Brokerage Aims to Settle Charges Related to O.C. Bankruptcy

A brokerage that helped schools and cities borrow money in 1993 and 1994 to invest in the Orange County treasury says it is trying to settle Securities and Exchange Commission fraud charges related to the county’s December 1994 bankruptcy.

Dallas-based Rauscher Pierce Refsnes said it is talking with the SEC “to resolve this matter on satisfactory terms prior to or in lieu of the filing of a federal complaint.”

It said the SEC has authorized a federal lawsuit against the brokerage and one former and one current employee. Rauscher Pierce said it believes it has “substantial and meritorious defenses available” to the charges and will fight them vigorously if it can’t settle the case.

“We believe that we acted properly, and we respectfully disagree with the SEC’s position,” said Jennifer Driscoll, a spokeswoman for Rauscher Pierce’s parent company.

The disclosures of the potential SEC lawsuit and the talks to settle it were made Aug. 14 in an SEC filing by Rauscher Pierce’s parent, Minneapolis-based Interra Financial Inc.

At issue is $880 million in municipal bonds on which Rauscher Pierce acted as underwriter or advisor.

The bondholders were repaid during the complicated reorganization of Orange County affairs that followed its filing of the nation’s biggest municipal bankruptcy.

The SEC’s concerns are whether Rauscher Pierce, Merrill Lynch & Co., CS First Boston and other financial firms adequately disclosed to municipal bond investors the risks that the county treasury was running in 1993 and 1994.

The county’s portfolio, top-heavy with interest-rate-sensitive securities purchased with borrowed funds, toppled when the Federal Reserve Board forced rates sharply higher in 1994.

The SEC already has charged First Boston and two of its investment bankers with misrepresenting or omitting details of the county’s shaky financial condition when it sold $110 million in county bonds. The company and the bankers have denied wrongdoing.

Orange County’s lawsuits attempting to recover the $1.64 billion lost in the bankruptcy include one accusing Rauscher Pierce of breach of contract and negligence.

The brokerage, which had acted as an advisor on several county note offerings during the summer of 1994, knew or should have known that former Treasurer Robert L. Citron’s investments were “naked to the risk of a rise in interest rates,” that lawsuit contends.