Wagner, Boss at District Had Business Ties

NEWPORT BEACH —  While Stephen A. Wagner allegedly was embezzling money from the Newport-Mesa Unified School District, he was engaged in private business ventures with the district’s finance officer who was his boss, according to interviews and public documents.

The private relationship between Wagner and Terrell J. Zimmerman raises concerns about the potential for bias or the perception of favoritism toward Wagner, according to some management ethics experts and a school district official.

Zimmerman said this week that he sees nothing wrong in a boss and an employee having a private business relationship. And Newport-Mesa’s acting superintendent, Carol Berg, said there is no policy against such outside business dealings, so long as they don’t intrude into the workplace.

However, the Wagner scandal--which prosecutors believe cost the district at least $3 million--has already prompted the Newport-Mesa teachers union and some parents to question how the district was managed at the time of the alleged fraud.

As director of fiscal services at the Newport-Mesa district from 1979 until his retirement in November, 1989, Zimmerman handled the district’s budget and paid its bills. Wagner, who became chief accountant in 1979, then assistant director of fiscal services in 1986, was Zimmerman’s right hand, the man everyone turned to for the numbers. Wagner replaced Zimmerman when he retired.

Wagner allegedly stole the $3 million between the fall of 1986 and April, 1992. He has pleaded not guilty to grand theft and misappropriation of public funds but has told the court that he wants to make full restitution to the district.

While the two men worked together, they were involved in two ventures. In 1990, Wagner also was involved in a real estate deal with Zimmerman’s wife. Records and interviews show that:

* In July, 1985, Wagner bought a one-third interest in a Rancho Mirage condominium that belonged to Zimmerman and his wife, Lois. One month before Zimmerman’s retirement, Wagner and his wife, Linda, along with another Newport-Mesa employee and her husband, bought out the Zimmermans.

* In the spring of 1987, Zimmerman said, he invited Wagner to invest $50,000 in a Newport Beach limited partnership that was supposed to make money by turning soft drink cans into aluminum ingots. The partnership went bust and Zimmerman and Wagner each lost their investment.

* Eight months after her husband’s retirement, Lois Zimmerman served as Wagner’s real estate agent in his purchase of a $975,000 home in the exclusive Dover Shores area. Zimmerman said her real estate agency received a $21,875 commission, of which she took home $12,501.

The Zimmermans said in an interview that there is nothing unusual about a boss and employee being friends and investing together. They were as surprised as anyone, they said, to learn of the accusations against Wagner.

But Thomas Godley, Newport-Mesa’s assistant superintendent for budget, facilities and personnel, said it is not good practice for boss and employee to have private business relationships.

“Public educators are under the microscope. Why give people something to be critical over? I don’t think it’s right,” Godley said. “I think business and personal things should be separated.”

The “guiding principle,” said University of Southern California management professor and author Burt Nanus, “has to be that whenever there is a potential conflict, the employer must come first.”

An even higher standard should apply in government or institutions such as taxpayer-financed school districts, said Nanus, director of the Leadership Institute at USC’s School of Business Administration.

“In the public sector, there shouldn’t even be the appearance of impropriety,” he said. “If people are doing any thing that appears improper or smacks of favoritism, then obviously they should not do that and it is not good management practice.”

There is no district policy to prohibit a Newport-Mesa supervisor from investing in properties or outside business transactions with a subordinate, said acting Supt. Berg, who is filling in while Supt. John W. Nicoll recuperates from heart bypass surgery.

“The district’s position on any kind of outside work is that it must not interfere with a person’s responsibilities and professional tasks relating to their jobs,” Berg said. “What people do outside of their regular work responsibilities is their business.”

Berg, who was assistant superintendent near the end of Zimmerman’s tenure, said she was not aware of the financial links between Wagner and his former boss. Owning property together and investing in outside businesses would not necessarily be a conflict. It would present a conflict only if those outside business activities are conducted during school hours or on school district property, she said.

Nor do other Orange County school districts ban such outside relationships, according to Ronald D. Wenkart, senior attorney for the County Department of Education, which oversees and advises local schools.

