WASHINGTON - Orange County, Calif., officials may have violated securities laws by failing to disclose that the county's multi-billion dollar investment pool was having financial troubles because of derivatives and leveraged investments, according to federal regulators, a California accountant, and a review of bond documents.

County officials also may not have properly disclosed the market risks associated with the pool's investments or strategies for mitigating those risks in public statements and in the offering documents for their municipal bonds, the sources said.

These are some of the issues surrounding the county that are under investigation by the Securities and Exchange Commission, an SEC official said. The county filed for bankruptcy Tuesday.

"All aspects [of this] will be scrutinized," the SEC official said. "The focus is on Orange County right now, but sooner or later the scope is going to widen to take a careful look at the broker-dealers [involved] and other issues," the SEC official added.

Municipal issuers are required to disclose information that could affect the market's evaluation of their municipal bond issues under the securities laws' antifraud provisions, he said.

The SEC reminded issuers of their disclosure obligations under the securities laws in an interpretative release issued last March.

"People have not really focused on that interpretative release and they really should," said Christopher Taylor, executive director of the Municipal Securities Rulemaking Board.

Meanwhile, one bond lawyer who did not want to be identified, predicted that the Orange County debacle "is only the tip of the iceberg."

"I would not be surprised if there are other governmental units across the country who find their portfolios leveraged in derivatives such that they should have concerns about rising interest rates," he said.

In addition, some lawmakers are saving the Orange County controversy could prompt calls for legislation to require pooled funds to make more disclosures, including revealing daily net asset values.

The concerns about possible securities law violations stem from reports that Robert Citron, the former county treasurer, may have painted too rosy a financial picture of the pool in statements to voters during the election and in a recent meeting with fund participants.

"He seemed to be saying that there was no risk and that everything, was fine and dandy when clearly it was not"' the SEC official said.

The SEC's interpretative release says that "issuers in the municipal market routinely make public statements and issue reports that can affect the market for their securities" and that misstatements or omissions of material information may violate the antifraud provisions.

John Moorlach, an accountant that ran against Citron and lost in the recent election, said Citron kept pool investors in the dark.

"The term I would use is obfuscation," said Moorlach, who is with Balser, Horowitz, Frank & Wakeling. "He used patronizing language, he used euphemisms, he used his arrogance."

"If you pulled out of his fund you were berated publicly like the city of Tustin was," the accountant said yesterday.

Tustin, Calif., had pulled out of the investment pool because of a provision in its investment policy prohibiting it from investing in reverse repurchase agreements.

In addition, the offering documents for recent county bond issues do not appear to contain information about the pool's financial troubles or an adequate description of the potential market risks of the fund's investments, according to sources and a review of the documents.

The official statement for a $64 million tax-exempt note issue sold last August did contain a section on the county's investment pool that said the pool contained derivatives as well as fixed, and floating-rate securities, a "significant portion" of which "are pledged with respect to repurchase agreements."

The document said that "the price and income volatility" of the securities "is greater than standard-fixed income securities and may serve to increase the volatility of the [pool's] return and market value in various interest rate environments."

Eric Tashman, a lawyer with Brown & Wood, which represented Leifer Capital Inc., the county's financial adviser in the deal, said, "We believe that the disclosure was adequate" on the deal.

But the SEC, in its interpretative release, calls for issuers to disclose "the market risks to which [they] are exposed" and the "strategies used to alter such risks" as well as the market risks and credit risks that could arise from such strategies.

Attached to the official statement for the deal was the county's audited financial statement for the fiscal year ending June 1993, but neither document appears to contain any information about the pool's troubles, even though the county reportedly was borrowing heavily in the taxable market at the time to shore up its cash-flow situation because of the pool's problems.

Both Dana Rohrabacher, a Republican congressman from Orange County, and Moorlach said the county's debacle could prompt calls for legislation.

"My personal view is it appears that they did not even give the most elementary disclosure that any mutual fund investor would expect from a mutual fund," an aide to Rohrabacher said. "They never told their investors what the net asset value was even in their annual report."

"We'll have to see what people believe is necessary on the federal level," the Rohrabacher aide said, adding that the lawmaker doesn't plan to introduce legislation but might support a measure in the future.

Rohrabacher "believes in making sure consumers are fully informed, although in this case you have some investors who are supposed to be fairly sophisticated," the aide said.

Moorlach said that because of Orange County's losses and its bankruptcy filing, the time is ripe for regulators and lawmakers to take a look at the investment abuses and lack of adequate disclosure.

"The SEC makes mutual funds mark to market at net asset value for a very specific and honest reason: that no one gets cheated out of a penny," Moorlach said.

The accountant said he will help lawmakers, both in Washington and in California, draft legislation.

"It's time to look at some of the abuses. Why in the world should a public entity, government-run, be able to circumvent the SEC's rules," Moorlach added.

Moorlach ran against Citron in the most recent election and had expressed concerns that the fund would face potential losses because of Citron's investment practices.

Moorlach said he is currently providing assistance to Rep. Chris Cox, R-Calif., who Moorlach expects to most likely introduce legislation.

Meanwhile, Federal Reserve Board chairman Alan Greenspan played down the risk of any fallout from the events in Orange County when he testified before the congressional Joint Economic Committee.

Rep. Ron Wyden, D-Ore., asked Greenspan whether "there are other Orange Counties out there that face very serious exposure" from derivatives losses. Greenspan replied that he didn't know, and if he did he would not comment.

But the Fed chairman then went on to say that the market for derivatives has been absorbing losses all year. "I don't consider this to be an issue which gives me great concern," he said.

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