WASHINGTON -- Charles County, Md., sued an accounting firm this week for allegedly failing to disclose in annual audits that the county's former deputy treasurer engaged in unauthorized investments in derivatives and structured notes.

The lawsuit, which was filed in Charles County Circuit Court on Monday, charges Bridgett, Mock & Associates of Waldorf, Md., with negligence and breach of contract and seeks $10 million in damages from the firm.

The county claims that Bridgett Mock failed to make proper disclosures in audits of the county's finances for 1992 and 1993.

The audits did not disclose that Stephen R. Johnson, the county's former deputy treasurer, invested most of the county's investment portfolio in taxable inverse floating-rate bonds, collateralized mortgage obligations, and other medium- and long-term risky derivatives and structured notes in violation of a state-approved local law, the county says.

The law restricts the county to investing in short-term U.S. government obligations.

But the derivatives and structured notes purchased by Johnson were not government securities and had maturities of up to 29 years.

Standards issued by the Government Accounting Standards Board in 1986 require the "disclosure of the types of investments authorized by legal or contractual provisions" as well as the "disclosure of significant violations during the period of legal or contractual provisions related to deposits and investments," county officials said in a written statement announcing the lawsuit.

Charles County brought the lawsuit against Bridgett Mock after the nationally recognized accounting firm of Grant Thornton reviewed the audits and supporting working papers, county officials said.

Charles County has filed a lawsuit against most of the securities firms that sold Johnson the investments and has recovered about $28 million thus far from settlements with some of the firms.

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