Water District Board Blasts Member Who Disclosed Loss

After disclosing that bad investments had cost the Three Valleys Municipal Water District more than $900,000, district Director William Koch was censured by his fellow board members last week for leaking confidential information.

Koch was alleged to have disclosed information about the district’s loss of $900,000 of the $1.5 million it invested in November with E. F. Hutton & Co. Koch also revealed that the district intends to sue the investment firm to recover its losses, board members said. Litigation is one of a few topics that public agencies may discuss in private.

“The purpose of executive session, the reason the law allows it, is that there are certain sensitive areas that need to be discussed without everybody knowing about it,” board member Sandra Baldonado said in an interview last week. “There’s a risk in tipping your hand, in letting out information that might hurt your bargaining position.”

‘Cover-Up’ Alleged

However, Koch said the material he provided to citizens and newspapers was public information that had been discussed by the board in open session. Koch, who was the only board member to vote against investing with E. F. Hutton, accused his colleagues of trying to hide the loss.

“It appears to be a conspiracy and a cover-up,” said Koch, who alerted newspapers about the loss and provided a transcript of the open-session portion of the meeting to reporters and the public.

“(The board members) do not feel this is the public’s business, the money we lost on investments. . . . It was public record. Everything that appeared in the paper was what happened at the public meeting.”

The board of directors voted, 3-1, to censure Koch at its meeting Tuesday night. Board members Baldonado, Douglas Miller and Carlton Peterson approved the motion, with Koch opposing it. Board President Muriel O’Brien is on vacation.

In November, the district invested $1.5 million each with E. F. Hutton, Prudential-Bache and the Dover Group. The money for the investments came out of the district’s reserve fund, which currently contains $14.2 million.

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

Buys, Sells Water

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.

According to minutes of the board’s Sept. 21 meeting, the directors met in closed session “for discussion of possible litigation.” The board then reconvened in open session and passed a motion calling on the district to close its account with E. F. Hutton “at the most propitious time.” The minutes mention Koch’s opposition to the motion but do not contain any reference to a possible lawsuit against the firm.

But according to the transcript of the open session, litigation was discussed in detail by the water district’s attorney, Art Kidman. In response to questions from board members, Kidman said the district had “a very good case” to recover its money from E. F. Hutton. He explained the legal grounds for such a suit and said the case would most likely be settled through arbitration.

Leak Suspected

The district’s general manager, Richard W. Hansen, confirmed last week that litigation was mentioned by the board in open session. But, he said, specific questions from reporters and members of the public led the directors to conclude that Koch had leaked confidential information.

“It was obvious that there was a lot more information divulged than just what was divulged in open session,” Hansen said.

Baldonado, who practices law in Claremont, said Koch could be held personally liable if it can be proven that his statements hampered the district’s efforts to recover its losses. She also said Koch “orchestrated” the open part of the meeting to cause confidential information to be made public.

Others Talked

“(If) you look at the transcript of the public meeting, it appears Mr. Koch said more than he should have said,” Baldonado said.

According to the transcript, Koch mentioned the $900,000 loss almost immediately after open session was convened. However, Peterson was the first to mention litigation; Miller revealed that the district’s lawyers had sent a letter of demands to E. F. Hutton, and O’Brien asked Kidman the questions that elicited his legal analysis of the district’s case.

When Kidman attempted to further clarify his remarks about legal action, Baldonado cut him off by saying: “I think we don’t want to be discussing this in open (session).” O’Brien agreed and moved to adjourn the meeting, the transcript reported.

Hansen confirmed that the district is seeking to recover its losses through legal action against E. F. Hutton and that lawyers representing the district are trying to negotiate a settlement with attorneys for the investment firm.

Bought on Margin

Steve Nelson, a spokesman for E. F. Hutton in New York, said the $900,000 loss was incurred from the purchase of government securities “on margin,” meaning that the district’s $1.5-million initial investment was used as collateral to buy bonds worth much more. The district was then fully responsible for the bonds’ decrease in value.

“The main problem has been the difficult market forces affecting fixed-income markets,” Nelson said.

Hansen said the $900,000 loss probably could have been recouped if the district had kept the bonds until they matured in 20 to 30 years, but he said he was bothered by the firm’s business practices.

“If there weren’t other circumstances involved here, which lean toward unauthorized and illegal activities, the investments could have been held to maturity,” Hansen said. He would not specify what activities were allegedly illegal.

Against Policy

The district contends that E. F. Hutton violated the district’s investment policy, which prevents public funds from being placed in risky portfolios, Hansen confirmed. A copy of the policy was attached to the standard investment agreement signed by the district and E. F. Hutton, Hansen said.

However, Nelson said E. F. Hutton regularly informed the water district about its investments, adding that the firm “does believe it had authorization from Three Valleys for margin trading.”

Another point of contention between the water district and the investment firm is the resignation in March of William Parodi, the E. F. Hutton account representative who handled the district’s investments.

“We weren’t informed that he was asked to resign,” Hansen said.

Parodi was “permitted to resign,” Nelson said. He explained that whenever a registered broker leaves a firm, the company must report whether the employee resigned voluntarily, was discharged or was “permitted to resign.”

Hansen also said E. F. Hutton’s monthly reports to the district gave no indication that the district was losing money until late in September. Nelson has said the firm was “in frequent contact” with the district regarding the status of its investments.

Last week, the board voted, 3-1, to have Bowen McBeth Inc., the district’s auditors for more than 10 years, investigate the investment problems. Koch opposed the motion, saying he questioned the objectivity of an audit by a firm that has established such a “friendly” relationship with Hansen, the general manager.

“That’s not a very astute statement,” Hansen replied to Koch’s assertion. “You look at any professional, an attorney or an auditing firm. They have certain professional standards that they have to follow.”

At last week’s meeting, Koch called on the board to seek a fully independent audit of the district’s investments and to compel Hansen to make public all contracts and correspondence between the district and the investment firm.

‘Public Record’

“If we were allowed to look at those monthly reports, we could make some determinations based on fact,” Koch said. “But when I asked the (district’s) secretary for these materials, she said they were in the hands of the lawyers. This is public record. If I have to get a writ from a judge (to get access to the documents), I’ll do just that.”

Koch withdrew the proposal after other board members criticized him for circulating a memo containing his suggestions to members of the audience. In an interview last week, Koch said he will make the same request at the next meeting, though he doubts the other directors will be very receptive.

‘Vendetta’ Claimed

“They may shoot me down again,” Koch said. “That’s been happening pretty regularly for the past year and a half. The vendetta against me by some of the board members probably arises out of the fact that I supported some candidates than ran against them in past elections.”

Baldonado said the board’s censure of Koch capped a series of disputes with the director, whom she accused of seeking publicity to further his political goals.

“I think he’s run for everything he possibly can,” Baldonado said. “He’s interested in using his position on the water board to further his own political goals. . . . This is not the first time he has behaved irresponsibly, and I think the members of the board are getting fed up.”