SANTA ANA — Ending the only federal case against a brokerage linked to Orange County's bankruptcy, a Wall Street firm and two employees agreed Thursday to pay $870,000 to settle charges they failed to disclose the risks of investing in county bonds.
The Securities and Exchange Commission had accused C.S. First Boston Corp. of intentional fraud and reckless conduct in helping the county sell $110 million in pensions bonds just before it declared bankruptcy in December 1994.
In settling the case Thursday, the accusations were downgraded to an administrative charge of negligence. Parent company Credit Suisse First Boston, which had a 1996 pretax profit of more than $1.5 billion, paid $800,000 and two former municipal bond experts for the firm paid $35,000 each. None admitted guilt in the case.
There are no other criminal or regulatory charges pending in the bankruptcy, which became the largest financial collapse ever by a local government. The SEC previously settled similar charges against Orange County and several of its officials, including former Treasurer-Tax Collector Robert L. Citron, whose losing bets on low interest rates caused a $1.6-billion loss.
In addition, the county settled a criminal investigation of Merrill Lynch & Co., Citron's chief investment firm, by accepting a $30-million payment. Citron pleaded guilty to six felonies and served time in a county jail work program while his former top deputy, Assistant Treasurer Matthew R. Raabe, later was convicted on the same charges and was sentenced to three years in prison. He remains free on appeal.
Criminal charges against other county officials were thrown out or bargained down to misdemeanors.
However, the main financial battle is still being fought. The county government and various agencies have civil lawsuits pending against 28 defendant groups--including Merrill Lynch--seeking billions of dollars.
Elaine Cacheris, the SEC's regional director in Los Angeles, said Thursday that additional charges may yet be brought against other defendants she declined to identify.
Notices of possible SEC charges have previously gone out to former Orange County bond lawyers, financial advisors and investment bankers, including Merrill Lynch. Another of the county's investment bankers, Rauscher Pierce Refsnes Inc., has said it is negotiating a settlement with the SEC although they have not been charged.
Also put on notice previously by the SEC were the cities of Anaheim and Irvine and four Orange County school agencies, all of whom sold bonds to investors in 1993 and 1994 for the purpose of reinvesting the proceeds back in the county treasury.
In settling the case Thursday, First Boston and its former investment bankers Douglas S. Montague and Jerry L. Nowlin agreed not to commit similar violations of failing to disclose information important to investors.
The settlement avoided potentially far heavier penalties, including public censure by the SEC. Possible penalties that could have been sought included six-figure fines and multiyear suspensions from the bond business for Montague and Nowlin.
But sources said that after the evidence-gathering phase of the case ended last month, the SEC reopened periodic settlement talks, agreeing to substitute the administrative case for the lawsuit. It also dropped demands for public censure or suspensions, several sources said.
In brief statements, the defendants said they were happy to put behind them the "distraction" of the SEC civil case.
The county's bankruptcy shocked Wall Street because of threats that municipal bondholders, traditionally secure in their investments, might not be repaid by one of the nation's wealthiest counties.
In September 1994, First Boston had helped the county sell $320 million in bonds to cover pension obligations. On $110 million worth, the county treasury was obliged to buy back the bonds from investors who wanted to cash out and couldn't find buyers elsewhere.
After the bankruptcy, the county treasury was unable to do so and the bonds went into default, although bondholders were later repaid as part of the county's financial restructuring.
Several sources involved in litigation over the bankruptcy said the case against First Boston was easier than others the SEC could take on because there was virtually no disclosure about the risks of Citron's investments in the documents describing the bonds.
The SEC, which has sought to tighten up municipal finance practices nationally, initially accused First Boston of intentionally misrepresenting to investors the safety of the county's investments.
But the defendants maintained that they, like others including the SEC itself, had been lied to by Citron and other county officials about the riskiness of his investments.
In the end, the SEC charged that they had failed to adequately investigate the representations of Citron and others at the county.