The U.S. Securities and Exchange Commission is investigating whether Maricopa County's massive budget deficit precipitated a series of illegal bond sales in 1993, several county officials say.
While the officials refused to comment on the record, one county supervisor confirmed last Monday that an SEC investigation is under way.
The probe quietly began about a month ago, and everyone questioned so far has been ordered not to discuss the case in public, another official familiar with the investigation says.
"I think everybody is scared shitless, because they have been deposing people right and left," the official says.
Additional depositions, including interviews with at least one more county supervisor, are scheduled soon, the source says.
An SEC spokesman on Monday would neither confirm nor deny that the agency is conducting an investigation.
The SEC reportedly has interviewed Maricopa County treasurer Doug Todd and some of his deputies. Todd was the first elected official to express concern about the state of the county's finances and problems with bond offerings. His complaints were ignored by former county manager Roy Pederson ("Dangerous Games, Your Money," April 27, 1994).
Todd, a former state legislator, tried to sound the alarm soon after he took office in January 1993, telling supervisors that the debt stood at more than $70 million.
Todd declined on Monday to comment on the SEC probe.
New Times reported last summer ("Playing the Market," August 18, 1994) that a 1993 sale of $25.5 million worth of general obligation bonds may have run afoul of SEC reporting rules.
In its "Official Statement," the county told prospective bond buyers that proceeds from the bonds would be used to build capital projects such as roads. In reality, the money was always intended to help cover operating deficits.
While the county's Official Statement doesn't need to be approved by the SEC in advance, federal law requires that the statement be an accurate reflection of what the money will be used for. The statement must also provide a true picture of the county's financial condition.
The Official Statement, however, failed to reveal to investors that Maricopa County had amassed tens of millions of dollars in debt.
Larry Given, president of the financial consulting firm hired by the county to handle that bond sale, told New Times last summer that his company had been misled by the county's finance department. Given, who did not return calls on Monday, said last summer that in retrospect, the information in the Official Statement was, indeed, misleading.
"We were misled, and everybody else in the world was, also," said Given, president of the investment firm Peacock, Hislop, Staley & Given.
Given said last summer that the county finance staff lied to his company about the true state of the county's financial problems; therefore, his company unwittingly omitted information about the debt from the Official Statement.
"If all that was known now, was known then, there would have been something in the Official Statement," he said.
While Given and other county officials were blaming the county finance staff, there were plenty of indications that something was amiss with county finances before the county supervisors approved the $25.5 million bond sale on July 26, 1993. These indicators included:
The week before the bond issue was approved, the county's finance director resigned under pressure in the wake of an internal audit that found numerous accounting errors.
Treasurer Todd had discovered and informed supervisors and the county manager that the finance staff was cooking the books, and that tens of millions of dollars of debt had been built up.
Repeatedly, the supervisors had been asked to move short-term funds around to cover operating shortfalls.
The very day the board approved the $25.5 million bond, it also approved another $103.3 million in short-term debt so the cash could be used to loan money to the general fund.
Despite a panoply of financial problems, four supervisors--Tom Rawles, Mary Rose Wilcox, Ed King and former board chairman Jim Bruner--voted to approve the bond sale along with the misleading Official Statement.
Supervisor Betsey Bayless abstained from the vote because of a conflict of interest. Bayless is a vice president of Peacock, Hislop, Staley & Given, which handled the sale.
New Times also reported last year ("More Shaky Disclosures," September 1) that the county had sold securities on at least two other occasions in 1993 without disclosing to investors that it was in deep financial trouble.
The county refinanced $22.3 million in general obligation bonds in July 1993 and $100 million worth of short-term notes in August 1993 without disclosing its debt.
In the August deal, the county sold $100 million in Tax Anticipation Notes as part of a mad scramble for cash to keep the county afloat. But rather than using the notes for their intended purpose--providing short-term cash flow to the county while waiting for the twice-per-year property-tax collections to roll in--the county quietly rolled over $40 million in debt that would not be repaid for another year.
The financial disclosure statement for the $100 million worth of notes was prepared by the investment firm Rauscher Pierce and Refsnes. The disclosure made no mention of the county's crushing deficit.
The county finally began to acknowledge its massive debt last summer when a series of disclosure statements was prepared in connection with several bond sales. One section, titled "The County's Operating Deficit," clearly outlines the budget problems and explains how a new county finance staff hopes to work its way out of them.