Federal Funds May Be Missing in School Case : Investigation: D.A.’s affidavit says Stephen Wagner diverted $786,000 from a Newport-Mesa food services account that included money to pay for children’s lunches.

Federal funds meant to pay for children’s lunches may be among the $1.2 million or more allegedly embezzled from the Newport-Mesa Unified School District by its former chief fiscal officer, according to school budget documents and sources close to the case.

Stephen A. Wagner--arrested Tuesday on charges of grand theft and misappropriation of public funds--diverted more than $786,000 from the school’s food services account to a secret slush fund, according to an affidavit filed by the Orange County district attorney.

Newport-Mesa’s fiscal 1992 report shows that the food services account received $3.2 million in revenue, including $1.3 million in federal lunch money for disadvantaged children. The U.S. Department of Agriculture grants money to school districts to ensure that children who cannot afford to buy lunch are still fed.

The FBI this week said it wants to begin its own investigation of Wagner because agents suspect federal funds may have been tampered with.

Federal statutes involving embezzlement often carry long prison terms and steep fines. One statute covering theft from a program that receives federal funds carries a 30-year prison term and $1-million fine.

Prosecutors do not have to prove that any money taken was purely from federal sources; they only have to show that the missing money came from an account--such as food services--that contained at least $10,000 in federal funds.

Federal representatives are still negotiating with district attorney officials, however, on whether the case should move from state to federal courts.

Wagner, 40, who is scheduled to be arraigned Monday, is being held in Orange County Jail on $1.2 million bail. If convicted he could be sentenced to up to six years in prison.

His attorney could not be reached for comment Thursday but has indicated that his client will do everything he can to make restitution to the school district.

The district attorney has charged that Wagner used an inactive Newport-Mesa account to siphon $1.2 million to $2.2 million from school funds.

Those estimates are preliminary as auditors comb through the school district’s books back to the mid-1980s.

Sources have indicated that cashier checks made payable to Wagner already total more than $3 million, but it is unclear if all of those were cashed.

Meanwhile, Canadian officials on Thursday said they believe Wagner was bilked of at least $180,000 in what they say was a Toronto gemstone scheme.

Toronto Detective Michael Holland said officials found evidence in a raid of Harth Group International that Wagner had heavily invested in the alleged scam.

Detectives found a letter in Harth’s files thanking Wagner for investing in the Mogok 10 Syndicate.

Holland said the company told investors that “because of the advanced technology that Harth Group International provided to the Burmese government in opening up the Mogok valley to mining, the Burmese government is supplying us with 30,000 carats of rubies per year for the next 10 years.”

Investors were invited to buy a share in the Mogok 10 partnership for $180,000, Holland said.

“Wagner apparently went for that,” Holland said, adding that Harth Group’s “technical expertise and advanced technology consisted of a couple of the best telephones you are likely to find. That is their business--telemarketing.”

Harth Group was shut down, and Holland said Canadian authorities believe the firm’s management is now somewhere in the Bahamas.

Newport-Mesa district employees have said Wagner received gemstones at district offices, sometimes by armed courier.

Holland said he has documents showing that Wagner invested in precious stones with at least two different Toronto firms.

Typically, these firms sold $300 rubies for $3,000 each, Holland said. Investors were then told they could double their money by re-selling the same rubies to other people for $6,000 apiece.

“They are not going to resell at $6,000 a carat because no one in their right mind is going to pay $6,000 for a $300 stone. Well, except for people like Wagner,” Holland said.

Newport-Mesa officials say Wagner explained his rich lifestyle--including a Rolls-Royce, two Mercedes-Benzes and a $1-million Newport Beach home--by painting himself as an astute businessman and savvy investor.

Besides his experiences in gems, Wagner lost $50,000 investing in a Newport Beach partnership that unsuccessfully tried to convert soft drink cans into aluminium ingots.