Budget chief led away in handcuffs // School losses said
to total $1.2 million
DATE 11/25/92
NEWSPAPER THE ORANGE COUNTY REGISTER
SECTION NEWS
EDITION MORNING
PAGE a01
STORY LENGTH 73 INCHES
HEADLINE Budget chief led away in handcuffs // School losses said
to total $1.2 million
BYLINE/CREDIT Dan Froomkin:The Orange County Register
SUBJECT TERMS OC:SCHOOLS:THEFT:ARRESTS:INVESTIGATIONS
Stephen Wagner, who sported fur coats and drove fancy cars while
working as the Newport-Mesa school district's budget director, was
arrested and led from his million-dollar home in handcuffs Tuesday
after being charged with looting $1.2 million from district bank
accounts.
According to school officials and investigators from the Orange
County District Attorney's Office, Wagner's life of luxury could
not be supported by his $76,000-a-year salary. They allege that it
was fueled largely by cashier's checks he wrote to himself from a
secret slush fund -- a fund he fed by diverting money from the
district's building programs, food services and insurance rebates.
Deputy District Attorney Carl Biggs filed charges Tuesday
against Wagner, 40, that far exceed earlier allegations by the
school district that Wagner embezzled $175,000 by writing four
checks from the district's health-insurance account to a
shoe-repair company he co-owned.
Court documents say that while the documented losses to the
Newport-Mesa Unified School District now total $1.2 million, they
are likely to approach $2.2 million when the investigation is
complete.
School officials said their theft insurance will not come close
to covering even a $1.2 million loss.
And they said $1.2 million, which is more than 1 percent of the
district's annual budget, is enough to hire 21 teachers -- about the
number needed to reduce class sizes by three or four students.
"This is a giant theft by anybody's standards," Biggs said.
Biggs said the investigation also determined that Wagner
invested in gemstones with companies in Toronto, Canada, and
Hollywood, Fla., and has a bank account in the Caribbean.
Between 1989 and 1991, Biggs said, Wagner wrote 25 checks to
himself worth almost $1 million out of an old health-insurance
account other school administrators thought had been closed since
1986.
"No one knew it was still open," said Assistant Superintendent
Thomas Godley, Wagner's direct supervisor. "That's how he could
hide it. The auditors didn't pick it up. He just had a secret fund
out there."
Godley said Wagner allegedly diverted to the slush fund a
variety of miscellaneous checks intended for other accounts,
including a fund for capital projects.
Biggs said the total embezzled could rise above $1.2 million
because investigators found that $2.2 million in all flowed through
the secret account after it should have been closed. The cashier's
checks to Wagner total almost $1 million, but Biggs said he still
isn't sure where the rest of it went.
According to Biggs, Wagner switched horses in June 1991,
apparently after the slush fund was depleted, and began pilfering
the district's active health-insurance account instead, using not
only the four checks to his company -- written between June 1991 and
April 1992 -- but a $90,000 wire-transfer to a bank account he
controlled in Florida.
The switch is what eventually tripped up Wagner, Biggs said. A
school district employee, alerted by the bank that Wagner had tried
to write himself a check on the active account, tipped district
attorney's investigators in March.
Investigators eventually approached district officials Oct. 13.
Wagner, who had been with the district for 21 years, was suspended
10 days later after one check was discovered. He was fired by the
school board Nov. 10.
Wagner was charged with felony misappropriation of funds. If
convicted he could be sentenced to as much as a six-year prison
sentence.
Biggs said he decided to arrest Wagner on Tuesday -- earlier than
he had planned -- because he was afraid Wagner might leave the
country.
"The loss got so high we were afraid to wait any longer," he
said. "It was large enough that we saw a substantial likelihood, if
he knew that we knew the extent of the loss, that he might flee."
While Wagner has many assets in Southern California -- including
about $2 million in real estate purchased since 1989 -- most of his
holdings are encumbered by loans and by the bankruptcy proceeding
Wagner and his wife began in July. That was shortly after the IRS
imposed a $2.4 million federal lien for unpaid taxes.
At a brief hearing in Orange County Harbor Municipal Court in
Newport Beach, Judge Susanne S. Shaw set bail at $1.2 million, with
the condition that "every dime" come from a proven, lawful source.
