SEC Subpoenas Supervisors’ Records on All Broker Dealings : Investigation: Agency specifically seeks documents naming three Merrill Lynch employees, sources say. It also demands members’ tax returns, financial holdings and full campaign reports.

SANTA ANA —  The federal investigation into Orange County’s bond disaster widened dramatically Wednesday when members of the Board of Supervisors were issued subpoenas seeking a broad range of records outlining their dealings with Merrill Lynch and other bond brokerages, sources close to the supervisors said.

The Securities and Exchange Commission, which is investigating Merrill Lynch and at least one other brokerage that conducted bond sales that put millions of dollars into the county’s now-soured investment pool, faxed the subpoenas to county offices late in the day.

Four supervisors could not be reached for comment late Wednesday. Supervisor William G. Steiner said he was unaware of the subpoenas.

An SEC spokesman declined to comment.

But several sources confirmed that all five board members had been sent subpoenas, seeking documents from January, 1993, to the present.

The subpoenas ask specifically about the supervisors’ dealings with three Merrill Lynch brokers: Michael Stamenson, Debra Harris and Duane Canaga.

By Dec. 29, the supervisors must turn over all records of “compensation or other things of value received,” as well as their federal and state income tax returns, one source said.

The subpoenas also seek:

* “All documents relating to communications” with the Merrill Lynch brokers “or any other broker dealer or its employees.”

* All personal and business diaries, calendars, telephone logs, books, memos and notes and other documents.

* Checking and savings account statements.

* Campaign accounts, including all campaign disclosure statements or reports including but not limited to campaign statements.

* All documents related to any securities accounts held by the supervisors or members of their families.

* Any gifts or loans made to them directly or indirectly.

* Any tape recordings of any conversations related to Merrill Lynch or other brokers.

Harris, reached at her home in Lafayette, Calif., declined to comment beyond referring questions to Merrill Lynch’s corporate headquarters. Stamenson and Canaga could not be reached for comment.

But Merrill Lynch spokesman Richard T. Silverman, contacted at his home in New Jersey, defended the firm and the brokers: “We believe that Merrill Lynch acted professionally and properly in all its dealings with Orange County.”

The development came on a day when anxious creditors jockeyed for a crack at Orange County’s bankrupt investment fund, and the county’s chief financial adviser announced that $1 billion of its safest remaining securities would be auctioned this morning.

Former state Treasurer Thomas W. Hayes said the auction would be the first step toward restructuring the county’s investments, which have dropped $2.02 billion--or 27%--in value this year. The sale would bring in badly needed cash for local agencies whose savings are tied up in the fund.

The crisis triggered job cutbacks for the first time, as 47 custodians, clerks and classroom aides who had begun work over the past few weeks for the Saddleback Valley Unified School District were told that Friday would be their last day.

“They are all casualties from this--no doubt about it,” said Supt. Peter A. Hartman.

Earlier in the day, creditors packed a U.S. Trustees hearing in Los Angeles, with representatives from schools, cities and special districts clamoring for seats on committees that will suggest how the beleaguered fund’s remaining holdings will be divided.

It was evident that there would be a struggle for spots at the front of the line.

“We in the schools feel we have a case for 100 cents on the dollar, and we intend to aggressively pursue that case,” said Supt. James A. Fleming of the Capistrano Unified School District.

In other developments Wednesday:

* Health officials said that preventive services, such as well-child care, may have to be put on hold while other crucial public health programs--such as tuberculosis and AIDS services, restaurant inspections and immunizations--take priority in the strapped county’s spending plans.

* County supervisors and community leaders called for local government to be pared down and restructured in the wake of the financial crisis. Supervisor Roger R. Stanton created a task force to consider cutbacks.

“The streamlining of government could be the silver lining in this cloud,” said Peer Swan, chairman of the Irvine Ranch Water District.

* Sources at the SEC confirmed that investigators visited Orange County in April when the investment practices of Treasurer-Tax Collector Robert L. Citron became a campaign issue. They reported back to the commission’s enforcement branch that they found the practices risky but in violation of no law and not subject to the SEC’s authority.

* Federal Bankruptcy Judge John E. Ryan approved a plan that would allow the county to receive a $200-million line of credit from Bank of America for its day-to-day business transactions. The credit line will allow the county to continue its normal banking practices and make sure its checks do not bounce.

* Business leaders announced the creation of a high-powered team to help burnish Orange County’s image and restore its financial health. Taco Bell Chairman John Martin, Fluor Chairman Leslie G. McCraw and Rockwell Chairman Donald R. Beall are expected to take active roles in a task force being formed by the Orange County Chamber of Commerce & Industry and the Industrial League of Orange County, which represent about 13,000 local companies.

“I don’t know if it’s a ‘red team’ or an ‘orange team’ or a crisis response team,” said H. Fred Mickelson, chairman of the chamber. “But we’re going to function as a single, clear voice for business in Orange County.”

School Layoffs

The day brought bad news for 47 temporary school workers who learned that they would be without work after Friday. Because of the financial crunch, Saddleback Valley Unified School District officials decided that they could not approve routine hiring, promotion or job extensions for those workers.

“We’re hoping that before Friday something turns around and they say, ‘Hey! You guys can continue,’ ” said Ronni Hughes, a district employee whose husband is a substitute janitor and was one of those laid off. “It’s hard to take. It’s hard to take if it’s Christmas. It’s hard to take if it’s the Fourth of July. It’s hard to take if it’s Groundhog Day.”

The district expects to save about $50,000 a month in salaries and benefits because of the cuts, said Jennifer Huff, executive director of personnel. She said the employees will be hired back if the district can find money in the budget.

