SEC Report Flays County Officials Over Bankruptcy

LOS ANGELES — In an action unprecedented in the agency’s history, the U.S. Securities and Exchange Commission on Wednesday issued scathing reports accusing the Orange County Board of Supervisors, its former treasurer and assistant treasurer of repeatedly misleading and defrauding the buyers of more than $2.1 billion in municipal securities.

Former Treasurer-Tax Collector Robert L. Citron, former Assistant Treasurer Matthew Raabe and the five supervisors in office at the time of the county’s December 1994 bankruptcy neither admitted nor denied guilt in settlements with the agency, but agreed not to violate securities laws in the future.

As part of the deal, the supervisors also agreed to allow a harshly worded critique of their conduct to be filed as a permanent public notice to investors by the SEC.

William R. McLucas, the agency’s enforcement chief, said the agency’s action constituted a warning to other municipalities throughout the nation that it will aggressively pursue public officials who disregard securities laws.

“We think this is the most significant and direct procedure against a municipal government and officials of a municipal government in the 60-some-odd years of the commission’s existence,” McLucas said. It is the first time the agency has taken an enforcement action specifically against a county.

He defended his agency’s decision not to impose fines or recommend federal criminal charges against the officials--the two most serious actions the agency could have taken.

“You read the report [naming the supervisors] and decide if this a badge of honor or slap on the wrist to the public officials,” McLucas said.

The SEC did not impose fines, he said, because the penalty would likely “fall on the shoulders of taxpayers, residents and investors” in bankrupt Orange County.

Furthermore, SEC officials said, the county has recently taken steps to reform the way it approves municipal financings, and three of the five supervisors involved in the financial debacle already are out of office.

Attorney Gerald E. Boltz, who represented the five supervisors and negotiated the settlement with the SEC, characterized the action against his clients as “appropriate.” He said the supervisors were “prisoners of a process that was flawed.”

The supervisors accused of wrongdoing by the SEC are: Board Chairman Roger R. Stanton, Supervisor William G. Steiner and former Supervisors Gaddi H. Vasquez, Harriett M. Wieder and Thomas F. Riley.

Boltz said the SEC was using the case as an example for other municipalities on how they should conduct financial business. He added that the SEC findings are “going to be quoted and read a lot in the future and provide guidance for public officials for some time to come.” Previous SEC enforcement actions have generally involved small special districts.

Steiner said the SEC’s “harsh criticism should extend to the entire municipal securities industry. The brokers, financial advisors and lawyers have gotten lazy, shuffled papers and charged high fees under the assumption that governments would never default. . . . The SEC’s action should put those folks on notice.”

Stanton said he was pleased that the SEC matter had been settled.

“Now we [can] give full attention to the ongoing financial recovery of the county,” he said in a prepared statement, “and pursue its claims against the professional firms on whom we thought we could rely and who regrettably failed us and, most of all, the people of Orange County.”

SEC officials said that based on their 13-month investigation, the individual board members let the taxpayers down by not doing their jobs.

According to the SEC, the supervisors knew the county was relying on risky investments to boost the county’s interest income so they could balance the county’s budget. Despite their knowledge of the county’s finances, the supervisors continued to approve borrowings and did not adequately disclose those risks to investors, SEC officials said.

“These supervisors did not even read the official statements [related to each of the bond issues], nor did they ask any questions regarding the disclosures” that were required by law, said Elaine Cacheris, director of the SEC’s Pacific Regional Office.

“The supervisors were aware of material information [that] called into question the county’s ability to repay its securities,” SEC documents charged. “Nevertheless the supervisors failed to take appropriate steps to assure disclosure of these facts.”

The agency also accused Citron, Raabe and the board of failing to disclose to investors the risks associated with $2.1 billion of county borrowings in 1993 and 1994--eight by Orange County, one by the county’s Flood Control District and two by the Placentia-Yorba Linda School District.

SEC officials said that Raabe was “principally responsible” for the “fraudulent offer and sale” of $150 million in securities by the school district.

“Disclosure in the official statements for every one of these offerings was false or misleading,” Cacheris said.

She said the county never told investors the high degree to which funds in the county’s investment pool were leveraged, nor the pool’s vulnerability to interest rate increases.

“A rise in interest rates would have a devastating effect on the pools, impacting the issuer’s ability to repay the securities,” Cacheris said. “Which is precisely what happened.”

Raabe also was accused of lying to the national agencies that rate the soundness of investment offerings about what proportion of the county’s portfolio was devoted to risky securities. In addition, Raabe failed to tell investors that much of the money in the county’s $142-million “Economic Uncertainty Fund” was not available to repay bond debts as claimed, but had been illegally skimmed from other public agencies investing in the county’s pool, officials said.

