Orange County Auditor Says Its Name Wrongly Used in Bond Issue
SANTA ANA, Calif. (AP) _ The official papers for $600 million in Orange County bonds underwritten by Merrill Lynch & Co. wrongly implied that KPMG Peat Marwick was involved in issuing the debt, a top executive of the accounting firm says.
Merrill Lynch maintained again Thursday that its dealings with the county were proper. But Peat Marwick’s assertion sheds new doubt on whether bond buyers were misled about the county’s risky bets on interest rates
The county’s $1.7 billion investment loss, which forced it into bankruptcy court, has gravely threatened its ability to make bond payments. Bond buyers have sued Merrill Lynch, and have previously indicated they intend to add Peat Marwick and other professional advisers to the county as defendants.
Peat Marwick’s audit of Orange County’s finances for the fiscal year ended June 30, 1993, was attached to the document describing the $600 million bond issue dated July 8, 1994. In the intervening year, the county had increased the heavy borrowing and purchases of derivative securities that ultimately resulted in its huge losses.
Governments can attach such outdated reports to bond statements without asking the accounting firm, said John R. Miller, director of Peat Marwick’s government assurance practice. That’s what happens 75 percent to 80 percent of the time, he said.
But they cannot say the firm consented to the inclusion of the report and financial data without asking, he said. Such a request would be granted only after the firm goes back over the financial data to ensure nothing has changed, Miller said Thursday in a telephone interview with The Associated Press.
``What it says is the auditor has been involved in the issue of that debt,″ he said.
The official statement for the bonds says twice that Peat Marwick approved inclusion of its report and the 1992-93 Orange County financial data it had certified.
``KMPG Peat Marwick was never asked to and never gave consent to the inclusion of our auditor’s report and financial statements of the county included in that offering statement,″ Miller said.
He said he only learned of the language on Dec. 21, two weeks after Orange County sought Chapter 9 protection from its creditors.
``I was having a conversation with the chairman of the governmental accounting standards board, and he said: `I see in the official statement that KPMG consented’.″
``I was stunned. I asked him to please send me a copy of the official statement,″ Miller said. ``That was the first time that we knew that consent language was included in that official statement.″
He said he had never before seen consent language included in a bond offering statement when it had not been granted. He said consent to include audit material in an official statement is normally given in writing to the lead underwriter and the issuing agency.
Merrill Lynch said approaching Peat Marwick was not its job. The responsibility for the representations rests with Orange County and the law firm that advised it on the bond issue, said Paul Critchlow, Merrill Lynch’s chief spokesman.
Terry Andrus, Orange County’s top in-house lawyer, declined immediate comment. He said he would check if Peat Marwick had been contacted before the statement was issued.
LeBoeuf, Lamb, Greene & MacRae, the Los Angeles law firm that acted as bond counsel for the issue, did not return a phone call seeking comment.
Peat Marwick’s audit for the 1994 fiscal year did not begin until last October and has never been released.
After discussions with Assistant Orange County Treasurer Matthew Raabe in 1993, it had found that as of mid-1993 the county’s investments were adequately protected against risk and that the county understood the risks, Miller said.
Neither the county, the outside law firms involved nor Merrill Lynch ever asked for Peat Marwick’s consent to include the earlier information, he said.
Richard Lehman, president of the Bond Investors Association in Miami, said if Peat Marwick’s story is true, it will limit the firm’s exposure to class-action litigation accusing Merrill Lynch and other professionals of misleading investors about the risks of Orange County bonds.
``They are the county’s representations but also Merrill’s _ because Merrill buys the bonds from the county and then uses the offering statement to resell them,″ Lehman said.
The offering statement was signed by Raabe, who was suspended last week after refusing to answer questions about an alleged diversion of funds. His lawyer, Terry Bird, didn’t immediately return a phone call seeking comment.
Brown & Wood, the San Francisco firm that was disclosure counsel for the offering, also did not return a phone call.