Many of the 47 employees have been working as substitutes and were told recently they would receive full-time jobs, school officials. Others had just finished their application and interview process and were awaiting rubber-stamp approval by the school board this week.

“These people would have had jobs, would have had paychecks, would have been out there spending money on Christmas presents and now they won’t be,” said George Anderson, president of the teachers union.

There also was turmoil at the U.S. Trustees office in Los Angeles as 200 people--mostly attorneys and financial advisers representing Orange County’s creditors--packed a hearing that lasted much of the day.

Panel Appointments

As is typical of bankruptcy cases, many of the public agencies with the most money in the investment pool were eager for a place on the creditors committees. Membership provides access to the latest information and the best opportunity to represent a creditor’s interests; 187 agencies have money in the pool--now valued at $5.4 billion--along with youngsters whose damages from private lawsuits were deposited in the fund.

Those appointed to the committees by Trustee Marcy J.K. Tiffany were representatives the Orange County Department of Education, the Orange County Transportation Authority, the Transportation Corridor Agencies, the Orange County Sanitation Districts, the city of Irvine, representing all the cities in the county, and the city of Mountain View, representing municipalities outside Orange County. Tiffany said she may add further members later.

At Wednesday’s meeting, Tiffany proposed a package of cost containment measures intended to save taxpayers millions of dollars by limiting the amount of money collected by bankruptcy attorneys and financial advisers. Costs “could clearly be astronomical” without such controls, she said.

“Uncontrolled attorneys are probably worse than a toddler in a candy store,” Tiffany added in an interview. “There’s a public interest here. We have to control fees. Every dollar that is pulled out for administrative costs is one less dollar that can be used to cover the very serious shortfalls that exist in this case.”

Even with her proposed controls, Tiffany estimated that legal and financial advisory fees would be as high as $30 million. Without controls those costs could skyrocket to $40 million, she said.

Perhaps the most controversial of Tiffany’s cost containment proposals was to urge creditors not to retain their own investment advisers or accountants, relying instead on financial information provided by the county’s consultants.

In contentious corporate bankruptcies, creditors and debtors typically retain their own financial advisers to dig up information to bolster their arguments before the bankruptcy judge. Normally, the debtors--in this case Orange County and its investment fund--are required to pay both sides’ fees.

Tiffany said that having teams of consultants on both sides of the Orange County case was unnecessary because the financial interests of the county and its creditors are the same. The county has “a natural desire to get as much money to the people as they can,” she said.

But Daniel Harrow, a bankruptcy adviser who attended Wednesday’s meeting, said creditors need to be confident that they are getting credible financial information.

“They need assessments from people who are beholden to them only so they know they’re getting good information,” said Harrow, who was seeking business for his consulting firm.

Tiffany also proposed that, effective immediately, legal fees be submitted to her for review on a monthly basis. She also asked creditors to form subcommittees to represent the interests of like-minded groups, such as school districts and cities, and suggested that those agencies pay half the subcommittee’s legal bills, with the county itself picking up the other half.

Board Takes Action

While the creditors were meeting in Los Angeles, the Orange County Board of Supervisors tried to resume normal county business.

The board approved Supervisor Roger Stanton’s proposal to create a management council to handle the day-to-day operations during the crisis, establish a “strike team” to review potential budget cuts and form a committee to look at the issue of reinventing the way county government operates.

Since the county’s financial problems surfaced, there has been a growing call for trimming local government.

“I do not believe any rational leader should expect the taxpayers of Orange County to agree to refinance a clone of the former county bureaucracy,” Stanton said. “I believe the restructuring of Orange County is inevitable.”

Bond Offer Rejected

In updating plans Wednesday for unwinding the county’s shrunken portfolio of bond holdings, Hayes--named the county’s financial adviser last week at the urging of Gov. Pete Wilson--disclosed that he had received the first serious offer to buy the securities, but had turned it down.

“We have had an offer,” Hayes said. “I’m not at liberty to say from whom. We’re working to get the best price for the bonds and other instruments in the portfolio.”

The county will be selling $1 billion of fixed-rate, non-structured securities issued by federal government agencies--among the less volatile of the mostly risky holdings remaining in the portfolio.

Hayes said that although he wants to sell the securities as soon as possible, he does not want to make any ill-considered transactions.

“We’re working to get the best price for the bonds and other instruments in the portfolio,” Hayes said. “I have 180 days to do it. I don’t want to pass up any opportunities. We could have traded today, but we chose not to.”

A sale will be made “when it’s in the best interest of the people of Orange County,” he added.

But time is not on the county’s side.

“It is still highly volatile,” Hayes said of the $5.4 billion in holdings. “It is still possible that the value erodes further, because we’re in a very risky portfolio--and that’s why we shouldn’t be in a risky portfolio.”

Still, there was speculation in the financial markets that the Federal Reserve Board would delay any further increase in interest rates until January to ease the county’s financial turmoil.

The Fed has been tightening credit to fight what it considers incipient inflation. But for Orange County, each percentage point increase in interest rates from here on will mean a $300-million hit to its portfolio, county financial advisers say.

Contributing to this story were Times staff writers Don Lee, Greg Johnson, Jodi Wilgoren, Rebecca Trounson, Martin Miller, Anna Cekola, Julie Marquis and Susan Marquez Owen in Orange County and Tom Petruno in Los Angeles.

* BANKRUPTCY COVERAGE: Related Orange County stories inside. A26-A30, D1-D3

* FEDERAL PROBE WIDENS: SEC investigators focus on 3 Merrill Lynch brokers. A30