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DIRE STRAITS : Orange County Bankruptcy Spurs SEC to Crack Down on Small Communities


WHEATLAND, Calif. — Not since 1913 have times been so dark in Wheatland. On a hot August day that year, four men were killed when 4,000 angry hops pickers rioted and the state militia had to be called in.

Now, the hulking brown kilns that once roasted hops for beer stand silent as this Northern California town of 2,000 battles a much greater threat: the U.S. Securities and Exchange Commission.

Wheatland is caught up in a sweep by the SEC, the agency that generally regulates stock exchanges and corporations. The town is one of 11 local governments in California, including six in Orange County, being investigated by the SEC as part of a crackdown on abuses in municipal finance.

Sparked by Orange County's massive bankruptcy filing 15 months ago and the SEC's new get-tough policy on municipal bonds, investigations into California's local governments are at an unprecedented high.

Small governments such as Wheatland claim they are being unfairly targeted by the SEC. Although all the SEC investigations involve bad bond deals, the local governments say any bond problems are due to an ignorance of municipal finance and overreliance on bond lawyers and bankers hired as experts. It isn't a case of outright fraud, elected officials say.

In Wheatland's case, it was the town's only bond deal in 30 years--a $2-million bond sold in 1990 to expand a sewer system and build 700 homes--that sparked the SEC probe.

"We say, 'No way.' We didn't do anything wrong," said Clay Castleberry, Wheatland's part-time city administrator.

But he acknowledges that when word of the probe got out, it caused a panic in town.

Residents clamored for answers at a town meeting. The only full-time city employee rounded up volunteers to make copies of bond documents and drive them 125 miles to the SEC's office in San Francisco. And now, Wheatland is trying to hire a securities lawyer.


"They say it takes $100,000 in legal fees to defend against an SEC notice," said Castleberry, noting that the city's annual budget is only $350,000.

"If the SEC gets tough with us," he said, "we're going to hand them the key to City Hall and say 'Turn out the lights when you're done.' "

The SEC's clampdown has sent shock waves throughout the state. In some city council chambers and county board rooms, public officials are becoming afraid to approve even the simplest of bond deals because of concerns the financings may go bust later.

"If I were a public official right now, I'd be freaked. They are being required by the SEC to know things they can't know--even with good effort," said Dean Misczynski, a bond expert for California. "It has the potential of chilling the climate of public finance in California."

Eventually, small cities that rely on the $1.2-trillion municipal bond market to borrow tax-free money for roads, schools and other projects could be shut out, much the same way very small companies find it too expensive or complicated to raise money on the New York Stock Exchange.

This could hamper economic growth in California and limit government's ability to function, some experts say. Such concerns prompted the National League of Cities this month to urge the SEC to focus on fraud and negligence in its municipal bond investigations rather than lack of disclosure or missing information in bond documents.

The SEC's investigations "appear to have been particularly targeted against smaller cities with inadequate resources to defend themselves," the league said.

Which is exactly Wheatland's predicament, said Juanita Neyens, the town's 74-year-old mayor who lives less than a block from City Hall in the house once occupied by her great-grandmother. Neyens also manages the cemetery and runs the historical society in this town that doesn't yet have a stoplight.

"There are no Bob Citrons [the former Orange County treasurer-tax collector indicted for fraud] here in Wheatland," Neyens said. "We haven't done anything wrong, but we can't afford to fight back."


Once a place of comfort for any investor who could balance a checkbook, the municipal bond market has become increasingly risky and complex.

Although still a place where local governments go to raise money for infrastructure projects, the market's new complexity has prompted a greater reliance by public officials on outside lawyers, bankers and advisors for assistance on the deals. And with that comes the possibility for more abuses.

Now, the SEC, which has traditionally focused on corporate finance, is doing some badly needed housecleaning in the municipal bond world.

In a statement to The Times, SEC Chairman Arthur Levitt said the scrutiny over municipal bonds is necessary because they are so popular.

"It is one of the SEC's top priorities to make sure that investors and taxpayers alike get accurate and complete information about their investments."

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