Embezzling of U.S. School Lunch Funds Suspected : Inquiry: Investigators say former chief fiscal officer of Newport-Mesa District diverted $786,000 from food services account to a secret slush fund. U.S. aid may be among money allegedly shifted.

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 sources and school budget documents.

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 youth. The U.S. Department of Agriculture grants money to school districts to ensure that children who cannot afford to buy lunch are fed.

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

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

Wagner, 40, who is scheduled to be arraigned on Monday, is being held at Orange County Jail on $1.2-million bail. He is facing up to six years in prison.

His attorney could not be reached for comment Thursday but has indicated 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 off between $1.2 million and $2.2 million in 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’s checks made payable to Wagner already total in excess of $3 million, but it’s unclear whether all were cashed.

Meanwhile, Canadian officials on Thursday said they believe Wagner was duped for at least $180,000 in what they claim was a bogus Toronto gemstone scheme.

Toronto police 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.

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

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

Newport-Mesa officials claim Wagner had explained his rich lifestyle--including a Rolls-Royce, two Mercedeses and a million-dollar 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 aluminum ingots.