The commission filed civil complaints against Raabe and Citron in U.S. District Court in Santa Ana. A separate SEC administrative proceeding was entered against Orange County, its Board of Supervisors and the flood control district.

At a news conference at the agency’s Los Angeles office, McLucas said the investigation--one of the largest in the agency’s history--is continuing.

“We are not done,” he said. “This is the first chapter.”

The SEC now plans to turn its attention to the financial and legal firms that sold the county’s massive notes and bond issues, and advised county supervisors about disclosures required to be made to investors, according to a source close to the investigation.

SEC Chairman Arthur Levitt issued a statement from Washington on Wednesday saying that the agency is trying to protect investors and preserve the integrity of nation’s municipal bond market.

“The case boils down to problems with statements made to sell securities--in other words, with disclosure,” Levitt said. “Investors depend on the information provided in public offerings of securities. The law requires that the accuracy and completeness of that information be held sacrosanct.”

Experts said Wednesday that they hoped the SEC actions would help prevent future disasters in municipal finance. But they said the biggest deterrent was not so much the SEC but the fear of suffering the same fate as Orange County, which will be paying off its losses for the next 20 years.

Former SEC Commissioner Richard Roberts, who was at the agency when it began the investigation of Orange County, said he thought the action was appropriate.

“A fine would be a silly sanction, just an extra burden on taxpayers,” said Roberts, who was commissioner from 1990 to July of last year. “An injunction is a very serious sanction because it darkens the cloud over the county’s ability to raise public funds.”

The SEC’s uncontested accusations were another blow to former and current county officials who continue to deal with the fallout from the nation’s worst-ever municipal bankruptcy.

Currently, Supervisors Stanton and Steiner and County Auditor-Controller Steve E. Lewis are defending themselves in state court against accusations of willful misconduct for failing in their duties to oversee the actions of Citron. If the accusations are found to be true they will be removed from office.

Raabe is fighting six felony charges of fraud and misappropriation of public funds. Citron has pleaded guilty to those same charges and is awaiting sentencing. Both men face a maximum punishment of 14 years in prison and $10 million in fines.

Additionally, former Budget Director Ronald S. Rubino is under a criminal grand jury indictment charging him with aiding and abetting Citron in the misappropriation of public money.

Neither Rubino nor Lewis were accused of wrongdoing by the SEC.

* GARBLED MESSAGE? SEC and critics clash over what settlement says. A15

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The Legal Front

The Securities and Exchange Commission announced on Wednesday the settlement of civil fraud charges against former Orange County Treasurer-Tax Collector Robert L. Citron, his assistant Matthew Raabe and the five county supervisors on the board when the bankruptcy occurred. The supervisors named in the settlement:

* Thomas F. Riley: Served on board from 1974 through 1994. Had announced plans to retire before the county filed bankruptcy.

* Harriett M. Wieder: Board member from 1978 through 1994. Like Riley, she had announced her retirement long before the bankruptcy filing.

* Gaddi H. Vasquez: Board member since 1987 who resigned last September to accept position of division vice president at Southern California Edison. Has since left that position to take up his old job as a patrol officer with Orange Police Department.

* Supervisors Roger R. Stanton and William G. Steiner: Current board members. They have been charged by Orange County Grand Jury with willful misconduct for not adequately overseeing the operations of county treasurer. Maximum penalty is removal from office. They deny accusations and seek to have Orange County district attorney’s office removed from handling the case.

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ON THE DOCKET:

* Robert L. Citron: Pleaded guilty to six felonies involving fraud and misappropriation of public funds. Faces 14 years in prison and $10 million in fines at his Feb. 23 sentencing.

* Matthew Raabe: Pleaded not guilty to same six felonies his former boss confessed to. Faces same penalty as Citron. Awaiting trial.

* Former Budget Director Ronald S. Rubino: Charged with two felony counts of aiding and abetting Citron in misappropriating public funds. If convicted, faces maximum punishment of nine years in prison. Awaiting trial.

* Auditor-Controller Steve E. Lewis: Faces willful misconduct accusation, like Steiner and Stanton. Denies accusation and is also seeking district attorney’s removal from the case.

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ALSO IN MOTION:

* SEC has an ongoing investigation into the actions of finance professionals involved in the bankruptcy.

* Orange County district attorney’s office is continuing its criminal investigation and is expected to present evidence against other players to the county’s newly sworn grand jury.

Source: Times reports

Researched by DAVAN MAHARAJ / Los Angeles Times