Federal officials investigating Orange County's bankruptcy are contacting bond firms, lawyers and county officials this week, informing them that they may be subject to civil charges for violations of securities laws.
Several firms involved in the county's finances on Monday denied they had received such notices, but a source said that several of the firms would be contacted soon by the U.S. Securities and Exchange Commission.
Under a so-called Wells procedure, firms or individuals are given notice that the SEC plans to file charges against them and they are given about two weeks to argue against such action.
Since Orange County declared bankruptcy on Dec. 6 after its investment pool lost about $1.69 billion, regulators have questioned whether the county's financial condition was adequately disclosed in bond documents offered to investors.
Elaine Cacheris, executive director of the SEC in Los Angeles, declined to comment on the investigation, which is the biggest case ever handled out of the SEC's office in Los Angeles.
In Washington, SEC enforcement chief William McLucas also declined to comment. But another SEC source said such investigations are "handled in stages," and that some bond firms or individuals may have gotten notices while others have not been notified yet because the investigation into their actions has not been completed.
Clearly, sources said, the SEC is focusing on taxable bond issues sold by four Orange County school districts and other taxable bonds sold by the county, including a $600-million issue sold to invest in the county's pool.
The most likely charges, sources said, would be violations of federal securities laws, such as SEC Rule 10b-5. That rule, which centers on disclosure, makes it a crime to mislead investors or "omit material facts" from bond documents.
The SEC is expected to charge securities firms with failing to disclose accurate information to investors about the bonds and the investment pool and the purpose of the bond sales.
The type of punishment for violating disclosure laws can vary greatly, officials said. The SEC can bar a firm or individuals from the securities industry completely or make them pay back any money they gained from the violation and pay punishments. In the Orange County case, this could range into the millions of dollars.
Sources who asked not to be identified said that from 10 to 100 phone calls were being made to targets in the case.
Reportedly, former Treasurer-Tax Collector Robert L. Citron, who managed the county investment pool, other individuals and various Wall Street and California firms are being targeted.
Leifer Capital Inc. of Santa Monica, financial adviser to Orange County on a $600-million taxable bond issue sold in 1994, and LeBoeuf, Lamb, Greene & MacRae, the New York law firm that provided legal counsel on some county bond sales, said they did not receive Wells notices from the SEC.
"I haven't received any letter or phone call from the SEC," regarding enforcement action, Jeffrey Leifer, president of Leifer Capital, said on Monday.
"No one at my firm has. I'm pretty confused," he said.
Linda Pomarantz, spokeswoman for Rauscher Pierce Refsnes Inc., a Dallas brokerage firm that underwrote notes for Orange County, said the firm would not confirm or deny whether it had received a notice, though sources close to the investigation said the firm had been or was in the process of being notified.
Merrill Lynch & Co., another of the county's bond underwriters, had no comment.
Orange County officials have sued Merrill for more than $2 billion, charging that it sold the county illegal securities. Another law firm that did work for the county also would not comment.
"We have a policy not to comment," said Jeffrey M. Oderman, managing partner with Rutan & Tucker, a Newport Beach law firm that helped the county sell $110 million in pension bonds. Oderman would not say if the firm had received a notice, but sources said the firm was a target.