Ohio auditor says three localities broke time limit with investments.

CHICAGO - The state auditor of Ohio has found that three local governments involved in an investment scandal last year exceeded the state limit for the duration of their investments and lost more than $1.1 million.

In findings released last month and earlier this week, the auditor's office concluded that the three localities all invested in interest-only stripped mortgage-backed securities that exceeded a two-year redemption or maturity limit.

The three localities were Strongsville Local School District, which lost $647,000; the Vermilion Local School District, which lost $127,453; and the city of Jackson, which lost $341,760.

John Conley, a spokesman for state auditor Thomas E. Ferguson, said yesterday that the findings were the first released by the office since millions of dollars in investment losses by a number of local governments in Ohio surfaced last year.

In November, the state auditor released the names of 18 counties, cities, villages, and school districts that lost about $8 million due to their investments in what the auditor deemed "high-risk and potentially illegal investments.

The auditor's findings held liable current and former finance officials at the three governments; as well as Hart Securities, the Texas brokerage firm that sold the investments; and Ken Schulte, a former Hart broker.

Conley said it is up to the governments to take action to recover the money. If they do not act, he said, the findings would be turned over to the Ohio attorney general's office.

Michael McNamee, the Dayton attorney who is representing the Strongsville and Vermilion school districts, said those two clients as well as three other government clients - the city of Englewood, the village of Chardon, and Van Wert County - have filed for arbitration before the National Association of Securities Dealers, charging fraud and misrepresentation involving their investments.

The changes were directed at Schulte, Hart Securities, and Murchison Investment Bankers in Houston, where Schulte worked before joining Hart, according to McNamee.

The governments are seeking money for their losses, as well as punitive damages and attorney fees, McNamee said. He said Englewood's case has already been heard by the NASD and that a decision is expected within 10 days.

Paul Francis, an attorney for Hart Securities, said the Ohio auditor's office has been inconsistent in addressing interest-only investments. He said the firm felt that the government officials were knowledgeable about the investments and the losses were due to "a market reversal" that brought an interest rate drop and mortgage refinancings.

Dennis Taylor, Murchison's attorney, said his client is fighting the charges lodged with the NASD and is contending that the government officials "voluntarily assumed" the investment risk and subsequently turned down Murchison's offer to get out of the investments when interest rate began to drop.

Harold Geringer, Schulte's attorney, said all the transactions entered into by his client were "perfectly proper." The attorney representing the city of Jackson, did not return phone calls.

The auditor's findings against the two school districts and Jackson were based on an opinion released by the Ohio attorney general's office last fall that reviewed investment laws for school districts and non-charter governments.

Conley said the release of more findings has been held up because the auditor is waiting for the attorney general's office to issue another opinion regarding investments made by the 10 counties on the auditor's list.

David Spialter, business counsel in the attorney general's office, said the opinion has not been forwarded to the auditor because of corrective legislation pending in the Ohio legislature and litigation between some of the governments and the brokerage firms that sold them the investments.

Lawsuits were filed last year by a few of the governments involved in the investment scandal.

One of those governments, Sandusky County, reached a $5.5 million settlement in February with Government Securities Corp. of Texas.

So far the investment scandal has not affected any of the government's debt ratings. Moody's Investors Service, which rates 11 of the 18 governments on the state auditor's list, issued a release in January saying that no immediate rating action was contemplated because the governments' financial positions were not dramatically affected by the investment losses. None of the governments were rated by Standard & Poor's Corp.

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