Water District Loses $900,000 in Bad Investments

The Three Valleys Municipal Water District has lost more than $900,000 in public funds since last November, when it invested $1.5 million from its reserve fund in a portfolio managed by E. F. Hutton & Co., a member of the district’s board of directors and the investment firm disclosed this week.

Director William Koch said the $900,000 loss was revealed to the board at its meeting last week by the district’s general manager, Richard W. Hansen.

“I was totally shocked,” Koch said. “At no time was it even indicated that we were losing any money.”

Board member Carlton Peterson said the $900,000 figure was “sort of in the ball park,” but accused Koch of exaggerating the seriousness of the loss.

“Bill Koch, who loves to see his name in the paper, decided he would make an issue out of this,” Peterson said. “We may have lost something, but it’s not entirely determined. . . . We’re not going to say we got in trouble.”

On Sept. 21, the board met in closed session to discuss possible legal action against the investment firm. The directors then convened in open session and voted, on the advice of Hansen and the water district’s attorney, to close the account with E. F. Hutton “at the most propitious time.”

Steve Nelson, a spokesman for E. F. Hutton in New York, confirmed that the water district had lost at least $900,000 through its investments with the firm. Nelson said the district’s money had been placed in fixed-income investments, such as treasury bills and government securities.

“It’s no secret that 1987 has been a difficult year for fixed-income investments because of market conditions,” Nelson said.

Hansen did not return calls. The water district’s attorney, Art Kidman, refused to comment on the matter, as did board members Sandra Baldonado and Douglas R. Miller. Board president Muriel F. O’Brien is out of the country, other board members said.

The money used for the investments came from the district’s reserve fund, which still contains $14.2 million, the district’s administrative assistant said.

The district receives money from interest income, property tax funds allocated by the county, revenue from its hydroelectric facilities and surcharges assessed to water companies and city water departments in the eastern San Gabriel Valley.

Serving as a water broker, the district buys water from the Los Angeles Metropolitan Water District and sells it to water providers serving the cities of Claremont, Covina, Glendora, Industry, La Verne, Pomona, San Dimas, Walnut and West Covina, and the unincorporated communities of Diamond Bar and Rowland Heights.

Koch, the only board member to oppose making the investments, has chastised his colleagues for placing the district’s reserves in “rickety” portfolios. Koch also criticized Hansen for failing to keep the board informed of the investments’ status. However, he did not blame the investment firm.

‘Don’t Have Facts’

“I’m not going to fault E. F. Hutton because I don’t have all the facts,” he said in an interview.

E. F. Hutton spokesman Nelson said his firm was “in frequent contact with Three Valleys Water District over the past few months.”

Koch said he will call for an independent audit of the district’s investments at the board’s next meeting Tuesday. He said he will ask the board not to allow Hansen to choose the auditor because the general manager is to blame for a “fiasco.”

Borrowing a line from recent congressional hearings, Koch said: “I want to know what the general manager knew and when he knew it, as far as when we started losing money . . . and whether we could have withdrawn our portfolio in a timely manner and saved a lot of money for the district’s taxpayers.”

Peterson, who will serve as board president at the next meeting while O’Brien is in Europe, said he has no objection to an audit if the majority of the directors want one. He stressed that “at this point, we really haven’t lost anything,” adding that some or all of the money “may very well be recovered.”

Lawsuit Considered

“If Hutton’s got a reputation, they’re not going to let that reputation go down the tubes,” Peterson said. “And even if they do, we have recourse.”

Such recourse evidently includes a lawsuit against E. F. Hutton, which the board discussed in closed session Sept. 21. Although public agencies usually do not deal with such matters publicly, the board continued to discuss legal action against the securities firm with its attorney after reconvening in open session.

“I think we better sue the hell out of them,” Peterson is quoted as saying in a transcript of the open- session portion of the meeting.

Peterson refused to comment on any statements made at the meeting, which he said was conducted entirely in closed session. However, Miller--the board’s secretary--confirmed that litigation was discussed after the directors had reconvened in open session.

According to the transcript, Kidman, the water district’s attorney, told the board that he had seen problems with the contracts between the district and E. F. Hutton, which he said were not sufficiently clear in stating that the top priority in investing the district’s money should be security.

‘Problem’ Documents

“I have never advised this board or Mr. Hansen of any investment decision of any kind--the one that has gone sour or any of the others,” Kidman is quoted as saying. “I did review the documents. I thought the documents were a problem; (and) therefore advised the district to make sure (its) investment policy is reiterated to these people. That was done.”

According to the transcript, Kidman went on to say that the district “had a good case” to sue E. F. Hutton for recovery of some of the lost money because the firm had not invested according to the district’s guidelines, even if those guidelines were not explicitly stated in the contract.

“They have duties in the securities industry to make sure that the types of investments they select for the district are suitable for the district, and those (duties) appear to have been violated,” Kidman is quoted as saying.

Kidman refused to comment on any statements attributed to him in the transcript. After a reporter read him an excerpt from the transcript, Kidman said: “That information is available from the water district, and obviously you have it.”

Koch Opposed Actions

The investments with E. F. Hutton were made possible by two actions taken by the district’s board of directors in November, both of which were opposed by Koch.

First, the board voted 4 to 1 to authorize the use of investment firms to increase the district’s interest income. At the time, the district invested only in U. S. Treasury bonds, the state’s Local Agency Investment Fund, passbook savings accounts and certificates of deposits in local banks. These investments paid an average of 6% interest, according to a district memorandum.

“Previous investments were not really investments,” Koch said. “We deposited our money in banks and we drew interest. . . . (The majority of the board) decided to opt for more yield on our reserves.”

At its next meeting, the board--with Peterson absent--voted 3 to 1 to invest $1.5 million each with E. F. Hutton, Prudential-Bache and the Dover Group. The money was to be invested in high-yield portfolios, which could increase the district’s interest income by more than $35,000 for each $1 million invested, according to figures in a district memorandum.

“I thought it was shaky at the very least,” Koch said. “I was very uncomfortable with what I heard. I thought at the very best we were doing some gambling.”

Report Never Came

The board’s motion to authorize the investments also called for a performance evaluation of the three firms to be presented to the directors after six months. However, Koch said, no such report was ever presented.

Koch said that when he asked Hansen about the evaluation, he was told that “the board had agreed to extend (the review period) from six months to 12 months.”

Koch said he did not recall the board ever taking such an action. He said he asked for a copy of the minutes from the meeting when the board had agreed to wait another six months for the report. In a memo to Koch dated Sept. 23, district administrative assistant Chris Francisco said he was unable to find any record of such an action by the board.

Baldonado said she recalled that the board voted earlier this year to extend the review period. However, Baldonado said the board received monthly summaries of investments prepared by the district staff, and none of them indicated a loss.

“If (Hansen) had brought (the performance evaluation) in at the end of six months like the board had voted, we could have closed out our portfolio and avoided a large part of this $900,000 loss,” Koch said.

Other Firms Used

According to the transcript of last week’s board meeting, Kidman mentioned that the district has money invested with two other securities firms besides the three authorized by the board.

Koch said it was the first time he had been informed about investments with any other firms. He said he was told that the board had approved the additional investments, but said he had seen no record of the board’s approval. Koch said he does not even know the names of the two firms,

Koch said: “My deep concern now is, ‘Have we lost any other money with E. F. Hutton? What about the other $600,000 (invested with Hutton)? What about the other investment firms?’ ”