O.C. Supervisors Seek Settlement of SEC Charges

Two current and three former Orange County supervisors under investigation by the U.S. Securities and Exchange Commission for their part in the county’s historic bankruptcy are trying to negotiate a settlement of expected federal securities charges, their attorney and a high-ranking SEC official acknowledged Wednesday.

But both said the regulatory agency’s Los Angeles office has not yet decided how the SEC will proceed against the supervisors or the county itself.

The supervisors received official notices last month from the SEC that an enforcement action is anticipated.

“We are aware that the staff of the Los Angeles office will shortly be forwarding a recommendation . . . in this matter together with a settlement proposal, the precise terms of which are yet to be negotiated,” wrote Gerald Boltz, the Santa Monica lawyer who represents the supervisors, in response to an Oct. 23 letter from the commission.

Boltz was responding to SEC General Counsel Simon Lorne, who rejected Boltz’s request to have SEC Chairman Arthur Levitt recuse himself from considering any enforcement action against the Orange County supervisors because of public statements Levitt has made.

Levitt told a congressional committee delving into the Orange County bankruptcy that the supervisors were guilty of nonfeasance, at the very least.

“The [Orange County] supervisors clearly did not do their job,” Levitt said at the congressional hearing, arguing that Orange County’s problems should not be blamed on risky securities such as derivatives, but on a poor investment strategy and even poorer oversight.

Even the Orange County Grand Jury agreed that a string of failures by the supervisors was as much to blame as the flawed investment strategy carried out by longtime Treasurer-Tax Collector Robert L. Citron, whose wrong-way bets on interest rates cost the county investment pool nearly $1.7 billion in losses.

The correspondence between Boltz and Lorne, obtained by Bloomberg News Service, apparently describes settlement terms of the SEC’s enforcement action that the supervisors would accept if Levitt removes himself from any case that might be filed.

Both Boltz and Lorne said they would not comment on the status of the investigation or exactly what charges the SEC’s Los Angeles staff may bring against the supervisors or the county.

Boltz, a former 20-year employee of the SEC, said he did not leak his letters to the SEC and does not know how they became public. “I’m mystified by that myself,” he said.

Lorne, the general counsel, acknowledged that he responded to Boltz’s letters and that he rejected--at least for now--the request to have Levitt recuse himself.

“Since everything this [exchange] is about is prejudging, I don’t want to prejudge the issue now,” Lorne said. “I think the request is at least premature and quite possibly both premature and wrong. But I haven’t decided the second question yet, the wrongness of it.”

Lorne said he advised Boltz that the appropriate time to consider a request to have Levitt remove himself was after the SEC formally filed charges.

Boltz’s concern about Levitt relates to the unique way the SEC enforces federal securities law, and the unusual nature of an enforcement action against public officials.

The agency can pursue three enforcement courses, lawyers and officials say.

The most serious would involve filing an action in federal district court. This would enable the SEC to seek a significant fine and the matter would ultimately be decided by a judge.

The second course would be an administrative proceeding before an administrative law judge employed by the SEC, in effect making the agency both judge and prosecutor. Typically, the agency chooses this course when it determines that a cease-and-desist order is the appropriate enforcement action.

But once an administrative ruling has been issued, the matter can be appealed back to the full securities commission. Were that to happen in a case with the supervisors, Levitt, as the chairman of the commission, would sit in judgment.

Finally, the least aggressive enforcement path available to the agency would involve issuing a lengthy non-accusatory report of its investigative findings under section 21A of the 1934 Securities Exchange Act.

In two of the largest municipal finance scandals before Orange County’s--the 1975 New York City financial crisis and the 1989 bond default of the Washington Public Power Supply System--the agency took no enforcement action and issued reports instead.