“Perhaps we should look into it in the future to prevent possible conflicts down the road, but there may be some legal reasons that would prohibit this,” Wenkart said. “We may not be able to prohibit two employees from engaging in a business relationship together as long as it doesn’t directly relate to the district because that might interfere with their rights as individuals.”

Other legal experts said that even if such a policy were imposed, if may be impossible to enforce. “How do you require people to disclose that information without breaching their right to privacy?” said one school district attorney who asked not to be named.

For their part, the Zimmermans express frustration over their connections with Wagner.

“The net result is this whole damn thing taints everything,” Terry Zimmerman said. “It’s like standing in a whirlwind. You get sucked into it.”

The Zimmermans said Wagner led them to believe that he had a number of successful business enterprises outside his school job. The couple said he told them about apartment buildings in Texas, $300,000 worth of timber land in the Pacific Northwest and a $1-million sale of an airport shuttle service among other things.

“Maybe there wasn’t a shuttle service, but who are we to question our friends?” Lois Zimmerman said.

The relationship between Wagner and the Zimmermans stretches back more than a decade.

Zimmerman was hired by the Newport-Mesa district on Sept. 4, 1979, as director of fiscal services and immediately became Wagner’s boss. Wagner, 27 at the time, was already an eight-year veteran of the district’s accounting department.

The Zimmermans asked Wagner in 1985 if he would like to buy a one-third interest in a Rancho Mirage condominium they co-owned with two other couples.

“We asked him because he had money,” Lois Zimmerman said. “We had no idea it was the school district’s money.”

On July 3, 1985, Wagner and the Zimmermans became property owners together. Wagner had bought his interest from one of the original owners.

The Zimmermans decided in 1989 that they wouldn’t be able to afford their $500-a-month payments after Terry retired. So Wagner bought them out, one month before Terry Zimmerman’s retirement.

“I would ask him, ‘How can you do this? How can do you that?’ ” Terry Zimmerman said.

Wagner would then talk more about his outside businesses, Zimmerman said.

Two years later, Terry Zimmerman told Wagner about BRS Partners Ltd. in Newport Beach, started by some businessmen who hoped to make money recycling aluminum cans.

One of the general partners in BRS was Charles Jennings, who along with Zimmerman belonged to the Balboa Rotary Club.

Jennings said Wagner “met the net worth requirements, met the criteria of being a sophisticated investor.”

In July, 1990, Wagner bought his five-bedroom, four-bath home on Galaxy Drive for $975,000. Lois Zimmerman was his real estate agent.

“I sold Steve his house. Does that make me a criminal?,” asked Lois Zimmerman. “I’ve sold a lot of houses.”

Lois Zimmerman said she never saw any of Wagner’s financial documents that might have shed light on the sources of his wealth.

“I didn’t see the credit report,” she said. “We had no problem qualifying him for the loan.”

The Zimmermans both said, however, they were surprised that Wagner could afford to buy the Dover Shores property before he had sold his $700,000 home on Victoria Drive in Santa Ana.

“We wondered how he could afford it,” said Terry Zimmerman. “His outside activities always seemed to support his lifestyle.”

(A court-appointed trustee seized the Galaxy Drive house and changed all the locks on Wednesday while an investigation is conducted of the Wagners’ assets in connection with the couple’s bankruptcy case. They filed for bankruptcy last July, just four days after the Internal Revenue Service hit them with liens totaling nearly $2.4 million for back taxes from 1986 through 1989.)

Terry Zimmerman said that in hindsight he can see that there were clues of Wagner’s alleged scheme. But he said he was too busy at the time to see them.

But Lois Zimmerman said Wagner would have been the last person she ever would have suspected of embezzlement.

“He seemed like a stable Rock-of-Gibraltar type,” she said. “Very stable, very conservative.

Terry Zimmerman recalled that his wife was fond of saying, “ ‘I would trust Steve with five or ten thousand dollars, and I’d get every dollar back.’ ”

Added Lois Zimmerman: “Now all this money turns out to have been from the school district, it just makes you want to throw up.”

Times staff writer Jodi Wilgoren contributed to this report