As Maricopa County's leaders indulged themselves in a four-year debt binge that has left the county deep in the hole, the financial consulting firm of Rauscher Pierce Refsnes, Inc., may have joined the county in running afoul of federal securities laws.

Two weeks ago, New Times reported that the county, its bond counsel and another of its financial advisers--Peacock, Hislop, Staley & Given--probably broke federal laws in July 1993 by issuing a misleading prospectus for a $25.5 million general obligation bond issue.

In effect, the county lied to investors about its financial condition and did not disclose that the $25.5 million would be used to cover daily operating expenses.

Additional documents obtained by New Times, including some provided in response to a public-records request, indicate that the $25.5 million bond issue is not the only potentially fraudulent transaction undertaken by the county.

At least two other times in the summer of 1993, the county sold securities without disclosing to investors that it was in deep financial trouble.

Federal securities laws require that a government disclose all "material" facts when it is issuing a prospectus--or Official Statement--for securities about to be sold on the open market.

Basically, the law requires the county to tell the truth and the whole truth to investors who might want to buy the county's notes.

The fact that a county government is tens of millions of dollars in debt, several bond attorneys and experts agree, would almost certainly be considered "material."

But in July 1993, when the county refinanced $22.2 million worth of general obligation bonds, and again in August, when it approved $100 million worth of short-term notes, the county did not disclose to investors that it was deeply in debt.

Altogether in the three dubious deals, the county sold almost $150 million worth of securities without telling the buyers just how screwed up the county's finances were.

The $100 million deal last August was the largest example of possible deception, and was also the deal that involved Rauscher Pierce Refsnes, Inc.

In that situation, the county sold $100 million of Tax Anticipation Notes--or TANs--as part of a mad summer scramble for cash to keep the county afloat.

TANs are a perfectly legal way for counties to raise money while waiting for the twice-a-year tax collections to roll in to the county's coffers.

Used for their intended purpose, they are short-term loans that allow the county to pay its bills from week to week. When property-tax revenue starts rolling in, the notes are supposed to be paid back.

But by mid-1993, Maricopa County had become addicted to the TANs and was using them for purposes far afield of their intended role.

As a way to hide that the county was running a deficit, the TANs were used to roll debt from year to year, out of sight of taxpayers. The 1993 TANs, in fact, included $40 million that would roll over and not be paid until the next fiscal year.

The county Board of Supervisors, then chaired by Jim Bruner, repeatedly approved larger and larger amounts of TANs to patch over cash shortfalls.

Board members, including Bruner, have consistently maintained that they were not aware of the county's growing financial problems, and that the county staff misled them about the true financial picture.

But by July 1993, when the supervisors approved issuing $100 million more in TANs, warning signs of impending financial doom were everywhere.

Bond raters, alarmed by the county's cash-flow problems and apparent deficit, had already downgraded the county's bond rating. A Moody's report on Maricopa County's finances dated July 29, 1993, notes that the county was running short of cash and had "increasingly relied on short-term borrowing" to get needed money.

Moody's would not even assign a rating to the 1993 TANs until the county secured a $65 million line of credit with Bank One to assure that the notes would be paid back.

But the prospectus for the $100 million TAN issue--which Rauscher Pierce Refsnes helped prepare and the Board of Supervisors approved--made no mention of the county's deficit, or of the required credit line that was being used to back them.

Chris Hamel, the Rauscher financial adviser who worked on the deal, says the deficit is discernible in the prospectus to a savvy investor.

The prospectus specifically shows that $40 million of the TANs would not be paid back until a new fiscal year had begun, he says, indicating that the $40 million was deficit financing.

"That is a form of disclosure," Hamel says, "saying that payment is bumped into the following fiscal year."
Hamel says he knew the county was engaging in deficit financing at the time the TANs were issued and discussed it with the county's financial staff and county bond counsel Fred Rosenfeld.

Since the county had obtained the $65 million credit line from Bank One, Hamel says, he, Rosenfeld, the bond raters and the county staff felt comfortable that the TANs would be repaid and did not feel a lengthy disclosure of the county's financial problems was needed.

The 1993 TANs were all paid back, the last in late July, so no investors lost money. But when $120 million of new TANs were sold this month, the prospectus did contain a disclosure of the county's battered finances.

Similar problems surround the refinancing of $22.2 million worth of general obligation bonds in July 1993.

The county was basically attempting the equivalent of refinancing a house--bonds that required the county to pay higher-than-market interest rates were replaced with lower-yielding bonds.

Again, the refinancing itself was perfectly legal, and saved the county millions in interest payments.

But the prospectus for that refinancing also did not include full disclosure of the deficit problems. Peacock, Hislop, Staley & Given were the financial advisers on that transaction.

Those bonds have since been downgraded again by both major bond-rating companies, potentially costing millions of dollars for investors who bought them in good faith based on the misleading prospectus.

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David Pasztor