"That being the case, I don't think he'll be going anywhere
soon," Shaw said.
Wagner, brought into the courtroom in handcuffs, wore a
long-sleeved white sport shirt, blue jeans and dirty white
sneakers. His short hair was mussed. He slumped and looked somber,
speaking only to say "yes" -- once almost soundlessly -- to two
questions Shaw asked.
Shaw ordered Wagner held in the Orange County Jail over
Thanksgiving weekend unless he posts bail. He will be arraigned
Monday.
Wagner's attorney, Paul Meyer, had little to say after the
hearing. "I think one can safely say that Mr. Wagner is
exceptionally concerned about this," he said.
Meyer said questions about how he and Wagner will respond to the
charges are "premature."
At district headquarters Tuesday, officials were expressing
outrage over the alleged embezzlement.
Officials say $1.2 million is enough to hire 21 teachers -- about
the number needed to bring class sizes back down to about 28, after
about a four-student-per-classroom jump this fall that angered
parents.
Carol Berg, acting superintendent of the district while veteran
school chief John Nicoll recovers from heart surgery, said she
doesn't know what to think anymore.
"At this point, I would believe that anything is possible," she
said. "I'm glad he's finally been arrested."
Berg said the district is in no risk of financial collapse. The
effect of the diversions, she said, is past.
Godley called the incident a tragedy. "Most of all, the students
are victims," he said. "It could have been money that in some way
would have been spent on the education of students."
Investigators said when they arrived at Wagner's home in Dover
Shores shortly after 7 a.m., Wagner and his wife, Linda, answered
the door wearing robes and pajamas.
Investigators said Wagner appeared startled as he was arrested,
but went calmly. His wife wept and watched as six investigators
spent almost five hours in the sprawling, two-story home.
When they emerged, investigators took with them three computers;
several cases of diskettes; and about 25 boxes filled with files
taken from desks and file cabinets in two dens, two bedrooms and
the garage.
Investigators even searched Wagners' classic 1964 Rolls-Royce.
"What we were looking for was financial records that would help
document the theft or where the money went," Biggs said.
Biggs said his office has not figured out what Wagner did with
the money. But he said some assumptions can be made.
"From what we know, he couldn't afford the houses that he owned
on his salary," Biggs said. "And we're not aware of other forms of
income that supported his lifestyle."
Register staff writer Tony Saavedra contributed to this story.
SIDEBAR
Officials say they had no reason to question trusted
employee
NEWPORT BEACH -- Stephen Wagner arrived in the Newport-Mesa
school district 21 years ago as a rookie account clerk, all of 19
years old.
By 1989, when he was named budget director, he was considered
the financial wizard of the Newport-Mesa Unified School District,
a protege of veteran Superintendent John Nicoll, a guy who knew all
the answers.
"Stephen was a trusted employee," acting Superintendent Carol
Berg said Tuesday. "He was the person who was responsible for
implementing the checks and balances."
So when school officials are asked how Wagner could end up being
charged with embezzling $1.2 million or more from the district's
coffers, they have a simple answer:
Betrayal.
Wagner was so trusted that none of his bosses doubted him when
he said outside investments had paid for his Dover Shores home, his
Rolls Royce, his Mercedes-Benz and his furs.
"You had a very trusted employee who'd been with the district
more than 20 years and knew the system very well," Assistant
Superintendent Tom Godley said.
As budget director, Wagner's chain of command led from his
direct supervisor, Godley, to Berg and then Nicoll.
But whenever any of the three asked him about the budget, Berg
said, "He assured us that everything had been taken care of." And
they believed him.
Why didn't anyone notice anything?
"What was there to notice?" Godley asked. "Nobody knew about the
account." Godley said the account Wagner used to allegedly embezzle
$1.1 million from the district was one that should have been closed
in 1986, when the district changed health-care providers.
The District Attorney's Office, which filed charges against
Wagner on Tuesday, defended the district's system. Deputy District
Attorney Carl Biggs said embezzlement is difficult to prevent.
"When a person is of a mind to steal, it's pretty hard to stop
that."
But school officials say the system could be improved.
"Could the system be better?" Godley asked. "Yeah, it could be
better in some areas, and we are making changes to do that. But
there is no system that is fail-safe."