“This sends a message,” said SEC senior trial counsel William E. White. “It’s very clear that an investor is entitled to know what the municipality is going to do with the money that is invested.”

White said the settlement should be seen as a warning: The SEC will hold municipalities to the same strict standards as private companies that issue securities.

Under the terms of the settlement, the cities and schools neither admit nor deny wrongdoing. Anaheim City Attorney Jack L. White said they agreed to the settlement to avoid a costly legal battle.

“We felt it was a fair and equitable settlement on both sides, and we’re happy to get this behind us,” he said. “This brings to a close our chapter in the county bankruptcy.”

The North Orange County Community College District, which faces similar charges of negligence, has refused to settle with the SEC. The district oversees Fullerton College, Cypress College and a continuing education program.

“Under the order, we’d have to agreed that we committed fraud and deceit. We don’t agree that we did that,” said district spokeswoman Donna Hatchett. “We have a good name, and we want to keep it that way.”

Hatchett said the college district acted responsibly by hiring well-regarded financial and legal advisors to make sure the bonds were handled properly. “We’re just as much a victim as anyone.”

Regulators with the SEC disagreed, and said the cities and schools failed to warn investors about the investment risks taken by then-county Treasurer Robert L. Citron. White said they also failed to disclose the declining performance of the investments even as the county sped toward financial ruin.

Citron’s investment gamble on low interest rates lost $1.64 billion by December 1994, forcing the county into the nation’s biggest municipal bankruptcy. Eventually, bond investors were repaid, but the county and 200 cities, schools and local agencies have yet to fully recoup their losses.

The SEC charges against the cities and schools were limited to negligence, rather than more serious charges of fraud and recklessness that were filed against others connected to the bond deals.

The SEC brought an intentional fraud suit against Dain Rauscher Inc., the firm that acted as a financial advisor and underwriter for the cities and schools. White said a “settlement in principal” has been reached in that case and could be finalized in the near future.