CHICAGO -- The Ohio attorney general's office has found that counties can legally invest in securities issued by federal mortgage corporations, which are at the heart of an investment scandal involving local governments.

However, the advisory opinion released by Attorney General Lee Fisher on Aug. 5 cautions that to be legal, the investments must also adhere to standards of fiduciary responsibility. It does not say whether the investments in question adhere or not to such standards.

Ohio auditor Thomas Ferguson asked the attorney general's office for its opinion after the auditor's office uncovered millions of dollars of investment losses last year by several local state governments in the state. Many of the governments' losses stemmed from investments in interest-only, stripped, mortgage-backed securities.

The opinion says that counties can invest funds in "obligations or securities issued by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.," but adds that such investments must be made "in accordance with those fiduciary standards of care, skill, and judgment as are generally applicable to the investment of inactive moneys of a county."

The opinion also states that factors such as the amount of money invested, the marketability of the securities, the size and composition of a government's investment portfolio, and other factors would have to be analyzed to determine if a given investment was appropriate.

The attorney general's opinion does not directly address specific county investments in interest-only securities. That is because a case currently pending in U.S. district court in Ohio will take up the matter, according to David Spialter, business counsel in the attorney general's office.

Spialter said the case brought by Portage County against Government Securities Corp. of Texas, the brokerage firm that sold the county the securities, will result in a legally binding decision on whether or not the interest-only securities constitute a responsible or appropriate investment.

The attorney general's policy precludes issuing advisory opinions on matters pending before courts, he said.

On the matter of liability for investment losses, the opinion said a county's investment officer could be personally liable "if the investing authority invested in unlawful investments not listed in the statutes or if it breached its fiduciary responsibility," Spialter said.

John Conley, a spokesman for the state auditor, said the office is reviewing the opinion and will shortly release an advisory bulletin to local governments on the matter.

In a previous opinion requested by the state auditor, the attorney general found that investments in mortgage securities were illegal for school districts and non-charter local governments in Ohio.

So far the auditor has issued findings against three school districts and one city for having made investments that matured beyond a two-year statutory limit. The $1.3 million of losses sustained by the governments has been assessed against fiscal officers of the governments and the securities firm and broker-that sold them the investments.

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