School embezzlement left deep mark

Deirdre Newman

It was 10 years ago that signs of a million-dollar embezzlement

first appeared in the Newport-Mesa Unified School District,

eventually sending shockwaves through the administration and eroding

the public’s trust when it turned out the man entrusted with the

financial stewardship of the district was responsible.

Stephen Wagner, who was the district’s budget director, was

suspended Oct. 23, 1992 pending an investigation that eventually

turned up an embezzlement of close to $4 million.

Wagner pleaded guilty that December to embezzling more than $3.5

million -- at the time, the largest school district embezzlement in

state history. In March 1994, Wagner was sentenced to five years in

prison. He died in jail from complications of AIDS after spending

about a year and a half in a medical ward.

Since then, the district has gone to great lengths to implement a

series of checks and balances to prevent one person from wielding so

much financial power. It has been so successful that the district’s

system is now a statewide model.

While the financial loss was a devastating blow to the district,

the deeper wound was the loss of trust throughout the community

because of Wagner’s betrayal, said trustee Martha Fluor, who was in

her first year on the board when the embezzlement was discovered.

“That was the hardest part,” Fluor said. “The biggest thing all of

us felt is that an individual could do that and lie right to your

face.”

Wagner, who was 40 at the time the embezzlement was discovered,

was arrested Nov. 24 at his $1 million Dover Shores home after a

20-year career with the school district.

As far back as 1980, the district had been faulted for flawed

accounting procedures that could lead to embezzlement. But since

Wagner was the one who fixed the mistakes when auditors found these

deficiencies, he was able to hide his actions as he began siphoning

money out of various district funds, including a health fund account.

Even in September 1991, when then Asst. Supt. Tim Godley, who

oversaw the school district budget, was moved to the district’s

fiscal services office after a $1 million error was discovered, no

criminal wrongdoing on Wagner’s part was found.

In February 1992, a group of five parents, including current

trustee Dana Black, began examining school district budget documents

and found sloppy bookkeeping.

But it wasn’t until September of that year that the smoking gun

appeared. When Wagner went on vacation, a bank mailed a statement to

the district that he usually stopped by to pick up, said Jim de Boom,

who was a school board trustee at the time.

One of the clerks in the district’s accounting office got the

statement and noticed a couple hundred thousand dollars of activity

in the account, even though it was supposedly closed, said de Boom, a

Pilot columnist. The employee immediately went to the district

attorney’s office, and an investigation was launched.

“I was shocked,” Black said. “The gang of five -- we never thought

that it was embezzlement. We thought it was mismanagement. [Wagner]

was very good at what he did.”

Although Wagner admitted to embezzling $3.5 million, it was

probably more, Fluor said. The accountants doing the investigation

had to stop counting when certain bank records were not obtainable,

she said.

While the district took a big financial hit, it was “peanuts” to

what it suffered through in the county bankruptcy two years later,

Fluor said.

The district made some adjustments to compensate for the loss,

such as putting a freeze on personnel costs and putting a hold on

some instructional materials, Fluor said to the best of her

recollection. The district was able to withstand the depletion of

funds because it had a good deal of money from property taxes.

Repairing the delicate issue of trust proved more challenging,

though.

“What I noticed [when I first came to the district] is, it was a

major issue,” Supt. Robert Barbot said. “When something like that

happens in a community, credibility and relationships are hurt. You

have to work really hard to overcome that.”

Soon after the embezzlement was discovered, a citizen’s budget

advisory committee was formed to help guide the district.

“When this happened, we reached out to the community,” said

current board president Judy Franco, who was a trustee at the time.

“Actually, the community reached out to us and asked ‘what can we do

to help the district get through this to make it stronger so that

more of us are the eyes and the ears?’”

An audit committee was also developed to add another layer of

oversight, Franco said.

Everyone interviewed for this story agreed that the efforts the

district has made have been tremendously successful in repairing the

shattered trust and elevating the district to a model of financial

protection.

“I think we’re stronger now,” Fluor said. “As a result of the

embezzlement, all the districts have benefited from our horrific

situation. A majority of districts now have citizen budget advisory

committees and audit committees. In retrospect, some good has come

out of that adventure.”

* DEIRDRE NEWMAN covers education. She may be reached at (949)

574-4221 or by e-mail at deirdre.newman@latimes.com.