SEC Transcripts Show Focus on Stanton, Board

Federal securities investigators probing Orange County’s bankruptcy are sharply focusing on the Board of Supervisors’ reliance on extraordinary interest earnings and its relationship to Wall Street financiers, according to transcripts of U.S. Securities and Exchange Commission interviews.

Transcripts of sworn depositions from Board Chairman Roger R. Stanton obtained by The Times on Friday offer the first detailed glimpse of the continuing federal investigation into the county’s financial collapse.

According to the transcripts, SEC authorities are casting a wide investigative net over the crisis, interviewing dozens of county and Wall Street officials. They questioned Stanton earlier this year about his relationship with financial firms, the board’s oversight of the independently elected treasurer and the board’s attention to county finances and operations.

Stanton strongly denied that he or his colleagues could have averted the disaster and told his SEC questioners that their agency shared blame for the county’s financial collapse, noting that SEC investigators had queried then-Treasurer-Tax Collector Robert L. Citron about his investment pool seven months before the county declared bankruptcy on Dec. 6, 1994.

“If they knew something, if they saw something, we really would have appreciated knowing about it at the time because I think that might have changed the history of Orange County, at least with regard to the last 12 months,” Stanton said during his interview Aug. 28 with the SEC.

“I think we all would have been better off if there had been an action brought at that time,” Stanton added. “It certainly would have prevented this debacle.”

The questions from SEC investigators closely mirror the queries made by county prosecutors in their separate grand jury probe of the bankruptcy.

Earlier this month, the Orange County Grand Jury accused Stanton, Supervisor William G. Steiner and Auditor-Controller Steve E. Lewis in civil action of “willful misconduct” and indicted former Budget Director Ronald S. Rubino of aiding and abetting Citron in fraud and misappropriation of public funds. They all have denied any wrongdoing.

Both the grand jury and SEC investigations have focused on why the supervisors seemingly failed to oversee the operations in the treasurer’s office, according to transcripts.

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Stanton was interviewed twice by SEC investigators--last May and then again in August. However, he refused to testify before the grand jury.

As he has in other public statements, Stanton told SEC investigators that he relied on the county staff to keep him informed, especially then-County Administrative Officer Ernie Schneider, who has since been fired. “We expect[ed] him to have people on his team that [knew] what’s happening.”

Supervisors also relied on financial professionals outside the county, such as rating agencies Standard & Poor’s and Moody’s, Stanton said.

Before the bankruptcy, Orange County’s approach to high finance was like flying, Stanton told the SEC.

“It’s like we’re on a plane. We’re the generalists. We had the mechanics check the plane out before we left. You know, the bond counsel, the rating agencies, and say we’re OK,” Stanton said.

“We had a landing somewhere in the middle of the country on the way to our destination,” he continued. “The FAA looked at things and said the plane was OK when one of the wings was hanging off and we were allowed to take off again. In fact, some decision was made to let us crash to prove a point.”

Despite Stanton’s criticism of the SEC, the agency’s investigators pressed on with their questions, probing his role in the bankruptcy.

Throughout the interviews, Stanton said repeatedly that he couldn’t recall specific details of reports, meetings or conversations in which he might have learned sooner of Citron’s risky investment practices and acted on the information before the county’s investment pool collapsed.

Stanton also was asked repeatedly to share what he knew of the $100 million in interest income from the investment pool that budget officials were anticipating to balance the county’s books.

For example, he was asked, “Do you recall seeing any document or hearing that Mr. Citron was projected to realize over $100 million over budget for interest . . . ?”

Stanton replied, “I don’t have a recollection of that, sir, at this time.”

When asked if he ever questioned anyone in the county about the source of the enormous interest earnings projected in revenue estimates, Stanton said, “No, I don’t recollect asking anybody to review the estimates that were provided by [Schneider’s] office.”

Even though the projected interest would represent “the single largest source of general purpose revenue for the upcoming fiscal year,” the SEC investigator asked, “did anybody mention that to you?”

Stanton replied, “I already answered in all varieties. I don’t recall anybody coming and saying that to me.”

The investigator persisted: “Wouldn’t that be important for you to know?”

“Well, if someone came up to me and said this is a problem, watch out,” Stanton said, adding, “Nobody did that.”

The SEC also quizzed Stanton about his relationship with political consultant Scott Hart of the Newport Beach firm of Ellis Hart Associates Inc., which represented Merrill Lynch & Co. as a lobbyist seeking county business.

Stanton acknowledged that he had met with Hart to discuss Merrill Lynch, but added, “I can’t remember any specific meetings.”

Hart also approached Stanton on Merrill Lynch’s behalf after the bankruptcy, Stanton said, adding that Hart “dropped off a package of . . . Merrill Lynch [public relations] material. But I didn’t discuss it with him.”

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Stanton told SEC investigators that he later instructed his staff not to take any calls or schedule any appointments with Hart. Before the bankruptcy, Stanton said, he wasn’t aware of Merrill Lynch’s relationship with Citron.

The giant brokerage firm, which steadfastly denies playing any part in the county’s bankruptcy, is blamed by the county for selling Citron risky securities and extending him levels of credit that exceeded state debt limits.

Sources knowledgeable about the SEC investigation say the federal agency is poised to take action against the Board of Supervisors early next year.

In October, the SEC notified current and former board members who were in office at the time of the $1.64-billion financial collapse that they might be charged with violating federal securities laws.

The SEC also notified at least four Orange County school agencies that they might be charged with fraud and deceptive practices for raising nearly half a billion dollars purely to increase their holdings in the county investment pool.

* RECURRING NIGHTMARE

For many, it sounds like last December all over again. A30